Wuhan Guoyu Logistics Group Co Ltd and another v Emporiki Bank of Greece SA 

[2013] EWCA Civ 1679

We have discussed this case before in Issues 145 and 150. The central question then was whether a payment guarantee was a guarantee or an “on demand bond”. The CA held that it was an on-demand bond, which meant that the liability of the Bank to pay did not depend on any breach of the underlying contract. At the same time as these court proceedings were taking place, an arbitration was on foot between the Buyer and Seller (the underlying contract being in relation to shipbuilding). As the Award was not final, the Bank paid the amount due into an escrow account in the joint names of the Bank’s and the Sellers’ solicitors. When the Tribunal’s findings did become final, prior  to releasing the funds, the Bank issued an application for a declaration that following payment, the Sellers would hold the money on trust either for the Bank or for the Buyer who would in turn hold it in trust for the Bank. The Bank argued that once the Award became final, the Sellers knew that they were not entitled to the money paid. The CA held that in the case of an on-demand bond, the general principle is that the position crystallises when the relevant demand is presented and the payer can only resist payment against an apparently conforming demand if there is a clear case of fraud. The implication of a trust, impressed upon the monies received by the Sellers here under the on-demand bond, would be contrary to this general principle.

It is implicit in the nature of a performance bond that, in the absence of clear words to the contrary, when the bond is called, there will at some stage in the future be an “accounting” between the parties where the rights and obligations will finally be determined. The bond is a guarantee of due performance; not a pre-estimate of the amount of damages to which the beneficiary may be entitled in respect of the breach of contract which gave rise to the right to call the bond. If the amount of the bond was not enough to satisfy the claim for damages, the Buyer would be liable to the Seller for damages in excess of the amount of the bond. On the other hand, if the amount of the bond is more than enough to satisfy the Seller’s claim for damages, the Buyer can recover from the Seller the amount of the bond that exceeds the Seller’s damages.