Wuhan Guoyu Logistics Group Co Ltd and another v Emporiki Bank of Greece SA  EWHC 1715 (Comm)
The claimants jointly operated a shipyard in China (“the Seller”) and entered into a shipbuilding contract for the construction of a bulk carrier. The contract was later novated to two other companies (“the Buyer”). The contract price for the vessel was payable in five instalments, with the second instalment to be paid on receipt by the buyer of a “Refund Guarantee” issued by the claimant’s bank, together with a certificate of the cutting of the first 300m steel plate of the vessel. In turn, the Buyer was to give a “Payment Guarantee” in respect of the second instalment. On 14 December 2007 the defendant Bank issued a Payment Guarantee providing finance to the Buyer and to which the Buyer had assigned all claims under the shipbuilding contract and the refund guarantee.
A dispute arose and the Buyer did not pay the second instalment. The Seller made a claim under the Payment Guarantee on 22 June 2011, arguing that it was a performance bond which was due on written demand, regardless of whether the underlying payment was due. The Seller claimed summary judgment for the principal and interest. Conversely, the Bank said that the instrument was properly called a guarantee, therefore its liability, as guarantor, was contingent on an underlying obligation. The Bank argued that its liability could not be decided summarily as there was a genuine dispute as to whether the second instalment was in fact due.
The relevant clauses of the Payment Guarantee provided:
“(1)… We hereby irrevocably absolutely and unconditionally guarantee, as the primary obligor and not merely as the surety, the due and punctual payment by the BUYER of the 2nd instalment of the Contract Price… as specifi ed in (2) below.
(2) The instalment guaranteed hereunder pursuant to the terms of the Shipbuilding Contract, comprises the 2nd instalment… payable by the BUYER within fi ve New York banking days after completion of cutting of the fi rst 300 MT of steel plate…
(4) In the event that the BUYER fails to punctually pay the second instalment guaranteed hereunder…then, upon receipt by us of your fi rst written demand stating that the BUYER has been in default of the payment obligation for twenty (20) days… we shall immediately pay to you… the unpaid 2nd Instalment…”
Clarke J refused to grant summary judgment in favour of the Seller on the basis that the Bank had an arguable case that the Payment Guarantee was a guarantee and not a performance bond.
The Judge noted that the Payment Guarantee was continuously referred to as a guarantee, and used the classic language of a guarantee. The Bank’s undertaking under the Payment Guarantee was the liability of a guarantor in respect of the second instalment, and not simply an agreement to pay on demand the second instalment in the event that the Buyer failed to make payment. The Payment Guarantee also clearly described the circumstances in which the Bank should make payment under clause 2. This included a requirement that notice of the cutting of the steel be counter-signed by the benefi ciary of the guarantee, which acted as a condition precedent to payment.
Despite containing some features of a demand bond, including a provision in clause 4 for immediate payment on “first written demand”, and repeated references to the guarantor as “a primary obligor”, in the context of the rest of the Payment Guarantee Clarke J held that this was not inconsistent with it being construed as a guarantee. Clarke J relied on the decision in Carey Added Value SL v Grupo Urvasco SA  EWHC 1905 (Comm), where it was decided that the wording “primary obligor” was not a decisive indication that an instrument was a demand bond.
Therefore the cumulative eff ect of the guarantee’s clauses was that the primary obligation undertaken by the Bank was an obligation to pay the sum actually due under the shipbuilding contract. Only when the underlying sum was due, was payment due under the Payment Guarantee.