A review of the Wuyhan Guoyu v Emporiki Bank of Greece [2013] which sets out how the court will decide if a document is a bond (easy money) or a guarantee (much harder). The note was prepared by Sarah Fox, 500 Words Ltd. She is a speaker and trainer, and specialist in construction contracts including bonds and guarantees. She helps you write simpler contracts and understand complex ones. Contact her sarah@500words.co.uk or for more information go to www.500words.co.uk

1. How Can You Tell If Your Bond is a Guarantee?
Being the recipient of a bond is a little like being given a betting slip. The bond, of which you are now
a proud owner, promises much. It may even be the key to huge wealth. Or it may prove to be a
worthless piece of paper.
An invaluable skill is to be able to distinguish between the two!
Thankfully, the 2013 Court of Appeal decision in Wuyhan Guoyu v Emporiki Bank of Greece1
provides some valuable tips which are worth studying before you place your bet.
1 The Facts
The case involved an agreement to buy two bulk carriers from a shipyard in China. A ‘letter of
guarantee’ from the Emporiki Bank of Greece said that:
‘…we, [the Bank] 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 second instalment of the Contract
Price…’
The second instalment exceeded US $10m. The document also guaranteed, in similar terms, the
payment of interest on that instalment.
2 First Decision
The Technology and Construction Court held that the document was similar to a guarantee, setting
out grounds which included:
 The document refers to itself as a guarantee;
 The document provides that disputes will enable the bank to withhold payment under the letter;
 The document refers to an instalment under the principal contract and the obligation in relation
to interest requires default under the principal contract;
 The reference in the document to ‘primary obligor’ was not decisive (per Carey Added Value v
Grupo Urvasco [2010]2
). [see note on jargon below]
3 Decision on Appeal
The Court of Appeal allowed the appeal, confirming that the proper construction of the document
depends on the words used by the parties. It restated the presumption (from Paget’s Law of
Banking) that a document will be ‘on-demand’ if it:
 Relates to a transaction between parties in different jurisdictions;
 Is issued by a bank (rather than an insurance company or parent company);
 Contains an undertaking to pay ‘on demand’;
 Does not contain terms which exclude or limit the bank’s defences.
As the document met conditions 1-3 above, the Court of Appeal held that the document was in fact
an ‘on-demand’ bond. It was not a guarantee.

2. 4 Consequences for the Recipient
The Court of Appeal noted that “guarantees of this kind…are almost worthless if the Bank can resist
payment on the basis that the foreign buyer is disputing whether a payment is due.”
An on-demand bond provides a much cleaner right for the recipient to bring a claim against the
Bank. The recipient does not need to prove either loss or breach. In comparison to bringing a claim
under a guarantee, a claim under an on-demand bond results in payment which is:
 quicker (except where the courts get involved),
 not subject to cross-claims or counterclaims,
 subject to fewer defences.
A claim under an on-demand bond is similar to storing pennies in a piggybank – easy and quick to
access. A claim under a guarantee is more like having your money in a safe to which you have
forgotten the combination.
5 Consequences for the Bank
The Bank has two defences to a claim under an unexpired on-demand bond: the claim is fraudulent
or in the incorrect form. Fraud means actual notice of dishonesty, rather than a mere impression of
impropriety. Any procedural irregularity can normally be rectified and is no more than a stalling
tactic.
The Bank does have a significant means of reducing its ultimate liability. Most on-demand bonds are
backed by counter-indemnities from the party in breach of the principal contract. The Bank can,
except in the case of insolvency, recover $1 for $1 what it pays out to the recipient.
The party in breach has the most to lose!
6 Consequences for the Party in Breach
This party has some limited protection against claims.
Firstly, it can ask for an injunction if the claim is fraudulent.
Secondly, it can recover any over-payments from the recipient. The Court of Appeal briefly
considered whether the recipient might be ‘over-compensated’. Although it did not decide the
point, a series of cases starting with Cargill v Bangladesh [1996]3
have implied terms into bonds
requiring credit to be given and an accounting to be made after the damages for breach have finally
been determined.
As a result the Bank is required to pay the recipient in full now, and the defaulting party can recover
over-payments later.
7 Plain Language?
For once, the judges did not comment on the language of the bond itself. Sadly, given the number of
senior judges already required to determine what the document meant, it can hardly be said to be a
model of clarity.

3. However, Longmore LJ in the Court of Appeal said that the commercial community ‘deserved better’
than our system of judicial precedent if the construction or interpretation of these comparatively
short documents required an exhausting 93 paragraphs and 20 cases to be reviewed! An appeal for
clarity and concise judgments...
Note on jargon: ‘primary obligor’ is a term which means that the liability of the Bank did not depend
on the shipbuilding contract but only on the terms of the document between the Bank and the
recipient. This is referred to as primary liability. The use of such a term would be more appropriate to
an on-demand bond which results in the Bank having a primary liability than to a guarantee when
the Bank’s liability depends on the terms and validity of the principal contract.
The Author
Sarah Fox of 500 Words Ltd wrote this note. She is a speaker and trainer, who helps construction
specialists write simpler contracts and understand complex ones. She is also author of a series of
500-Word construction contracts.
To find out how Sarah can help you avoid disputes contact her on: 07767 342747 or by email:
sarah@500words.co.uk
Footnotes
1
Wuhan Guoyu Logistics Group Co Ltd & Anr v Emporiki Bank of Greece SA [2013] EWCA Civ 1679.
2
Carey Value Added, S.L. v Grupo Urvasco, S.A. [2010] EWHC 1905.
3
Cargill International SA v Bangladesh Sugar and Food Industries Corporation [1998] 1 WLR 461.