What makes a guarantee a primary as opposed to a secondary obligation?

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The answer lies in the words used as became apparent in the recent case of Ultrabulk A/S v. Jagatramka [2017] EWHC 2792 (Comm).

In the above case, ship operators (“Ultrabulk”) entered into agreements with a producer of coke in 2007. By 2013 the coke producer Gujarat NRE Coke Limited (“Gujarat”) owed US$4.26 million. Gujarat entered into an agreement to pay off the debt by instalments but this was backed by a personal guarantee from Gujarat’s principal – Mr Jagatramka.

The words used in the guarantee were effectively that Mr Jagatramka was aware of Gujarat’s debt in the sum of US$4.26 million (the “Gujarat Liabilities”) and that if Gujarat did not pay the Gujarat Liabilities by 31 December 2013 he would “on [Ultrabulk’s] first written demand… pay a sum equivalent to the Gujarat Liabilities plus the interest”.

Gujarat had not paid any of the debt by 31 December 2013 but it later paid US$1.95m. In 2015, Ultrabulk called upon the Personal Guarantee and demanded US$4.26 million plus interest from Mr Jagatramka. The question for the Court was very simple. Was the guarantee a primary or secondary obligation? If the former then Mr Jagatramka must may the entire US$4.26 million plus interest. If the latter then Mr Jagatramka would only be liable to pay US$2.31 million plus interest.

Mr Justice Teare concluded that the words used in the guarantee made it effectively an on demand bond, i.e. if such demand was validly made Mr Jagatramka was bound to pay the total debt of US$4.26 million, and not such sum as Gujarat was in fact liable to pay at that time. The following parts of the guarantee lead to the conclusion:

  • Mr Jagatramka agreed to pay “a sum equivalent to” the “Gujarat Liabilities” which was defined as US$4.26 million. He did not agree to pay a sum of money to be determined by reference to Gujarat’s actual liability at the material time.
  • He “unconditionally and irrevocably” guaranteed that if Gujarat did not pay the Gujarat Liabilities by 31 December 2013 he would, on demand, pay a sum equivalent to the Gujarat Liabilities. Such language was indicative of a primary liability.
  • He “irrevocably confirms that he will not contest and/or defend any application and/or proceedings to enforce” the guarantee. Again, such language was consistent with a primary liability and inconsistent with his liability being coextensive with that of Gujarat.

While there was authority for a presumption against construing an instrument as an on-demand bond where it was not given by a bank or other financial institution, Mr Justice Teare held that there was no doubt, considering the wording of the guarantee in question, that the instrument signed by Mr Jagatramka was in fact an on-demand bond.

The moral of the story of course is always consult a lawyer before entering into any form of personal guarantee. On demand bonds are common forms of security and, whilst they are usually issued by banks or financial institutions, this case extends the principal to cases where individuals are asked to provide such forms of security.

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