QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice Strand, London, WC2A 2LL |
||
B e f o r e :
____________________
Rainy Sky S.A. & others |
Claimants |
|
and |
||
Kookmin Bank |
Defendant |
____________________
____________________
Crown Copyright ©
Mr Justice Simon:
Introduction
[1] ... 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 ... (7%) per annum (or ... (10%) per annum in the case of Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of the 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] ... plus interest thereon at the rate of ... (7%) per annum (or ... (10%) per annum in the case of Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of the remittance by telegraphic transfer of such refund.
[4] Payment by us under this Bond shall be made without any deductions or withholding, and promptly on 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 claimed. Such claim and statement shall be accepted by us as evidence for the purposes of this Bond alone that this amount claimed is due to you under the Bond.
... [the] Builder shall also deliver to the Buyer an assignable letter of guarantee issued by a first class Korean Bank ... acceptable to the Buyer's Financiers for the refund of the respective instalments following the way of the payment 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 [Article 10.5] above in the form annexed hereto as Exhibit 'A' which is yet to be agreed.
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 any 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 ... 7% per annum on the amount to be refunded to the Buyer ... and immediately on receipt of such notice the Builder shall refund such amount to the Buyer.
i) The 1st-6th Claimants made pre-delivery instalments to the Builder totalling US$46,620,000.
ii) During the course of 2008 the Builder experienced financial difficulties; and in late January 2009 entered into and/or became subject to a 'debt work-out procedure' under the Korean Corporate Restructuring Promotion Law 2007.
iii) On 25 February 2009 the 1st-6th Claimants wrote to the Builder notifying them that this procedure triggered Article 12.3 of the Shipbuilding Contracts; and requiring them immediately to refund all the instalments which had been paid plus interest at 7%. The Builder declined to do so.
iv) On 23 April 2009 the 1st-6th Claimants wrote to the Defendant Bank making a demand for repayment of the instalments pursuant to the terms of the Advance Payment Bonds. The Defendant declined to do so.
The issues
(1) Whether the Advance Payment Bond covers sums which the Claimants claim to be entitled to under Article 12.3 of the Shipbuilding contracts, and
(2) Whether the Claimants are entitled to payment under the Bonds 'regardless of any dispute as to whether repayment of the instalments is due under the shipbuilding contracts'?
The arguments on issue 1
i) Paragraph [3] of the Bond makes it clear that the Defendant is undertaking to pay 'all such sums due to you under the contract'.
ii) This refers to the sums referred in paragraph [2] of the Bond: namely the pre-delivery instalments paid by the buyers which the Builder was liable to repay in particular circumstances. These circumstances were specifically confined to (i) the buyer's rejection of the vessel, (ii) the buyer's termination, cancellation or rescission of the contract, or (iii) upon the Total Loss of the vessel.
iii) Although Article 12.3 entitled the Buyer to repayment, it did not entitle the Buyer to repayment 'upon rejection of the Vessel, termination, cancellation or rescission of the Contract or total loss' (the words used in [2] of the Bond).
iv) It follows that the Bond does not cover the Builder's obligation to pay under Art 12.3.
v) The Bond was only apt to cover repayments which the Builder was liable to make under Article 10.5 - refunding in case of rejection, termination, cancellation or rescission; and/or Article 10.6(b) - refunding in the case of a Total Loss. These are the phrases which are used in paragraph [2] of the Bond; and demonstrate a clear intention that the Claimants' rights under the Bond were confined to such eventualities.
vi) This construction is reinforced by the fact that the Bonds were issued pursuant to the Builder's obligation under Article 10.8 to procure an assignable Letter of Guarantee from a First Class Korean Bank in relation to the instalments.
i) It would be odd, and highly uncommercial, if the Bond were to be treated as intended to respond to some but not all cases where the Shipbuilding contract provided for a refund of pre-delivery instalments.
ii) The words covered by the Bond in paragraph [3] define the subject matter of the Defendant's obligation: 'all such sums due to you under the Contract'. This plainly includes pre-delivery instalments which may be due to be repaid under the contract in the cases falling within Article 12.3.
Discussion and conclusion on Issue 1
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 used 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 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 pre-amble in the preceding paragraph [2]. As Mr Baker noted, the '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 arguments on issue 2
i) The task of the Court is to determine the nature of the document in question without any preconceptions as to what it is.
ii) Where an instrument (a) relates to an underlying transaction between parties in different jurisdictions, (b) is issued by a bank, (c) contains an undertaking to pay 'on demand' and (d) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee, see the Gold Coast case at [16] citing with approval a passage from Paget on Banking (11th Edition).
iii) In such cases,
... a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud,
see the Esal Commodities case at 549r.
iv) There is a presumption in favour of a construction which holds a performance bond to be conditioned on documents rather than facts, see the I.E. Contractors case at page 500 and the Gold Coast case at [17].
v) An 'On Demand' guarantee will often make reference to the obligation for whose performance the guarantee is security.
A bare promise to pay on demand without any reference to the principal's obligation would leave the principal even more exposed in the event of a fraudulent demand because there would be room for argument as to which obligations were being secured.
See the Gold Coast case at [18], again citing with approval another passage in Paget.
Discussion and conclusion on Issue 2
Conclusion