The true nature of a guarantee: lessons from Chugga Chugg v Privinvest

Briefing

Background

In the recent case of Chugga Chugg Pty Ltd v Privinvest Holding SAL EWHC 585 (Comm), the High Court provided important clarification on how to interpret and analyse the true nature and effect of certain types of guarantee, particularly in the case of construction disputes.

Chugga Chugg Pty Ltd (Chugga Chugg) was the special purpose vehicle of Australian businessman and billionaire Brett Blundy, engaged in the design and construction of super yachts. The case centred around its claim for EUR9,995,000 under a parent company guarantee. The claim followed a dispute that arose from the termination of a GBP99.5 million superyacht construction contract (the Contract) with Nobiskrug GmbH (Nobiskrug), a German shipbuilder subsidiary within the Privinvest Group.

As security for the Contract, Privinvest Holding SAL (Privinvest) provided a guarantee for EUR9,955,000 – which was equivalent to the first instalment payment. Nobiskrug started to face financial difficulties in 2020 and telephone calls were made between Chugga Chugg and Nobiskrug which indicated that Chugga Chugg was seeking to terminate the Contract. On 8 June 2020 Nobiskrug served a termination notice on Chugga Chugg on the basis that Chugga Chugg had terminated the Contract by way of its conduct. Chugga Chugg then served its own termination notice on Nobiskrug asserting that the shipbuilder had wrongfully terminated the Contract and failed to cure this within 20 business days.

In June 2020, Nobiskrug commenced arbitration proceedings against Chugga Chugg. Formal insolvency proceedings were then opened in Germany in July 2021 with an insolvency administrator appointed to Nobiskrug at that point. Chugga Chugg sought to recover its payments under the guarantee, sending a demand letter to Privinvest under the guarantee in December 2021.

The two main considerations before the court were:

whether the Contract was wrongfully terminated by Nobiskrug
whether, in accordance with principles applicable to determining the true nature of a guarantee, the guarantee provided by Privinvest was a demand guarantee (primary obligation) or a surety guarantee (secondary obligation).

Termination of the Contract

This article focuses on the issues in relation to the guarantee which were considered by the High Court, but the Court was also required to consider whether Chugga Chugg had in fact renounced the Contract. The Court found that, even if there had been a continuing renunciatory breach, the Contract was affirmed by Nobiskrug prior to its termination by continued performance, which included the agreement of amendments, seeking approval for insurance, reopening the yard and holding a steel cutting ceremony, all without express reservation of rights.

The nature of the guarantee

The issues to be determined in relation to the guarantee included an analysis of whether the guarantee was a demand guarantee payable upon satisfaction of the requirements set out within it (which would usually be on the beneficiary's written demand), or an instrument of secondary liability (a surety guarantee) which made Privinvest's liability conditional upon establishing Nobiskrug's liability under the Contract.

The Court emphasised that determining whether an instrument is a demand guarantee or surety guarantee is a matter of construction that depends on the particular wording and circumstances of each case which reflects the principles established in Shanghai Shipyard Co Ltd v Reignwood International Investment.

Court's analysis

The High Court's analysis included the following points arising from the documentation:

there was no wording which made Privinvest's liability 'absolute and unconditional', in fact the wording used was at odds with this – the guarantee provided that it was given as security for "the payment and performance of [Nobiskrug]'s obligations under the contract or arising by reason or in consequence of any breach or termination of the contract" and to guarantee due and punctual performance of all such obligations
there were no words imposing liability on Privinvest as primary obligor rather than surety. The reference to 'primary obligor' used in clause 4(a) of the guarantee concerned the procedural position, not the circumstances triggering liability under the guarantee
the obligation to procure performance or pay “as required” was considered to mean as required in circumstances of breach or default clearly tying this to breach or default
the fact that the guarantee was triggered by a demand and only a demand where the alleged breach or termination was uncontested, was not found to be determinative and was found simply to be a variation of the standard arrangement. It was noted in previous case law that it would be difficult for a guarantor to know that its liability had been triggered other than by service of a demand
the circumstances for the making of a valid demand under the guarantee were also considered. The conditions were set out in clause 2 and required that Chugga Chugg's demand be made either in circumstances where Nobiskrug's liability under the Contract was uncontested or in circumstances where its liability was contested and Chugga Chugg had obtained a "final unappealable" arbitration award in its favour. There was no express provision that the liability of the guarantor was to be unaffected by the existence of a dispute with the debtor, conversely clause 4(b) expressly preserved Chugga Chugg's rights in circumstances where the guarantor would otherwise be discharged. This pointed away from it being a demand guarantee
the guarantee lapsed on delivery of the yacht or lawful termination by Nobiskrug.

Decision

Mrs Justice Dias concluded that the guarantee was fundamentally a classic "see to it" guarantee rather than a demand guarantee.
Key factors in this determination included the drafting points analysed above and of clear importance, the fact the guarantee was only triggered in the event that Nobiskrug was in default or breach of contract or where the Contract was terminated otherwise than lawfully by Nobiskrug.
In practical terms a breach by Nobiskrug had to be established either because it was not contested (admitted) or because it was contested and established by final unappealable award – in determining this, the court's clear view was that there was no middle ground between 'contested' and 'uncontested' breaches – a breach was either contested (if positively denied and requiring the claim to be dealt with by arbitration) or uncontested (if admitted). In this case the breach was contested, and the conditions required by clause 2 in relation to contested breaches were fulfilled ie a final unappealable award and demand. Nobiskrug's liability was therefore sufficiently established for the purpose of the guarantee and the claim under the guarantee succeeded.
The triggering of obligations under the guarantee was described by the Judge as "the very antithesis of the guarantor's liability being triggered by an event independent of breach" and she further commented: "to say this was nonetheless a demand bond would in my view be a triumph of form over substance".
However, the Court noted that while the guarantee was secondary in nature, a contractual agreement about how the underlying liability would be established was effectively created by clause 2 of the guarantee, making it "almost indistinguishable from a conditional demand bond". In summary therefore the conclusion was that the guarantee was an instrument of secondary liability with clause 2 embodying a contractual agreement as to how Nobiskrug's liability under the Contract was to be established for the purposes of a claim under the guarantee.

Key takeaways

This case reinforces the need for careful drafting of guarantees, and the fact that a court will analyse all relevant aspects of an instrument in order to determine its true nature, noting that variations within the drafting from these will not be fatal where the majority of relevant characteristics point towards a certain type of instrument.