The case of Wuhan Guoyu Logistics v Emporiki Bank of Greece provides a recent example of English judges taking a robust approach to bonds.  It makes clear that money paid out under an on-demand bond will not be held in trust by the recipient beneficiary where it is subsequently shown that the recipient was not entitled to payment under the underlying contract to which the on-demand bond relates. 

This case relates to a shipbuilding contract under which the buyer was to procure its bank issue a “Payment Guarantee” in favour of the seller – that Payment Guarantee was held in a previous judgment (also covered by Law-Now) to be an on-demand bond.
 
Under the Payment Guarantee, the defendant guaranteed certain of the buyer’s payment obligations.  The seller,Wuhan, made a demand from the defendant bank,Emporiki Bank, for payment of an unpaid instalment of the contract price which, though initially refused by the defendant, was ultimately paid out under the Payment Guarantee.  It was, however, later determined at arbitration that the instalment had not fallen due under the shipbuilding contract and the defendant, relying on that determination, argued that the money paid out under the Payment Guarantee was held on trust for the defendant.  

The court disagreed; the claimant did not hold the money on trust for the defendant.  The court’s reasoning was as follows:

  • There was no analogy with cases of mistake.  On making its demand, the seller had acquired an enforceable cause of action against the defendant and the defendant had to make payment immediately as per the Payment Guarantee terms.  It was of no relevance that the demand, although made in good faith, was in fact made upon an incorrect premise.
  • The Payment Guarantee was intended to be an autonomous contract, independent of disputes between the seller and the buyer.  The underlying contract between seller and buyer is subject to an implied term that the seller, as beneficiary of the Payment Guarantee, will account to the buyer to the extent that the seller was over-compensated by the defendant. 
  • It is critical to the efficacy of financial arrangements such as these that as between seller and defendant the position crystallises at presentation of demand.  Only in the case of fraudulent demand can the defendant resist payment against an apparently conforming demand.
  • There was no unconscionability in the seller’s retention of the Payment Guarantee sum.  The purpose of prompt payment under the Payment Guarantee was to ensure that the seller had funds available to conduct its business, including construction of the ship.

Both of the Wuhan judgments demonstrate the traditionally robust approach to on-demand bonds taken by the English courts. In the first judgment, the court held that the Payment Guarantee was an on-demand bond rather than a performance guarantee (despite a number of ‘pointers’ indicating that it could be one or other). Now in this second judgment the court has decided in strong terms that payment under a bond will not be held on trust where the demand for payment was validly made albeit based on an incorrect premise. 

This continuation of the robust approach to on-demand bonds contrasts with a decision late last year in Doosan Babcock v Comercializadora De Equipos Y Materiales Mabe Limitada where Mr Justice Edwards-Stuart in the TCC sought to widen the grounds upon which challenges to calls under on-demand bonds can be made by the party procuring the bond. The judgment in that case expressly acknowledges that it is a departure from the traditional approach and it remains to be seen whether Mr Justice Edwards-Stuart’s judgment will be followed in other cases. 

Reference: Wuhan Guoyu Logistics Group Co Ltd and another v Emporiki Bank of Greece SA [2013] EWCA Civ 1679