Reed Smith  (Charles Weller) recently acted for the successful Respondents in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2013] EWCA Civ 1679.

The Respondents were sellers under a shipbuilding contract. The Applicant was the buyers’ bank. When the buyers refused to pay an instalment due under the contract, the sellers demanded payment from the bank pursuant to (what the Court of Appeal determined to be, in an earlier appeal) an on demand performance guarantee.

Some two years after the demand had been made, an arbitration tribunal concluded that the instalment had not in fact fallen due from the buyers. The bank paid the amount alleged to be due into an escrow account in the name of both the sellers and the bank. When the money was later released to the sellers, the bank asserted that it would be held by the sellers on trust, either for the bank or for the buyers who would in turn hold the money on trust for the bank. The bank applied to the court for a declaration to that effect. They also argued that because of the tribunal’s conclusion, the sellers had received the money by reason of a mistake.

The Court of Appeal refused the bank’s application. No trust was created, and there was no analogy here with cases of mistake. In such cases, by definition, no obligation to pay ever arose. In this case, when the sellers made their demand, they acquired a complete and immediately enforceable cause of action against the bank. The guarantee was entirely independent of any disputes between the sellers and buyers under the shipbuilding contract.

In order for financial arrangements in international trade to work, the position as between a beneficiary and a bank must crystallise as at presentation of documents or demand. A bank can only resist payment in the case of fraudulent presentation or demand by the beneficiary.

On that basis, it was irrelevant to the bank’s obligation to pay that the sellers subsequently discovered that their demand, although made in good faith, was made on what was subsequently found to be an incorrect premise (i.e. that the buyers were in default under the contract). When the sellers, in good faith, asserted that the buyers were in default and sent a demand to the bank, that rendered payment due under the guarantee. Once payment was due, it remained due.