The High Court has 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).
This was the court's finding in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA in which the claimant had entered into a shipbuilding contract with the buyer with the contract price payable in five instalments. The second instalment was due when the buyer was notified that the first 300 metres of steel plate had been cut and approved by the buyer's representative.
The defendant had issued a payment guarantee for the payment of the second instalment. The cutting of the steel allegedly took place, but without the buyer's representative being present. The buyer failed to pay the invoice for the second instalment and the claimant made a claim under the payment guarantee saying it was a performance bond, due on written demand, whether or not the underlying payment was due. The claimant sought summary judgment.
The defendant argued that the payment guarantee was a 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. It followed that as there was a dispute about whether the cutting of the steel had taken place, and so whether the second instalment was due at all, its liability could not be decided summarily.
The court agreed that the defendant had an arguable case that the payment guarantee was a guarantee, not a performance bond because:
- The core obligation was that of a pure guarantee, being an undertaking to guarantee payment by the buyer
- The guarantee set out the circumstances when payment would be made by the defendant - being the notice of the steel cutting as confirmed by the buyer's representative
- Although not conclusive, the payment guarantee was referred to as a guarantee throughout the document.
The cumulative effect was an obligation to pay the sum due under the contract only when it became due.
Things to consider
Given the nature of a performance bond, had that been intended, the wording used in the document needed to have made the position clearer.