We first reviewed the decision in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA in our August 2012 issue of Finance Litigation Briefing. At first instance, the court held that even where a party is referred to in the guarantee as a "primary obligor", the agreement may still be a guarantee (creating a secondary obligation), not a performance bond (creating a primary obligation requiring payment on first demand).
The brief facts are that the claimant had entered into a shipbuilding contract with the buyer with the contract price payable in five instalments. The defendant bank provided finance to the buyer and issued a payment guarantee for the second instalment. The buyer failed to pay the second instalment and the claimant made a claim under the payment guarantee on the basis it was a performance bond, due on written demand. The demand was not met and the claimant sought summary judgment.
The defendant argued that the payment guarantee was a 'proper' guarantee, not a bond, despite some of the language used being appropriate for a performance bond. Therefore, its liability as guarantor was contingent on the underlying obligation and as there was a dispute about whether the second instalment was due at all, its liability could not be decided summarily.
At first instance, the court held the instrument to be a guarantee only. The claimant successfully appealed.
The Court of Appeal held that while the words used by the parties were highly relevant, there was, nevertheless, a presumption that if certain elements were present in the instrument, it would be construed in a particular way. It was a settled presumption that an instrument would almost always be construed as a demand guarantee or on demand bond where it:
- related to an underlying transaction between the parties in different jurisdictions;
- was issued by a bank;
- contained an undertaking to pay 'on demand'; and
- did not contain clauses excluding or limiting the defences available to the guarantor.
The guarantee in this case bore those elements. The Court of Appeal held that the court at first instance should have had more regard to the settled and accepted presumption that an instrument such as this was an on demand guarantee and not a traditional guarantee.
Things to consider
Guarantees of the type before the court in this case would be almost worthless if the bank could resist payment on the basis that the foreign buyer was disputing whether a payment was due, or could simply refuse to sign a certificate of approval which might be required by the underlying contract. The presumption gives the seller some security.