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

Whether an instrument is a guarantee or a demand bond is determined by construction of the instrument as a whole, in its commercial and contractual context, without preconception. A guarantee creates secondary liability, so the guarantor may rely on defences available to the principal debtor. A demand bond creates an autonomous obligation, normally payable against conforming documents unless fraud is established.

Labels, payment-on-demand wording, primary-obligor clauses and anti-discharge provisions are relevant but rarely decisive individually. Clauses defining the guaranteed instalment, requiring an underlying event and contemplating default may show that payment depends on the underlying liability. The Payment Guarantee was therefore a guarantee properly so called, and summary judgment was refused.

The claimants, Chinese shipbuilders, sought payment from the defendant bank under a Payment Guarantee securing a shipbuilding instalment payable by the Buyer. The instrument required the bank, described as primary obligor, to pay upon a first written demand stating that the Buyer had been in default for 20 days.

The underlying instalment was disputed. The disputes included whether the required steel cutting had occurred, whether the Buyer had approved it, and whether the contractual Refund Guarantee had been provided. Those issues were to be determined in arbitration. The central issue was whether the Payment Guarantee was an autonomous demand bond or a guarantee whose liability depended upon the Buyer’s underlying liability.

1. Application refused. The court declined to give the Seller summary judgment because the Payment Guarantee was a guarantee properly so called, not a demand bond.
2. The distinction is one of construction of the instrument as a whole, in its commercial and contractual context, without a pre-assumption as to the answer. A guarantee involves secondary liability: if the principal debtor has no liability, the guarantor ordinarily has none and may rely on the debtor’s defences.
3. A demand bond instead creates an autonomous obligation. Its usual commercial operation is payment against the documents specified in the instrument, regardless of disputes under the underlying contract, subject to fraud.
4. The repeated description of the instrument as a guarantee was a relevant pointer, although not conclusive. More importantly, clauses 1 and 2 described the Bank’s obligation as guaranteeing the due payment of the Second Instalment and defined that instalment by reference to conditions including a countersigned certificate of steel cutting. Those requirements were part of the Bank’s contractual undertaking and could not be treated as a dead letter.
5. Clause 3 contemplated interest only after the Buyer was in default. Clause 4 required a demand following a failure to pay the guaranteed instalment and a continuing 20-day default. In context, the demand was necessary but not sufficient: the underlying payment obligation had also to exist.
6. The anti-dispute wording in clause 7 did not prevent the Bank from contending that the conditions for the instalment to become due had not occurred. It could, however, prevent reliance on later counterclaims or classic grounds for discharge once the guaranteed obligation had arisen. Such provisions did not convert the instrument into a demand bond.
7. The Seller’s alternative arguments failed. If the instrument had been a demand bond, no further countersigned certificate could be implied contrary to its express terms, and any alleged trade custom requiring a Refund Guarantee would be ineffective if inconsistent with clause 4.