Clause And Effect: "See To It" And "On Demand" Guarantees

In the recent case of Shanghai Shipyard Co. Ltd. V. Reignwood International Investment (Group) Company Limited  [2021] EWCA Civ 1147 the Court of Appeal (COA) unanimously overturned the first instance decision and found a parent company guarantee to be a guarantee “on demand”. Despite arbitration proceedings having commenced under the underlying contract, the COA found the guarantor liable to pay $170 million under the guarantee. The COA emphasised that the words used in the guarantee and the commercial context of the guarantee are critical factors.

“On demand” and “see to it” guarantees

In construction projects, where a subsidiary company enters into a contract with a third party, it is common for the third party to request a parent company guarantee to ensure the performance of the contract. In that situation a parent company can give a guarantee to provide a level of security in respect of the obligations of its subsidiary under the contract. Typically, these