Shanghai Shipyard Co. Ltd v Reignwood International Investment (Group) Company Ltd [2021] EWCA Civ 1147

The Court of Appeal has allowed an appeal by Shanghai Shipyard Co. Ltd (the “Builder”) against a decision of the English High Court that a guarantor was entitled to withhold payment under an irrevocable payment guarantee issued in connection with a shipbuilding contract pending the outcome of an arbitration between the shipbuilder and buyer.

A key consideration was whether the guarantee in question was a demand guarantee requiring payment on demand or a surety (or “see to it”) guarantee requiring payment of a disputed claim only after liability has been established in arbitration proceedings or litigation.  The Court of Appeal’s reasoning underlines the importance of considering the actual words used by the parties and the contractual context in which they are used.


In 2011 the parties entered into a shipbuilding contract for the construction of an offshore drillship for a price of US$200 million (the “Contract”).  Reignwood International Investment (Group) Company Ltd (“Reignwood”), initially as buyer, issued an irrevocable payment guarantee to secure the buyer's obligation for the payment of the final instalment of the contract price (US$170 million) (the “Guarantee”).  The Contract anticipated the substitution of a special purpose vehicle as the buyer, although the novation of Contract did not occur until after Reignwood provided the Guarantee.

In late 2016, the Builder made a demand to the buyer for the final instalment and other sums allegedly due under the Contract.  In January 2017 the Builder sent a notice of default to the buyer for non-payment of the sums allegedly due, and in February 2017 the Builder sent a cancellation notice to the buyer, followed in May 2017, by a demand of the Guarantor for the final instalment under the Guarantee.  A dispute arose between the Builder and the buyer as to whether the Vessel was in a deliverable condition and a London arbitration was ultimately commenced in 2019. 

In the meantime, the Builder had commenced proceedings in the Commercial Court against Reignwood under the Guarantee.  The Judge determined that the guarantee was a “see to it” guarantee in which the Guarantor's liabilities arose upon demand only if the Buyer was liable to pay the final instalment under the terms of the Contract.  He also held that the Guarantor was entitled to refuse payment in accordance with clause 4 of the Guarantee pending and subject to a London arbitration award notwithstanding that Reignwood commenced the arbitration after the date of demand.


Lord Justice Popplewell (with whom Sir Geoffrey Vos, the Master of the Rolls, and Lord Justice Baker agreed) disagreed with the Judge, determining two preliminary issues in favour of the Builder.  He held first that the Guarantee, properly construed, was a demand guarantee.  On the second issue, he held that the proviso by which payment could be deferred pending the publication of an arbitration award required there to be both a dispute and the commencement of arbitration prior to a valid demand being made.  As that had not happened, the Builder had “an accrued right to payment under the Guarantee” immediately on demand.

The first issue – what type of guarantee was it?

The decision addresses several important issues in this regard.

Wuhan and the “Paget presumption”

Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA[1] is a key recent case on the law of guarantees.  In Wuhan Lord Justice Longmore observed[2] that “while everything must in the end depend upon the words actually used by the parties, there is nevertheless a presumption that, if certain elements are present in the document, the document will be construed in one way or the other”.  He then referred to Paget’s Law of Banking, a leading text:

It is exactly this kind of assistance that the editors of Paget's Law of Banking have endeavoured to provide. In the 11th edition of that work these words appeared under the heading of "Contract of Suretyship v. demand guarantee":-

"Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay "on demand" (with or without the words "first" and/or "written") and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.””

Applying this, he concluded that the relevant document in Wuhan was a demand guarantee (notwithstanding that condition (iv) identified by Paget above was not fulfilled).  This approach has been frequently applied since 2012 and the “Paget presumption” has become an accepted shorthand for many practitioners.

However, this Court of Appeal has now sounded a note of caution concerning applying presumptions in this area, pointing to the problem of seeking to apply a presumption in circumstances in which only some of the conditions for its existence are fulfilled.  That had been the case in Wuhan (regarding the non-fulfilment of condition (iv)) and Reignwood argued that there was similar non-fulfilment here e.g. that the guarantee was given by a parent, not a bank.  Lord Justice Popplewell asked “Which are the important [conditions] if not all are required? Without clear answers to such a question, the court is not … assisting the commercial community in promoting certainty as to the nature and legal consequences of their instruments.  If resort is to be had to presumptions at all, …, they should … be confined to circumstances where all the stated conditions are fulfilled.  Moreover and in any event, the primary focus must always remain on the words used by the parties in their context.”.

Wuhan was one of only two cases found by the Court of Appeal to “engage the legitimate line of argument” in the appeal.  Popplewell LJ considered that the decision in Wuhan was actually fully justified on the language of the instrument without reference to any presumption.  In any event, as Wuhan is a Court of Appeal decision in a similar context, on wording which contained no material distinction from the language of the Guarantee, the Court of Appeal held that considerations of commercial certainty suggested that the result should be the same in this case and that Wuhan supported the conclusion the Court itself reached on the language of the instrument in the current case.

Distinguishing demand guarantees from surety guarantees

A traditional guarantee by way of suretyship is an undertaking by the guarantor to be answerable for the debt or obligation of another if that other defaults.  Popplewell LJ referred to these as “surety guarantees” but noted that they are sometimes called "see to it" guarantees, on the basis that the nature of the obligation was "to see to it that the debtor performed its own obligation to the creditor"[3]. 

Another means of securing performance of a payment obligation is by use of an undertaking to pay a sum on demand, or within so many days of a demand, irrespective of whether the obligor/debtor is under a liability to make the payment.  Despite being referred to as “demand guarantees”, their defining characteristic is that they are payable on or by reference to an event, namely the demand, and without reference to the obligor's liability.  The demand may have to be in prescribed form, and/or may have to be accompanied by prescribed documents, but it is the demand which triggers the liability to pay.

The usual purpose of a surety guarantee is to provide the beneficiary with protection against “counterparty risk”, namely the risk of failure of performance arising from deficiencies in the financial or commercial probity of the obligor.  Shipbuilding contracts were referred to as “a paradigm example of cases in which one party, the shipbuilder, needs protection from counterparty risk”.  A demand guarantee also addresses counterparty risk but serves an additional purpose, which is one of cashflow.  As Popplewell LJ noted, “In the shipbuilding context, cashflow is sometimes described as the lifeblood of the business”.  A builder’s ability to fund the building of any vessel depends upon “timeous receipt” of the relevant instalments.

Nature of Guarantor irrelevant to categorisation of guarantee What matters for the purposes of counterparty risk is not the nature of the business carried on by the guarantor but simply the commercial and financial strength and probity of the guarantor.  It is long-established in shipbuilding that payment and refund guarantees can be demand guarantees and there are examples in the cases of such guarantees being given by individuals and companies, not banks.  Reignwood had argued that as it was not a bank, or a financial institution akin to a bank, but merely a parent, this gave rise to a presumption about the nature of the Guarantee which might lead to a different conclusion to what would follow if a bank had issued it.  The Court of Appeal rejected this and held that in the present context there ought to be no room for assumptions about the nature of the instrument to be derived from the identity of the guarantor.  If a non-bank gives a guarantee adopting a form of wording which, if given by a bank, would be a demand guarantee, it would be “a recipe for commercial uncertainty” if that meant something different from an identical instrument issued by a bank.  What matters is the wording in which the parties have chosen to express their bargain, interpreted in accordance with the well-established rules of construction.

Language of Guarantee relevant to categorisation of guarantee

Popplewell LJ outlined a number of features identified by Reignwood as hallmarks of a surety guarantee which he instead found to be neutral.  However, some of the language used in the Guarantee pointed strongly towards the Guarantee being a demand guarantee.  This “critical language” included:

Second issue - application of the proviso

The second issue determined by the Court of Appeal related to the wording of the proviso contained in the Guarantee (which, if engaged, converted the Guarantee from being payable on demand to being payable against an appropriate arbitration award).  Reignwood argued it could defer payment if there were a dispute prior to the demand even if an arbitration had not been commenced until after the demand had been made. It also argued that if it were otherwise, the 15 day time limit by which arbitration was to have been commenced was too short and therefore uncommercial.

Popplewell LJ disagreed.  The language in the proviso was quite clear – the proviso could not be triggered without both a dispute and the commencement of an arbitration prior to a valid demand being made.  If that had not occurred before the demand was made, the Builder had an “accrued right to payment under the Guarantee” which was a right to payment “immediately upon a valid demand”.  Clear language would be needed to divest a party of a valuable right and there was no such language present.  He also held that there is nothing uncommercial in a proviso to a demand guarantee, intended to protect cash flow, having a relatively short window in which to trigger the conversion of the entitlement into one involving considerable delay.


This is an important decision, particularly for those seeking to receive the benefit of demand guarantees in a shipbuilding project to secure counterparty risk, whether by way of payment guarantees for the builder’s benefit (as here) or refund guarantees for the buyer’s benefit.  It reinforces the point that the drafting of the instrument is critical to determining whether the relevant instrument is in fact a demand guarantee or a surety (or “see to it”) guarantee.  However, it also emphasises that presumptions, even those set out in leading texts, must be used cautiously and confirms that the identity of the guarantor should not be a determining factor in the assessment of the instrument.  The focus must always be on the precise wording used in the document.

Parties should therefore closely examine the drafting of instruments proposed to ensure the drafting is accurate for the type of instrument to be issued.  Furthermore, if the parties intend that guaranteed sums are only to be paid pending the outcome of formal dispute resolution, it is essential to ensure the drafting of the relevant mechanism is clear - and is clearly understood.


[1] [2012] EWCA Civ 1629

[2] At [25].

[3] Per Lord Diplock in Moschi v Lep Air Services Ltd [1973] AC 331, 348


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