Court of Appeal refutes subversive and heretical proposition

20/12/13

Wuhan Guoyu Logistics Group Co Ltd V Emporiki Bank of Greece SA

[2013] EWCA Civ 1679

This was a follow-on from the earlier decision of the Court of Appeal delivered on 7 December 2012 [2012] EWCA Civ 1629 in which it held that 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 bond payable on demand rather than as a traditional "see to it" guarantee payable only when the liability of the buyer was established.  The Court however left over for later argument the wrinkle that had arisen a few days before the hearing – a panel of London arbitrators had determined that the second instalment was not actually due under the shipbuilding contract, although the third instalment was due (in respect of which there was no bank guarantee).

The Bank contended that the payment under the guarantee was held in trust for it or, alternatively, for the Buyer.  The Shipyard contended that it was liable to account to the Buyer but only after setting off the unpaid third instalment. 

The Court of Appeal (Longmore, Rimer and Tomlinson LJJ) held that the money was not held in trust for the Bank and, without deciding it, gave strong indications that the Shipyard’s obligation was to account to the Buyer and that the money was not held in trust for the Buyer.

Delivering the judgment of the Court of appeal, Tomlinson LJ summarised the court’s view as follows:

“A bank, “the Bank”, is properly called upon by a shipbuilder beneficiary, “the Seller”, to make a payment under an on demand performance guarantee issued at the request of the Buyer.The Bank guaranteed due and punctual payment by the Buyer of the second instalment of the price of a vessel under a building contract.The Seller’s demand for payment by, firstly, the Buyer, and secondly, in default, the Bank was made in all good faith.However by the time payment was made by the Bank pursuant to the guarantee, it had been conclusively determined by an arbitration award which had become final and subject to no further challenge that the second instalment had not in fact fallen due.Is the money paid over by the Bank pursuant to its obligation under the guarantee held by the Seller on trust for the Bank, alternatively on trust for the Buyer who would in turn hold the money on trust for the Bank?

The answer to this question is in my view no.It is only the very unusual facts of this case which have enabled some plausibility to be given to what is essentially a heretical proposition which, if accepted, would be subversive of the basis upon which international trade is routinely financed.

As to the alternative argument advanced by the Bank that the money was held in trust for the Buyer, Tomlinson LJ said:

I do not consider it appropriate to express a concluded view on the question whether the Seller holds the money on trust for the Buyer.  I can only observe that it is difficult to see why the principles to which I have already referred do not militate conclusively against the creation of any trust affecting the money in the hands of the Seller.  In particular, I see great force in Mr Hirst’s submission that the creation of a trust for the Buyer is inconsistent with the obligation to account which envisages the payment of the balance due on striking the account as between Seller and Buyer.  The existence of a trust in favour of the Buyer might, and I emphasise might, affect the ability of the Seller to bring into account the unpaid third instalment which the arbitral tribunal has held to be due and owing as between Seller and Buyer.  It is presumably at the instance of the Buyer that the Bank seeks to raise the point, but the Buyer is not before the court and it is unnecessary to say anything further on a point which it is not for us to decide.

The judgment is here.