Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd.

Factual and Procedural Background

These proceedings concern the interpretation of a written agreement executed as a deed dated 15 September 2009, referred to as the "2009 Guarantee". The parties to this agreement are the Plaintiff, described as the "Guarantor", and the Defendant, formerly known as Angel Trains International Limited and now renamed Company B, representing itself and its affiliates collectively called the "Angel Trains Group". The dispute centers on the circumstances under which the Plaintiff's liability to make payments to a "Beneficiary" under the 2009 Guarantee is triggered.

The Plaintiff contends that its liability arises only upon proof, either by admission or court decision, of a breach of contract by one or more "Guaranteed Parties" (certain companies within the Plaintiff's corporate group). In contrast, the Defendant argues that the Plaintiff's liability is triggered by demand alone, characterizing the 2009 Guarantee as an unconditional "on demand performance guarantee".

The Plaintiff initiated these proceedings after receiving a letter of demand claiming over £17 million under the 2009 Guarantee, which was later revised to a sum of £17,267,354. The Plaintiff disputes the full amount claimed.

The background includes a long-standing commercial relationship between the Plaintiff's group and the Defendant's group dating back to 2000, involving the sale and maintenance of locomotives through various agreements, including a Master Purchase Agreement ("MPA") and related contracts. The Defendant has raised complaints about defects in sixty-three locomotives supplied under these agreements, leading to claims for losses and repair costs.

There are ongoing proceedings in another court concerning the liability and quantum related to the locomotives supplied under the MPA, with detailed technical disputes anticipated.

Legal Issues Presented

1. Whether the Plaintiff's liability under the 2009 Guarantee is conditional upon proof of default or breach by the Guaranteed Party, or whether it arises upon demand alone.
2. The proper construction of the 2009 Guarantee: whether it constitutes a traditional contract of guarantee with secondary liability or a demand bond (performance guarantee) with primary liability triggered by demand.
3. The effect and interpretation of specific contractual clauses, including those relating to waiver of defences, demands, and conclusive evidence provisions.
4. The implications of the contractual context and previous related guarantees on the construction of the 2009 Guarantee.
5. Whether the Plaintiff is liable under the 2009 Guarantee to indemnify the Defendant for losses already incurred in respect of defective locomotives.

Arguments of the Parties

Plaintiff's Arguments

• The Plaintiff's liability under the 2009 Guarantee is triggered only upon proof of breach of contract or default by a Guaranteed Party, not merely by demand.
• The 2009 Guarantee contains a mixture of primary and secondary obligations, but key obligations remain conditional on the underlying breach or failure to perform by the principal.
• Clauses such as 3.1 (payment on demand), 6 (waiver of defences), and 11.2 (conclusive evidence) are standard in guarantees and do not convert the instrument into a demand bond.
• The "pay now, argue later" clause (6.4) defers the right to raise defences until after payment but does not eliminate the need to prove liability of the principal.
• The extensive definition of "Beneficiary" and the unlimited nature of obligations weigh against construing the 2009 Guarantee as a demand bond.
• Comparisons to earlier guarantees are not determinative because the 2009 Guarantee differs materially in wording and scope.
• The governing law is English law, which requires strict construction of such guarantees and does not allow foreign law concepts to alter the interpretation.

Defendant's Arguments

• The 2009 Guarantee is a demand bond, an unconditional and independent promise to pay on demand without requiring proof of default.
• Contextual factors support this interpretation, including the close commercial relationship between the parties, the nature and duration of the underlying agreements, and the Defendant's need for prompt security against non-performance.
• Specific clauses support the demand bond construction: clause 2.1 describes the Plaintiff's obligations as "principal debtor and not merely as surety"; clause 3.1 requires payment "on demand"; clause 6.3 waives the Plaintiff's right to require proceedings against others first; clause 6.4 enforces "pay now, argue later"; clause 7 allows multiple demands regardless of proceedings against the principal; and clause 11.2 treats the Beneficiary's certificate as conclusive evidence of the amount owed.
• The earlier 2003 guarantee contained express demand bond language, and the 2009 Guarantee should be interpreted consistently with the parties' prior intentions.
• The instrument was intended for international use by beneficiaries unfamiliar with English law subtleties, and underlying agreements may be governed by civil law jurisdictions where "demand" is interpreted literally.
• The Defendant seeks a declaration or judgment that the Plaintiff is liable to indemnify for losses already incurred due to defective locomotives.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by reviewing the relevant legal principles governing contracts of suretyship, distinguishing between guarantees (secondary liability) and indemnities (primary liability), and the specialized category of demand or performance bonds, which are typically banking instruments enforceable on demand alone.

The court recognized a strong presumption against construing non-banking suretyship instruments as demand bonds unless clearly expressed otherwise.

Analysis of the 2009 Guarantee revealed a broad and extensive scope of obligations covering present and future liabilities owed by the Plaintiff's group to the Defendant's group, including both guaranteed and indemnified obligations.

Clause 2.1, which sets out the Plaintiff's obligations, contains sub-clauses that appear to be a mixture of primary and secondary obligations. However, key sub-clauses (a), (b), and (c) were interpreted as secondary obligations conditioned on the principal's failure to perform or pay.

The court rejected the Defendant's argument that the opening words of clause 2.1 convert all obligations into primary ones enforceable on demand without proof of default, finding instead that the clause contemplates a mixture of obligations.

Clauses relied upon by the Defendant to support the demand bond construction—such as payment "on demand" (clause 3.1), waiver of rights to require proceedings against others (clause 6.3), "pay now, argue later" (clause 6.4), multiple demands (clause 7), and conclusive evidence of amount (clause 11.2)—were found to be standard features in guarantees and did not alter the fundamental requirement of proving breach or default.

The court held that clause 6.4, which allows the Plaintiff to raise defences only after payment, presupposes that such defences exist and are relevant, consistent with secondary liability rather than primary unconditional liability.

The court also considered the contractual context, including the commercial relationship between the parties and the nature of the underlying agreements, but found no persuasive reason to depart from the presumption against a demand bond.

Arguments based on international use and civil law jurisdictions were rejected because the instrument expressly states it is governed by English law, which must be applied as written.

The court declined to give weight to the earlier 2003 guarantee as a guide to construction of the 2009 Guarantee, emphasizing that the later agreement replaced the earlier one and must be construed on its own terms.

Regarding the Defendant's alternative claim for indemnity for losses already incurred, the court noted ongoing proceedings concerning the same issues and considered it appropriate to await their outcome before determining the Plaintiff's liability under the 2009 Guarantee.

Holding and Implications

The court's final decision is to DECLARE that the Plaintiff's liability under the 2009 Guarantee is not a primary, unconditional liability triggered solely by demand. Instead, the Plaintiff's liability is conditional upon proof of breach or failure by the Guaranteed Party under the Relevant Documents.

The direct effect of this ruling is that the Defendant cannot call upon the Plaintiff to pay sums under the 2009 Guarantee without establishing the underlying liability of the Guaranteed Party. The court did not establish any new precedent but reaffirmed established principles regarding the construction of guarantees and demand bonds outside the banking context.

The court also indicated that the Defendant's alternative claim for indemnity based on incurred losses is premature and should be considered in the context of the ongoing proceedings concerning liability and quantum.