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

Whether a bank-issued payment instrument is a traditional see-to-it guarantee or an on-demand guarantee depends ultimately on the words used, but courts may apply a presumption to promote commercial certainty.

An instrument relating to an international underlying transaction, issued by a bank and containing an undertaking to pay on demand, will almost always be construed as an on-demand guarantee. The absence of clauses excluding or limiting a guarantor’s defences does not prevent that conclusion where the other features are present.

References to the underlying obligation, default or disputes do not necessarily displace the presumption. An on-demand guarantee requires payment according to its terms without awaiting final determination of the underlying dispute.

The appellants operated a Chinese shipyard and entered into shipbuilding contracts for two vessels. The respondent bank issued a payment guarantee for the buyer’s second instalment.

The instalment remained unpaid. The sellers demanded payment under the guarantee. The buyer disputed whether the instalment had become due, including whether the required steel cutting and approval conditions had been satisfied and whether an effective refund guarantee had been provided. Those issues were being considered in arbitration.

Christopher Clarke J held that the instrument was a traditional guarantee and that the bank could resist payment until the underlying liability was determined: [2012] EWHC 1715 (Comm). The central issue on appeal was the proper construction of the payment guarantee.

1. Appeal allowed. The payment guarantee was construed as an on-demand guarantee, and judgment was entered accordingly.
2. The classification of a guarantee ultimately depends on the words used. It is not determined by counting isolated indications in favour of one construction or the other. Courts may, however, provide commercial certainty through a presumption based on recognised features of the instrument.
3. The presumption stated in Paget’s Law of Banking applies where the instrument relates to an underlying transaction between parties in different jurisdictions, is issued by a bank, and contains an undertaking to pay on demand. It will almost always be construed as a demand guarantee. The fourth feature, namely the absence of clauses excluding or limiting a guarantor’s defences, is not indispensable. The approach had been approved in Gold Coast Ltd v Caja de Ahorros [2002] 1 Lloyd’s Rep 617, para 16.
4. The guarantee contained strong on-demand indicators, including its irrevocable, absolute and unconditional undertaking by the bank as primary obligor, payment upon first written demand, immediate payment without action against the buyer, and protection against disputes under the shipbuilding contract. Its references to the guaranteed instalment, buyer default and variations or indulgences did not displace those indicators. The earlier authorities, including Howe Richardson v Polimex [1978] 1 Lloyd’s Rep 161, Owen v Barclays Bank [1978] QB 159, Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd’s Rep 546 and Siporex v Banque Indosuez [1986] 2 Lloyd’s Rep 146, supported a consistent approach under which the bank need not await resolution of the underlying dispute.
5. The document appeared partly to reproduce wording from earlier forms. In that commercial context, its individual phrases should not be treated with the reverence appropriate to statutory language, consistent with the approach illustrated by Federal Commerce v Tradax Export (The Maratha Envoy) [1978] A.C. 1, 13H.
6. The possible constructive or resulting trust consequences if the underlying instalment was never due were left for consideration after finality in the arbitration.

• Court of Appeal (Civil Division): allowed the appeal, construed the payment guarantee as an on-demand guarantee and entered judgment accordingly.
• High Court, Queen’s Bench Division, Commercial Court: Christopher Clarke J held that the instrument was a traditional guarantee rather than an on-demand bond: [2012] EWHC 1715 (Comm).