Caterpillar Motoren GmbH & Co KG v Mutual Benefits Assurance Company

Factual and Procedural Background

The Plaintiff, a German industrial equipment manufacturer and subsidiary of an American company, entered into contracts in late 2013 to deliver two power plants in Liberia. The Plaintiff also subcontracted construction services to a Liberian company ("Subcontractor") for these projects. The subcontract required the Subcontractor to procure Advance Payment Bonds and Performance Bonds in favor of the Plaintiff, issued by the Defendant, a Liberian insurance company and subsidiary of a Nigerian company.

On 10 January 2014, the Defendant issued the required bonds. Subsequently, disputes arose between the Plaintiff and the Subcontractor regarding performance and repayment of advance payments. The Plaintiff terminated the subcontract and demanded payment from the Defendant under the bonds. The Defendant refused, leading the Plaintiff to seek summary judgment in a lawsuit to recover sums claimed under the bonds.

Legal Issues Presented

1. Whether the Advance Payment Bonds and Performance Bonds issued by the Defendant are "on demand" bonds or true guarantees requiring proof of the Subcontractor's liability before the Defendant is liable to pay.

Arguments of the Parties

Appellant's Arguments (Plaintiff)

• The bonds should be construed as "on demand" bonds, meaning the Defendant's liability to pay arises upon the Plaintiff's demand without the need to prove the Subcontractor's liability.
• Application of Paget's presumption supports the bonds being "on demand" given the nature of the instrument and the background.

Appellee's Arguments (Defendant)

• The bonds are true guarantees, meaning the Defendant is only liable to pay if the Subcontractor's liability to the Plaintiff is established by admission, concession, or arbitration award.
• The court should apply general contractual construction principles to ascertain the parties' intentions.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by considering the language of the Advance Payment Bond (APB). Clauses 1 and 2 explicitly provided that the Defendant guarantees payment "forthwith on demand" and "without reference to the Contractor," with the Plaintiff's decision as to the amount payable being "binding" and "conclusive." This language strongly indicated an "on demand" bond rather than a true guarantee requiring proof of default.

Although the word "guarantee" and references to the Subcontractor's failure might suggest a true guarantee, clause 2's terms dispelled any doubt by removing the Defendant's right to contest the Plaintiff's demand or require proof of default.

Applying Paget's presumption, the court found that the APB met the four factors required: it related to an underlying international transaction, was issued by a financial institution engaged in insurance, contained an undertaking to pay "on demand," and lacked clauses excluding or limiting guarantor defences that would rebut the presumption. The court noted that even where such exclusion clauses exist, they do not necessarily rebut the presumption, consistent with prior case law.

Regarding the Performance Bond (PB), the court noted some language suggestive of a true guarantee, such as liability arising upon the Subcontractor's failure to pay lawful claims. However, clause 4 provided that the Defendant must pay "unconditionally" and "without demur" upon the Plaintiff's written declaration of default, with such a declaration being "conclusive." Clause 5 further supported prompt payment upon demand.

The court concluded the PB was also an "on demand" bond. The presence of clauses typical of true guarantees did not rebut the presumption given the clear language manifesting an intention to create an "on demand" bond.

The court rejected the Defendant's submissions that either bond was a true guarantee requiring proof of the Subcontractor's liability. The court emphasized the primacy of the contractual language and the application of established presumptions in commercial bond construction.

Holding and Implications

The court held that both the Advance Payment Bonds and the Performance Bonds are "on demand" bonds on their true construction.

As a result, the Defendant has no real prospect of successfully defending the claim, and the Plaintiff is entitled to summary judgment on its claims for the sums demanded under the bonds.

The decision directly affects the parties by confirming the Defendant's immediate payment obligations upon the Plaintiff's demand. No new precedent was established beyond the application of existing principles and presumptions in bond construction.