ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
THE HONOURABLE MR JUSTICE BEATSON
Strand, London, WC2A 2LL
B e f o r e :
THE RIGHT HONOURABLE LORD JUSTICE LONGMORE
THE RIGHT HONOURABLE LORD JUSTICE ETHERTON
| MERITZ FIRE & MARINE INSURANCE CO LTD
|- and -
|JAN DE NUL N.V. & ANR
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Mr Iain Milligan QC & Mr Mark Humphries (instructed by Linklaters LLP) for the Respondents
Hearing dates: 11th July 2011
Crown Copyright ©
Lord Justice Longmore:
"17.1 The Owner may immediately terminate the Contract by notice to the Builder if at any time before takeover of the Vessel:
a) The Owner demonstrates that the Builder is in delay on any one of the Milestones … by more than hundred and fifty (150) Days; or
d) The Builder has a receiver, administrator or administrative receiver, trustee, liquidator or like person appointed over any substantial part of its assets under any jurisdiction or law relating to the reorganisation, arrangement or adjustment of debts or the dissolution, administration or liquidation of corporation.
17.2 In the event of such termination of the Contract the Owner shall have the option - at its discretion – either (i) to take possession of the Vessel as it is constructed and to take over all the materials, equipments, design and services purchased by the Builder for this project and have it completed by a third party, whereby the Builders shall promptly repay the Owner all sums not used in the construction of the Vessel plus the extra costs incurred in the completion thereof up to the amount guaranteed under the [APG], [or] (ii) the Builder shall refund to the Owner the amount of all monies paid by the Owner under the Contract together with interest. …"
"As soon as possible after the signature of this Contract, the Builder shall at its expense provide to the Owner through a First-Class Bank a Guarantee in the form as per Annex 3 to guarantee the faithful and timely performance of the Builder's obligations under the Contract."
" We hereby issue the irrevocable Advance Payment Guarantee (Letter of Guarantee Number …) in favor [sic] of [Jan de Nul NV/Codralux SA] … (hereinafter called "the Buyer") for the account of Heun Woo Steel Co Ltd, a shipyard organized and existing under the laws of the Republic of Korea … (hereinafter called ("the Builder") in connection with the shipbuilding contract … (hereinafter called ("the Shipbuilding Contract") made by and between the Buyer and the Builder for the construction [the Vessel is then identified by description and its Builder's Hull number] … (hereinafter called "the Vessel").
 If, in connection with the terms of the Contract, the Buyer shall become entitled to a refund of advance payments made to the Builder prior to the delivery of the Vessel, we hereby irrevocably and unconditionally guarantee the repayment of the same to the Buyer within Thirty (30) days after demand is made not exceeding the sum [specified] … together with interest …
 Under no circumstances shall the amount of this Advance Payment Guarantee (Letter of guarantee) exceed [the specific sum, being an amount equal to 20% of the total Contract Price in the case of HS1005 and HS1006 and 70% of the total Contract Price in the case of HS1007] plus interest thereon at the rate of Six percent (6%) per annum …
 The Buyer's demand for payment under this Advance Payment Guarantee (Letter of Guarantee) is payable upon our receipt of the Buyer's signed statement certifying that the Buyer's demand for refund is made in conformity with Clause 17 of the Contract and that the Builder has failed to make the refund.
 Notwithstanding the provisions hereinabove, in the event that within Thirty (30) days from the date of your claim to the Builder referred to above, we receive written notification from either you or the Builder stating that your claim for refund hereunder is disputed by the Builder and has been referred to arbitration in accordance with the provision of the Contract, we shall, under this Advance Payment Guarantee (Letter of Guarantee), refund to you the sum as per the award issued under such arbitration immediately upon receipt from you of a demand for the sum so adjudged together with a copy of the arbitration award, and not before.
 This Advance Payment Guarantee (Letter of Guarantee) [shall] become null and void upon receipt by the Buyer of the sum guaranteed hereby or upon acceptance by the buyer of the delivery of the Vessel in accordance with the terms of the Contract …
 This Advance Payment Guarantee (Letter of Guarantee) is valid from the date herein stated below until such time that the Vessel is delivered by the Builder to the Buyer in accordance with the provision of the Contract.
 This Advance Payment Guarantee (Letter of Guarantee) shall be governed by and construed under the substantive law of England and the undersigned hereby submits to the non-exclusive jurisdiction of the courts of England.
 **** This Advance Payment Guarantee (Letter of Guarantee) is subject to the Uniform Rules for Demand Guarantee of the International Chamber of Commerce (ICC), ICC Publication No. 458."
"… The Rules are intended to apply worldwide to the use of demand guarantees, that is, guarantees, bonds, and other payment undertakings under which the duty of the guarantor or issuer to make payment arises on the presentation of a written demand and any other documents specified in the guarantee and is not conditional on actual default by the principal in the underlying transaction.
Demand guarantees differ from documentary credits in that they are properly invoked only if the principal has made default. However, the guarantor, like the issuer of a documentary credit, is concerned not with the fact of default, but only with documents.
These Rules do not apply to suretyship or conditional bonds or guarantees or other accessory undertakings under which the guarantor's duty to pay arises only on actual default by the principal. Such instruments are widely used but are different in character from demand guarantees and are outside the scope and purposes of these Rules.
The beneficiary wishes to be secured against the risk of the principal's not fulfilling his obligations towards the beneficiary in respect of the underlying transaction for which the demand guarantee is given. The guarantee accomplishes this by providing the beneficiary with quick access to a sum of money if these obligations are not fulfilled.
Whilst recognising the needs of the beneficiary, the principal can expect on the grounds of equity and good faith to be informed in writing that, and in what respect, it is claimed he is in breach of his obligations. This should help to eliminate a certain level of abuse of guarantees through unfair demands by beneficiaries.
For these Rules to apply, the guarantee should not stipulate any condition for payment other than the presentation of a written demand and other specified documents. In particular, the terms of the guarantee should not require the guarantor to decide whether the beneficiary and principal have or have not fulfilled their obligations under the underlying transaction, with which the guarantor is not concerned. The wording of the guarantee should be clear and unambiguous.
The Instructing Party
The new Rules recognise the existing widespread practice whereby an instructing party may forward to the guarantor instructions received from or on behalf of the principal and counter-guarantee such instructions.
The ICC wishes to encourage good demand-guarantee practice which is equitable to all concerned, and believes that these Rules will result in a fair balance of interests, recognising the rights and obligations of all parties. Compared with the ICC Rules published in 1978, these Rules incorporate a major change in favour of beneficiaries in that they are no longer confined to guarantees which require the presentation of an arbitration award or other independent documentary evidence in support of any demand. However, guarantees which do require such evidence are still within the scope of these Rules. …
It is a characteristic of all guarantees subject to these Rules that they are payable on presentation of one or more documents. The documentary requirements specified in demand guarantees vary widely. At one end is the guarantee which is payable on simple written demand, without a statement of default or other documentary requirements. At the other end is the guarantee which requires presentation of a judgment or arbitral award.
Between these two extremes lie various intermediate forms of guarantee, such as guarantees requiring a statement of default by the beneficiary, with or without an indication of the nature of the default, or the presentation of a certificate by an engineer or surveyor. All these fall within the scope of the new Rules.
However, the interests of the beneficiary must be balanced against the need to protect the principal against an unfair claim on the guarantee. The ICC considers it reasonable to provide that in accordance with principles of equity and fair dealing a demand should be in writing and should at least be accompanied by a statement by the beneficiary that, and in what respect, the principal is in default, and Article 20 so provides. A party who wishes to avoid or alter even this requirement is free to do so but must take the deliberate step of excluding or modifying Article 20 by the terms of the guarantee. However, Article 20, when read with Articles 2(b) and (c), 9 and 11, also makes it clear that guarantors are not concerned with the adequacy of any statement of breach. The documents must, of course, appear to conform to the guarantee, so that where a non-conformity is apparent on the face of the documents the beneficiary is not entitled to payment. Moreover, these Rules do not affect principles or rules of national law concerning the fraudulent or manifest abuse or unfair calling of guarantees."
a) For the purpose of these Rules, a demand guarantee (hereinafter referred to as "Guarantee") means any guarantee, bond or other payment undertaking, however named or described, by a bank, insurance company or other body or person (hereinafter called "the Guarantor") given in writing for the payment of money on presentation in conformity with the terms of the undertaking of a written demand for payment and such other document(s) (for example, a certificate by an architect or engineer, a judgment or an arbitral award) as may be specified in the Guarantee, such undertaking being given
a) at the request or on the instructions and under the liability of a party (hereinafter called "the Principal"); or
b) at the request or on the instructions and under the liability of a bank, insurance company or any other body or person (hereinafter "the Instructing Party") acting on the instructions of a Principal to another party (hereinafter the "Beneficiary").
b) Guarantees by their nature are separate transactions from the contract(s) … on which they may be based, and Guarantors are in no way concerned with or bound by such contract(s) … despite the inclusion of a reference to them in the Guarantee. The duty of a Guarantor under a Guarantee is to pay the sum or sums therein stated on the presentation of a written demand for payment and other documents specified in the Guarantee which appear on their face to be in accordance with the terms of the Guarantee.
a) Any demand for payment under the Guarantee shall be in writing and shall (in addition to such other documents as may be specified in the Guarantee) be supported by a written statement (whether in the demand itself or in a separate document or documents accompanying the demand and referred to in it) stating:
a) that the Principal is in breach of his obligation(s) under the underlying contract(s) …
b) the respect in which the Principal is in breach."
i) On the true construction of the APGs, Meritz had guaranteed the obligation of HWS to make the repayment and not the obligation of anyone else. Once the obligation of HWS had disappeared (whether by transfer to Buyoung or for any other reason), the APGs no longer had any application;
ii) No demand in conformity with clause 17 of the shipbuilding contract could be made, as required by paragraph 4 of the APG, once the Builder was no longer HWS but Asia Heavy;
iii) Commercial Bank of Tasmania v Jones  AC 313 decided that, where a debtor has been released by novation, the guarantor is discharged.
i) On the true construction of the APGs, Meritz promised to repay the sums advanced if HWS did not. HWS had not paid and had therefore failed to pay within the meaning of paragraphs 2 and 4 of the APG;
ii) the contract documents had been presented and, in the absence of fraud (which is not suggested) Meritz are bound to pay;
iii) Commercial Bank of Tasmania was a case of a "see-to-it" guarantee and, in any event, only applied when the creditor/beneficiary was a voluntary party to the novation.
"demand for refund is made in conformity with Clause 17 of the Contract and that the Builder has failed to make the refund."
That is precisely what the signed statement of the Buyers did certify in respect of each of the shipbuilding contracts. It matters not whether there is a true liability to refund under clause 17, nor whether the Builder has, in fact, failed to make the refund. But since as a matter of fact no refund has been made it is, in any event, no abuse of language to say that the Builder has failed to make the refund. It may be that in the light of the novation HWS was not liable to make the refund but Asia Heavy was; it may be that in the light of the fact that HWS was dissolved on 8th June 2007, HWS cannot make the refund. But neither of those facts matters. It has still "failed to make the refund" as envisaged by paragraph 4 of the APG.
"It may be taken as settled law that where there is an absolute release of the principal debtor, the remedy against the surety is gone because the debt is extinguished, and where such actual release is given no right can be reserved because the debt is satisfied, and no right or recourse remains when the debt is gone. Language importing an absolute release may be construed as a covenant by the creditor not to sue the principal debtor, when that intention appears, leaving such debtor open to any claims of relief at the instance of his sureties. But a covenant not to sue the principal debtor, is a partial discharge only, and, although expressly stipulated, is ineffectual, if the discharge given is in reality absolute. In this case, the acceptance of Marshall as full debtor, in room and stead of Wakeham, which constituted a complete novation of the debt, necessarily operated as an absolute release of Wakeham, and it is therefore in vain to contend that such novation merely amounted to a covenant not to sue the debtor for whom the respondent was surety."
This is an authority in relation to a traditional "see-to-it" guarantee in respect of which the guarantor can say that he is not liable if the principal debtor is not. But, as I have already said, questions whether the debtor is liable under the underlying contract are irrelevant to guarantees (such as the APGs) where payment is to be made against documents (whether certificates or awards or other documents). In such cases, if the documents are in order, the guarantor must pay.
Lord Justice Etherton:
Lord Justice Laws: