England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		The Law Courts Mold, CH7 6NB
		2 May 2001

Mr Justice Thomas:

1. There are before the court applications for summary judgment in an action commenced by the Claimant (the Buyers) against the Defendant Spanish Banks (the Banks) under seven refund guarantees in identical form given by the Banks in respect of instalments paid under a shipbuilding contract entered into between the Buyers and Naval Gijõn, SA (the Builders). The Buyers claimed under their shipbuilding contract with the Builders that, because of delay in the construction of the vessel, they were entitled to declare the contract in default and recover the instalments paid by them to the Builders. Their right was disputed by the Builders and the matter has been referred to arbitration. The Buyers claim in these proceedings that they are now entitled to reclaim from the Banks under the refund guarantees for instalments paid; the Banks dispute their entitlement. The Buyers and the Banks each sought summary judgment against the other in applications before the court.
2. When the applications came on for hearing in January 2001, the issues before the Court turned purely on questions of construction; for those purposes, as all the material facts were before the court, the applications were in effect a trial of the action. However, as I was immediately resuming the conduct of an enquiry, I indicated that I was unable to give judgment for sometime; in early February, I was told that the Banks wished for a further hearing and to raise a further issue. That further hearing took place on 21 February 2001; it will be necessary to describe briefly what happened as it led to an adjournment and to the Banks abandoning the new issue on 13 March 2001. The only questions that remained before the Court were those raised by the original applications.
3. It is first convenient to set out the facts in more detail.

The shipbuilding contract and the buyers’ financial arrangements

4. On 19 December 1997, the Buyers entered into a shipbuilding contract with the Builders for the construction for a Stainless Steel Chemical Tanker of 22,000 dwt. The Buyers under the contract were in fact another company but the details surrounding the transfer of the obligations to the Claimants are not relevant and it is sufficient to refer to the Claimants as the Buyers under the contract. The Buyers are a one ship Isle of Man company with no substantial assets.
5. The contract price was 6.675bn Spanish Pesetas (US$ 38.5m); under article 7 of the contract, the price was payable in a number of instalments specified to be made at various stages of the performance of the contract with a final instalment due on delivery. When the instalments became due, the Builder had to provide a refund guarantee from a bank in the form specified as exhibit A to contract. During the course of the contract, the instalments were paid and refund guarantees in that form were given by the Banks in respect of the payments made to the Builders.
6. Article 6(a) of the shipbuilding contract specified that the vessel would be delivered on 1 October 1999, but that date could be extended by aggregating permissible delays as provided for under the contract. Permissible delays were defined by article 6(d) to include force majeure delays, delays on account of causes attributable to the Buyers, extensions in the delivery date that were agreed and other matters. Under article 6(e) of the shipbuilding contract, if the accumulated delays beyond the delivery date including certain permissible delays exceeded 240 days or more, then the Buyer was entitled to declare the shipbuilding contract in default and exercise his rights under article 11. Under article 5.1(a) of the shipbuilding contract there was also a right to declare the contract in default if the delay in delivery for causes for which the Builders was liable exceeded 180 days, excluding the first 60 days from the delivery date.
7. It is not necessary for me to consider how the rights under article 5 and article 6 fit together. Both those articles give the right to declare the contract in default and to exercise the rights set out in article 11. In view of the importance of that article to the argument it is necessary to set out part of it:

“11.1 EFFECT OF BUILDERS DEFAULT

If, in accordance with any of the provisions of this contract the Buyer declares this contract in default and/or rescinds this contract, then subject to any arbitration under Article 15, at the Buyer’s option, either

a. the Builder shall be liable to repay to the Buyer all monies paid by the Buyer for or on account of the Contract Price together with interest thereon at the rate of the MIBOR plus 2% per annum, or the LIBOR plus 2% per annum when reference is made to the US Dollar Equivalent amounts, from the date when such monies were paid by the Buyer to the Builder up to the date of the repayment thereof, as well as the value of the Buyer Supply or the Buyer Supply, if any; or

b. make a demand under the Refund Guarantee(s); or”

The other options, set out in sub-clauses c to e, included agreeing to continue building the vessel, delivery of the vessel, the buyer taking possession of the vessel and selling the vessel or continuing to build the vessel.

8. The shipbuilding contract was governed by English law and provision was made in article 15 for reference to an expert (article 15(b)) and for arbitration (article 15(c)). Under the arbitration provisions the right of appeal to the courts was excluded.

The financing arrangements made by the Buyers

9. Simultaneously with the building contract, the Buyers entered into financial arrangements with Lloyds Bank plc; under the loan facility they borrowed US$38.5m and had to begin repayment at about the time of the scheduled delivery of the vessel. The Buyers also entered into, by way of security, a deed of general assignment under which the Buyers covenanted to provide information to the Lloyds Bank about the progress of the vessel’s construction at the request of Lloyds Bank and promptly to notify Lloyds Bank if the vessel was or was likely to be the subject of delayed delivery. It also was the case that under the facility agreement, the Buyers became obliged to pre-pay the loan if the delivery of the vessel had not occurred by 1 June 2000.

The refund guarantees

10. During the course of the construction of the vessel, instalments were paid against the provision by the Banks of a number of refund guarantees. The refund guarantees are all in identical terms (save as to the amount covered). Each was addressed to the Buyer; after referring to the building contracts and the various assignments, each provided:

“…we do hereby irrevocably and unconditionally undertake (except as provided below) that we will pay to you within five (5) days of your first written demand US$ [….] together with interest thereon at the rate of two per cent (2%), per annum over LIBOR from the date of your payment of the Instalment to the date of our payment to you of amounts due to you under this Guarantee if and when the Instalment becomes refundable from the Builder under and pursuant to the terms and conditions of the Shipbuilding Contract.”

This Guarantee is subject to the following conditions:

1. We shall pay any amount payable under this Guarantee upon receipt of a certificate issued by Lloyds Bank Plc stating the amount of the Instalment paid to the Builder under the Agreements, the date of such payment that you have become entitled to a refund pursuant to the Agreements and that the Builder has not made such refund.

2. This Guarantee shall become null and void upon the earlier of: (a) our receipt of a photocopy of the protocol of delivery and acceptance of the Vessel in accordance with Article 6(b) of the Shipbuilding Contract, duly signed by you and the Builder, or (b) your receipt of payment in full of the Instalment and interest thereon either from us under this Guarantee or directly from the Builder, or (c) 1^st July 2000, provided that in this latter case if arbitration proceedings have been commenced by the Builder or you under Article 15 of the Shipbuilding Contract, then this Guarantee will remain in full force and effect until 21 days after the publication of the final award in those arbitration proceedings except that we shall not be liable under this Guarantee for any interest accruing on the instalment after 1^st May 2001.

….

5. Any variation, amendment to or waiver given in respect of the Agreements will not limit, reduce or exonerate our liability under this Guarantee, always provided such variation, amendment or waiver will not increase our maximum liability assumed under this Guarantee.

….

8. This Guarantee shall be governed in every respect by English law. Any Dispute arising under or in connection with this Guarantee shall be referred to the exclusive jurisdiction of the English Courts and we irrevocably appoint Watson, Farley & Williams of 15 Appold Street, London EC2A 2HB, (reference JS) to accept service of any legal proceedings issued against us by you or your assignees in the English Courts.”

The events in and after June 2000

11. The vessel was delayed in her construction. On 19 June 2000, the solicitors to the Buyers claimed that the 240 day period provided for under article 5 of the shipbuilding contract had expired on 28 May 2000, after which period the Buyers had continued to reserve in full their rights for rescission under article 11. They noted that the delays in delivery of the vessel had persisted and the vessel was still not ready for delivery. They therefore informed the Builders that the Buyers declared the contract in default and rescinded it in accordance with article 11. They then requested under article 11.1(a) the Yard’s immediate confirmation that the Builders would repay all the sums paid together with interest thereon. They stated that, if they did not received confirmation of repayment, they would make demands under the refund guarantees under article 11.1(b) of the contract. By that time 80% of the contract price had been paid, with the balance of 20% being due on delivery.
12. On the following day, 20 June 2000 the Builders’ solicitors replied rejecting the declaration of default and claiming it constituted the repuditory breach of the contract by the Buyers. They claimed that, because of the operation of article 5 and 6 and the notice of permissible delays which had been given, the delivery date was not until 20 September 2000 or 1 August 2000. They also offered to deliver the vessel and made it clear that any demands under the refund guarantee would be wrongful, as the refund guarantees were not capable of being called before a final arbitration award had been given.
13. That same day the Buyers’ solicitors gave notice to the Banks making a formal written demand under the refund guarantees. No certificate from Lloyds Bank was enclosed.
14. On 16 May 2000 a dispute had arisen between the Buyers and the Builders about a proposed novation; in consequence the Builders had appointed Sir Christopher Staughton as their arbitrator. It was not clear to Lloyds Bank whether that arbitration encompassed the dispute as to the termination of the contract. On 27 June 2000, Norton Rose, solicitors to Lloyds Bank, wrote to the Builders to clarify that point and also to the Banks, asking them to confirm that under the provision of clause 2 of the refund guarantees, the refund guarantees would remain in full force and effect until 21 days after the publication of final award in the arbitration proceeding. Their letter continued:

“As you will appreciate, if you are not prepared to give the confirmation we are seeking, Lloyds Bank may be entitled to conclude, first, that it is not disputed that the Instalments are now refundable and, secondly, that they should therefore issue the appropriate certificates to enable demands to be made under the Guarantees before 1 July 2000. We therefore look forward to receiving your prompt confirmation of the matters set out in the preceding paragraph.”

15. On 28 June 2000 the Builders nominated Sir Christopher Staughton as an arbitrator to determine the disputes relating to the delivery. On 30 June 2000 Lloyds Bank who appeared to have no response from the Banks wrote to the Banks in the following terms:

“1. We refer to the guarantees and advise that our primary case in relation thereto is that arbitration proceedings have already been commenced between the Builder and Gold Coast Limited (“the Buyer”) under Article 15 of the Shipbuilding Contract on the issue of whether the instalments have become refundable from the Builder and that, pursuant to condition “2” of each of the Guarantees, the Guarantees will each remain in force and effect until 21 days after the publication of the final award in those arbitration proceedings, (our “Primary Case”).

2. We have previously invited you to confirm that you accept that the Guarantees will remain in full force and effect after 30 June 2000, but you have failed to do so. We therefore infer that you do, or may, reserve the right to argue that our Primary Case is incorrect and that any certificate issued by us pursuant to condition “1” of the Guarantees will therefore be ineffective if issued after 30 June 2000. Accordingly, and entirely without prejudice to our Primary Case, we hereby certify that the Buyer has become entitled, pursuant to the Agreements, to a refund of the instalments detailed in the schedule to this letter and that the Builder has not made such refund.”

16. The parties subsequently agreed that Sir Christopher Staughton would be the sole arbitrator for all the disputes referred to arbitration; in early January 2001 points of claim were served by the Buyers. There was no information before the court in relation to that dispute; it is, however, a matter of common experience that such disputes relating to the cause of delay in a shipbuilding contract can be complex and time consuming to resolve, though there are cases where the facts relating to delay may be clear.

The certificates issued by Lloyds Bank and the procedural history

17. The Banks did not make any response to the demand made on them and on 11 August 2000 proceedings were issued by the Buyers. The exchange of pleadings and witness statements then ensued; various points were taken. It appears that as a result of the exchange of evidence on 23 November 2000 Lloyds Bank issued a further letter certifying that the Buyers had become entitled to a refund of the instalments paid. It stated:

“We refer to the Guarantees.

We hereby certify that Gold Coast Limited has become entitled, pursuant to the Agreements (as defined in the Guarantees) to a refund of the Instalments paid to the Builder under the Agreements on the dates and in the amounts set out below and that the Builder has not made such refund”

There were then set out the instalments, amounts and dates of payment. The letter was signed on behalf of Lloyds Bank by two officers.

18. On 28 November 2000 fresh proceedings were issued by the Buyers against the Banks based on a new demand and the letter from Lloyds dated 23 November 2000.
19. On 12 January 2001, in the light of a further question raised by the Buyers, Lloyds Bank issued a further certificate correcting the date of the payment of the first instalment. It was otherwise in identical terms to the certificate issued on 23 November.
20. On 15 and 16 January 2001, I heard the arguments on the issues of construction; significant emphasis was placed by the Buyers on the certificates issued by Lloyds Bank.
21. On 14 February 2001, I was informed that the Banks wished to amend their defence to allege that the certificates given by Lloyds Bank were not given in good faith, but were fraudulent and were therefore invalid and of no effect; that the Banks wished to rely upon this as an additional ground of defence. The basis of the allegation was that on the occasions on which Lloyds Bank had issued a certificate it well knew that the Builders disputed the Buyers alleged recission of the shipbuilding contracts and that the matter had been referred to arbitration. Lloyds Bank had made no detailed enquiries as to the merits of the dispute; none had been made of the Builders and neither the Buyers nor Lloyds Bank had suggested that any enquiries were made of the Buyers. They therefore contended that Lloyds Bank simply had no knowledge and no possible basis of knowing whether the Buyers had become entitled to a refund of the instalments. In the circumstances, a statement made certifying that the Buyers were entitled to a refund was a statement made without an honest belief in its truth; it was therefore not made in good faith and was fraudulent.
22. Further witness statements were served and the application was heard on 21 February 2001. Towards the end of the hearing of the application during which a partner in Norton Rose, solicitors to Lloyds Bank, had been present, the Buyers produced to the Court a letter from Norton Rose written during the course of the hearing which stated:

“We understand that questions have been raised in Court this morning as to why we declined to respond substantively to a letter from [the solicitors to the Spanish Banks] dated 25 January 2001. We were advised by Leading Counsel not to respond to the detailed questions and requests for documents advanced in that letter, given the fact that the summary judgment application had already been heard and judgment was awaited.

We are prepared to say that our clients certified with an honest belief, and on reasonable grounds, having investigated with us the underlying issues in the arbitration under the shipbuilding contract. Moreover, our clients had the benefit of Leading Counsel’s advice when certifying. ”

23. In the light of that letter, counsel for the Banks asked for an adjournment of the proceedings to consider the letter and their position in respect of the application; I granted that adjournment. On 13 March 2001, when on Circuit at Chester, I was informed that in the light of the letter, the Banks had decided that they could not go behind the facts stated in Norton Rose’s letter and that they had reluctantly decided not to pursue their application to amend. The questions of costs of the application and the hearing on 21 February 2001 have, by agreement, been adjourned for argument.
24. In these circumstances, there is no factual dispute between the parties. I will consider the matter on the basis that by 23 November 2000, Lloyds Bank had satisfied themselves on reasonable grounds that they could issue the certificate and they issued the certificate in that bona fide belief. In the circumstances, it is unnecessary for me to consider their earlier letters. Thus the issues for determination relate solely to the question whether, on the basis of the certificate from Lloyds, the Buyers were entitled to payment under the refund guarantees or whether no payment was due until after the resolution by arbitration of the dispute between the Builders and the Buyers.
25. The Buyers argument was that the refund guarantees were demand guarantees (as defined in the ICC Uniform Rules for Demand Guarantees) payable on demand against the certificate of Lloyds Bank and independent of the shipbuilding contract. It was not a “ see to it guarantee” dependent upon the position being determined as between the Buyers and the Builders under the shipbuilding contracts. Their principal contentions in respect of the construction of each of the guarantees (which were in identical form) were:

• The refund guarantee was expressed to be payable on “first written demand” and this was a very strong indication that it was a demand guarantee. They relied upon a passage in Paget’s Law of Banking, 10^th edition, at p 653:

“If the instrument is payable upon “first written demand”, this points strongly to a performance bond”.

• It was payable against the certificate of Lloyds Bank; this was the protection given to the Banks as Lloyds had to be prepared to certify that the Buyers were entitled to a refund. This was an important safeguard to the Banks. They had put their faith in Lloyds Bank acting carefully and properly. The certificate would carry the implication that it was Lloyds Banks’ bona fide belief based on reasonable grounds that the Buyers were entitled to a refund of the instalments

• Clause 5 of the refund guarantee was to cater for the possibility a court might hold that the rules applicable to an ordinary guarantee might apply to a demand guarantee.

• The Builders would remain substantially secured as they would retain the vessel and the instalments to be repaid were 80% of the price.

• The refund guarantee contained its own dispute resolution mechanism; there was nothing that pointed to payment being dependent on an award under the shipbuilding contract; the general principle was that a guarantor was not bound by an award made under the contract which he guaranteed: see the judgment of Robert Goff J in The Vasso [1979] 2 Lloyd’s Rep 412 at 418.

• The financing arrangements for the vessel pointed to the need for Lloyds Bank and the Buyers to be able to recover promptly the instalments paid in the event that the vessel was not delivered.

• Article 11 of the shipbuilding contract gave the Buyers the right to make a demand under the refund guarantee; the words “subject to arbitration” did not make the award in an arbitration a condition of the exercise of the right.

26. The Banks maintained that each refund guarantee was a true guarantee, in the sense of a “see to it” guarantee and not a performance bond. The Banks were therefore entitled to rely upon all the defences available under the contract. They relied on a number of arguments to support their contention:

• On a proper reading of clause 1 of the refund guarantee, Lloyds Bank were not required to certify that the Buyers were entitled to a refund. Their function was more restricted. In any event, it was highly unlikely that the parties would have in effect permitted Lloyds Bank to determine the issue.

• The certificate of Lloyds Bank was intended only to be given when there was an arbitration award or if the parties were agreed or possibly in the event of an insolvency. The important matter to be certified was the date of the payment of the instalments as interest had to be calculated from that date. Lloyds were competent to express a view in those circumstances, but not to determine issues of delay. The parties had not intended to confer jurisdiction on Lloyds Bank to make a decision on matters (such as the reasons for delay under the shipbuilding contract) which would be decided by the arbitrator under the shipbuilding contract.

• Clauses 2 and 5 were not appropriate to a performance bond but to a true “see to it” guarantee.

• The opening words of the refund guarantee by the reference to “if and when the Instalment becomes refundable from the Builder under and pursuant to the terms and conditions of the Shipbuilding Contract” made it clear that the entitlement had to be determined under the shipbuilding contract and that meant by arbitration.

• The words of article 11 of the building contract made it clear there was no right to make a demand under the shipbuilding contract if the declaration of default was disputed. If it was disputed, then the words “subject to arbitration” made it clear that that dispute had to be resolved before payment was due under the refund guarantee. As the form of the refund guarantee was annexed to the contract, it would be expected that the refund guarantee was only callable in the circumstances set out in the shipbuilding contract.

• The Buyers were (as set out at paragraph 4) a one ship Isle of Man company with no substantial assets. The instalments represented security to the Builders; it was not to be expected that the Buyers would be able to negate that security unless they were acting in accordance with the terms of the shipbuilding contract. On the facts, if the sums were repaid to the Buyers and were used to repay the financing, the Builders would have no assets against which to enforce their award, if they were successful in the arbitration.

The meaning of the refund guarantee

Practice in the shipbuilding industry

27. In the shipbuilding industry, there is no standard practice in relation to guarantees given for the repayment of instalments paid by buyers to the shipbuilders. Such guarantees can either be in the form of independent performance bonds (or stand by letters of credit) or true “see to it” guarantees. From my own experience, I agree with the views to this effect expressed in Curtis: The Law of Shipbuilding Contracts, 2^nd edition at p 229. Although in many types of contract (including construction contracts not involving a ship), a performance bond might ordinarily be limited to a small proportion of the contract sum (about 10%) (see Hudson’s Building and Engineering Contracts 11^th edition 1995 at para. 17-002 and Documentary Credits by Jack, Malek and Quest (3^rd edition, 2001) at para. 12-45), that is not, in my experience, necessarily the case in the shipbuilding industry; I do not believe that there is any standard practice as regards the amount.

The wording of the guarantee

28. The question whether the Buyers are entitled to payment must depend upon the terms of the refund guarantee in the light of the surrounding circumstances. In the first place the refund guarantee is expressed to be unconditional save for the conditions set out in the text of the refund guarantee; it states that payment will be made within five days of the first written demand. In Esal (Commodities) v OCL [1985] 2 Lloyds Rep 546, a performance bond had provided that:

“We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance…”

The Court held that the bond was payable on demand without reference to the underlying dispute; as Ackner LJ observed:

“if the performance bond was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could never safely be made by the bank except on a judgment of a court of competent jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely to enable the beneficiary to obtain prompt and certain payment.”

He also held that the beneficiary making the demand under that bond had to inform the bank that he did so on the basis provided for in the performance bond itself.

“A beneficiary may seek, honestly or dishonestly, to apply a performance bond to the wrong contract, and the need to inform the bank of the true basis upon which he is making his demand may be very salutary….The requirement that he must when making his demand for payment in order to support his request for an extension, also commit himself to claiming the contract has not been complied with, may prevent some of the many abuses of the performance bond procedure that undoubtedly occur.”

29. The use of the words “on first written demand” is the language of an obligation independent of the underlying contract; it indicates that the payment will be made against a demand made and without a final decision on the actual position under the underlying contract. This indication is reinforced by the first condition under which the refund guarantee is payable – the certificate of Lloyds Bank.
30. In I.E. Contractors v Lloyds Bank [1990] 2 Lloyd’s Rep 496, where the Court of Appeal was considering a performance bond, Staughton LJ observed at 500 that:

“.. there is a bias or presumption in favour of the construction which holds a performance bond to be conditioned upon documents rather than facts. But I would not hold the presumption to be irrebuttable, if the meaning is plain. ”

31. The provision of the Lloyds certificate under clause 1 is, in my view, another significant indication that the refund guarantee was an obligation independent of the underlying contract. It was the document against which the sums were payable. On the natural reading of clause 1, the certificate was to state a number of matters including the amount of the instalment paid, the date of payment, the fact that the Buyers had become entitled to a refund and the fact that the Builders had not made a refund. The only part of the clause over which there could be any dispute were the words “ the date of such payment that you have become entitled to a refund pursuant to the Agreements”. If there had been a comma between the words “payment” and “that”, the meaning could not have been questioned. It was submitted by the Banks that the word “that” was commonly used instead of “which” to introduce a defining clause; in this phrase, “that” meant “in respect of” or “to”, so that the phrase would read, “ the date of such payment to [in respect of] which you have become entitled to a refund pursuant to the Agreements”. I do not accept that submission; it does greater violence to the language of the clause than the alternative; on this basis the words “that you have become entitled to a refund” would add little. I prefer the more natural reading of the words and that therefore the certificate was to cover entitlement to a refund.
32. The certificate provided very important protection to the Banks; this was not a case where the Buyers could demand repayment without production of any document. The document that they had to produce was the certificate of a leading bank as to their entitlement. Although Lloyds Bank would have an interest in obtaining the return of the instalments because they had provided financing to the Buyers, their obligation was plainly only to provide the certificate if they could certify honestly and in good faith that the Buyers were entitled to the refund; it would also seem to me to follow that they could only do so if there were reasonable grounds for that belief.
33. It must therefore follow that the words “on first written demand” and the provision of a certificate by Lloyds Bank are very strong indications that the refund guarantee gave rise to obligations independent of a final determination the state of affairs under the underlying shipbuilding contract and that this was not a “see to it” guarantee. In my view it was for Lloyds Bank to decide when and whether they would issue a certificate; they might in most circumstances decide to await for the determination by the arbitrator if the facts or legal arguments were not sufficiently clear; but they might on the other hand reach their own determination without awaiting for the arbitrator. There is nothing, in my view unusual in the provision of such a certificate and I do not consider it uncommercial for the parties to have agreed that Lloyds Banks were entitled to make up their own mind as to when they might issue a certificate.
34. Thus the “on demand” nature of the obligation and the terms of condition 1 are very strong indications that once Lloyds Bank were prepared to certify in good faith and on reasonable grounds that the instalments were refundable, the Banks became obliged to pay, as condition 1 states, on receipt of that certificate.
35. Three principal matters are relied on as indications to the contrary. In the first place, it is said that the words in the opening paragraph “if and when the Instalment becomes refundable from the Builder under and pursuant to the terms and conditions of the Shipbuilding Contract” make the payment conditional upon the actual building contract. Those words point to the fact that payment is to be made under the refund guarantee when the instalments are refundable in accordance with the terms of the shipbuilding contract. In Documentary Credits by Jack, Malek and Quest (3^rd edition, 2001), the authors, after concluding at paragraph 12.57 that the cases indicate that where a guarantee is stated to be payable on demand, it is likely to be a demand guarantee, state:

“In particular, such a guarantee will not be construed as payable only if a particular event had occurred simply because the guarantee sets out, without more, the event or events following the happening of which it is intended that a demand be made.”

Furthermore in Esal, where (as set out above) the performance bond was payable on demand in the event the supplier failed to perform the contract, the court held that the condition did not make payment dependent upon a determination of the actual position as between the two parties to the underlying contract. The conditions of the refund guarantee in my view permitted Lloyds Bank to issue their certificate when they formed the view that the instalments were refundable under the terms of the shipbuilding contract, either making up their own mind as to whether the instalments were refundable under the shipbuilding contract or awaiting the award of the arbitrator to that effect.

36. The second and third matters were conditions 2 and 5 of the refund guarantee. It is a normal term of bonds and guarantees issued by banks that they contain a termination date for the obligations of the bank. Condition 2 provides for a termination date for the refund guarantee. Three events or dates are given – the delivery of the vessel, a refund of the instalment and a cut off date of 1 July 2000. The cut off date of 1 July 2000 was extendable, if arbitration proceedings had been commenced, until 21 days after the completion of the award, though interest was not payable after 1 May 2001. I do not consider that the inclusion of condition 2 in the refund guarantee supports the argument that the refund guarantee was a “see to it” obligation. It was clearly foreseeable that the circumstances in which rights under article 11 were invoked might be so complex that Lloyds Bank were unable to come to a view as to whether the Buyers were entitled to a refund until after the arbitrator had made his award; thus the long stop date of the refund guarantee had to extend to a period after the determination to enable Lloyds Bank to issue its certificate only after the arbitration had been determined. However, this did not mean that Lloyds Bank could not issue their certificate earlier if they considered the facts were sufficiently clear for them to come to the view that the Buyers were entitled to a refund.
37. In support of their argument on condition 5 of the refund guarantee, the Banks relied heavily on Trafalgar House Construction (Regions) Ltd v General Surety Guarantee [1996] A. C. 199 in which the House of Lords considered a bond given to a main contractor by a subcontractor for 10% of the value of a sub-contract. The bond provided:

“Now the condition of the above written bond is such that if the subcontractor shall duly perform and observe all the terms provisions conditions and stipulations of the subcontract on the subcontractor’s part to be performed and observed according to the true purport and intent and meaning thereof or if in default by the subcontractor the surety shall satisfy and discharge the damages sustained by the main contractors thereby up to the amount of the above written bond, then this obligation shall be null and void, but otherwise shall be and remain in full force and effect but no alteration in the terms of the said subcontract made by agreement between the main contractor and the subcontractor or in the extent and the nature of the subcontract works to be constructed and completed thereunder and no allowance of time by the main contractor under the said subcontract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the said subcontract on the part of the main contractor shall in any way release the surety from any liability under the above written bond ”

The Court of Appeal held that this was not a true guarantee (in the sense of a “see to it obligation”) but an independent obligation to pay what the contractor asserted in good faith was the amount of damages it had sustained. The House of Lords reversed this decision, concluding that it was a true “see to it” guarantee. Bonds in this form had always been treated by the parties and the courts as guarantees; there were clear indications in the language of the document that it was intended to be a guarantee, one of which was the provision to the effect that no alteration in the terms of the subcontract would release the surety from liability (see page 205). The fact that condition 5 is a term which the House of Lords considered was a clear indication that a guarantee was a “see to it” guarantee and not a guarantee akin to a bond must be a powerful indication that the refund guarantee is a “see to it” guarantee. Were it not for the other matters to which I have referred this might have been a decisive consideration. However, although counsel could not refer me to any case where a court had considered a performance bond or other obligation akin to it independent of the underlying contract which had contained such a clause, it seems to me that this does not outweigh the other considerations, because the refund guarantee was quite different in other respects to the bond considered in Trafalgar House. It is possible that the draftsman of the refund guarantee had inserted the clause out of an abundance of caution, thinking that the rule as to variations applicable to “see to it” guarantees might apply. It is difficult to see why the rule might be applicable and counsel were unable to refer me to any case where it had been argued that a variation to the underlying contract affected the obligation under an independent bond. Whatever the reason the clause was inserted, although I accept the force of the argument advanced by the Banks, this one point does not in my view outweigh the other considerations to which I have referred.

The commercial purpose of the refund guarantee

38. Both parties advanced arguments as to the commercial purpose of the refund guarantees favouring their position; both have force. The Buyers can make the point that they require the money to be repaid because of their obligations under the financing arrangements; the Builders can say that they require security beyond the value of the vessel. However the principal effect is on cash flow. Both the Builders and the Buyers have obligations to their bankers. If the guarantees can be called, then this will alleviate the cash flow of the Buyers. If the Banks have to pay on the guarantees, then as the Banks will look to the Builders for reimbursement, it would impact on the cash flow of the Builders. A commercial purpose cannot therefore in my view favour one construction over the other.

The shipbuilding contract

39. It was common ground that, as the refund guarantee had been annexed to the shipbuilding contract, it should be construed as a coherent whole with the shipbuilding contract. As set out in paragraph 7, article 11 dealt with the Builders’ default; article 11.1 provided that if the Buyer declared the contract in default or rescinded the contract, “then, subject to any arbitration under Article 15”, there were a number of options, including making a demand under the guarantee.
40. The Banks contended that this strongly supported their argument on the construction of the refund guarantee, because they contended that under the shipbuilding contract, the right to make a demand under the refund guarantee was subject to arbitration. I do not accept that argument. It seems to me that the words “subject to arbitration” cannot postpone the accrual of causes of action in respect of the various rights set out in any of the sub-clauses of article 11.1; those rights must accrue and be disputed for there to be a dispute for the arbitrator to determine. If the cause of action to make a demand accrues under the shipbuilding contract, then there is no inconsistency in any dispute under the refund guarantee being determined as between the parties to that guarantee – the Banks and the Buyer- and the dispute as between the Builder and the Buyer over the declaration of default and the rights as between them over the refund guarantee being determined by the arbitrator. Furthermore the refund guarantee itself contains no reference to an arbitration award being a condition of payment; payment is to be made against the certificate of Lloyds Bank. If the arbitrator subsequently determines as between the Buyers and the Builders that the position was such that the refund guarantee should not have been called, despite the certificate of Lloyds Bank, then under article 11, he will make an award to that effect as between Buyer and Builder. However, in my view, the provisions of article 11 do not affect the right of the Buyers to make a demand as against the Banks, if they have the necessary certificate from Lloyds Bank.

Entitlement to payment

41. In my view, therefore, on the true construction of the refund guarantees the Banks were obliged to pay if a certificate complying with the conditions of clause 1 of the refund guarantee was produced. The certificate produced does, in my view, satisfy the conditions and, as the Banks, in the light of the letter of 21 February 2001 from Norton Rose, no longer seek to impugn the bona fides of the certificate, I consider that the Banks must pay against the certificate.