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getting your money back just got (slightly) easier

15 August 2011

Imagine buying something big e.g. a ship or production line. The seller wants a payment upfront. You agree in return for a promise from a third party that you’ll be repaid if the seller fails to deliver (an “advanced payment guarantee”). The seller disposes of its business, meaning that the guarantee no longer refers to the right party. Can you still enforce the guarantee?

The Court of Appeal gave a purchaser in this situation greater comfort by treating the advanced payment guarantee as a performance bond (a primary obligation). Interpreted this way, rather than as a guarantee (a secondary obligation), the purchaser can enforce it even where the original contract for sale has been changed – which might otherwise have rendered a guarantee void.

With so much at stake and an “all or nothing” result, there is no substitute for clear drafting to make it clear that rights are intended to survive. A few extra words in the guarantee could have avoided the dispute entirely.

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