Guarantees or On-Demand Bonds?

The recent Court of Appeal case of Wuhan Guoyu Logistics Group Co Limited & Others v Emporiki Bank of Greece SA reversed the first instance decision of the Commercial Court in Wuhan Guoyu Logistics Group Co Limited & Others v Emporiki Bank of Greece SA [2012] EWHC 1715 (Comm) that a security document was a guarantee rather than an on-demand bond. However, neither the first instance judge or the Court of Appeal found the case particularly easy and so the guidance given by the Court of Appeal will be helpful in distinguishing on-demand bonds from guarantees in the future.

The Facts

The claimant sellers operated a shipyard in Yangzhou in the People's Republic of China. They entered into a ship building contract with the buyer, and payment was made in five instalments. The ship building contract required the second instalment to be payable within five New York banking days of receipt by the buyer of a refund guarantee, together with a certificate confirming the cutting of the first steel plates of the vessel. The seller was to:

"...notify with a telefax notice to the Buyer stating that the 1st 300 mt steel plate has been cut in its workshop approved by the Buyers representative and demand for payment of this instalment." The ship building contract then contained the form of words for an irrevocable letter of guarantee, referred to as a "Refund Guarantee". There was also a separate irrevocable letter of guarantee in respect of the second instalment of the price. A "Payment Guarantee" was issued by a bank.

An invoice for the second instalment dated 4 May 2009 and a written demand for payment together with a certificate stating that in April 2009 the steel had been cut were then issued. There was a dispute about whether the steel cutting had taken place. A demand for payment under the Payment Guarantee was made on 22 June 2011. The demand stated that the steel plates had been cut.

The buyer sought to avoid immediate payment being made by the bank to the seller under the Payment Guarantee, on the following grounds:

There was no proof that the first 300 mt of steel was ever cut; The condition of approval of the buyer of the cutting was never met; The seller did not provide the Refund Guarantee required under the ship building contract. This was on the basis that the Payment Guarantee actually issued differed slightly from the Refund Guarantee set out in the ship building contract. The Issue

Was the Payment Guarantee a guarantee or an on-demand bond?

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