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

An on-demand performance guarantee is an autonomous contract. A beneficiary’s good-faith demand complying with the guarantee crystallises the bank’s immediate and indefeasible obligation to pay, even if the underlying buyer’s obligation is later shown not to have fallen due. The established exception is fraud in the presentation or demand.

Payment under a performance bond is ordinarily followed by an accounting between the parties to the underlying contract. That accounting does not make the proceeds trust property for the bank. Later knowledge of the underlying position does not create a constructive trust in the beneficiary’s hands.

The Bank issued an alleged payment guarantee at the Buyer’s request in connection with a shipbuilding contract. The Seller demanded the second instalment from the Buyer and, when it was not paid, made a good-faith demand on the Bank. The Court of Appeal had earlier held the instrument to be an on-demand performance guarantee, reversing the Commercial Court’s refusal of summary judgment: [2012] EWCA Civ 1629; the Commercial Court decision was [2012] EWHC 1715.

After an arbitration finally determined that the second instalment was not due, the Bank paid the sum into escrow and sought declarations that the Seller held it on trust for the Bank or, alternatively, for the Buyer. The central issue was whether the later determination displaced the Bank’s accrued obligation or generated a trust over the payment.

Application dismissed. The Bank was not entitled to a declaration that the Seller held the money on trust for it.

1. Crystallisation of liability. An on-demand performance guarantee is an autonomous contract. A good-faith demand complying with its terms creates a complete and immediately enforceable cause of action against the bank. The obligation becomes indefeasible at the time of demand. A later final determination that the underlying instalment was not due does not retrospectively undo the bank’s liability. Only fraudulent presentation or demand permits the bank to resist payment of an apparently conforming demand. This reflected the analysis in Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152 and United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168.
2. Trust and accounting. The case was not analogous to a mistaken payment, because the Bank’s obligation to pay arose under the guarantee when the demand was made. The guarantee’s autonomy, its provision for payment without set-off or counterclaim, and its protection against disputes under the underlying contract were inconsistent with a trust for the Bank. The ordinary consequence of payment under a performance bond is an accounting between the Seller and Buyer. The Seller must account for any over-compensation, but that obligation does not make the money trust property for the Bank. The reasoning in Cargill SA v Bangladesh Sugar Corporation [1998] 1 WLR 461, Comdel Commodities Ltd v Siporex Trade SA [1997] 1 Lloyd’s Rep 424, Uzinterimpex JSC v Standard Bank plc [2008] EWCA Civ 819 and Pan Ocean Shipping Co and Credit Corp Ltd [1994] 1 WLR 161 supported that conclusion.
3. Trust for the Buyer. The Bank had no locus to seek declaratory relief concerning a trust for the Buyer. That issue arose between the Seller and Buyer and was for the arbitrators; the Buyer was not before the court. The court expressed no concluded view on that issue, although it considered that the autonomy and accounting principles militated against any trust affecting the money.

The declaration sought by the Bank was refused.

• Court of Appeal (Civil Division) — The Bank’s application for declarations concerning the guarantee proceeds was dismissed: [2013] EWCA Civ 1679.
• Court of Appeal (Civil Division) — In the earlier appeal, the court reversed the Commercial Court and held that the Payment Guarantee was an on-demand performance guarantee: [2012] EWCA Civ 1629.
• High Court, Commercial Court — The court refused the Seller summary judgment on its claim against the Bank: [2012] EWHC 1715.