Performance bonds: trust in good faith

In 2012, the Court of Appeal reversed the first-instance decision of the High Court in the case of Wuhan Guoyo Logistics Group Co Ltd and another v Emporiki Bank of Greece SA, where it had been held that a particular security document was a guarantee, rather than an on-demand bond. Now, in its second judgment in this case, the Court of Appeal has held that payments made in accordance with a bond will not be held on trust by the recipient beneficiary where the demand for payment was validly made, even if the demand was based on incorrect facts.

On 29 November 2006, the claimant entered into a shipbuilding contract with a buyer for the construction, sale and purchase of two carriers. Payment was to be made by instalments. The buyers were funded by a Greek bank, the defendant, and the payments were secured by a ‘payment guarantee’ issued by the defendant.

When the second instalment was not paid, the claimant demanded payment. The buyers refused to pay as they did not believe the instalment was due. The claimant then made a demand on the defendant under the payment guarantee, in good faith, for the unpaid instalment. When this was not forthcoming, the claimant issued proceedings. As well as pursing the claim in the courts, the parties also referred the matter to arbitration. Of particular significance was the dispute as to whether the second instalment had actually become due…

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