Prior History: Wuhan Guoyu Logistics Grp. Co. v. Emporiki Bank of Greece SA, [2012] EWCA (Civ) 1629 [England], rev'g [2012] EWHC 1715 (Comm) [England], discussed in 2013 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE at 523-529 (Strong presumption exists that a "payment guarantee" between international parties, particularly where it provides for payment "on demand" and does not limit defenses available to guarantor, is a demand guarantee).

Note: Wuhan Guoyu Logistics Group Co. Ltd. & Anr (Seller/Beneficiary), contracted with Kantara Navigation Limited and Tamassos Navigation Limited (Buyer) to build two bulk carriers. The Emporiki Bank of Greece (Issuer) issued a "payment guarantee" assuring payment of the second installment of the price of a vessel. A dispute arose between Seller and Buyer over whether performance in the underlying contract had occurred and what defenses could be asserted under the payment guarantee. The parties commenced arbitration, but Seller meanwhile demanded payment under the guarantee on 22 June 2011. Issuer refused to pay, contending that the guarantee was not an "on demand performance guarantee", and that the arbitration tribunal appointed by the parties had not yet determined whether Buyer was obligated to pay.

Beneficiary sued Issuer for wrongful dishonor of the claim on the second installment. In an appeal, the High Court of Justice ruled that the payment guarantee was a demand guarantee in favor of Beneficiary. However, the arbitration tribunal had previously determined by award that the second installment had not fallen due, and the High Court of Justice Queen's Bench Division Commercial Court, Cooke, J., refused permission to appeal the arbitration award. Subsequently, Issuer agreed to release the second installment that had been held in escrow to Beneficiary's counsel. Before releasing the proceeds however, Issuer applied for an order requiring Beneficiary to hold the proceeds in trust for Issuer or for Buyer in trust for Issuer. The Court of Appeal, Civil Division, in an opinion by Tomlinson, J., with Rimer, J., and Longmore, J., concurring, denied the relief.

Issuer argued that because Seller knew from the arbitral award that it was not entitled to the second installment, the proceeds were held in a constructive trust. The Judge noted that while retention of mistaken payment after a bank learned of the mistake may give rise to a constructive trust, Beneficiary was indefeasibly entitled to immediate payment upon its 22 June 2011 demand. The Judge noted that "it is of no relevance that the [Beneficiary] subsequently discovers that his demand, although made in good faith was in fact made on an incorrect premise." The Judge further noted that "the bond . . . is not to be treated as representing a pre-estimate of the amount of damages to which the beneficiary may be entitled...if the amount of the bond is more than enough to satisfy the seller's claim for damages, the buyer can recover from . . . the amount of the bond which exceeds the seller's damages."

In the ruling, the Judge remarked that unconscionability by Beneficiary had not been detected in retention of the installment, since the prompt payment under the guarantee was to ensure unencumbered benefit of Seller for use in its business, including completing the vessels. Issuer did not pay promptly, and Beneficiary sought to be put in the position it would have been had the contract of guarantee been performed. The Judge did not consider it appropriate to rule on whether Beneficiary held the money in trust for Buyer, but it noted that its above reasoning would militate against the creation of any trust affecting the second installment payment.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.