Wuhan Guoyu Logistics v Emporiki Bank

DMC/SandT/13/12

England

Wuhan Guoyu Logistics Group Co Ltd & Anor v Emporiki Bank of Greece SA

English Court of Appeal: Longmore, Rimer and Tomlinson, LJJ.: [2012] EWCA Civ 1629

SHIPBUILDING CONTRACT: PAYMENT GUARANTEE: WHETHER PAYMENT GUARANTEE A TRUE GUARANTEE OR AN ON-DEMAND BOND

Summary

A payment guarantee issued by a Bank in relation to an instalment of the price due under a shipbuilding contract was in the nature of an on-demand bond or demand guarantee, rather than a guarantee properly so called, under which there would have been no liability if the instalment was not due.

Jonathan Hirst QC and Sara Cockerill QC, instructed by Reed Smith LLP, for the appellant shipyards

Nigel Tozzi QC and James Leabeater, instructed by Ince & Co LLP, for the respondent Bank.

Background

The appellant shipyards (Sellers) appealed against a decision of Christopher Clarke J at first instance - [2012] EWHC 1715 (Comm), [2012] 2 All E.R. (Comm) 685 - that a payment guarantee issued by the respondent Bank was a guarantee, properly so called, rather than an on-demand bond.

The Sellers jointly operated a shipyard in Yangzhou in the People's Republic of China. On 29 November 2006 they entered into two shipbuilding contracts for the construction of two 57,000 DWT bulk carriers, known as Hull No. GY402 and Hull No. GY404.

The contract price for Hull GY 404 (‘the vessel’) was to be US$41,250,000, payable in five instalments. Under article 3(b) of the shipbuilding contract for the vessel, the second instalment of US$10,312,500 was payable within five New York Banking days of receipt by the Buyer of a refund guarantee, in the form annexed as Exhibit A to the contract, issued by the Seller's Bank, together with a certificate of the cutting of the first steel plate of the vessel in the Seller's workshop. The article provided that the Seller should notify the Buyer by telex, “stating that the 1st 300mt of steel plate had been cut in its workshop approved by the Buyer's representative…”

Exhibit A contained the text of an irrevocable letter of guarantee – the refund guarantee – in respect of the repayment by the Seller to the Buyer of the first to fourth instalments of the price. Under clause 7 of the shipbuilding contract, payments were to be refunded in the event that the contract was rescinded or cancelled in accordance with its terms. Exhibit B to the shipbuilding contract contained the text of an irrevocable letter of guarantee in respect of the payment by the Buyer to the Seller of the second instalment of the price, as required by clause 6 of the shipbuilding contract.

The respondent – Emporiki Bank of Greece SA (‘the Bank’) – was a Greek Bank, which provided finance to the Buyer for its purchase of the vessel.

On 14 December 2007, the Bank issued what was described as a guarantee (‘the payment guarantee’) in respect of the second instalment of the price of the vessel under the shipbuilding contract.

The payment guarantee, which was transmitted by the Bank to the Bank of China, provides, inter alia, as follows:

“ (1) In consideration of your entering into a Shipbuilding Contract dated 29th November 2006… for the construction of one (1) 57,000 Metric Tons Deadweight OEC known as Hull No. GY404, 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...

(4) In the event that the Buyer fails to punctually pay the second Instalment guaranteed hereunder… 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…, without requesting you to take any or further action, procedure or step against the Buyer…

(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 the terms thereof… 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.”

On 29 April 2009, the Bank received a refund guarantee issued by the Bank of China in respect of the second instalment. It was not entirely in the form of Exhibit A and, despite negotiations, no refund guarantee in the agreed form was ever issued.

On 11 May 2009 the Seller sent to the Buyer, inter alia, an invoice for the second instalment dated 4 May 2009 and a written demand for payment together with a certificate that the steel cutting for the vessel had been done on 18 April 2009 at the Seller's shipyard. The certificate appeared to have been signed by each of the claimants and by a Bureau Veritas surveyor. It was not signed by any representative of the Buyer.

There was an underlying issue between the Seller and the Buyer as to whether the second instalment was due. The Buyer contended (a) that there was no proof that the first 300mt of steel for the vessel had, in fact, been cut; (b) that the condition of approval by the Buyer of such cutting had not been met; and (c) that the Seller had not provided in respect of the second instalment the refund guarantee required by the shipbuilding contract, namely a guarantee in the form finally approved by the Banks of the Buyer and the Seller. These issues were determined at an arbitration heard in September 2012, from which leave to appeal had been sought by both parties.

In any event, the second instalment was not paid and, in consequence, demand for payment under the payment guarantee was made on 22 June 2011.

The shipbuilding contract came to an end; but the means by which it did so was in dispute. Both the Seller and the Buyer claimed that the other party was in repudiatory breach and that they had cancelled or rescinded the contract in consequence.

The central question in the case was, therefore, whether the payment guarantee was a guarantee, properly so called, or an ‘on-demand bond’, as it is called in Banking terminology. At first instance, the judge held that it was a guarantee properly so called and that it was, therefore, open to the respondent Bank to argue that no payment became due under the contract containing the obligation guaranteed and that the Bank was therefore not itself liable under the guarantee.

Judgment

In approaching the problem of interpretation which the ‘guarantee’ in this case presented, the court said that it should be guided by the presumption expressed in the following words of Paget's Law of Banking (11th edition):

‘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” … 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…

Paget's presumption had in due course been approved by the Court of Appeal in Caja de Ahorros v Gold Coast Ltd [2002] CLC 397, where the document in that case was held to be an on-demand guarantee although (as in this case) the fourth element of the presumption was absent but the others were present.

The Court went on to say:

“The fact is that guarantees of the kind before the court in this case are almost worthless if the Bank can resist payment on the basis that the foreign buyer is disputing whether a payment is due. That would be all the more so in a case such as the present when the buyer can refuse to sign any certificate of approval which may be required by the underlying contract.”

In examining the points on which the judge of first instance had relied for his finding that the ‘guarantee’ was not an on-demand bond, the Court said:

“These could all be very serious points if a court was approaching the document on a wholly fresh basis without regard to previous authority. But the court is not in that position. There were also the positive factors [fn.1] in favour of the document being an on-demand guarantee and, granted these positive factors, and the presumption enunciated by Paget… and supported by previous authority, the judge ought in my respectful view to have had much more regard to the presumption than he did”

For these reasons, the Court concluded, following the guidance offered by Paget, that the document sued on was an on-demand guarantee. Judgment was entered accordingly.

In a postscript to the judgment the Court said that it had heard some argument as to the legal position if, on the assumption that the Bank was liable to pay and did pay the amount guaranteed, the underlying position turned out to be that the Buyer never was obliged under the shipbuilding contract to pay the second instalment in the first place. Would the Seller then hold the amount paid by the Bank on constructive or resulting trust for the Buyer? The Court concluded that this would be better considered once finality had been reached in the arbitration.

Comment

Leave to appeal has been refused by the Supreme Court

The effect of this judgment is to put the Bank (and its clients, the Buyer) in the potentially precarious position of having paid under the on-demand bond without the security of a refund guarantee in the agreed form.

Fn.1 The Court mentioned the following points that might be thought to favour a conclusion that the document was an ‘on-demand’ bond:

(i) clause 4, the clause which required payment by the Bank, provided that:

(a) payment was to be made on the Seller's first written demand saying that the Buyer had been in default of the payment obligation for 20 days; and

(b) payment was to be made ‘immediately’ without any request being made to the Seller to take any action against the Buyer;

(ii) clause 7 provided that the Bank's obligations were 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 provided 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 was thus not envisaged that there would be any great delay in payment after default as there would be if (as in the present case) there was a dispute about whether the second instalment had ever became due.