Wuhan Guoyu Logistics Group Co Ltd & Others v Emporiki Bank of Greece SA

[2012] EWCA Civ 1629

The central question here was whether a payment guarantee was a guarantee or an “on demand bond”. The liability of the issuer to pay under an on-demand bond does not depend on breach of the underlying contract, whereas a guarantee cannot be enforced until a breach has occurred. At first instance (see Issue 145) the court had decided that an instrument described as a “Payment Guarantee” was held to be a guarantee, rather than an on-demand bond, with the result that the bank’s liability to pay was a secondary obligation.

The CA disagreed. Longmore LJ noted the following points that might be thought to favour a conclusion that the document was a traditional guarantee:

  1. The document was called a “payment guarantee” not an “on demand bond”;
  2. Clause 1 said that the Bank guaranteed “the due and punctual payment by the Buyer of the 2nd instalment”;
  3. Clause 2 described the 2nd instalment as being payable (in terms different from the Building Contract) 5 days after completion of cutting of the first 300 tons of steel of which written notice was to be given with a certificate countersigned by the Buyer;
  4. Clause 3 guaranteed the due and punctual payment of interest;
  5. Clause 4 imposed an obligation on the Bank to pay “in the event that the Buyer fails punctually to pay the second instalment”;
  6. Clause 7 said that the guarantor’s obligation was not to be affected or prejudiced by any variations or extensions of the terms of the shipbuilding contract or by the grant of any time or indulgence.

Against that, Longmore LJ thought the following points favoured the conclusion that the document was an “on demand” bond:

  1. Clause 4, the clause which required payment by the Bank, provided that payment was to be made: (a) on the Seller’s first written demand saying that the Buyer has been in default of the payment obligation for 20 days; and (b) “immediately” without any request being made to the Seller to take any action against the Buyer;
  2. Clause 7 provided that the Bank’s obligations were not to be affected or prejudiced by any dispute between the Seller and the Buyer under the shipbuilding contract or by any delay by the Seller in the construction or delivery of the vessel;
  3. Clause 10 provided a limit to the guarantee of US$10.3million representing the principal of the second instalment plus interest for a period of 60 days. This meant that it was not envisaged that there would be any great delay in payment after default as there would be if there was a dispute about whether the second instalment ever became due.

It was Clause 4 which turned out to be key.

The CA then referred with approval to the 11th edition of Paget’s Law of Banking which it noted was supported by judicial authority and which states as follows:

Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/ or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.

In construing guarantees it must be remembered that a demand guarantee can hardly avoid making reference to the obligation for whose performance the guarantee is security. A bare promise to pay on demand without any reference to the principal’s obligation would leave the principal even more exposed in the event of a fraudulent demand because there would be room for argument as to which obligations were being secured.”

This led the CA to the view that the document here was an ondemand bond, despite the fact that it was actually called a payment guarantee. Reading the document as a whole, and in particular clause 4, it was clear that the Bank had to make payment on written demand by the Seller. Longmore LJ noted that guarantees of the kind before the court here would be almost worthless if the Bank could resist payment on the basis that the foreign buyer was disputing whether a payment was actually due. That would be all the more so in a case such as the one here where the Buyer was able to refuse to sign any certificate of approval which may be required by the underlying contract.

At the end of his judgment, Longmore LJ noted that it was important that there should be a consistency of approach by the courts, so that all parties know clearly where they stand. This would seem to be a clear policy statement and one reason why the Judge quoted, again with approval, from the judgment of Ackner LJ in the case of Esal (Commodities) Ltd v Oriental Credit Ltd:

“… a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud and of the bank’s knowledge of that fraud.”