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Journal of International Banking and Financial Law
(2012) 7 JIBFL 429
1 August 2012
Guarantee or demand bond?
Features
Jonathan Lawrence
K&L Gates
jonathan.lawrence@klgates.com
www.klgates.com
© Reed Elsevier (UK) Ltd 2012
WUHAN GUOYU LOGISTICS GROUP CO LTD AND ANOTHER COMPANY V EMPORIKI BANK OF
GREECE SA [2012] EWHC 1715 (COMM) (QBD, COMMERCIAL COURT) (MR JUSTICE CHRISTOPHER
CLARKE) (22 JUNE 2012)
FACTS
The two claimants (the Seller) jointly operate a shipyard in China. The Seller entered into shipbuilding contracts with a buyer (the Buyer) under which the contract prices were payable to the Seller in instalments
which were to be refunded if a contract was rescinded or cancelled. Emporiki Bank of Greece SA (the Bank)
provided finance to the Buyer for its purchase of the vessel under a facility agreement. The Buyer assigned
to the Bank certain claims and guarantees due to the Buyer. The Bank then issued to the Seller what was
described as a guarantee (the Payment Guarantee) in respect of the second instalment of the price of the
vessel. That instalment has not been paid. The Seller submitted that the Payment Guarantee is in the form of
a demand (or performance) bond. The Bank contended that the instrument is a guarantee properly so called.
CONCLUSION
The court held that the Payment Guarantee was, in law, a guarantee. If the Seller wanted the additional security of a demand bond the court would have expected the instrument (i) not to use what was (a) described
as, (b) took the form and used the language of, and (c) included provisions habitually found in, a guarantee;
and (ii) to have used, instead, appropriate (and terser) language to make it clear that it was a demand bond.
A demand bond is an instrument by which a bank or similar institution promises to pay an instalment due
against a written demand (either with or without accompanying documents as the only condition of payment).
The bank is obliged to pay, unless there is fraud. This is so even if there is a dispute as to whether the in-
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stalment is truly due. Liability arises from the instrument rather than the underlying contractual arrangement.
A guarantee may put a bank in difficulty because it may not be able to pay out safely if there is any dispute
as to the existence of the obligation guaranteed.
In this case, the Payment Guarantee was not to be regarded as a demand bond: (as a pointer) it is continuously referred to as a guarantee; it contains the classic language of a guarantee; the Bank gives its undertaking to guarantee irrevocably, absolutely and unconditionally (not an undertaking to pay); the existence of an
"as primary obligor and not merely as surety" clause does not automatically mean that the instrument is not a
guarantee; the guarantee of interest runs from and including the "first day after the date of instalment in default" -- wording difficult to reconcile with a free standing obligation to pay interest following demand and requiring the Buyer being "in default" before it starts to run; and the provision for payment on demand is not
inconsistent with the instrument being an on demand guarantee.