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When is a guarantee not a guarantee?

Sadly, we see many cases where clients enter into charters on the assumption that their counterparty risk is guaranteed only to find out later that the “guarantee” is effectively worthless.

Earlier this year the English Courts provided valuable guidance on how to apply the rules of construction when determining the scope and validity of a guarantee in the context of a bareboat charter (1). Where a guarantee seeks to impose an autonomous obligation on the guarantor to pay, irrespective of the actual liability of the primary obligor, then the wording of the guarantee needs to make it clear that performance of the charterparty and all obligations under it are guaranteed by the guarantor, who shall be liable as primary obligor and not merely as a surety.

Words in a charter to the effect that performance is “guaranteed by X” or, worse still, “to be guaranteed by X” are not necessarily enough to bind X, particularly where X has not signed the charter. In many cases, we see charters that name a guarantor but nobody has taken care to check that the guarantor has in fact agreed to guarantee the obligations of its subsidiary or related company. In one case, the owner only knew of a problem when the “guarantor” rejected the demand and contested the jurisdiction of the Tribunal on the basis that they could not be party to an arbitration agreement that they had not signed!

We would urge our clients to try to follow best practice and either insist on (1) a properly worded separate guarantee to be executed at the same time as the charter; or (2) a form of clear wording in the charter that the obligations of the charterer be guaranteed by X who is to be liable for those obligations a primary obligor and not merely as surety and that X also signs the charter to ensure that they are bound by the terms and are subject to the arbitration clause.

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