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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Wuhan Guoyu Logistics Group Co Ltd & Anor v Emporiki Bank of Greece SA  EWCA Civ 1629 (07 December 2012)
Cite as:  1 All ER (Comm) 1191,  CILL 3300,  Bus LR D76,  EWCA Civ 1629,  1 Lloyd's Rep 266,  BLR 74,  2 CLC 986
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ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
THE HONOURABLE MR JUSTICE CHRISTOPHER CLARKE
Strand, London, WC2A 2LL
B e f o r e :
THE RIGHT HONOURABLE LORD JUSTICE RIMER
THE RIGHT HONOURABLE LORD JUSTICE TOMLINSON
| 1) WUHAN GUOYU LOGISTICS GROUP CO LTD
2) YANGZHOU GUOYU SHIPBUILDING CO LTD
|- and -
|EMPORIKI BANK OF GREECE SA
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Nigel Tozzi QC & Mr James Leabeater (instructed by Ince & Co LLP) for the Respondent
Hearing dates: 18th October 2012
Crown Copyright ©
Lord Justice Longmore:
"shall notify with a telefax notice to the Buyer stating that the 1st 300 mt of steel plate has been cut in its workshop approved by the Buyer's representative and demand for payment of this instalment." (sic)
The judge said that this phraseology leaves it unclear whether it is the workshop or the cutting that is to be approved.
"DETAILS OF GUARANTEE
1) In consideration of your entering into a Shipbuilding Contract dated 29th November 2006 ("the Shipbuilding Contract") with Tamassos Navigation Ltd as the buyer ("the BUYER") and WUHAN Guoyu Logistics Group CPM LTD and Yangzhou Guoyu Shipbuilding Co. Ltd as the seller ("the SELLER") for the construction of one (1) 57,000 Metric Tons Deadweight OEC known as YANGZHOU GUOYU SHIPBUILDING COMPANY LTD. HULL NO. GY404 ("the VESSEL"), we, EMPORIKI BANK OF GREECE SA, hereby IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee, as the primary obligor and not merely as the surety, the due and punctual payment by the BUYER of the 2nd instalment of the Contract Price amounting to a total sum of United States Dollars 10,312,500.00 (Ten million three hundred twelve thousand five hundred only) as specified in (2) below.
(2) The Instalment guaranteed hereunder, pursuant to the terms of the Shipbuilding Contract, comprises the 2nd instalment in the amount of U.S. Dollars 10,312,500.00 (Ten million three hundred twelve thousand five hundred only) payable by the BUYER within five (5) New York banking days after completion cutting of the first 300 MT of steel plate in your Seller's workshop and written notice thereof along with certificate of cutting of steel plate countersigned for approval by the Buyers representative.
(3) We also IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee, as primary obligor and not merely as surety, the due and punctual payment by the BUYER of interest on the second Instalment guaranteed hereunder at the rate equal to the three months US$ LIBOR quoted on page no. 3750 of Telerate, 2 days before the date from which interest becomes effective, plus 1% margin, from and including the first day after the date of instalment in default until the date of full payment by us of such amount guaranteed hereunder.
(4) In the event that the BUYER fails to punctually pay the second Instalment guaranteed hereunder or the BUYER fails to pay any interest thereon, and any such default continues for a period of twenty (20) days, then, upon receipt by us of your first written demand stating that the Buyer has been in default of the payment obligation for twenty (20) days, we shall immediately pay to you or your assignee the unpaid 2nd Instalment, together with the Interest as specified in paragraph (3) hereof, without requesting you to take any or further action, procedure or step against the BUYER or with respect to any other security which you may hold.
(5) We hereby agree that at your option this Guarantee and the undertaking hereunder shall be assignable to the Bank of China Limited, Hubei Branch, 65 Huangshi Road, Wuhan City, Hubei 430013, the People's Republic of China
(7) Our obligations under this Guarantee shall not be affected or prejudiced by any disputes between you as the SELLER and the BUYER under the Shipbuilding Contract or by the SELLER's delay in the construction and/or delivery of the VESSEL due to whatever causes or by any variation or extension of their terms thereof or by any security or other indemnity now or hereafter held by you in respect thereof, or by any time or indulgence granted by you or any other person in connection therewith, or by any invalidity or unenforceability of the terms thereof, or by any act, omission, fact or circumstances whatsoever, which could or might, but for the foregoing, diminish in any way our obligations under this Guarantee.
IN WITNESS WHEREOF, we have caused this Letter of Guarantee to be executed and delivered by our duly authorised representative the day and year above written."
The contentions in outline
i) the document is called a "payment guarantee" not an "on demand bond";
ii) clause 1 says that the Bank guaranteed "the due and punctual payment by the Buyer of the 2nd instalment";
iii) clause 2 describes the second instalment as being payable (in terms different from Article 3(b) of the Building Contract) 5 days after completion of cutting of the first 300 metric tons of steel of which a written notice is to be given with a certificate countersigned by the Buyer;
iv) clause 3 guarantees the due and punctual payment of interest;
v) clause 4 imposes an obligation on the Bank to pay "in the event that the Buyer fails punctually to pay the second instalment";
vi) clause 7 says that the guarantor's obligation is not to be affected or prejudiced by any variations or extensions of the terms of the shipbuilding contract or by the grant of any time or indulgence.
i) clause 4, which is the clause which requires payment by the Bank, provides that
a) payment is to be made on the Seller's first written demand saying that the Buyer has been in default of the payment obligation for 20 days; and
b) payment is to be made "immediately" without any request being made to the Seller to take any action against the Buyer;
ii) clause 7 provides that the Bank's obligations are not to be affected or prejudiced by any dispute between the Seller and the Buyer under the shipbuilding contract or by any delay by the Seller in the construction or delivery of the vessel;
iii) clause 10 provides a limit to the guarantee of US$ 10,312,500 representing the principal of the second instalment plus interest for a period of 60 days; it is thus not envisaged that there will be any great delay in payment after default as there will be if (as in the present case) there is a dispute about whether the second instalment has ever became due.
"Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay "on demand" (with or without the words "first" and/or "written") and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.
In construing guarantees it must be remembered that a demand guarantee can hardly avoid making reference to the obligation for whose performance the guarantee is security. A bare promise to pay on demand without any reference to the principal's obligation would leave the principal even more exposed in the event of a fraudulent demand because there would be room for argument as to which obligations were being secured."
"So, as one takes instance after instance these performance guarantees are virtually promissory notes payable on demand. So long as the customers make an honest demand, the banks are bound to pay: and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay.
All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is clear fraud of which the bank has notice.
Such has been course of decision in all the cases there have been this year in our courts here in England."
And from the judgment of Ackner LJ in Esal at page 549:-
" a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud and of the bank's knowledge of that fraud."
In Siporex v Banque Indosuez  2 Lloyd's Rep 146, 158 Hirst J was able to say this:-
"All three of the leading Court of Appeal cases are the strongest authority in favour of the proposition that the bank guarantor is not and should not be concerned in any way with the rights and wrongs of the underlying transaction. This is also the case in relation to letters of credit, with which all the authorities draw a very close analogy
I, of course, accept Mr Hallgarten's submissions that every bond has to be construed in accordance with its terms, and there can be no blind categorization of its character or blind assumption of the obligations which it creates. However, I can see nothing whatsoever in the present performance bond to differentiate it from a number of those quoted in the authorities (particularly that in the Esal case) or to justify a departure from the general principles laid down in those cases.
I also consider it is extremely important that, for such a frequently adopted commercial transaction, there should be consistency of approach by the Courts, so that all parties know clearly where they stand."
i) the document is called a "guarantee";
ii) when referred to in the exhibits to the contract, it is called an "irrevocable letter of guarantee";
iii) clause 1 contains the "core obligation" guaranteeing the due and punctual payment of the second instalment and identifies the second instalment in the terms set out in clause 2 without at that stage saying anything about agreeing to pay on demand;
iv) clause 3 relating to interest requires the Buyer to be in default;
v) clause 4 follows on from clauses 1, 2 and 3 and calls for payment "in the event that the Buyer fails punctually to pay" and goes "well beyond" what is needed for the purpose of identifying the obligation for which the security was being given;
vi) the closing words of clause 4 would be unnecessary if the document was an on demand guarantee;
vii) the later words of clause 7 were only necessary if the document was a true "see to it" guarantee;
viii) the Bank was not providing the guarantee for a set fee but was closely connected with the whole transaction which it was financing;
ix) although the contractual background did not provide any sure guide to the contract's correct interpretation, the judge was struck by the fact that the Bank could find itself having to pay up to the amount of the second instalment without any Refund Guarantee being in place from the Seller's bank to secure its return. The refund guarantee had to be provided before the second instalment was due under the contract and indeed arbitrators have now held (subject to any appeal for which leave might be given) that because it was not provided in the appropriate terms, the Buyer was not in fact obliged to pay the second instalment. The judge evidently thought reciprocity was appropriate.
"it is extremely important that there should be a consistency of approach by the Courts, so that all parties know clearly where they stand."
Lord Justice Rimer:
Lord Justice Tomlinson: