Case update: Performance bonds

2 minute read
10 March 2014

The Court of Appeal has reinforced the position that the primary liability to pay under a performance bond is entirely separate from the relationship between the parties to the underlying contract.

The case in question was the Court of Appeal hearing of the Wuhan Guoyu Logistics Group v Emporiki Bank of Greece [2013] EWCA Civ 1679.

The earlier decision (concluding that the document in question was a performance bond and not a guarantee) was the subject of an AAA last year. The latest hearing considered whether the beneficiary was required to hold the bond proceeds on trust for the issuing bank in a situation where it had submitted a valid demand in good faith but became aware (before receiving the payment), that it was not actually entitled to receive the funds under the terms of the underlying contract.

The court rejected the trust argument. It considered that, once a valid demand had been made, the beneficiary acquired a 'complete and immediately enforceable cause of action against the bank', which was 'indefeasible' and therefore the bank was obliged to pay. It was noted that the underlying contract was subject to an implied term that 'the beneficiary will account to the other party to the underlying contract to the extent to which the beneficiary has been over-compensated by the guarantor'.

The decision is not new law but reinforces the position with two things; first, that the primary liability of the party issuing a performance bond is clearly separated from the actions of the party performing the contract and that, secondly, if there has been any element of overpayment, this should be resolved between the parties to the underlying contract - not the parties to the performance bond.

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