More attempts to avoid on demand guarantee obligations

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Wuhan Guoyu Logistics Limited v Emporiki Bank of Greece [2014] BLR119 Court of Appeal

Wuhan was a Chinese shipyard which had a shipbuilding contract with Emporiki’s customer.  Wuhan required an on-demand performance guarantee to secure payment for its shipbuilding services and Emporiki Bank gave an on-demand performance guarantee accordingly.  In due course Wuhan and the customer fell out over whether a payment had been made under the shipbuilding contract and Wuhan sent a formal demand for payment to the bank.

Emporiki Bank refused to pay and in the alternative tried to argue that if it did pay then Wuhan could only receive the monies on trust from the bank.

Held:

When the beneficiary under an on-demand guarantee makes its formal demand, it acquires a complete and immediately enforceable right to payment.

Although it turned out, from an arbitration between the shipyard and the customer, that the payment was not in fact due, nevertheless Wuhan had acted in good faith.  Therefore, its demands were valid and binding on the bank.

Comment

It is an absolute fundamental of international commercial law that on-demand bonds and guarantees will and must be paid out on receipt of a valid demand addressed to the bondsman or guarantor.  It is usually only where banks do not have adequate security against a defaulting party that they even try to challenge this principle.  There have been several attempts in recent years in the English courts, none of which have been successful, absent proof of fraud on the part of the Claimant, or else a technically invalid demand notice.

For more information, help or advice please contact Rob Langley on 0191 211 7975.