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Author: Karen Dicks
Service Area: Construction & Arbitration
Date: April 2013
Country: Hong Kong

 

Construction And Arbitration Newsletter
Issue 1 of 2013: April

Arrangement signed for mutual recognition and enforcement of arbitral awards between Hong Kong and Macau

Arbitration (Amendment) Bill 2013

Adjudicator's fee may not be payable where his decision is unenforceable

Judgment confirms Hong Kong courts' "hands off" approach to arbitration

Hong Kong's new Mediation Ordinance

Court refused to strike out Plaintiff's expert report on basis that Defendant had previously consulted same expert

Court examines approach in respect of applications to set aside arbitration awards under Article 34 of Model Law

Surety's appeal dismissed in Hackney Empire Ltd v Aviva Insurance Ltd case

When is a payment guarantee a guarantee rather than a demand bond?

Arrangement signed for mutual recognition and enforcement of arbitral awards between Hong Kong and Macau

On 7 January 2013, the Governments of Hong Kong and Macau signed "The Arrangement Concerning Reciprocal Recognition and Enforcement of Arbitral Awards Between the Hong Kong Special Administrative Region and the Macau Special Administrative Region" ("the Arrangement") to provide mutual recognition and enforcement of arbitral awards in both places.

Under the Arrangement, the Hong Kong courts will recognise and enforce arbitral awards made in Macau pursuant to Macau's arbitration laws and the Macau courts will recognise and enforce arbitral awards made in Hong Kong pursuant to Hong Kong's Arbitration Ordinance.

Where a party fails to comply with an arbitral award, whether made in Hong Kong or Macau, the other party can apply to the relevant court in the place where the party against whom the application is filed is domiciled, or the place in which the property of the said party is situated, for recognition and enforcement of the award.

In Hong Kong, the Court of First Instance will have jurisdiction to entertain an application for recognition and enforcement of awards. In Macau, the Court of First Instance will have jurisdiction to entertain applications for recognition while the Court of Second Instance will have jurisdiction to enforce the arbitral awards.

The Arrangement was made in accordance with the provisions in the Basic Law of Hong Kong and Macau. The content of the Arrangement was made in accordance with the spirit of the New York Convention and is broadly similar to the existing arrangements on the same issue between Hong Kong and Mainland China and between Macau and Mainland China.

The Arrangement will no doubt lead to greater legal co-operation between Hong Kong and Macau and further enhance Hong Kong's reputation as an international arbitration venue. The Arrangement will come into effect upon commencement of the Arbitration (Amendment) Ordinance 2013, which is currently at the bill stage (see below).

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Arbitration (Amendment) Bill 2013

On 28 March 2013, the Arbitration (Amendment) Bill 2013 was passed and the Arbitration (Amendment) Ordinance 2013 will come into effect on a day to be appointed by the Secretary for Justice. Its purpose is to amend the Arbitration Ordinance (Cap 609) ("the Ordinance") to implement the "Arrangement Concerning Reciprocal Recognition and Enforcement of Arbitral Awards Between the Hong Kong Special Administrative Region and the Macau Special Administrative Region" ("the Arrangement") signed by the Hong Kong and Macau Governments on 7 January 2013, referred to in the article above.

The Bill also makes miscellaneous amendments to the Ordinance, including the following:-

  • Addition of a new Part 3A providing for the enforcement of emergency relief granted by an emergency arbitrator, namely that, with leave of the court, any emergency relief granted by an emergency arbitrator in or outside Hong Kong is enforceable in the same manner as an order or direction of the court.
  • Amendment of section 75 of the Ordinance to provide that if the parties to arbitration have agreed that the costs of the arbitration are to be taxed by the court, the costs are to be taxed on a party and party basis.
  • Addition of a new Division 4 to Part 10 of the Ordinance, providing for the requirements relating to the enforcement of Macau arbitration awards in Hong Kong, including the evidence to be produced for enforcement of Macau awards and the circumstances in which enforcement of Macau awards may be refused.
  • Addition of four new parties to the New York Convention, namely Fiji, Liechtenstein, Sao Tome and Principe and Tajikistan.
  • Consequential amendments to the Rules of High Court as regards the enforcement of arbitral awards under those Rules.

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Adjudicator's fee may not be payable where his decision is unenforceable

In the English Court of Appeal decision of PC Harrington Contractors Ltd v Systech International Ltd, the issue was whether an Adjudicator's fee was payable where his decision was unenforceable, for being in breach of the rules of natural justice.

Background

PC Harrington Contractors Ltd ("PCH") had been employed to carry out works on three construction projects and disputes arose between it and its sub-contractor in relation to the release of retention monies. The disputes were referred by the sub-contractor to three adjudications, in accordance with the terms of the sub-contracts and the Scheme for Construction Contracts (England and Wales) Regulations 1998 ("the Scheme"), under which adjudications were to be carried out. An adjudicator ("the Adjudicator"), employed by Systech International Ltd ("Systech"), was appointed in each of the adjudications, and ruled in favour of the sub-contractor in each case, without considering PCH's defence that no retention monies were due because the sub-contractor had already been overpaid. The Adjudicator also decided that PCH should pay his fees and addressed his invoices to PCH.

PCH issued proceedings seeking a declaration that the Adjudicator's decisions were not enforceable, as he had failed to observe the rules of natural justice, by refusing to consider PCH's defence. The Adjudicator had therefore, PCH submitted, failed to perform the service which he had contracted to perform (i.e. to produce an enforceable decision) and was therefore not entitled to any fees. Systech commenced proceedings against PCH for recovery of the Adjudicator's fees.

Court of First Instance Ruling

Although the Court of First Instance held that the Adjudicator's decisions were unenforceable, it held that he was still entitled to his fees because the role of the Adjudicator under the Scheme involved not only the production of his decision, but also the discharge of other duties involving the conduct of the adjudication in the period leading up to the decision, in the same way that it is not merely the function of a judge or arbitrator to produce the judgment or an award, but also to provide all necessary and important ancillary and anterior functions. The judge at First Instance therefore concluded that it could not be said that there had been a total failure of consideration, as the Adjudicator had done a considerable amount of work on the dispute, which was a partial discharge of his role as adjudicator.

Court of Appeal Ruling

PCH appealed to the Court of Appeal. The Court of Appeal said that the question was not whether there was a total failure of consideration, because the case did not involve a claim in restitution for repayment of money paid by PCH to the Adjudicator. The question, the Court of Appeal said, was whether the contract was (a) an entire contract, such that the bargained for consideration was an enforceable decision or (b) a divisible contract for the performance of a series of "ancillary and anterior functions", culminating in the making of a decision.

The Court of Appeal allowed the appeal, holding that
:-

  1. The bargained for performance was an enforceable decision and there was nothing in the contract between the Adjudicator and PCH to indicate that the parties agreed that they would pay for an unenforceable decision (which was of no value to the parties) or that they would pay for the services performed by the Adjudicator which were preparatory to the making of an unenforceable decision.
  2. As the decision was unenforceable, the Adjudicator was not entitled to recover his fees.

In reaching its decision, the Court of Appeal did place some significance on the fact that the Scheme provided that if the Adjudicator's appointment was revoked, due to his default or misconduct, he was not entitled to any fees. The Court of Appeal held that the making of an unenforceable decision by reason of a breach of the rules of natural justice was a "default" or "misconduct" on the Adjudicator's part. The Court of Appeal also took into account the fact that the contract did not contain any provision for the payment of the Adjudicator's fees by instalments or by reference to the completion of discrete parts of the engagement.

Lord Justice Dyson, who gave the leading judgment, referred to the judge at First Instance's comparison between adjudicators and judges and arbitrators (as referred to above) and said that such comparison was wholly inappropriate. In relation to the comparison between adjudicators and judges, Lord Dyson said that judges have an inherent jurisdiction and do not derive their powers over the dispute from a contract of appointment. In relation to the comparison between adjudicators and arbitrators, Lord Dyson said that although the comparison might seem more fruitful since they both derive their authority from the contract between the parties, there were important differences, namely:-

  1. serious errors and fundamental misunderstandings by an arbitrator do not invalidate an award; the award is binding, subject to the court's supervisory jurisdiction;
  2. when anterior and ancillary functions are carried out by an arbitrator, they are binding on the parties and therefore the arbitrator gives value in performing them;
  3. if, during the course of the reference, the arbitrator ceases to hold office, the parties are free to agree whether and, if so, how they fill the vacancy and whether and, if so, to what extent the previous proceedings should stand, whereas if an adjudicator's appointment is terminated, the process must be started again with a fresh referral;
  4. an arbitrator has inherent jurisdiction and power to make a binding decision on the scope of his own jurisdiction, unless the parties agree otherwise and an arbitrator, unlike an adjudicator, can give value by providing a binding ruling on his jurisdiction.

The judgment may lead to parties refusing to pay adjudicators' fees (or seeking to recover them if already paid) where the adjudicator's decision is held to be unenforceable. As referred to above, the Court of Appeal did place significance on the fact that under the Scheme, if the Adjudicator's appointment was revoked due to his default or misconduct, he was not entitled to any fees. Accordingly, a court may reach a different conclusion where a different adjudication scheme (with no such provision) applies. Notwithstanding this, it would be wise for adjudicators to review their terms of appointment in respect of payment of their fees and perhaps include a provision that they are to be paid even in the event of their decision being found to be unenforceable and also a provision for payment of their fees by instalments or by reference to completion of discrete parts of their engagement.

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Judgment confirms Hong Kong courts' "hands off" approach to arbitration

On 19 February 2013, Hong Kong's Court of Final Appeal refused leave to appeal against the Court of Appeal's leading judgment on the setting aside of arbitral awards.

Background

On 29 June 2011, the Court of First Instance ("CFI") granted the application of Pacific China Holdings Ltd ("Pacific China") to set aside an International Chamber of Commerce (ICC) arbitral award ("the Award") made against it in favour of Grand Pacific Holdings Ltd ("Grand Pacific") for US$55 million. The Award was set aside under Article 34 (2) of the UNCITRAL Model Law (which is incorporated in Hong Kong's Arbitration Ordinance) on the grounds that Pacific China had been unable to present its case and/or that the arbitral procedure had not been in accordance with the parties' agreement.

The CFI found that the arbitral tribunal("the Tribunal") had departed from an agreed procedural timetable for the exchange of pre-hearing submissions and had refused Pacific China leave to rely on legal authorities and respond to submissions of Grand Pacific on a particular issue, meaning that the arbitral procedure had not been in accordance with the parties' agreement and rendering Pacific China unable to present its case.

In respect of the violations, the CFI was unable to say that if they had not occurred, the result could not have been different and accordingly, Pacific China was entitled to the exercise of the court's discretion in favour of setting aside the Award.

Court of Appeal Ruling

By a unanimous decision on 9 May 2012, the Court of Appeal reversed the CFI's decision and reinstated the award, holding that:-

1. The setting aside remedy provided by Article 34 is not an appeal and the court will not address itself to the substantive merits of the dispute or to the correctness or otherwise of the award in fact or law. It would address itself only to the structural integrity of the arbitration process.

2. For the award to be set aside on the basis that a party had been unable to present his case, the conduct complained of must be serious or even egregious before a court might take the view that a party had been denied due process.

3. There was no basis for disagreeing with the Tribunal's decisions made in this case and the CFI was not entitled to interfere with a case management decision that was fully within the Tribunal's discretion.

4. The burden was on the party seeking to set aside the award to show that it had or might have been prejudiced.

Court of Final Appeal Ruling

On 19 February 2013, the Court of Final Appeal refused to grant Pacific China leave to appeal to the Court of Final Appeal, the Court of Appeal having previously also refused leave. The Court of Final Appeal said that the Court of Appeal had been entirely correct to hold that the complaints advanced by Pacific China did not constitute viable grounds for setting the Award aside. The rulings complained of, were, the Court of Final Appeal said, made by the Tribunal in the proper exercise of its procedural and case management discretion, reflecting its assessment of the requirements of procedural fairness, as appropriate to the circumstances and there was no basis for interference by the court.

This judgment makes it clear that the Hong Kong courts will be slow to interfere with procedural and case management decisions of arbitral tribunals and that in order to set aside an arbitral award on the basis of lack of due process a party has to meet a very high threshold, namely the conduct complained of must be serious or even egregious. This will no doubt further cement and enhance Hong Kong's reputation as an attractive arbitration seat.

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Hong Kong's new Mediation Ordinance

Purpose of the new Mediation Ordinance

Hong Kong's new Mediation Ordinance ("the Ordinance") came into effect on 1 January 2013 and provides a regulatory framework in respect of certain aspects of mediation, including confidentiality and privilege. The Ordinance states its objects as being:-

i. to promote, encourage and facilitate the resolution of disputes by mediation; and

ii. to protect the confidential nature of mediation communications.

Mediation defined

For the purpose of the Ordinance, "mediation" is defined as:

..." a structured process comprising one or more sessions in which one or more impartial individuals, without adjudicating a dispute or any aspect of it, assist the parties to the dispute to do any or all of the following:-

  1. identify the issues in dispute;
  2. explore and generate options;
  3. communicate with one another;
  4. reach an agreement regarding the resolution of the whole, or part, of the dispute".

A "session" is a meeting between a mediator and one or more of the parties to the dispute and includes any activity undertaken in respect of arranging or preparing for it (whether or not it takes place) and follow up of any issues and matters raised at it.

What mediations does the Ordinance apply to?

The Ordinance applies to any mediation conducted under an agreement to mediate if either of the following circumstances apply:-

  1. the mediation is wholly or partly conducted in Hong Kong; or
  2. the agreement provides that the Ordinance or the law of Hong Kong is to apply to the mediation.

The Ordinance does not apply to those processes listed in Schedule 1 of the Ordinance. These include, for example, mediation proceedings under sections 32(3) and 33 of the Arbitration Ordinance (Cap 609) and conciliation under certain sections of the Labour Tribunal Ordinance (Cap 25).

An agreement to mediate means an agreement in writing by two or more persons to submit a dispute to mediation, regardless of whether:-

  1. the agreement is in the form of a mediation clause in an agreement or in the form of a separate agreement;
  2. whether the agreement is made before or after the dispute arises; and
  3. whether or not a mediator is appointed at the time the agreement is made.

An agreement to mediate can be in electronic form.

The Ordinance applies to:-

  1. agreements to mediate made before, on or after 1 January 2013 i.e. the date when the Ordinance came into effect;
  2. mediations conducted before, on or after 1 January 2013;
  3. mediation agreements entered into in Hong Kong or elsewhere.

What mediation communications does the Ordinance apply to?

The Ordinance applies to any mediation communication (made before, on or after 1 January 2013) relating to any mediation to which the Ordinance applies. A "mediation communication" means:-

  1. anything said or done;
  2. any document prepared; or
  3. any information provided

for the purpose of or in the course of mediation, but does not include:-

  1. an agreement to mediate; or
  2. a mediated settlement agreement.

Confidentiality of mediation communications

The Ordinance prohibits a person from disclosing a mediation communication, except in the following circumstances:-

(a) with the consent of the parties to the mediation, the mediator(s), and the person who made the communication (in those cases where s/he is not a party to the mediation);

(b) information that is already in the public domain (apart from that put in the public domain unlawfully);

(c) information which is otherwise subject to discovery in civil proceedings or similar procedures;

(d) there are reasonable grounds to believe that disclosure is necessary to prevent/minimise danger of injury to any person or of serious harm to a child's well-being;

(e) disclosure is made for research, evaluation or educational purposes, without revealing, or being likely to reveal, the identity of the person to whom the mediation communication relates;

(f) disclosure is made for the purpose of seeking legal advice; or

(g) disclosure is required by law.

A mediation communication can be disclosed, with the court's or tribunal's leave, for the following purposes:-

  1. enforcing or challenging a mediated settlement agreement;
  2. establishing or disputing an allegation or complaint of professional misconduct made against a mediator, or any other person who participated in the mediation in a professional capacity;
  3. any other purpose that the court or tribunal considers justifiable in the circumstances of the case.

Admissibility of mediation communications in evidence

A mediation communication can only be admitted in evidence in any judicial, arbitral, administrative or disciplinary proceedings with the court's or tribunal's (as the case may be) leave.

Leave for disclosure or admission into evidence of a mediation communication

The Ordinance specifies the matters to be taken into account by the court or tribunal when deciding whether to grant leave for disclosure of a mediation communication or its admission into evidence, namely whether the mediation communication may be or has been disclosed i.e. whether it falls within one of the categories, referred to at (a) to (g) above, whether it is in the public interest or interests of the administration of justice and any other circumstances or matters the court or tribunal considers relevant.

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Court refused to strike out Plaintiff's expert report on basis that Defendant had previously consulted same expert

In the recent Hong Kong High Court decision of Daimler AG (formerly known as Mercedes-Benz AG) v Leiduck, Herbert Heinz Horst & Anor, the court dismissed the Defendants' application to strike out the Plaintiff's expert's report on Russian law on the ground that he was unsuitable to be an expert. The expert in question was a partner in the law firm White & Case, Moscow. The Defendants' objection was that they had consulted another partner of White & Case, Moscow (before the Plaintiff) with a view to engaging him as expert in the same proceedings. Although not a construction case, it is nevertheless relevant to experts in the construction field, given the relatively small community of construction experts.

The court held that generally there is no property in an expert witness, subject to the protection of legal professional privilege and confidence. It said that the mere fact an expert had been consulted, and had in the course of such consultation, been provided with privileged or confidential information by one party who had decided not to call him, would not prevent the expert from subsequently giving an opinion to and testifying for the opposite party on the same subject-matter, provided that the expert's opinion was not based, or inseparably dependent, on the privileged or confidential material provided to him by the party who approached him first, so that he can (and does) give evidence without having to refer to or deploy any such privileged or confidential material.

The question, the court said, boiled down to whether privileged or confidential information had been provided by the Defendants' solicitors to White & Case, Moscow in the course of their communications and, if so, whether the expert had disclosed or misused such information in acting as expert witness for the Plaintiff. In this regard, to attach privilege or confidentiality to a piece of information imparted in a communication by a solicitor with a third party on behalf of his client, that information must itself be information for which privilege can be claimed by the solicitor's client against others or which has the essential quality of being confidential. The third party cannot be restrained from receiving the same information from another client or obtaining it from public avenues or from using the information so received or obtained for such other client, merely because he had been given it first by the earlier client.

In the present case, the court was not persuaded that information for which the Defendants could claim privilege or confidence had been imparted by the Defendants' solicitors to White & Case, Moscow or that the expert had disclosed or misused any privileged or confidential information of the Defendants in acting as the Plaintiff's expert witness or had taken a stance against the Defendants or compromised his impartiality.

The expert evidence in this case related to general questions of Russian law and practice in relation to the registration of companies and the court could not see that questions on which an expert would require contribution, or was likely to receive instruction or information from the party retaining him, was that for which that party could claim privilege or confidence.

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Court examines approach in respect of applications to set aside arbitration awards under Article 34 of Model Law

In the Hong Kong case of Pang Wai Hak & Anor v Hua Yunjian & Anor, the Applicants (who had been the Respondents in the arbitration) applied under Article 34(2) of the Model Law to set aside an arbitration award made in Hong Kong, on the grounds that the Applicant had been unable to present his case.

PRC law was the governing law under the arbitration agreement and the Applicants had contended for the first time, in their opening submissions during the arbitration hearing, that the Respondents' claim was time-barred under PRC law. There had been no examination in chief, cross examination or re-examination of factual witnesses or experts on the limitation issue. The Arbitrator gave his award and upheld the Respondents' claim to the extent of RMB$3.55 million and dismissed the Applicants' counterclaim. The two reasons given for rejecting the limitation defence were that: (i) it had not been pleaded; and (ii) the factual witnesses had not given any concrete evidence in respect of contentions that the claim or counterclaim were time-barred.

The Applicants' complaint now was that the reasons given by the Arbitrator for rejecting the limitation defence had not been raised by either party or by the Arbitrator with the parties at the arbitration hearing, but were points taken by the Arbitrator himself. They argued that had the points been raised by the Arbitrator, they could have easily been dealt with.

As in the Grand Pacific case above, the court held that in determining whether to set aside an arbitral award on the ground that a party had been unable to present his case, the court was not concerned with the substantive merits of the dispute, or correctness or otherwise of the award, because it was not hearing an appeal from the decision of the arbitral tribunal.

The court said that to justify setting aside an arbitral award on this ground, the court had to be satisfied that a party had been denied due process and, for this purpose, the conduct complained of must be serious or even egregious.

The court said that whether there had been a denial of due process depended on the court's evaluation of the relevant facts and circumstances of each individual case. One particular instance in which a party could justifiably complain was where the tribunal carried out its own investigation or inquiry on primary facts, or decided a case based on a wholly new point of law or fact without giving the parties a fair opportunity to consider and respond to such point. Ultimately, in considering whether a party was unable to present his case, the question was, the court said, one of fairness in the arbitral process.

It was not necessary, the court said, for the party seeking to set aside the award, to show any form of dishonesty or reprehensible conduct by the arbitral tribunal or the other side. The "unable to present his case" ground was not limited, the court said, to situations where a party is prevented from presenting legal arguments or dealing with evidence, but may extend to a situation where a party is prevented from presenting his case on a procedural issue which is taken by the arbitral tribunal against him of the tribunal's own volition.

In respect of the first reason given by the Arbitrator for rejecting the limitation defence i.e. because it was not pleaded, the court said that the Arbitrator ought to have given the parties an opportunity to address the point before dismissing the limitation defence. The court said that had the pleading point been the only reason given by the Arbitrator for rejecting the limitation defence, it would have set aside the award. However, the court said that it was apparent from the Award that the Arbitrator was fully aware of the parties' respective contentions on whether the Respondents' claim was time-barred. It therefore considered that although the Applicants had made out their complaint in respect of the "pleading" point", it had not made out its case in respect of the "lack of concrete evidence point". The court said that as the two reasons given by the Arbitrator to reject the limitation defence were independent reasons, it seemed clear that the Arbitrator would have reached the same conclusion even if he had ignored the pleading point.

The court has, it said, a discretion not to set aside an arbitral award even if a violation of Article 34 has been established, if it is satisfied that the outcome could not have been any different, which was the case here.

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Surety's appeal dismissed in Hackney Empire Ltd v Aviva Insurance Ltd case

In our March 2012 Legal Update, we reported on the English case of Hackney Empire Ltd v Aviva Insurance Ltd, in which the surety disputed liability under a bond when the contractor defaulted, because the side agreement under which liability arose, had been entered into by the employer and contractor without the surety's knowledge.

The court held that the side agreement did not involve any material variation of the building contract and was, in any event, within the scope of an indulgence clause and that the bond was therefore still enforceable. However, it found that the obligations under the side agreement (to make advance payments on account of the contractor's claims for extensions of time and associated loss and expense) fell outside the scope of the bond and that the employer could therefore only recover liquidated and ascertained damages under the bond, but not advance payments.

The surety subsequently appealed to the Court of Appeal on the grounds that the judge had applied the wrong test for determining whether liability of a surety under a bond should be discharged. The surety argued that on the basis of the correct test, it should be discharged from its liability. The employer accepted that the wrong test had been applied, but contended that, by reference to the correct legal principles, it was still entitled to recover under the bond. The Court of Appeal dismissed the appeal holding that:-

  1. For the rule in Holme v Brunskill to apply (see our March 2012 Legal Update for details of the rule), there had to be a variation of the original contract without the surety's consent.
  2. Advance payments of the contract price made by an employer to a contractor might have the effect of discharging a surety's liability. On the other hand, additional payments (whether by gift or loan) made by the employer to the contractor outside the terms of the original contract did not have that effect.
  3. A surety will not be released from liability by reason of contractual variations or advance payments if (a) he has specifically consented to what was done or (b) there is an indulgence clause which covers what was done.

Applying the above principles, the Court of Appeal held that :-

  1. The parties had not varied the construction contract, save in two immaterial respects and it therefore followed that the rule in Holme v Brunskill did not apply.
  2. The effect of the side agreement was that the advance payments made by the employer to the contractor were a loan. If the contractor subsequently substantiated a loss and expense claim, then the money paid by the employer would be retained by the contractor as payment, or part payment, of the loss and expense. If the contractor failed to establish any loss and expense claim, then it would repay the advance payments to the employer.
  3. The advance payments made by the employer to the contractor in this case did not therefore have the effect of releasing the surety from liability under the bond. However, the surety's liability only related to the original construction contract and it therefore had no liability in respect of the contractor's failure to repay the advance payments which it owed to the employer under the side agreement. The surety was however, liable for the ₤205,000 liquidated and ascertained damages due under the construction contract.

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When is a payment guarantee a guarantee rather than a demand bond?

The English Court of Appeal case, Wuhan Guoyu Logistics Group Co Ltd & Anor v Emporiki Bank of Greece SA, involved a payment guarantee issued by a bank in relation to an instalment of the price payable under a shipbuilding contract. The main issue before the Court of Appeal was whether the payment guarantee, properly construed, was a demand bond or a guarantee.

The Court of Appeal held that the proper construction of a payment guarantee depends on the words that the parties use. The Court said that there is a presumption that if the instrument (i) relates to an underlying transaction between 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 guarantee.

In the present case, the Court of Appeal found that the first three of the above presumptions were present in the instrument in question and that the judge at first instance should have had much more regard to the presumption than he did, particularly where, as here, the contract was to some extent drawn up by persons not entirely familiar with the English language. The Court of Appeal therefore concluded that the instrument in question was an on demand guarantee.

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