COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM COMMERCIAL COURT
MR JUSTICE SIMON
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE PATTEN
SIR SIMON TUCKEY
| KOOKMIN BANK
|- and -
|RAINY SKY S.A.
SEILAND SHIPPING & TRADING CO.
ISLAY NAVIGATION INC.
SEAPRIDE NAVIGATION CORP.
METROBULK HOLDINGS S.A.
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7404 1424
Official Shorthand Writers to the Court)
Andrew BAKER Q.C. & Socrates PAPADOPOULOS (instructed by Ince & Co.) for the Respondents
Hearing dates: 29 April 2010
Crown Copyright ©
SIR SIMON TUCKEY:
ADVANCE PAYMENT BOND
"(1) We refer to the shipbuilding contract dated 11 May 2007 (as amended, varied or novated from time to time, the "Contract") entered into between Jinse Shipbuilding Co., Ltd of ... Pusan, Korea (the "Builder") and yourselves for the construction and delivery of a new-built ...."Vessel" to be delivered before ... . Other terms and expressions used in this Bond shall have the same meaning as in the Contract, a copy of which has been provided to us.
(2) Pursuant to the terms of the Contract, you are entitled, upon your rejection of the Vessel in accordance with the terms of the Contract, your termination, cancellation or rescission of the Contract or upon a Total Loss of the Vessel, to repayment of the pre-delivery instalments of the Contract Price paid by you prior to such termination or a Total Loss of the Vessel (as the case may be) and the value of the Buyer's Supplies delivered to the Shipyard (if any), together with interest thereon at the rate of seven per cent (7%) per annum (or ten per cent (10%) per annum in the case of a Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of remittance by telegraphic transfer of such refund.
(3) In consideration of your agreement to make the pre-delivery instalments under the Contract and for other good and valuable consideration (the receipt and adequacy of which is hereby acknowledged), we hereby, as primary obligor, irrevocably and unconditionally undertake to pay to you, your successors and assigns, on your first written demand, all such sums due to you under the Contract (or such sums which would have been due to you but for any irregularity, illegality, invalidity or unenforceability in whole or in part of the Contract) PROVIDED THAT the total amount recoverable by you under this Bond shall not exceed US$[26,640,000] (United States Dollars Twenty Six Million, Six Hundred and Forty Thousand only) plus interest thereon at a rate of seven per cent (7%) per annum (or ten per cent (10%) per annum in the event of a Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of remittance by telegraphic transfer of such refund.
(4) Payment by us under this Bond shall be made without any deduction or withholding and promptly upon receipt by us of a written demand (substantially in the form attached) signed by two of your directors stating that the Builder has failed to fulfil the terms and conditions of the Contract and as a result of such failure, the amount claimed is due to you and specifying in what respects the Builder has so failed and the amount clamed. Such claim and statement shall be accepted by us as evidence for the purposes of this Bond alone that the amount claimed is due to you under this Bond."
Other terms followed which included an English law and Commercial Court exclusive jurisdiction clause.
The shipbuilding contracts
"8 REFUND GURARANTEE
The Builder shall as a condition precedent to payment by the Buyer of the first instalment deliver to the Buyer an assignable letter of guarantee issued by a first class Korean bank .... to Buyer's Financiers for the refund of the first instalment, and at the same time, together with the letter of guarantee related to the first instalment Builder shall also deliver to the Buyer an assignable letter of guarantee issued by a first class Korean bank .... for the refund of the respective instalments following the way of the payments stipulated in this Article. The refund guarantees by the Builder to the Buyer shall be indicated pre-delivery instalments plus interest as aforesaid to the Buyer under or pursuant to paragraph 5 above in the form annexed hereto as Exhibit A which is yet to be agreed."
No form of guarantee was in fact annexed to the Contract.
"5 REFUND BY THE BUILDER
The payments made by the Buyer to the Builder prior to the delivery of the Vessel shall constitute advances to the Builder. If the Vessel is rejected by the Buyer in accordance with the terms of this Contract, or if the Buyer terminates, cancels or rescinds this Contract pursuant to any of the provisions of this Contract specifically permitting the Buyer to do so, the Builder shall forthwith refund to the Buyer in US dollars, the full amount of total sums paid by the Buyer to the Builder in advance of delivery together with interest thereon as herein provided within thirty (30) banking days of acceptance of rejection. ...
If the Builder is required to refund to the Buyer the instalments paid by the Buyer to the Builder as provided in this paragraph, the Builder shall return to the Buyer all of the Buyer's Supplies as stipulated in Article XIII which were not incorporated into the Vessel and pay to the Buyer an amount equal to the cost to the Buyer of those Buyer's Supplies incorporated into the Vessel."
"6 TOTAL LOSS
If there is a Total Loss or a constructive Total Loss of the Vessel prior to delivery thereof, the Builder shall proceed according to the mutual agreement of the parties hereto either:
(a)to build another vessel in place of the Vessel so lost . ... or
(b)to refund to the Buyer the full amount of the total sums paid by the Buyer to the Builder under the provisions of paragraph 2 of this Article and the value of Buyer's Supplies delivered to the Shipyard, if any, together with interest thereon at the rate of ten percent (10%) per annum ..."
3. If the Builder shall apply for or consent to the appointment of a receiver, trustee or liquidator, shall be adjudicated insolvent, shall apply to the courts for protection from its creditors, file a voluntary petition in bankruptcy or take advantage of any insolvency law, or any action shall be taken by the Builder having an effect similar to any of the foregoing or the equivalent thereof in any jurisdiction, the Buyer may by notice in writing to the Builder require the Builder to refund immediately to the Buyer the full amount of all sums paid by the Buyer to the Builder on account of the Vessel and interest thereon at seven percent (7%) per annum on the amount to be refunded to the Builder, computed from the respective date such sums were paid by the Buyer to the date of remittance of the refundable amount to the Buyer and immediately upon receipt of such notice the Builder shall refund such amount to the Buyer. Following such refund the Builder may, but shall not be obliged to, by notice in writing to the Buyer given within ten (10) business days terminate this contract. If the Builder does not so terminate the Contract the Buyer's obligation to pay further instalments prior to delivery of the Vessel under Article X paragraphs 2(a),(b),(c) and (d) shall be suspended and the full Contract price shall be paid to the Builder on delivery of the Vessel in the manner contemplated by Article X paragraph 2(e.)
Simon J's Judgment
(i) Paragraphs (2) – (4) of the Bond set out a clear structure. Paragraph (1) shows that the terms used in the Bond have the same meaning as the terms in the Shipbuilding Contract. Paragraph (2) is a preamble, in the sense that it sets out some (but not all) of the Claimants' rights against the Builder. It does not set out the Claimants' rights against the Defendant: those are contained in the next paragraph. Paragraph (3) sets out the Defendant's obligation to pay sums due to the Buyers under the shipbuilding contract. Paragraph (4) describes both the nature of the obligation, and when and how it becomes due.
(ii) The Defendant's obligation to pay arises specifically under paragraphs (3) and (4). The phrase "all such sums due under the Contract" in paragraph (3) (emphasis added) is clear and unqualified. "Such sums" are not defined; but it makes better grammatical sense if they were intended to apply to "the pre-delivery instalments" in the same sentence, rather than the repayment obligation recited as a preamble in the preceding paragraph (2). As Mr Baker noted, "value of the Buyer's Supplies" appears not to be covered by the Bond at all.
(iii) The Defendant's construction has the surprising and uncommercial result that the Buyers would not be able to call on the Bond on the happening of the event which would be most likely to require the first class security.
"The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear."
and The Antaios (1984) AC 191, where at 201 Lord Diplock said:
"If detailed and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense it must yield to business commonsense."
Lord Justice Patten:
"The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B.  A.C. 191 , 201:
"if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."
"The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties' positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. Cardozo J. thought so in the Utica Bank case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get "agreement" and in the hope that disputes will not arise. The only course then can be to try to ascertain the "natural" meaning. Far more, and indeed totally, dangerous is it to admit evidence of one party's objective — even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised."
"It is of course true that the fact that a contract may appear to be unduly favourable to one of the parties is not a sufficient reason for supposing that it does not mean what it says. The reasonable addressee of the instrument has not been privy to the negotiations and cannot tell whether a provision favourable to one side was not in exchange for some concession elsewhere or simply a bad bargain."
"The refund guarantees by the Builder to the Buyer shall be indicated pre-delivery installments plus interest as aforesaid to the Buyer under or pursuant to Paragraph 5 above…"
Lord Justice Thorpe