Ship Law Log Comment and analysis by Reed Smith lawyers on the latest developments in the shipping industry

Court of Appeal holds that a payment guarantee issued in respect of an instalment due under a shipbuilding contract was an “on-demand” bond

Posted in Case Law, Shipbuilding

Reed Smith (Charlie Weller) has represented the successful Appellant in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629. The Court of Appeal held that a payment guarantee issued by a bank in respect of an instalment due under a shipbuilding contract was in the nature of an on-demand bond or demand guarantee, as opposed to a guarantee under which there was no liability if the instalment was not due.

Facts

The Appellant, operators of a Chinese shipyard, entered into a shipbuilding contract for the construction of a bulk carrier. The contract price was payable in instalments. The second instalment was payable on receipt by the buyer of a refund guarantee issued by the Appellant’s bank, together with a certificate of the cutting of the first steel plate of the vessel. The contract also required a guarantee in respect of the buyer’s payment of the second instalment.

The Respondent provided finance to the buyer for the purchase of the vessel, and provided what was described as a guarantee in respect of payment of the second instalment. That instalment was not paid, and a dispute arose as to whether it was in fact due. That dispute was referred to arbitration.

Findings at First Instance

Prior to determination of that issue in arbitration, the Appellant demanded payment under the guarantee issued by the Respondent and sought summary judgment from the court for its claim. The basis for this was that the payment guarantee was a demand or performance bond, that payment was due on written demand and that such a demand was made. The Respondent argued that it was in fact a guarantee properly so called, under which liability depended on whether the second instalment was due. That issue remained to be decided. The judge at first instance found in favour of the Respondent.

Findings on Appeal

The Court of Appeal allowed the appeal, relying on a presumption that where an instrument met four key requirements, it would be construed as a demand guarantee or on-demand bond. Those requirements were that the instrument:

(i) related to an underlying transaction between parties in different jurisdictions;

(ii) was issued by a bank;

(iii) contained an undertaking to pay “on demand” (with or without the words “first” and/or “written”); and

(iv) did not contain clauses excluding or limiting the defences available to the guarantor.

The instrument in this case did not meet the fourth requirement. The Court of Appeal, however, followed Caja de Ahorros del Mediterraneo v Gold Coast Ltd [2001] EWCA Civ 1806, where the instrument in question also did not meet that requirement.

The judge at first instance should have had more regard to the presumption and previous authority, rather than approaching the construction of the guarantee afresh.

This case exemplifies the balance which must be drawn by the courts when interpreting documents. Whilst it is important to give a document the meaning which the parties intended it to have, the courts should also be guided wherever possible by previous authority. The case also further entrenches the presumption set out in the leading textbook Paget’s Law of Banking and approved in Gold Coast regarding when an instrument will be regarded as a demand guarantee or an on-demand bond.