Court of Appeal allows appeal and holds guarantee to be an on-demand bond

07/12/12

WUHAN GUOYU LOGISTICS GROUP CO LTD v EMPORIKI BANK OF GREECE SA

[2012] EWCA Civ 1629

The Court of Appeal today handed down judgment in this case allowing the appeal from Christopher Clarke J's judgment in the Commercial Court.  The issue was whether a guarantee issued by the Bank in favour of the Shipyard respect of the second instalment payable under a shipbuilding contract was to be treated as a traditional "see to it" guarantee payable only when the liability of the buyer was established, or as a bond payable on demand.

Differing from the Judge, the Court of Appeal held the guarantee to be an on-demand bond.  Lord Justice Longmore giving the judgment of the Court (following Hirst J in Siporex v Banque Indosuez) emphasised the importance of a consistency of approach by the Courts, so that all parties know clearly where they stood.  He was critical of the complexity of the authorities in this area of the law, describing the Judge's judgment as exhausting. Something had surely gone wrong if the comparatively simple question of construction required such lengthy consideration.  The commercial community deserves better than this, if better can be done.

The Court expressly adopted the guidance given by the editors of Paget's Law of Banking that:

"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."

The Court observed that "the fact is that guarantees of the kind before the court in this case are almost worthless if the Bank can resist payment on the basis that the foreign buyer is disputing whether a payment is due.  That would be all the more so in a case such as the present when the Buyer can refuse to sign any certificate of approval which may be required by the underlying contract".

The Court considered that it was appropriate to follow the guidance offered by Paget and to conclude that the document sued on is an on demand guarantee and to enter judgment accordingly.  It left open the question whether, if it turned out that the buyer never was obliged under the ship-building contract to pay the second instalment, the Shipyard hold the amount paid by the Bank on constructive or resulting trust for the buyer.

The judgment is here.