Wuhan Guoyu Logistics Group Co Ltd and Yangzhou Guoyu Shipbuilding Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629

Summary

The Court of Appeal was asked to consider a decision of the High Court concerning whether a payment guarantee was a guarantee or actually an on demand bond. The Court considered that the High Court’s lengthy consideration of previous authorities was unnecessary. The document could be interpreted based on the words actually used by the parties and the presumption that, if certain elements are present, it can be construed one way or another. The Court held that the document was an on demand bond.

Background

The Claimants (the “Seller”) owned a shipyard in Yangzhou, China. They entered into a shipbuilding contract with a ”Buyer”. The price payable was due in five separate instalments. The second instalment was due within five days of receipt by the Buyer of a refund guarantee issued by the Seller’s bank together with a certificate that the first cutting of steel for the vessel had taken place. The Defendant Bank (the “Bank”) provided finance to the Buyer.

The Bank issued what was described as a payment guarantee in respect of the second instalment. A dispute then arose between the Seller and the Buyer as to whether that instalment was due, the Buyer not accepting that the first cutting of steel had taken place nor that the refund guarantee provided was in the required form.

The question for the Court was whether this document was a guarantee or an on demand bond. If a demand bond, as the Seller submitted, there was nothing to prevent a demand being made under it against the Bank on which payment was then due, even if there was a dispute under the underlying contract. If it were a guarantee, as contended for by the Bank, it could only be enforced if and when it was established that there was a liability to pay under the underlying contract on determination of the parties’ dispute. Demand having been made the Seller had claimed summary judgment, which had been refused at first instance.

Decision

The Court held that the document was a demand bond and judgment was given accordingly.

Although different elements of the document pointed in different directions, the Court found Paget’s Law of Banking particularly helpful in its guidance that a document will almost certainly be construed as a demand guarantee where it “(i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor”. This, coupled with previous authorities who had followed this presumption, led the Court to decide that the document was an on demand bond.

Comment

This judgment emphasises how careful parties have to be when issuing or relying on a payment guarantee to ensure that it is worded to achieve the intended effect. This was a robust judgment and where the above elements are present in a bank payment guarantee, although each instrument must be construed on its own terms, banks will have an uphill struggle resisting payment in the absence of fraud.