On Demand Bonds: In the UK, It Is "More or Less" a Demand Bond

The English Court of Appeal has recently overturned a first instance decision that the correct interpretation of a bank's undertaking in a document was that it constituted a guarantee rather than a demand bond.

In July 2012,[1] we reported on the first instance decision of In Wuhan Guoyu Logistics Group Co Ltd and another v Emporiki Bank of Greece SA.[2] In that case, the High Court in England found that even though a bank had agreed to "irrevocably, absolutely and unconditionally guarantee, as primary obligor and not merely as surety, the due and punctual payment by the buyer" and that "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…," this was nevertheless a guarantee rather than a demand bond. Such wording (particularly if given by a bank) had previously been viewed as a strong indicator of a demand bond, but the Court held that the primary obligation assumed by the bank was the obligation to pay the sum actually due under the underlying contract (if any).

That decision suggested that if you are involved with issuing demand bonds or are a beneficiary under a document that purports to constitute a demand bond, you would need to look very closely at the language used in such document to ensure a court will interpret them as such.

Court of Appeal

The case went to the Court of Appeal,[3] which, in a unanimous judgment, overturned the decision at first instance.

Longmore LJ commented that there were inconsistent indicators in the drafting of the documentation that made construction difficult and, entirely understandably, if the first instance judge "found it necessary ... to cite no less than 20 authorities and deliver a judgment of 93 paragraphs ... something has surely gone wrong if this comparatively simple question of construction requires such lengthy consideration."

However, the Court of Appeal adopted a much more commercially focused and pragmatic approach by considering the context of the transaction and using guidance set out in Paget's Law of Banking (11th edition), which states:

"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."

Having noted that "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 of a dispute as to payment under the underlying contract, the court held that the document was a demand bond and not a guarantee. This case is therefore important in demonstrating that, when distinguishing between a guarantee and a demand bond, the courts will not simply focus on the precise words and drafting used, but will rather focus on the document's commercial context.

Comment

Frequent users of such products will be relieved to see that the courts are not entirely focused on the minutiae of the drafting but will rather look at the commercial context of the particular product in question. Of course, such tools only are available to the courts should the wording used be ambiguous, and the judge himself noted that "…everything must in the end depend upon the words actually used by the parties...." However, the decision is to be welcomed.

If a bank truly wants to issue a guarantee rather than a demand bond, it should ensure that the drafting makes this absolutely clear.

Lawyer Contact

For further information, please contact your principal Firm representative or the lawyer listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.

Edwin Borrini
London
+44.20.7039.5152
eborrini@jonesday.com

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[1] See "Demand Bonds: In the UK, Less Is More," July 2012. This Alert also contains a summary of the facts.

[2] Wuhan Guoyu Logistics Group Co Ltd and others v Emporiki Bank of Greece SA [2012] EWHC 1715 (Comm) (22 June 2012).

[3] Wuhan Guoyu Logistics Group Co Ltd and another v Emporiki Bank of Greece SA [2012] EWCA Civ 1629 (7 December 2012).