Bonds and guarantees often contain a tangle of confusing and contradictory legalese which attempts to address issues raised in conflicting case law. The recent case of Wuhan Guoyu Logistics Group v Emporiki Bank of Greece illustrates this.
The bank entered into an instrument under which it agreed to pay out certain monies to Wuhan. Wuhan argued that the instrument was an on-demand guarantee and, as long as the demand was not fraudulent, the bank had to pay out as it could not rely on any defences available in the underlying contract. Wuhan relied on certain ‘pointers’ to support its case: the instrument had been issued by a bank; it contained an undertaking to pay ‘on demand’ and it did not contain a clause limiting the defences available to the bank.
The bank disagreed. It argued that the instrument was a ‘see to it’ guarantee and it therefore could rely on defences available in the underlying contract. The bank relied on other ‘pointers’ in the document to support its case: the instrument was described as a ‘guarantee’; the bank guaranteed the due and punctual payment by the buyer of the second instalment and the bank was obliged to pay “in the event that the Buyer fails punctually to pay the second instalment”.
At first instance, the judge agreed with the bank: it was a ‘see to it’ guarantee. The Court of Appeal disagreed. It decided that the instrument was an ‘on-demand’ guarantee. The Court of Appeal conceded that the case was tricky as the instrument contained “pointers in different directions”. The Court of Appeal decided to follow the guidance set out in Paget’s Law of Banking which states that where an instrument relates to a transaction between parties in different jurisdictions; is issued by a bank; contains an undertaking to pay ‘on demand’ and does not contain clauses excluding or limiting defences available to a guarantor, it will “almost always be construed as a demand guarantee” even if the same instrument contains conflicting ‘pointers’.
To avoid any confusion you may decide to dust off and review your guarantees and bonds to make sure that all the key obligations are pointing in the right direction.