QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| WS TANKSHIP II B.V.
|- and -
|(1) THE KWANGJU BANK LTD
(2) SEOUL GUARANTEE INSURANCE COMPANY
Claim No: 2010 Folio 756
|WS TANKSHIP III B.V.
|- and -
|SEOUL GUARANTEE INSURANCE COMPANY
Claim No: 2010 Folio 1520
|WS TANKSHIP IV B.V.
|- and -
| SEOUL GUARANTEE INSURANCE COMPANY
(instructed by Stephenson Harwood) for the Claimant
Mr Henry Byam-Cook (instructed by Elborne Mitchell LLP) for the First Defendant
Mr Stephen Cogley QC (instructed by DLA Piper UK LLP) for the Second Defendant
Hearing dates: 5, 6, 10, 11, 12, 13, 18 and 19 of October 2011
Crown Copyright ©
Mr Justice Blair:
1) In the GMS-103 action, the sum of US$3,142,000 (plus interest), being the amount of the 4th instalment paid under that contract;
2) In the GMS-104 action, the sum of US$3,142,000 (plus interest), being the amount of the 4th instalment paid under that contract (against SGIC only); and
3) In the GMS-105 action, the sum of US$3,112,000 (plus interest), being the amount of the 3rd instalment paid under that contract (against SGIC only).
1) Kwangju Bank argues that the refund guarantee applicable in its case imposed secondary, not primary, liability, in other words that it was a true guarantee rather than an instrument payable on first demand. (Strictly speaking this is a premise upon which various defences are adumbrated rather than a defence in itself.) SGIC's guarantees were in the same terms. It however does not dispute the primary nature of the instruments, but it does adopt the position of Kwangju Bank should I find in favour of the bank on the issue.
2) On that basis, Kwangju Bank argues that it is not liable on its guarantee because the buyers' termination of the shipbuilding contract in relation to GMS 103 (upon which the return of the advance payments was premised) was premature. This point is taken by Kwangju Bank only (and only arises if it is held that the refund guarantee imposes secondary, not primary, liability).
3) Both defendants argue that they are discharged from liability on the basis that the buyers and GEO varied the shipbuilding contract in relation to GMS 103 with regard to the timing of the second instalment due under that contract.
4) Both defendants argue that they are discharged from liability on the basis that the buyers failed to disclose various loans made to GEO by the buyers over the course of the contractual relationship between them.
5) Kwangju Bank argues that its refund guarantee in relation to GMS-103 is unenforceable because it was not signed within the meaning of the Statute of Frauds (this only arises if it is held that the refund guarantee imposes secondary, not primary, liability, and the point is taken only by Kwangju Bank).
6) In the event that any of the above defences succeed, the defendants (or the defendant taking the point in question) are entitled to the return of monies already paid to the claimants on restitutionary grounds (mistake of fact or law and/or failure of consideration are relied on).
7) On a true construction of the terms of the refund guarantee, Kwangju Bank's liability is limited to US$1,571,000 plus interest. This is a construction argument on the wording of the instruments: SGIC does not take the point on its guarantees.
8) The refund guarantees fall to be rectified so that the defendants' liability is limited to the amount already paid under the guarantees.
9) The claimants are estopped by convention (SGIC says by acquiescence also) and/or by representation from contending that their liability is more than the amount already paid under the guarantees. This defence is linked to a contention that the shipbuilding contracts were varied to the effect that the guarantees provided by GEO to the buyers would be limited to single instalments of the advance payments, rather than covering them all as the contracts had envisaged. This has been the focus of the argument in the case of SGIC. In this context, the honesty of Vroon's main witness has been challenged.
In view of the wide scope of these defences, it has been necessary to examine the underlying facts in much more detail than would be usual in a case of this kind.
The making of the shipbuilding contracts
1) "WS Tankship I BV" in respect of the hull identified as "GMS-102";
2) "WS Tankship II BV" in respect of the hull identified as "GMS-103":
3) "WS Tankship III BV" in respect of the hull identified as "GMS-104": and
4) "WS Tankship IV BV" in respect of the hull identified as "GMS-105".
1) The contract price for the vessel was to be paid in instalments, the last due on delivery of the vessel. The first instalment (10%) was payable on receipt of the required refund guarantee, the second (10%) on a stated date (that differed from vessel to vessel), the third (20%) on steel cutting, the fourth (20%) on the laying of the keel, the fifth (20%) on launching, and the sixth (20%) on delivery (which was to be on four dates originally between October 2008 and October 2009).
2) The payments prior to delivery were to constitute advances to the builder which would be refunded (together with interest) if the buyer terminated, cancelled or rescinded the relevant contract (see Art.X.2 and X.5). Art.X.5 provided that "The payments made by the BUYER to the BUILDER prior to delivery of the VESSEL shall constitute advances to the BUILDER. 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 … the full amount of total sums paid by the BUYER to the BUILDER in advance of delivery together with interest thereon as herein provided".
3) The builder was to deliver to the buyer a refund guarantee for the refund of the pre-delivery instalments plus interest in the form annexed in Exhibit A (see Art.X.8); Art.X.8 provided that "The BUILDER shall deliver to the BUYER the letter of guarantee issued by an Insurance Company acceptable to the BUYER for the refund of the pre-delivery instalments plus interest as aforesaid to the BUYER under or pursuant to Paragraph 5 and 6(b) above in the form annexed hereto as Exhibit "A". All expenses in issuing and maintaining the letter of guarantee described in this Paragraph shall be borne by the BUILDER".
4) The form of refund guarantee in Exhibit A (with gaps to be completed in the second and third paragraphs where figures were to be inserted in due course) closely resembled the standard form of wording which had been provided by GEO's broker as described above.
5) In the event of delay to delivery of the vessel continuing for a period of more than 210 days beyond the date when delivery was due, the buyer would be entitled to cancel the contract (see Art.III).
6) Provision was made for arbitration in the case of dispute, and the contract was governed by English law.
Delay in the issue of the refund guarantees
The alleged variation of the shipbuilding contracts
"Thank you for your good cooperation.
1. With regard to subject, we are going to be issued RG from Kwangju Bank today (when receiving Vroon's confirmation not later than tomorrow).
2. In the meanwhile, we would like to ask Vroon that we want to pay back the loan with interest around 20th April at the time for receiving 2nd instalment by deduction from Vroon's 2nd instalment.
Because we have to spend our money to get RG from the bank by deposit so much".
Kwangju Bank says that paragraph 1 was a reference back to the proposal made on 28 March 2007 (this was the email with the reference to "the R/G for 10%"), and this must be right.
"I'm sorry to send you directly this urgent e-mail without Mr U.S. Chung/USC maritime because he is work out now. I have received that Vroon have confirmed item 1 below, but we have to receive to confirm item 2 below by reason below.
Therefore you are kindly requested to make a confirmation the item 2 below and reply to us and Mr U.S. Chung"
"We are pleased to submit you the copy of RG for the first instalment for GMS-102 attached herewith.
Please check the same at your bank.
Please be informed that we are going to submit you the copy of RG for the first instalment for GMS-103 within 10th April.
And we are also going to submit you the copy of RG for the second instalment for GMS-102 on around 15th April."
"Sorry to inform you but the text of the RG is not acceptable
give and take a few typo's there is one paragraph on page 2/3
"THE AMOUNT OF THIS GUARANTEE WILL BE AUTOMATICALLY INCREASED UPON THE BUILDERS'S RECEIPT (OF) THE THE SECOND, THIRD, FOURTH AND FIFTH INSTALMENTS, PLUS INTEREST THEREON AS PROVIDED IN THE CONTRACT"
So far so good
But in the next line
"BUT IN ANY EVENTUALLY THE AMOUNT OF THIS GUARANTEE SHALL NOT EXCEED THE TOTAL SUM OF USD ONE MILLION FIVE HUNDRED SEVENTY ONE THOUSAND (SAP U.S. DOLLARS 1,571,000)"
That cannot be the case once the second etc. instalments are actual paid; the maximum amount is the total paid instalments + interest thereon.
Also the last alinea "AND GUARANTEE UIS SUBJECT TO THE UNIFORM RULES.." is not mentioned in the contract and I do not know the content of these rules and therefore we suggest to skip it.
Attached the scan including remarks..also where we think a part of the text is missing
Waiting for your reply."
The issuance of the Kwangju Bank guarantee for GMS–103
++LETTER OF GUARANTEE++
WE HEREBY OPEN OUR IRREVOCABLE LETTER OF GUARANTEE NUMBER FG24704OU00001 IN FAVOUR OF WS TANKSHIP II.B.V (HEREINAFTER CALLED THE "BUYER") FOR ACCOUNT OF GEO MARINE ENGINEERING AND SHIPBUILDING CO., LTD, KOREA (HEREINAFTER CALLED THE "BUILDER") AS FOLLOWS IN CONNECTION WITH THE SHIPBUILDING CONTRACT DATED 13TH DEC. 2006 (HEREINAFTER CALLED THE "CONTRACT") MADE BY AND BETWEEN THE BUYER AND THE BUILDER FOR THE CONSTRUCTION OF ONE (1) ONE 6,000 DWT ASPHALT TANKER, HAVING THE BUILDER'S HULL NO. GMS-103 (HEREINAFTER CALLED THE "VESSEL").
IF, IN CONNECTION WITH THE TERMS OF THE CONTRACT, THE BUYER SHALL BECOME ENTITLED TO A REFUND OF THE ADVANCE PAYMENTS MADE TO THE BUILDER PRIOR TO THE DELIVERY OF THE VESSEL, WE HEREBY IRREVOCABLY GUARANTEE THE REPAYMENT OF THE SAME TO THE BUYER WITHIN THIRTY (30) DAYS AFTER DEMAND NOT EXCEEDING USD1,571,000.00 (SAY U.S. DOLLARS ONE MILLION FIVE HUNDRED SEVENTY ONE THOUSAND ONLY) TOGETHER WITH INTEREST THEREON AT THE RATE OF FIVE PER CENT (5PCT) PER ANNUM FROM THE DATE FOLLOWING THE DATE OF RECEIPT BY THE BUILDER TO THE DATE OF REMITTANCE BY TELEGRAPHIC TRANSFER OF SUCH REFUND.
THE AMOUNT OF THIS GUARANTEE WILL BE AUTOMATICALLY INCREASED UPON THE BUILDER'S RECEIPT THE SECOND, THIRD, FOURTH AND FIFTH INSTALMENTS, PLUS INTEREST THEREON AS PROVIDED IN THE CONTRACT, BUT IN ANY EVENTUALITY THE AMOUNT OF THIS GUARANTEE SHALL NOT EXCEED THE TOTAL SUM OF USD12,568.000 (SAY U.S. DOLLARS TWELVE MILLION FIVE HUNDRED SIXTY EIGHT THOUSAND ONLY) PLUS INTEREST THEREON AT THE RATE OF FIVE PER CENT (5PCT) PER ANNUM FROM THE DATE FOLLOWING THE DATE OF THE BUILDER'S RECEIPT OF EACH INSTALMENT TO THE DATE OF REMITTANCE BY TELEGRAPHIC TRANSFER OF THE REFUND.
THE PAYMENT BY THE UNDERSIGNED UNDER THIS GUARANTEE (SUBJECT TO THE SECOND AND THIRD PARAGRAPH HEREOF) SAHLL BE MADE UPON SIMPLE RECEIPT BY US OF WRITTEN DEMAND FROM YOU INCLUDING A SINGED STATEMENT CERTIFYING THAT THE BUYER'S DEMAND FOR REFUND HAS BEEN MADE IN CONFORMITY WITH ARTICLE X OF THE CONTRACT AND THE BUILDER HAS FAILED TO MAKE THE REFUND.
IF IS HEREBY UNDERSTOOD THAT PAYEMENT OF ANY INTEREST PROVIDED HEREIN IS BY WAY OF LIQUIDATED DAMAGES DUE TO CANCELLATION OF THE CONTRACT AND NOT BY WAY OF COMPENSATION FOR USE OF MONEY.
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 RACEIVE NOTIFICATION FROM YOU OR THE BUILDER ACCOMPANIED BY WRITTEN CONFIRMATION TO THE EFFECT THAT YOUR CLAIM TO CANCEL THE CONTRACT OR YOUR CLAIM FOR REFUNDMENT THEREUNDER HAS BEEN DISPUTED AND REFERRED TO ARBITRATION IN ACCORDANCE WITH THE PROVISIONS OF THE CONTRACT, WE SHALL UNDER THIS GUARANTEE, REFUND TO YOU THE SUM ADJUDGED TO BE DUE TO YOU BY THE BUILDER PURSUANT TO THE AWARD MADE UNDER SUCH ARBITRATION IMMEDIATELY UPON RECEIPT FROM YOU OF A DEMAND FOR THE SUMS SO ADJUDGED AND COPY OF THE AWARD.
THIS 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 AND, IN EITHER CASE, THE BUYER SHALL RETURN THIS LETTER OF GUARANTEE TO US.
THIS LETTER OF GUARANTEE IS ASSIGNABLE AND VALID FROM THE DATE OF THIS LETTER OF GUARANTEE UNTIL SUCH TIME AS THE VESSEL IS DELIVERED BY THE BUILDER TO TH BUYER IN ACCORDANCE WITH PROVISIONS OF THE CONTRACT.
THIS GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF ENGLAND AND THE UNDERSIGNED HEREBY SUBMITS TO THE NON-EXCIUSIVE JURISDICTION OF THE COURTS OF ENGLAND.
"We have been issued RG for the 1st instalment of GMS-103 by Kwangju Bank today and will be forwarded to you soon.
Our RG system is consisted by 2 steps (guarantors). First step is guaranteed 70% by Seoul Guarantee Insurance, the 2nd step is 30% by Kwangju Bank and RG is issued by the Kwangju Bank.
RG for the 1st instalment of GMS-104 and 105 will be issued around 11th May. And the next stage will be 2nd instalment of GMS-102. After this stage, we will send you the massage for confirmation before 2 weeks of issuing RG..."
There was then a reference to repayment of the loan, which is not relevant for present purposes. Lastly on that day, GEO sent a copy of the refund guarantee direct to Vroon together with monthly cashflows.
The issue of refund guarantees by Seoul Guarantee Insurance Company
Discussions between June and October 2007
"Regarding of the issuing R/G matter, we like to ask one thing favour of you to bellowing.
As you can assume R/G that it should be deposit 30% of the amount to the guarantor from total R/G amount for issuing.
At this present GEO that it is preparing to issued the R/G for 2nd instalment of GMS 102~105 (4 ships). But we are in faced with lack of money for issuing R/G, at this moment, due to we have had allocated a certain company capital move to facilities for block assembly yard.
With that, we are concerning that the best way of the solution is loan from you. Therefore, we would like to ask you to borrow around US$2,000,000, as our loan agreement before…"
Mr Kim went on to express GEO's great appreciation if such a loan could be made. A similar message was sent by Mr US Chung on the same day referring to GEO's purchase of a steel block fabrication factory in Daebul for approximately US$3m, saying, "they would like to ask for your help to put USD2mil into Escrow Account in Kwangju Bank that is prerequisite for next Refund Guarantees to be issued".
"Many thanks for your kind message which we duly noted. I had earlier received a similar request from Mr Chung on your behalf. We appreciate all your efforts to ensure the successful design, construction and delivery of the six vessels we now have on order with you. As you know we intend to have further talks with you to extend our order beyond the current six vessels and also to include larger design Asphalt/Bitumen vessels. We also hope that for the time being you continue to focus your design and engineering efforts on completing the design for our vessels. We earlier asked you not to spend marketing efforts on selling the vessels to other clients untill the design is completed and the new Mokpo facility is up and running. We would appreciate if that is still the case.
We would be willing in some form or another to assist financially at this point in time if in one way or another you could offer some form of security for the loan. We would also like to make sure that no further loans are necessary and that this loan would suffice to get the yard up and running and also to make sure that this will be sufficient to assist the banks in issuing/increasing the refund guarantees for the six vessels as well as for the two optional vessels (that we intend to declare in the 4th quarter). For your bankers I enclose a financial summary on Vroon Group B.V. for 2006. We would appreciate if our financial data are kept private and confidential."
"As I mentioned this morning over the phone we would be willing to help you with providing a loan for USD 2 million.
In order to do this we would like to know the following.
1. Can you offer some security for the loan of USD 2 million (e.g. assignement of the contract of the main engines or something else, like a personal garantee pledge of shares, or something else??)
2. A confirmation that you do not plan to build for other owners for the time being (until the design for the vessels is completed and the yard is up and running).
3. A payment plan for the next installment on the four vessels. When do you expect us to pay the 2nd 10% downpayment for all 4 ships and when will we receive the refund garantees for these payments (we will pay in accordance with the contract terms)
4. When do you expect the refund garantees for vessel 5 and 6 and who will issue these? (KEIC?)
Look forward to hear from you soonest.
As discussed I will visit on August 20th 2007, at the meeting I would like to discuss further the option vessels 9 and 10.
" … we would like to suggest you to Refund Garantees under SSANGYOUNG insurance company with 70% of whole amount of ships price for Vessel No 5 & 6. We will notice to the amount on the Letter of Guarantee.it is not percentage of the value. It is mean that we will guarantee the amount on this letter. The R/G for remain 30% will be issued before the time of steel cutting for Vessel No. 5. …"
"I am back into the office and look into the Refund Guarantee tesks [i.e. texts] for the vessel no 102-105. I noted that the RG's will increased autimatically we pay and this seems fine to me. I will arrange for payment of the 4 invoices on Monday October 29th. Currently our Treasury Mngr is travelling as well as Mrs Alexandra Kranekamp the newbuilding project administrator. In any case this matter is resolved.
I now look forward to receive the RG's for the vessel 5 and 6
Floris and Mr Nick Spiljaard are both travelling and will return tomorrow and revert to you on the site office matters."
End October to November 2007
"RE: GEO – VROON (GMS -108/109)
I spoke to Vroon this morning any they are infuriated and disappointed that Refund guarantees had been issued for Courtney Fynn and Novo ship. After All the assistance Vroon has Showed to GEO over the last 8-10 months with issuing loans and assistance on design and technical matters, the yards conduct is far from acceptable on this matter.
As per the meeting on the 23rd August President B.J. Lee confirmed to Mr Marks that the first RG's to be issued were for hull the second instalments on the first 4 ships then for hull 106/107/. It was never even a question that Novoship or Courtney Fynn would be getting their R/G's issued in full prior to the outstanding RG's for Vroon.
During this meeting GEO also confirmed they would give us and offer for ship no 9 and 10.
Vroon informed us that their intention is to declare the option for Hull 108 and 109 today, we will get an official msg from them later today.
Upon doing so we expect to have an offer for the next two ships within today as promised by President Lee we would have last month.
Pls also inform the shipyard that Mr Marks and myself will be coming to Korea over the next 2 weeks to meet with GEO!"
Subsequent instalments paid by Vroon and guarantees issued by SGIC
The cancellation of the contracts
(1) The secondary liability/demand guarantee point
"One of Meritz 's main arguments below was that the APGs were not like performance bonds in respect of which money was automatically due on the beneficiary's say-so but were traditional "see to it" guarantees pursuant to which the beneficiary had to prove that the principal debtor was truly liable to his counter party under the original contract. In the light of the incorporation of the Uniform Rules No. 458, which expressly state that the terms of the underlying contract are of no concern to the beneficiary and the guarantor, this argument is extremely difficult and was, in my view, rightly rejected by the judge."
As indicated in this passage, the incorporation of the ICC Uniform Rules for Demand Guarantees (UDRG) is likely to be conclusive as to the nature of the instrument. But its omission is in itself (in my view) a neutral factor. I have described above what happened as regards the UDRG in the present case. In summary, the guarantee as first issued by Kwangju Bank in respect of GMS-102 incorporated the UDRG. The rules do not appear in the form annexed to the shipbuilding contract, and it is a fair inference that this reference must have been added by the bank's international department when issuing the guarantee and sending it through the SWIFT system to Vroon's bank in Amsterdam. This might be taken to indicate what the bank thought it was issuing. As it happened, upon receipt, a member of Vroon's treasury (not legal) department noticed the reference, and since he was unfamiliar with the rules, asked for it to be deleted. The reference was duly removed by Kwangju Bank by amendment. When the guarantee in respect of GMS-103 (upon which Vroon sues) was issued a few weeks later, it was also amended to omit the reference. However both parties accept that this cannot be relevant to the construction issue, and I have left it out of account.
(2) The construction defence as to the limit of Kwangju Bank's guarantee
(3) Kwangju Bank's defence that Vroon terminated the shipbuilding contract prematurely
(4) The variation defence
(5) The non-disclosure defence
"(1) the creditor is obliged to disclose to the surety any contract or other dealing between creditor and debtor so as to change the position of the debtor from what the surety might naturally expect, but (2) the creditor is not obliged to disclose to the surety other matters relating to the debtor which might be material for the surety to know. This is consistent with the fact that a contract of guarantee is not ordinarily a contract uberrimae fidei, such as insurance, whereunder the insured is required to disclose all facts material to the risk …".
The discussion is in the context of the line of authority in which the guarantor's liability was secondary in nature.
(6) Kwangju Bank's Statute of Frauds defence
(7) The rectification and estoppel defences
(i) Kwangju Bank's case
(ii) SGIC's case
(i) Kwangju Bank's case
(ii) SGIC's case
"It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption: The August Leonhardt  2 Lloyd's Rep. 28; The Vistafjord  2 Lloyd's Rep. 343; Treitel, Law of Contracts, 9th ed., at 112–113. It is not enough that each of the two parties acts on an assumption not communicated to the other. But it was rightly accepted by counsel for both parties that a concluded agreement is not a requirement for an estoppel by convention.
That brings me to estoppel by acquiescence. The parties were agreed that the test for the existence of this kind of estoppel is to be found in the dissenting speech of Lord Wilberforce in Moorgate Mercantile Co. Ltd. v. Twitchings  A.C. 890. Lord Wilberforce said that the question is "… whether, having regard to the situation in which the relevant transaction occurred, as known to both parties, a reasonable man, in the position of the 'acquirer' of the property, would expect the 'owner' acting honestly and responsibly, if he claimed any title to the property, to take steps to make that claim known… " at 903. Making due allowance for the proprietary context in which Lord Wilberforce spoke, the observation is helpful as indicating the general principle underlying estoppel by acquiescence."
"i) Was there a relevant assumption of fact or law, either shared by the two parties, or made by Ros Roca and acquiesced in by ING?
ii) If so, would it be unjust (or "unconscionable") to allow ING to go back on the assumption?"
(8) The counterclaim