England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE CHRISTOPHER CLARKE
[2012] EWHC 1715 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/12/2012

Lord Justice Longmore:

1. The central question in the present case is whether a payment guarantee is a guarantee, properly so called, or an "on demand bond", as it is called in banking terminology. Christopher Clarke J has held that it is a guarantee properly so called and that it is therefore open to the defendant bank to argue that no payment became due under the contract containing the obligation guaranteed and that the bank is therefore not itself liable under the guarantee.

The Facts

2. The claimants ("the Seller") jointly operate a shipyard in Yangzhou in the People's Republic of China. On 29 November 2006 they entered into two Shipbuilding Contracts with Swissmarine Inc of Liberia or nominee, as Buyer. These contracts were for the construction of two 57,000 DWT bulk carriers, known as Hull No. GY402 and Hull No. GY404.
3. In November 2007 the Shipbuilding Contracts were novated to Kantara Navigation Limited and Tamassos Navigation Limited ("the Buyer") of the Marshall Islands.
4. 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 Shipbuilding Contract") the Second Instalment of US $ 10,312,500 was payable within 5 New York banking days of receipt by the Buyer of a Refund Guarantee in the form annexed as Exhibit "A" 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:-

"shall notify with a telefax notice to the Buyer stating that the 1^st 300 mt of steel plate has been cut in its workshop approved by the Buyer's representative and demand for payment of this instalment." (sic)

The judge said that this phraseology leaves it unclear whether it is the workshop or the cutting that is to be approved.

5. 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 1^st to 4^th 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 Under Clause 7 of the Shipbuilding Contract payments were to be refunded in the event that the Contract was rescinded or cancelled in accordance with the terms of the contract. Exhibit A is headed "To be finally approved by the buyer's bank and seller's bank".
6. 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 2^nd instalment of the price, as required by Clause 6 of the Shipbuilding Contract. It has the same heading.
7. The defendant - Emporiki Bank of Greece S.A ("the Bank") - is a Greek bank, which provided finance to the Buyer for its purchase of the Vessel under a facility agreement dated 27th November 2007.
8. On 20th November 2007 the Bank of China issued a Refund Guarantee on behalf of the Seller securing any repayment due in respect of the first instalment for the Buyer. The Buyer paid this instalment.
9. By a Deed of Assignment dated 27th November 2007 the Buyer assigned to the Bank (a) all moneys and claims for moneys due to the Buyer under the Shipbuilding Contract at any time; and (b) the Refund Guarantee and any other guarantee given to the Buyer as security for money due to it under the Shipbuilding Contract.
10. Notice of the Assignment was given to the Seller on 27th November 2007 and an acknowledgment of the notice by the Seller was issued on 10th December 2007.
11. On 14th 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. That instalment has not been paid. The Buyer had not, in fact, received a contractual Refund Guarantee for the 2^nd instalment by 14^th December 2007 but that cannot affect the true construction of the Payment Guarantee issued by the Bank.
12. The Payment Guarantee, which was transmitted by the Bank to the Bank of China, provides, inter alia, as follows:-

"DETAILS OF GUARANTEE

Dear Sirs,

1) In consideration of your entering into a Shipbuilding Contract dated 29^th November 2006 ("the Shipbuilding Contract") with Tamassos Navigation Ltd as the buyer ("the BUYER") and WUHAN Guoyu Logistics Group CPM LTD and Yangzhou Guoyu Shipbuilding Co. Ltd as the seller ("the SELLER") for the construction of one (1) 57,000 Metric Tons Deadweight OEC known as YANGZHOU GUOYU SHIPBUILDING COMPANY LTD. HULL NO. GY404 ("the VESSEL"), 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 (Ten million three hundred twelve thousand five hundred only) as specified in (2) below.

(2) The Instalment guaranteed hereunder, pursuant to the terms of the Shipbuilding Contract, comprises the 2nd instalment in the amount of U.S. Dollars 10,312,500.00 (Ten million three hundred twelve thousand five hundred only) payable by the BUYER within five (5) New York banking days after completion cutting of the first 300 MT of steel plate in your Seller's workshop and written notice thereof along with certificate of cutting of steel plate countersigned for approval by the Buyers representative.

(3) We also IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee, as primary obligor and not merely as surety, the due and punctual payment by the BUYER of interest on the second Instalment guaranteed hereunder at the rate equal to the three months US$ LIBOR quoted on page no. 3750 of Telerate, 2 days before the date from which interest becomes effective, plus 1% margin, from and including the first day after the date of instalment in default until the date of full payment by us of such amount guaranteed hereunder.

(4) In the event that the BUYER fails to punctually pay the second Instalment guaranteed hereunder or the BUYER fails to pay any interest thereon, 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, together with the Interest as specified in paragraph (3) hereof, without requesting you to take any or further action, procedure or step against the BUYER or with respect to any other security which you may hold.

(5) We hereby agree that at your option this Guarantee and the undertaking hereunder shall be assignable to the Bank of China Limited, Hubei Branch, 65 Huangshi Road, Wuhan City, Hubei 430013, the People's Republic of China……
….
(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 their terms thereof or by any security or other indemnity now or hereafter held by you in respect thereof, or by any time or indulgence granted by you or any other person in connection therewith, 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.

…

IN WITNESS WHEREOF, we have caused this Letter of Guarantee to be executed and delivered by our duly authorised representative the day and year above written."

13. The first cutting of steel for the Vessel is said by the Seller to have taken place on 18th April 2009. No representative of the Buyer was present and there has been a dispute as to whether the steel cutting took place at all.
14. On 29th 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. The Seller says that that is because it was in the form agreed in respect of the first instalment with logical amendments (save for a single erroneous reference in a subsidiary paragraph to the first, which, the Seller submits, should obviously signify the second, instalment) and that it should be regarded as being in agreed form.
15. Initially the Seller declined to make any change in the Refund Guarantee. But after correspondence the Seller agreed to make the corrections requested by the Buyer. However, it is the Seller's case, disputed by the Buyer, that any such agreement was only intended to form part of a possible deal whereby the payment date of the Second Instalment would be revised to 30th June 2009, which was never, in fact, made. No Refund Guarantee in the altered form has been issued.
16. On 11th May 2009 the Seller sent to the Buyer, inter alia, an invoice for the Second Instalment dated 4th May 2009 and a written demand for payment together with a certificate that the steel cutting for the Vessel had been done at 10:58 a.m. on April 18th 2009 at the Seller's shipyard. The certificate appears 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.
17. Demand for payment under the Payment Guarantee was made on 22nd June 2011. The demand recited that 300 mt of steel plates had been cut by 28th April 2009.
18. There is an underlying issue between the Seller and the Buyer as to whether the Second (and the Third) Instalments are due. The Buyer contended in respect of the Second Instalment (a) that there is no proof that the first 300 mt of steel for the Vessel has, in fact, been cut; (b) that the condition of approval by the Buyer of such cutting has not been met; and (c) that the Seller has 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, and others, have been determined at an arbitration heard in September. Leave to appeal has been sought by both the Seller and the Buyer.
19. The Shipbuilding Contract has come to an end; but the means by which it has done so is in dispute. Both the Seller and the Buyer claim that the other party was in repudiatory breach and that they have cancelled or rescinded the contract in consequence.

The contentions in outline

20. The Seller submits that the Payment Guarantee is in the nature of a demand or performance bond. Payment is due upon a written demand, whether or not the payment which the bond "guarantees" is actually due by the Buyer to the Seller. That demand has been made and the Seller claims summary judgment for the principal and interest.
21. The Bank contends that the instrument is a guarantee properly so called. If the Second Instalment was and is not due, there can be no liability under the guarantee. There is a dispute as to whether the Buyer is liable to pay the Second Instalment which – as is common ground – has not yet come to a conclusion. The Seller must await the final determination of that question. If successful it can then recover under the Payment Guarantee.

The Judgment

22. The judge decided that the document was a traditional guarantee and not an "on demand" bond. I mean no disrespect to the judge whatever when I say that the judgment is an exhausting document. Entirely understandably he found it necessary, in order to resolve this question of construction, to cite no less than 20 authorities and deliver a judgment of 93 paragraphs. Beatson J needed to cite a similar number of authorities in Meritz v Jan de Nul [2011] 1 AER (Comm) 1049. But something has surely gone wrong if this comparatively simple question of construction requires such lengthy consideration. It is a problem of our system of precedent, that as more and more cases get decided, it seems to be necessary for judges at first instance to consider each case and determine how near or how far the document in question differs from the document construed in each past case. The commercial community deserves better than this, if better can be done.
23. The judge did not find this case particularly easy and neither do I. The difficulty, as so often in these cases, is that there are pointers in different directions. The following points might be thought to favour a conclusion that the document is a traditional guarantee:-

i) the document is called a "payment guarantee" not an "on demand bond";

ii) clause 1 says that the Bank guaranteed "the due and punctual payment by the Buyer of the 2^nd instalment";

iii) clause 2 describes the second instalment as being payable (in terms different from Article 3(b) of the Building Contract) 5 days after completion of cutting of the first 300 metric tons of steel of which a written notice is to be given with a certificate countersigned by the Buyer;

iv) clause 3 guarantees the due and punctual payment of interest;

v) clause 4 imposes an obligation on the Bank to pay "in the event that the Buyer fails punctually to pay the second instalment";

vi) clause 7 says that the guarantor's obligation is not to be affected or prejudiced by any variations or extensions of the terms of the shipbuilding contract or by the grant of any time or indulgence.

24. Conversely the following points might be thought to favour a conclusion that the document is an "on demand" bond:-

i) clause 4, which is the clause which requires payment by the Bank, provides that

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

b) payment is to be made "immediately" without any request being made to the Seller to take any action against the Buyer;

ii) clause 7 provides that the Bank's obligations are 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 provides 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 is thus not envisaged that there will be any great delay in payment after default as there will be if (as in the present case) there is a dispute about whether the second instalment has ever became due.

25. In deciding whether the document is a traditional "see to it" guarantee or an "on demand" guarantee, it would be obviously absurd to say that there are 6 pointers in favour of the former and only 4 pointers in favour of the latter and it must therefore be the former. But if the law does not permit boxes to be ticked in this way, commercial men will need some assistance from the courts in determining their obligations. The only assistance which the courts can give in practice is to say that, while everything must in the end depend on the words actually used by the parties, there is nevertheless a presumption that, if certain elements are present in the document, the document will be construed in one way or the other.
26. It is exactly this kind of assistance that the editors of Paget's Law of Banking have endeavoured to provide. In the 11^th edition of that work these words appeared under the heading of "Contract of Suretyship v. demand guarantee":-

"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.

…

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. A bare promise to pay on demand without any reference to the principal's obligation would leave the principal even more exposed in the event of a fraudulent demand because there would be room for argument as to which obligations were being secured."

27. The words "will almost always be" amount to a presumption which was by then fully justified by the Court of Appeal authorities, Howe Richardson v Polimex [1978] 1 Lloyd's Rep 161, Owen v Barclays Bank [1978] QB 159 and Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyd's Rep 546. It is enough to quote from the judgment of Lord Denning MR in Owen at page 170H – 171C:-

"So, as one takes instance after instance these performance guarantees are virtually promissory notes payable on demand. So long as the … customers make an honest demand, the banks are bound to pay: and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay.

All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is clear fraud of which the bank has notice.

Such has been course of decision in all the cases there have been this year in our courts here in England."

And from the judgment of Ackner LJ in Esal at page 549:-

"… a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud and of the bank's knowledge of that fraud."

In Siporex v Banque Indosuez [1986] 2 Lloyd's Rep 146, 158 Hirst J was able to say this:-

"All three of the leading Court of Appeal cases are the strongest authority in favour of the proposition that the bank guarantor is not and should not be concerned in any way with the rights and wrongs of the underlying transaction. This is also the case in relation to letters of credit, with which all the authorities draw a very close analogy …

I, of course, accept Mr Hallgarten's submissions that every bond has to be construed in accordance with its terms, and there can be no blind categorization of its character or blind assumption of the obligations which it creates. However, I can see nothing whatsoever in the present performance bond to differentiate it from a number of those quoted in the authorities (particularly that in the Esal case) or to justify a departure from the general principles laid down in those cases.

I also consider it is extremely important that, for such a frequently adopted commercial transaction, there should be consistency of approach by the Courts, so that all parties know clearly where they stand."

28. Paget's presumption was in due course approved by this court in Gold Coast Ltd v Caja de Ahorros [2002] 1 Lloyd's Rep 617 para 16 where the document 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.
29. 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.
30. Why then did Christopher Clarke J come to a contrary conclusion on the facts of the present case? He relied on the following indications with greater or lesser enthusiasm

i) the document is called a "guarantee";

ii) when referred to in the exhibits to the contract, it is called an "irrevocable letter of guarantee";

iii) clause 1 contains the "core obligation" guaranteeing the due and punctual payment of the second instalment and identifies the second instalment in the terms set out in clause 2 without at that stage saying anything about agreeing to pay on demand;

iv) clause 3 relating to interest requires the Buyer to be in default;

v) clause 4 follows on from clauses 1, 2 and 3 and calls for payment "in the event that the Buyer fails punctually to pay" and goes "well beyond" what is needed for the purpose of identifying the obligation for which the security was being given;

vi) the closing words of clause 4 would be unnecessary if the document was an on demand guarantee;

vii) the later words of clause 7 were only necessary if the document was a true "see to it" guarantee;

viii) the Bank was not providing the guarantee for a set fee but was closely connected with the whole transaction which it was financing;

ix) although the contractual background did not provide any sure guide to the contract's correct interpretation, the judge was struck by the fact that the Bank could find itself having to pay up to the amount of the second instalment without any Refund Guarantee being in place from the Seller's bank to secure its return. The refund guarantee had to be provided before the second instalment was due under the contract and indeed arbitrators have now held (subject to any appeal for which leave might be given) that because it was not provided in the appropriate terms, the Buyer was not in fact obliged to pay the second instalment. The judge evidently thought reciprocity was appropriate.

31. 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 in favour of the document being an on demand guarantee and, granted these positive factors, and the presumption enunciated by Paget (now contained in almost identical words in 13^th ed (2007) para 34.4) and supported by previous authority, the judge ought in my respectful view to have had much more regard to the presumption than he did. As Hirst J said:-

"it is extremely important that … there should be a consistency of approach by the Courts, so that all parties know clearly where they stand."

32. There are, moreover, indications that the document which began as Exhibit B to the contract was to some extent drawn up by persons not entirely familiar with the English language; it may well be something of a palimpsest (to use the word of Lord Diplock in Federal Commerce v Tradax Export (The Maratha Envoy) [1978] A.C. 1, 13H) incorporating words of previous forms. In these circumstances it is not in my judgment right to treat the words with similar reverence to the reverence with which one would construe a statute. It is much better (and indeed simpler) to be guided by the general tenor of previous authority enunciated by past judges of great distinction.

Conclusion

33. For these reasons, which an appellate court can state more shortly than a first instance judge, I consider that it is appropriate to follow the guidance offered by Paget and conclude that the document sued on is an on demand guarantee and to enter judgment accordingly.

Postscript

34. We had some argument as to the legal position if, on the assumption that the Bank is liable to pay and does pay the amount guaranteed, the underlying position turns out to be that the Buyer never was obliged under the ship-building contract to pay the second instalment. Would the Seller hold the amount paid by the Bank on constructive or resulting trust for the Buyer? That is better considered when finality is reached in the arbitration.

Lord Justice Rimer:

35. I agree.

Lord Justice Tomlinson:

36. I also agree.