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When is a payment guarantee a guarantee rather than a demand bond?

The English Court of Appeal case, Wuhan Guoyu Logistics Group Co Ltd & Anor v Emporiki Bank of Greece SA, involved a payment guarantee issued by a bank in relation to an instalment of the price payable under a shipbuilding contract. The main issue before the Court of Appeal was whether the payment guarantee, properly construed, was a demand bond or a guarantee.

The Court of Appeal held that the proper construction of a payment guarantee depends on the words that the parties use. The Court said that there is a presumption that if the instrument (i) relates to an underlying transaction between 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 guarantee.

In the present case, the Court of Appeal found that the first three of the above presumptions were present in the instrument in question and that the judge at first instance should have had much more regard to the presumption than he did, particularly where, as here, the contract was to some extent drawn up by persons not entirely familiar with the English language. The Court of Appeal therefore concluded that the instrument in question was an on demand guarantee.

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