Summary: Bonds and guarantees are a commonly-used
means of protecting a party against non-performance of a
contractual obligation. True guarantees and on-demand bonds are
often confused, but there is a key distinction between the two: the
liability of the issuer to pay under an on-demand bond does not
depend on breach of the underlying contract, whereas a guarantee
cannot be enforced until a breach has occurred. In Wuhan Guoyu
Logistics Group Co Ltd Anor -v- Emporiki Bank of Greece SA  EWHC 1715 (Comm) an instrument described as a "Payment
Guarantee" was held to be a guarantee, rather than an on-demand
bond, with the result that the bank's liability to pay was a
Primary or secondary liability? Under a
shipbuilding contract, the buyer was required to procure that its
bank issue a Payment Guarantee in respect of the payment by the
buyer of the second instalment of the price. The contract provided
that the second instalment was payable within five New York banking
days of receipt by the buyer of a refund guarantee issued by the
seller's bank, together with a certificate as to the cutting of the
first steel plate of the vessel. The buyer's bank (the respondent
in the case) provided the payment guarantee to the seller's bank.
The buyer disputed its liability to pay the second instalment,
which dispute was the subject of an arbitration.
The question for the court was whether the instrument called a
"Payment Guarantee" was in fact a guarantee or an on-demand
The seller argued that the payment guarantee was in the nature of
an on-demand or performance bond and that payment was due upon a
written demand under that bond, whether or not the payment which
the bond guaranteed was actually due by the buyer. The demand for
payment had been made and the seller claimed summary judgment for
the principal and interest.
Christopher Clarke J held that the Payment Guarantee was a
guarantee and not an on-demand bond for the following reasons:
- The instrument continually referred to itself as a "guarantee".
While that was "far from conclusive", it was a
- Although payment was to be made upon "first written
demand", which was an indicator of an on-demand bond, that
obligation followed on from clauses 1-3 of the instrument. Clause 1
expressed the core obligation and was in the classic language of a
guarantee.(1) Clause 2 required the buyer's countersigned approval
of the steel cutting certificate (which requirement would be a
"dead letter" if the instrument was a bond). Clause 3 contemplated
payment of interest only after the buyer's default.
- The words "in the event that the BUYER fails to punctually
pay….then" were an indication that the obligation to pay on
demand arose when, but not before, the event specified had
occurred. Thus the demand and a written notice of default were a
necessary, but not a sufficient, condition of recovery.
- While the undertaking was given "irrevocably, absolutely and
unconditionally", what the bank had undertaken to do was to
guarantee the due and punctual payment of the second instalment. It
was not a guarantee of what was not due.
- The existence of an "as primary obligor and not merely as
surety" provision did not automatically mean that the
instrument was not a guarantee (relying on Carey Value Added
-v- Grope Urvasco(2)). In this case the undertaking given as
"primary obligor and not merely as surety" was an
undertaking to guarantee the payment of the second instalment.
The judge undertook a detailed analysis of the phraseology and the
structure of the payment guarantee. Although he acknowledged that
reference in a security instrument to the contractual default to
which that instrument relates does not necessarily mean that the
beneficiary has to show that default has occurred, the wording in
the particular guarantee went well beyond what was needed for the
purpose of identifying the obligation for which the security was
being given. The language used confirmed the conditionality of the
If the instrument in question had done no more than provide that
the bank would pay on first written demand stating the second
instalment was not paid, the basis for saying that the instrument
was an on-demand bond would have been very strong. However, the
context of the "first written demand" obligation was important,
particularly the clauses that preceded it in the instrument.
The key difference: whether liability arises from the
instrument or the underlying contract. The case includes a
detailed discussion of the differences between a guarantee proper
and an on-demand bond, noting that the essential characteristic of
a guarantee is that the liability of the guarantor is a secondary
one. The effect of this is that, if the debtor has no liability,
the guarantor has none either. Under an on-demand instrument,
liability arises from the instrument itself rather than the
underlying contractual arrangement. In practice, the beneficiary of
an on-demand bond is likely to be able to obtain summary judgment
if he is not paid on presentation of the conforming documents even
if there is a bona fide dispute between the main parties to the
contract as to whether the sum in question is due.
The judge looked in detail at the authorities on this question,
including a number of recent authorities. He noted that the
authorities and the legal textbooks had identified particular
criteria - or combinations thereof - as having a certain effect but
the answer to the question of whether a given instrument is a
guarantee or bond cannot be given by a "tick box
approach". The same factor may have a different significance
from case-to-case and few factors, with the exception of a
conclusive evidence clause are, on their own, likely to be
Less is more. The message was clear: if the seller had wanted the
security of an on-demand bond, it should not have used a document
which was described as, took the form of, and used the language of
a guarantee and included provisions habitually found in a
guarantee. Instead, it should have used the appropriate, "terser"
language, of an on-demand bond.
(1) "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 installment of the
(2)  2 All ER (Comm) 149.
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