We last reported on Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA in April 2013. The dispute related to a shipbuilding contract where the bank guaranteed the payment obligations of its customer, the buyer, to the claimant seller under the contract. There was a dispute as to whether a payment instalment was due and the claimant called for payment under the payment guarantee from the bank.

The Court of Appeal had determined that the payment guarantee was a performance bond and that payment was to be made under it on demand, whether or not there was an underlying dispute as to payment between the contracting parties.

In the latest foray before the Court of Appeal, the issue was whether when the bank released money under the bond to the claimant, the claimant held it on trust for the bank, or the bank's customer, as argued by the bank. By the time payment had been made by the bank, it had been conclusively determined by an arbitration award that the disputed instalment had not in fact fallen due. As the seller therefore knew it was not entitled to payment of the instalment, the bank argued that that knowledge meant the seller held the money on trust for the bank.

The Court of Appeal disagreed holding that the guarantee was an autonomous contract independent of disputes between the seller and buyer pursuant to the underlying shipbuilding contract The seller would, however, be subject to an implied term in the underlying contract to compensate the buyer to the extent it had been over-compensated by the guarantor.

These principles were the basis upon which international trade was routinely financed. As between the beneficiary and the bank, the position crystallised at the time of presentation of the demand and the bank could only resist payment if there was a fraudulent demand by the beneficiary.

When the seller made its demand it had acquired a complete and immediately enforceable cause of action against the bank. It was irrelevant that it was subsequently determined that the demand, although made in good faith, had been made upon an incorrect premise (that payment was due).

The bank's failure to pay on demand had led to the circumstance where it could be said at the time of actual payment that the money was not in fact due. If payment had been made by the bank when it was due, that position would not have arisen. Payment from the bank fell due when demand was made following the purchaser's default. Once due, it remained due.

Things to consider

Although some may consider this a somewhat harsh judgment given the finding of the arbitrator before payment was actually made, that finding was not known at the time the demand was called upon. Certainty is crucial in international trade and this decision brings that certainty. Sellers can be certain they will get paid if a compliant on demand bond is in place and demand is properly made. Unfortunately, if over compensation is made under the demand, the bank and its customer may not have such certain of repayment if a seller has insolvency issues.