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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Spliethoff's Bevrachtingskantoor BV v Bank of China Ltd [2015] EWHC 999 (Comm) (17 April 2015)
URL: http://www.bailii.org/ew/cases/EWHC/Comm/2015/999.html
Cite as: [2015] EWHC 999 (Comm), [2016] 1 All ER (Comm) 1034
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
||
B e f o r e :
____________________
| SPLIETHOFF'S BEVRACHTINGSKANTOOR BV |
Claimant |
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| - and - |
||
| BANK OF CHINA LIMITED |
Defendant |
____________________
Mr Richard Handyside Q.C. and Mr Adam Zellick (instructed by Allen & Overy LLP) for the Defendant
Hearing dates: 17th, 18th, 19th, 23rd, 24th, 25th, 26th March 2015
____________________
Crown Copyright ©
- This is the trial of two actions brought by Spliethoff's Bevrachtingskantoor BV ("SBV"), one of the largest ship operating companies in the Netherlands, against Bank of China Limited ("BOC"). Each claim arises out of a refund guarantee issued by BOC ("the Guarantees" collectively). Counterclaims originally raised by BOC have not been pursued.
- The Guarantees were provided in support of two shipbuilding contracts ("the Contracts") between SBV as buyer and Rongcheng Xixiakou Shipyard Co Ltd ("XXK") and China National Electronics Import and Export Shandong Company ("Electronics") (together "the Sellers") as sellers for the construction of two ships with hull numbers XXK06-038 and XXK06-039 ("Hull 38" and "Hull 39" respectively, "the Ships" collectively). By order of Cooke J dated 7th August 2013 the two claims are tried jointly.
- Pursuant to the Contracts, between October 2006 and July 2011 SBV paid a total of some US$28.68 million to the Sellers by way of advance instalments towards the purchase prices due for the Ships, but on terms that the instalments would be refunded with interest if the Contracts were cancelled. The Guarantees secured the Sellers' obligation to refund.
- The Ships were not delivered on time and SBV claimed repayment of the instalments from XXK and Electronics. The Contracts provided for dispute resolution by way of arbitration in London. Two sets of arbitration proceedings (one for each of Hull 38 and Hull 39) ensued. SBV obtained arbitral awards against XXK and Electronics in its favour. It claims that it is entitled to payment from BOC under the Guarantees.
- Subject to a discrete defence raised in relation to the validity of SBV's demand under the Hull 39 Guarantee, BOC's defence and application for a stay in the event of liability essentially arise out of events in China, and specifically out of various interim orders and two judgments which have been made by the Qingdao Maritime Court ("the QMC") in two sets of proceedings brought by XXK against the Ships' engine manufacturers and suppliers, Wartsila Finland Oy and Wartsila Engines (Shanghai) Co Ltd ("Wartsila"), and SBV relating to Hull 38 and Hull 39 ("the XXK proceedings"). There XXK advanced claims in fraud, alleging that Wartsila and SBV agreed to provide second-hand and defective refurbished engines to the Sellers for installation in the Ships while concealing the fact that the engines were second-hand from XXK and passing them off as new.
- XXK obtained ex parte interim orders in July, August and September 2011 against SBV and BOC ("the XXK orders"), the overall effect of which so far as material was to :
- The XXK orders would be discharged in the event that SBV were to pay the amounts set out in the orders into the QMC.
- Electronics obtained ex parte interim orders against SBV and BOC in similar terms (albeit for lesser sums) in May 2013 (in the context of similar proceedings that it had by then also commenced against Wartsila and SBV) ("the Electronics orders") ("the Electronics proceedings").
- SBV unsuccessfully challenged the jurisdiction of the Chinese courts by reference to the arbitration clauses in the Contracts. Thereafter it fully defended the claims in the XXK proceedings. In April 2013 the QMC found Wartsila and SBV liable for fraud in respect of both Hull 38 and Hull 39 and awarded substantial damages against Wartsila and SBV. In April 2014 those findings were upheld by the Shandong High Court on appeal (though the award of interest was reduced). Although judgment on an application for retrial by SBV in the Supreme Court of the People's Republic of China ("the Supreme Court") in the XXK proceedings remains outstanding, it is common ground that the conclusion of the Shandong High Court is effective and enforceable.
- Beyond BOC's challenge to the validity of the Hull 39 demand, the central issue in the actions is whether the XXK judgments granted in China afford BOC a defence to SBV's claims under the Guarantees, alternatively whether the XXK and Electronics orders justify a stay.
- BOC is and was not at any stage a party to the XXK proceedings (nor to the subsequent Electronics proceedings). It is common ground that BOC has taken every step available to it in China to have the XXK orders against it set aside, to no avail. BOC contends that it could face criminal and/or civil sanction and would be at risk of double payment in the event of an immediate judgment against it here and in the absence of a resolution in China.
- SBV contends that, as a matter of construction of the Guarantees, the judgments against it in the XXK proceedings are not capable of affecting BOC's liability to it under the Guarantees. Additionally the judgments (and the XXK and Electronics orders) should not be recognised by this Court, having been obtained and maintained in breach of arbitration clauses and/or arbitral anti-suit findings and orders (which followed an earlier anti-suit injunction granted by Eder J on 11th November 2011). Finally, the XXK orders (which SBV contends have in any event lapsed) and the Electronics orders are irrelevant because the Guarantees are governed by English (not Chinese) law and do not specify a place of performance, meaning that any illegality under Chinese law is irrelevant.
- The Contracts were in materially identical terms and were entered into on 3rd June 2006. Each identified a defined Delivery Date (namely, 30th September 2008 for Hull 38 and 31st January 2009 for Hull 39) and specified that if the Ship was not delivered within 210 days of the Delivery Date, SBV would be entitled to cancel the contract whereupon the Sellers would become obliged to refund the instalments paid.
- Specifically, Articles II 4 and 5 of each Contract provided as follows :
- Article II 6 of each Contract provided as follows:-
- Article III 1 (c) of each Contract provided as follows:-
- Articles XIII A and C(1) and (5) of each Contract provided as follows:-
- Article XVIII of each Contract provided as follows:-
- By an addendum dated 9th January 2007, namely Addendum 2, in consideration for an increased contract price, SBV and the Sellers agreed that the supplier of the main engines would be "Wartsila".
- The Guarantees were each dated 12th October 2006 and divided into thirteen un-numbered paragraphs. They provided security only in respect of the Sellers' obligations to SBV to refund instalments upon contractual termination of the Contracts by SBV.
- The material parts of the Guarantees provided as follows:
- By Amendment No. 1 dated 20th March 2009 ("Amendment No. 1") the expiry date in the 8th Paragraph was extended from 30th September 2009 to 31st March 2011.
- BOC provided the Guarantees pursuant to an ongoing credit facility provided to Electronics which appears to have been renewed annually. The facility was originally secured by a guarantee provided by Xi Xia Kou Holdings Limited. BOC's exposure under the Guarantees was further secured by the fact that it was entitled to require Electronics to pay an Excess Reserve and by the fact that BOC obtained additional guarantees and other security to protect its exposure under the Guarantees, including mortgages over the Ships. BOC charged and was paid a fee for providing the annual facility and the Guarantees, and for agreeing to various amendments to the Guarantees.
- SBV paid the instalments due under each Contract as they fell due (on 20th October 2006, 17th April 2007 and 14th October 2008 for Hull 38; on 20th October 2006, 10th August 2007, 5th December 2008 and 28th July 2011 for Hull 39). The total paid in relation to Hull 38 was US$12,294,000 and the total paid in relation to Hull 39 was US$16,392,000.
- Neither Ship was delivered by her Delivery Date.
- Hull 38 was not delivered within 210 days of the Delivery Date (that is to say by 28th April 2009). On 13th July 2009 SBV cancelled the Hull 38 Contract and demanded repayment of the instalments paid. The Sellers failed to refund the instalments that had been paid, and on 20th October 2009 SBV demanded payment from BOC. BOC identified some discrepancies, leading SBV to issue a fresh demand on BOC on 6th November 2009. On the same day BOC wrote to Electronics stating that it considered that the demand was valid and that, absent documentary evidence showing Electronics starting the arbitration procedure by 19th November 2011, BOC would have to pay the claim in full. Otherwise, it demanded that Electronics provide a cash reserve.
- On 9th November 2009 the Sellers duly commenced the Hull 38 Arbitration ("Hull 38 Reference 1"), by which they challenged SBV's right to cancel and alleged that the cancellation was itself a repudiatory breach of the Hull 38 Contract.
- BOC was notified of Hull 38 Reference 1 and thereby became entitled to withhold payment under the Hull 38 Guarantee until the award was published. On 13th November 2011 BOC notified SBV that it would not be paying by reason of the Proviso. There is no dispute that BOC was entitled to defer payment at this stage.
- On 15th April 2013 the tribunal in the Hull 38 Refence 1 published the Hull 38 Award, holding that SBV had been entitled to cancel the Hull 38 Contract and that the Sellers were obliged to refund the instalments paid.
- On 22nd April 2013 SBV called on BOC to see to it that the Sellers refunded the instalments paid and interest in accordance with the Hull 38 Award. The Sellers failed to pay the sums due and on 2nd May 2013 SBV made a further demand for payment on BOC. On 31st May 2013 BOC informed the Claimant that it would not pay the sums demanded because it had been served with the XXK orders. By this time SBV had already (on 30th May 2013) commenced action No. 2013 Folio 748.
- In the meantime the Sellers also failed to deliver Hull 39 by the Delivery Date or within 210 days, namely by 28th August 2009. SBV states that it believed that it was entitled to cancel, but did not wish to do so in circumstances where it had been accused of repudiating the Hull 38 Contract. It therefore wrote to the Sellers on 12th July 2010 inviting them to agree that the Delivery Date for Hull 39 had not been extended or indicating what extension they considered to have been agreed. The Sellers' response was equivocal but no clear position was stated.
- There was, therefore, a dispute as to SBV's right to cancel. SBV referred this dispute to arbitration on 11th November 2010 ("Hull 39 Reference 1"), claiming a declaration that it was entitled to cancel, that if it did so the Sellers would thereupon become obliged to refund the instalments paid, and that if the Sellers failed to do so SBV would be entitled to demand repayment from BOC. SBV's solicitors' letter of 11th November 2010 to the Sellers stated :
- The Sellers disputed SBV's claim on substantially the same grounds as those they had relied on in challenging the right to cancel the Hull 38 Contract.
- By letter dated 23rd December 2010 SBV's solicitors informed BOC of the Hull 39 Reference 1 and asked it to confirm that the validity of the Hull 39 Guarantee would be automatically extended until the date falling on the forty-fifth calendar day after the arbitration award had been published. Having set out the 8th Paragraph of the Guarantee (as extended by Amendment No. 1) the letter stated :
- BOC gave that confirmation on 24th January 2011 by SWIFT message in the following terms :
- In November 2011 the Sellers sought an adjournment of the Hull 39 Reference 1 because of their appointment of new solicitors. The tribunal rejected that request. On 9th February 2012 it published the Hull 39 Award, declaring that SBV was entitled to cancel the Hull 39 Contract, that if it did so the Sellers would thereupon become obliged (on demand) to refund the instalments paid, and that if the Sellers failed to do so SBV would be entitled to demand repayment from the Defendant. The tribunal also made an order that, upon receiving notice of termination from SBV, the Sellers should forthwith refund the instalments paid.
- On 15th February 2012 SBV cancelled the Hull 39 Contract and demanded repayment of all sums paid on account. On 21st February 2012 it sent a message to BOC warning that if the Sellers did not repay the instalments within 30 days a demand would be made for payment by BOC. The Sellers failed to pay and on 12th March 2012 SBV demanded payment from BOC. The Sellers did not commence any further arbitration disputing the cancellation, or their obligation to refund the instalments, or SBV's right to make a demand on BOC.
- BOC declined to pay, because by this time it had been served with the XXK orders. BOC did not at this stage suggest that it had any other basis for declining to pay and did not, in particular, dispute SBV's right to demand payment in the circumstances that had arisen. BOC wrote to the Sellers confirming that there were no material discrepancies in the claim documents and that it was obliged to pay under the Hull 39 Guarantee by 10th April 2012. In the meantime SBV had (on 21st March 2012) commenced Claim No. 2012 Folio 442.
- XXK commenced the XXK proceedings in relation to Hull 38 in the QMC against Wartsila on 15th June 2011. On 5th July 2011 XXK applied ex parte to add SBV as third defendant. SBV was served on 13th July 2011. On 21st July 2011 XXK obtained the first of its (ex parte) interim orders prohibiting BOC from making payments under the Hull 38 Guarantee. The order was served on BOC together with a document entitled "Notice to Assist Enforcement" on 25th July 2011. It was served on SBV on 9th August 2011.
- XXK issued equivalent proceedings relating to Hull 39 on 26th July 2011. In or about August 2011 it issued an application headed "stop payment of down payment credit guarantee application form". The application concluded :
- Pursuant to that application, another (ex parte) interim order prohibiting BOC from making payments under the Hull 39 Guarantee was obtained on 22nd August 2011. The interim order and an Assistance Notice were served on BOC on 23rd August 2011. The proceedings were served on SBV on 8th October 2011, though not the interim order.
- On 14th September 2011 XXK applied (ex parte) for wider interim orders against BOC in both proceedings, now extending the prohibition so as to cover all of BOC's domestic and overseas branches and any payment of accrued interest. The new orders were served on BOC on 19th September 2011, together with a "Notice to Assist Enforcement". The new orders in respect of both Hulls 38 and 39 were served on SBV on 20th September 2011.
- In both actions in the XXK proceedings XXK alleged that Wartsila had supplied a second hand refurbished main engine instead of a new main engine, and that SBV had conspired with Wartsila to conceal this fact from XXK.
- SBV challenged the jurisdiction of the QMC in the XXK proceedings. It also applied (separately) to set aside or vary the XXK orders. The grounds for setting aside were that the QMC lacked substantive jurisdiction and that the sums covered under the Guarantees were not yet "due" and could not, therefore, be frozen. The ground for variation included the complaint that the XXK Orders effectively froze the entire amount due under the Guarantees (US$12,294,000 plus interest in the case of Hull 38 and US$16,392,000 plus interest in the case of Hull 39) whereas XXK's pleaded claims, albeit only estimates and subject to final assessment, were for far less : approximately US$5.67million in the case of Hull 38 and US$ 5.77m in the case of Hull 39. This was (on SBV's case) contrary to the relevant provisions of Chinese law.
- BOC also sought unsuccessfully to have the XXK orders of 14th September 2011 set aside on various occasions.
- In the meantime, on 4th August 2011, SBV's solicitors had written to the Sellers' solicitors arguing that XXK was in breach of Article XIII of the Contracts and inviting XXK to discontinue the XXK proceedings. XXK declined to do so.
- On 5th September 2011 SBV responded by commencing two new English arbitrations (one in relation to each Ship) ("Hull 38 Reference 2" and "Hull 39 Reference 2" respectively) and by calling on XXK to submit its claims in the engine proceedings to arbitration in accordance with Article XIII of the Contracts. SBV claimed a declaration that XXK was obliged to refer its main engine claims to arbitration and anti-suit relief, as well as damages for breach of the arbitration clause.
- On 28th October 2011 the Sellers served draft amended Claim Submissions in Hull 38 Reference 1 by which they sought to advance their claims in the engine proceedings. They did not seek to set off their (alleged) claim for damages against the claim for repayment. They did not serve any defence submissions in Hull 38 Reference 2 or Hull 39 Reference 2 (or any claim submissions advancing their claims from the engine proceedings).
- On 4th November 2011 SBV applied for an anti-suit injunction on notice restraining XXK from prosecuting the XXK proceedings until the tribunals in Hull 38 Reference 2 and Hull 39 Reference 2 could consider the applications for permanent relief. On 11 November 2011 Eder J. granted the application which was duly served that day on XXK.
- XXK nevertheless pursued the XXK proceedings. On 21st November 2011 the QMC dismissed SBV's jurisdictional challenges. It did not issue any formal ruling on the applications to vary the XXK orders.
- On 20th December 2011 the tribunals in Hull 38 Reference 2 and Hull 39 Reference 2 published their awards, which were sent to XXK that same day. By the Hull 38 Reference 2 and Hull 39 Reference 2 Awards, the tribunals found and declared that the disputes giving rise to the Hull 38 and Hull 39 Main Engine Claims fell within the scope of the respective arbitration agreements in the Contracts, that the tribunals had jurisdiction over those disputes, and that XXK was in breach of the arbitration agreement in those Contracts. The tribunals ordered XXK to withdraw and discontinue the XXK proceedings forthwith. The tribunals also held that SBV's claim for damages arising out of XXK's breach of the relevant arbitration agreements succeeded in principle, and reserved all issues relating to the quantum of the damage suffered to subsequent awards.
- XXK did not comply with the Awards in Hull 38 Reference 2 and Hull 39 Reference 2.
- SBV appealed against the QMC's dismissal of its jurisdictional challenges in China to the High Court of Shandong. Those appeals operated as a stay of proceedings. They were dismissed on 13th March 2012. On 6th April 2012 SBV launched an application for a retrial to the Supreme Court. Such application did not operate as a stay of proceedings. XXK was permitted to, and did, press ahead with both claims. Hearings took place on 14th May, 15th June and 16th July 2012. SBV participated fully in those hearings.
- On 7th June 2012 the Supreme Court gave notice of acceptance of SBV's applications for a retrial, which acceptance again imposed a stay on proceedings (albeit that there nevertheless appear to have been two subsequent hearings). However, on 30th November 2012 the substantive applications were dismissed by the Supreme Court.
- SBV contends that it had by now exhausted its jurisdictional options in China and had done everything it could to prevent XXK from prosecuting the XXK proceedings to judgment and thereafter enforcing against the Guarantees or its other assets in China. SBV contends that, had it not gone on to defend the XXK proceedings, there was a clear risk of judgment in default followed by enforcement. SBV thus had no choice but to continue to defend the claims in China.
- XXK's claims thus proceeded to full trial in the QMC. XXK made an application to amend in February 2013 which SBV challenged, again on the ground of jurisdiction. This led to XXK withdrawing its application to amend. In March 2013 XXK reformulated its case on quantum. SBV again applied to vary the XXK orders on the basis that they should be limited to the sum of the claims. The QMC did not issue any formal ruling on those applications.
- There followed two further hearings at which SBV fully participated : between 20th and 22nd March 2013 and 29th to 30th March 2013. SBV dealt fully with the merits, inviting the QMC to dismiss XXK's claims against it.
- Judgments in both actions were given on 9th April 2013. The claims succeeded in full together with interest (for which there had been no pleaded claim). By notices dated 15th May 2013 SBV appealed against both judgments to the High Court of Shandong. Such notices operated as a stay of the judgments. SBV contended that the QMC had made incorrect findings of fact and misapplied the law. On 2nd April 2014 the appeal as to liability was rejected but the sums awarded to XXK were reduced in respect of interest. On 26th September 2014 SBV filed application for retrial to the Supreme Court. An initial hearing took place on 12th December 2014 on the question of whether or not the Supreme Court would accept SBV's application on appeal. At that hearing SBV was told in terms by the court that all jurisdictional issues had been disposed of by the Supreme Court Ruling of November 2012. Following the hearing, written statements were filed for SBV on 26th December 2014. A ruling from the Supreme Court is currently awaited. It is common ground that, as a matter of Chinese law, the judgment on appeal from the High Court of Shandong is in these circumstances full and effective, the Supreme Court having not thus far accepted SBV's application. SBV believes that XXK is in the process of seeking assets of SBV in China against which to enforce its judgments.
- Meanwhile, on 2nd May 2013, Electronics commenced two actions against Wartsila and SBV in respect of Hull 38 and Hull 39, namely the Electronics Proceedings. Although the heads of damage claimed differ from XXK's claims, the factual basis of the claims is the same as that advanced in the Hull 38 and 39 References. On 8th May 2013 Electronics obtained the Electronics orders (again ex parte). By the Electronics orders, BOC was prohibited from paying the amount of CNY 7 million and accrued interest under the Hull 38 Guarantee, and the amount of CNY 53 million and accrued interest under the Hull 39 Guarantee.
- SBV was served with the Electronics Proceedings on 3 March 2014, although it has yet to be served with either of the Electronics Orders. BOC was served with the Electronics Orders on 8th May 2013. It applied immediately to have them set aside.
- SBV referred the matters giving rise to the Electronics Proceedings to arbitration, claiming the same relief as it had against XXK ("Hull 38 Reference 3" and "Hull 39 Reference 3"). Electronics participated by way of written submission. Amongst other things it argued that SBV had deferred to the jurisdiction of the Chinese Courts.
- On 19th March 2014 the tribunals issued awards in both references, rejecting the suggestion that SBV had submitted to the jurisdiction of the Chinese Courts on the claims the subject of the Electronics Proceedings and granting relief analogous to that ordered in the Hulls 38 and 39 2 References, including orders that Electronics should forthwith withdraw and discontinue the Electronics Proceedings. The tribunals also held that SBV's claim for damages arising out of Electronics' breach of the relevant arbitration agreements succeeded in principle, and reserved all issues relating to the quantum to subsequent awards. To date Electronics has failed to comply with the tribunal's orders.
- On 28th March 2014 SBV challenged the QMC's jurisdiction in the Electronics Proceedings. The challenge was heard on 28th March 2014 and judgment is awaited.
- The following "framework" issues arise :
- The outcome on these issues will either determine or at least be material to one or both of the defences raised by BOC as follows :
- Many additional issues have fallen away during the course of and up to the very concluding stages of trial, including the following : a) whether or not the Guarantees included a separate "see-to-it" obligation, breach of which would sound in damages and not debt; b) whether the judgments in the XXK proceedings should reduce the amount due from BOC by the amount of such awards; and c) whether there was an implied term of the Guarantees (that BOC would not be liable to pay in circumstances where to do so would amount to a breach of the XXK and Electronics orders).
- For the purpose of resolving some of these issues, each party called expert evidence from Chinese lawyers as follows :
- Both are expert in the field of Chinese maritime and commercial law. Amongst other things, Mr Li is an arbitrator of the panel of the China Maritime Arbitration Commission ("the CMAC") and guest professor at Shanghai Maritime University. Amongst other things, Mr Chen was Chief Judge of the Admiralty Tribunal of the Shanghai Maritime Court and is an arbitrator of the panel of the CMAC. The Shanghai Maritime Court is the equivalent maritime court for the Shanghai region to the QMC for the Qingdao region. Each expert gave his evidence in a careful and conscientious manner and broadly consistently with his written reports and views as expressed in the experts' joint memorandum.
- Performance bonds create an independent obligation to pay on demand by way of primary obligation on the party giving the guarantee and not by way of surety. They are irrevocable undertakings to pay a specified sum to the beneficiary in the event of a breach of contract, rather than a promise to see to it that the contract will be performed. They are also often called "performance guarantees" or "demand guarantees", although they are not guarantees in the true sense, but rather a strict form of contract of indemnity. Thus the various equitable defences available to a surety are not available to the issuer of a performance bond (see for example Marubeni Hong Kong and South China Ltd v Mongolia [2005] 2 Lloyd's Rep 231 ("Marubeni")). The issuer of a performance bond is as a general rule not concerned with the rights or wrongs of any underlying dispute between the beneficiary and the account party. His obligation to pay in accordance with the terms of the contract is entirely independent of the ultimate contract between the account party and the beneficiary. In practice, performance bonds are treated as substitutes for cash. (See generally Andrews and Millett : The Law of Guarantees (6th ed 2012) ("Andrews and Millett") (at paragraphs 1-015 and 16-001).)
- The following general principles of construction can be identified :
- Recent authoritative guidance on the proper construction of instruments such as the Guarantees is to be found in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629 ("Wuhan"). There Longmore LJ stated :
- In my judgment, an objective consideration of the Guarantees as a whole points to them being demand guarantees in the nature of a performance bond, and not by way of surety, which irrevocably and unconditionally obliged BOC, on demand, to make payment to SBV of advance instalment refunds due from the Sellers but not paid.
- By way of background, the Guarantees secured only the obligation of the Sellers under the Contracts to refund advance instalment payments (with interest) in the event of cancellation of the Contracts. They did not secure the many other and varied obligations of the Sellers. Their target was cashflow, a hallmark of a performance bond.
- Beyond that and more directly, three of the four factors identified by the Court of Appeal in Wuhan from "Paget's presumption" as justifying a presumption in favour of a performance bond are present : the Guarantees were issued by a bank in the context of international trade between international parties with an undertaking to pay "on demand".
- BOC suggests that the third "on demand" factor is not present, because of the Proviso. I disagree. The obligation under the 2nd Paragraph of the Guarantees to pay within thirty days of receipt of authenticated demand is unequivocal. The Proviso, which itself engages only in limited circumstances, falls to be considered separately. The Guarantees make it clear that any disputes between SBV and the Sellers are irrelevant to BOC's obligation to pay. The obligation is as "primary obligor not security" and irrevocable, unconditional and absolute. The fact that the obligation is engaged "should the Seller fail to make...repayment" does not point to the imposition of a secondary liability, but rather to the circumstances in which the obligation on BOC is triggered. Equally, the fact that the sums due under the Guarantees mirror the sums due from the Sellers does not point to a secondary liability only. It simply specifies the extent of BOC's primary liability under the Guarantees.
- Whether or not the third "on demand" factor is present, BOC relies heavily on the Proviso, particularly by reference to paragraph 29 of the judgment in Wuhan quoted above. In Wuhan itself (at first instance), counsel for the claimant expressly relied on the absence of a provision deferring any dispute to arbitration as indicative that the document there was a performance bond ([2012] EWHC 1715 (Comm) (at paragraphs 64 to 65)).
- In my judgment, neither the Proviso, nor the fact that the Guarantees contain clauses excluding or limiting the defences available to a guarantor, justify (or tip the balance in favour of) treating the Guarantees as contracts of surety.
- As for the Proviso, in the event of a qualifying reference to arbitration or appeal, BOC's liability is nevertheless still triggered by a document, namely an award or court order, not by reference to the merits of any underlying dispute between SBV and the Sellers. BOC is not required to become concerned with the merits of any underlying dispute. The question is one of timing, not substance.
- This approach is consistent with the authorities. Thus in Meritz Fire & Marine Insurance Co Ltd v Jan de Nul NV [2011] 2 Lloyd's Rep 379 the Court of Appeal held the instrument in question to be a performance bond. Although the parties there had expressly included the Uniform Rules for Demand Guarantee of the International Chamber of Commerce (ICC) (which rules were issued specifically for performance bonds), there was also a proviso similar to the one under consideration here. In WS Tankship II BV v The Kwangju Bank Ltd and another [2011] EWHC 3103 (Comm) ("WS Tankship") Blair J had to consider a letter of guarantee in materially similar terms to the Guarantees (as set out in paragraph 54 of the judgment). He stated by reference to the proviso there :
- BOC submits that this part of Blair J's decision is inconsistent with the subsequent decision of the Court of Appeal in Wuhan (and paragraph 29 in particular). I disagree. The embodiment of the Proviso does not render the Guarantees "almost worthless" because it enables BOC to resist payment on the basis that the Sellers are disputing whether a payment is due. The Proviso defers the obligation on BOC to pay (and then only in limited circumstances), but does not provide for any basis for resistance of the obligation once it arises.
- As for the no dispute and no set-off provisions, the authorities demonstrate well that non-compliance with the fourth factor identified in Wuhan is not inconsistent with the existence of a performance bond. Wuhan itself was such a case. In Gold Coast Ltd v Caja de Ahorros Del Mediterraneo and others [2002] 1 All ER (Comm) 142 ("Gold Coast"), approved by the Court of Appeal in Wuhan, the guarantee also contained a provision to the effect that any variation, amendment to or waiver in respect of the shipbuilding contract would not limit, reduce or exonerate the banks' liability under the guarantee. Holding that the guarantee was a performance bond, Tuckey LJ did not find that this provision militated in favour of finding that it was a true guarantee (on the basis that it was unnecessary). He said this :
- BOC points also to the fact that the Guarantees use the words of "guarantee" repeatedly throughout and relies for this purpose on Marubeni. There Carnwath LJ said this :
- The strong presumption referred to by Carnwath LJ was clearly founded on the basis that the instrument was not a banking instrument and that the transaction took place outside the banking context. It does not therefore apply to the instant facts.
- This is an area where the labelling used is generally accepted as being confusing (see for example the use of the phrase "demand guarantee" to describe a performance bond). I do not find the repeated use of the word "guarantee" in the Guarantees helpful to the process of construction, let alone determinative. Labelling plays no part in "Paget's presumption". I prefer to look at the substance and international and commercial context of BOC's obligations under the Guarantees. This is consistent with the approach of the courts in Wuhan, Gold Coast and WS Tankships.
- For these reasons, I conclude that the Guarantees are, on a proper construction, to be treated as performance bonds.
- SBV contends that the XXK orders expired on 14th September 2013, two years since the last orders were made (on 14th September 2011), pursuant to Article 29 of the Provisions of the Supreme People's Court on Seal-Up, Detainment, or Freezing of Property in the Civil Enforcement by People's Courts ("the Seal-Up Regulation").
- Both experts gave detailed expert evidence on this issue. In the event, however, for reasons which will become clear, it is unnecessary to make an outright determination on this issue, which is now only relevant to BOC's application for a stay.
- In overview, the general starting point for consideration is Chapter III of the Special Maritime Procedure Law of the People's Republic of China. Articles 12 and 16 provide as follows :
- Mr Li for SBV is of the opinion that the XXK orders were made as a freezing measure taken under Article 94. This in turn means that the Seal-Up Regulation applies to them, which it would not if the XXK orders were merely measures issued under Article 94 as "[an]other method as prescribed by the law".
- Articles 1 and 4 of the Seal-Up Regulation provide :
- Articles 29 of the Seal-Up Regulation provides the crucial two-year time limit relied on by SBV:
- Article 4 has been clarified recently by Article 168 of the Interpretations of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China (2015) to mean that the two-year period is calculated as a single continuous period from date of inception of the order in question.
- Article 33 of the Seal-Up Regulation provides that if any previous judicial interpretations are inconsistent with the provisions of the Regulation, the provisions of the Regulation shall prevail.
- Mr Chen for BOC, on the other hand, disagrees that the XXK orders were freezing orders made under Article 94 of the CPL 2007 and so disagrees that the time limit in Article 29 of the Seal-Up Regulation applies. The Seal-Up Regulation provides detailed provisions on seal-up, seizure and freezing preservation orders, but does not apply to "other methods as prescribed by the law" (see Article 1 above). In Mr Chen's opinion the XXK orders were not in the nature of sealing-up or seizure orders, which are used for real or moveable property. Nor were they freezing orders. They were orders imposed under Article 105 of the Opinion of the Supreme People's Court on Certain Issues Concerning the Application of the Civil Procedure law of the People's Republic of China ..."the Judicial Interpretation") which provides materially as follows :
- Then Article 109 of the Judicial Interpretation provides :
- Accordingly, Mr Chen is of the view that the XXK orders remain current. Mr Li ripostes, amongst things, that the Judicial Interpretation cannot make law. Even if it could properly be described as a "regulation", it is a secondary measure only.
- Having set out at a high level the broad nature of the debate between the experts, I turn to recent events.
- During the course of the litigation BOC has invited SBV on several occasions to seek confirmation from the QMC as to the expiry of the XXK orders. SBV has declined to do so. Thus, on 28th January 2015, BOC itself wrote to the QMC in the following terms (having first referred to the references for and dates of the XXK orders) :
- The QMC replied on 10th February 2015 :
- Mr Li stated that the QMC confirmation is not of superior effect to the XXK orders themselves. However, it carries the court seal and was the decision of a Judge of the QMC, most probably the Judge in charge of the case, Judge Ding Qixue.
- As already indicated, the currency of the XXK orders is now relevant only to BOC's application for a stay. In those circumstances, what really matters is the QMC's current view, expressed by a Judge in a formal document, after having been referred expressly to the provisions relied upon by SBV. That opinion is what is most relevant to a consideration of whether or not a stay by reference to alleged breach of the XXK orders should be granted.
- SBV, at least in its initial submissions, invites me to disregard the QMC confirmation on the basis that it is clearly wrong. But even if it could be shown here that the QMC's view as expressed in its confirmation was obviously unsustainable, it would be difficult to ignore the clearly expressed statement of the QMC as a matter of fact.
- It is nevertheless instructive to consider whether the contention that the XXK orders remain live is a sustainable one. In my judgment Mr Chen's view that the XXK orders remain current (without reference to the QMC confirmation) is at least an arguable one, by reference to the following non-exhaustive contentions :
- However, this reasoning was not that adopted by the QMC in the QMC confirmation, as is apparent from paragraph 100 above.
- Mr Li contends that the reasoning in the QMC confirmation is wrong. First, the QMC relies on Article 100 of the Civil Procedure Law of the People's Republic of China which did not come into force until 1st January 2013 ("the CPL 2013"). That Article could not apply to the XXK orders because it was not in force at the time that the XXK orders were made. Secondly, XXK orders are not "act preservation" orders because "act preservation" orders can only compel a party to do (or not do) something. BOC is only a third party.
- Mr Chen, however, is of the view that the QMC is entitled to refer to and rely on Article 100 of the CPL 2013. He states that there is a principle that a court should adopt the current procedural law when determining or interpreting current procedural matters, such as whether or not the XXK orders are still in place and binding. He refers to the transitional rules in the Provisions of the Supreme People's Court on Certain Issues Related to the Application of Laws to Unsettled Cases after the Implementation of the Amended Civil Procedure Law. Article 1 provides as follows :
- Mr Chen states that based on the CPL 2013, the XXK orders could be characterised as preservation of conduct for the purpose of Article 100.
- I regard Mr Chen's views again as at least arguable. The XXK orders, as confirmed in the QMC confirmation, cannot therefore simply be disregarded on the ground of expiry in 2013.
- In conclusion, the fact is that the QMC currently regards the XXK orders as live. For the purpose of considering BOC's application for a stay, that bald fact is one that cannot be ignored. And in any event, the view that the XXK orders remain live (whether for the reasons identified by the QMC and/or for the reasons identified by Mr Chen) is not one that could be disregarded on the basis that it is obviously unsustainable.
- The issues for consideration on the question of recognition can be distilled as follows :
- Sections 32 and 33 of the CJJA provide so far as material :
- It is common ground that SBV has not submitted to the jurisdiction of the Chinese Courts in the Electronics proceeding. The Electronics orders thus do not fall to be recognised.
- As for the XXK judgments and orders, SBV's primary case is that it did not "otherwise submit to the jurisdiction" of the Chinese courts for the purpose of s.32 (1)(c) in the XXK proceedings with the result that the XXK judgments and the XXK orders are not to be recognised here.
- The question of submission is one of English private international law. Briggs & Rees : Civil Jurisdiction and Judgments (5th Ed 2009) states (at paragraph 7.49) :
- Dicey, Morris & Collins : The Conflict of Laws (15th Ed 2012) ("Dicey & Morris") (at paragraph 14-055 and following) confirms that a fundamental requirement of recognition of a foreign judgment in England at common law is that the foreign court should have had jurisdiction according to the English rules of the conflict of law.
- Here, whilst the experts are not ad idem on the question of submission as a matter of Chinese law, there is no affirmative case advanced by SBV that under Chinese law SBV would not be treated as having submitted to the jurisdiction of the Chinese courts.
- Mr Chen is of the view that there is a similar concept of submission in Chinese law, by reference to Article 243 of the CPL 2007 :
- He is of the view that by its full participation in the XXK proceedings, SBV is to be considered under Chinese law as having accepted the QMC's jurisdiction.
- Mr Li disagrees, being of the view that there is no concept of submission in Chinese law.
- At its lowest, then, there is no positive case of no submission under Chinese law and nothing to consider as potentially overriding the English law position on submission.
- In my judgment, it is clear as a matter of English law that, in choosing to fully defend the claims against it in the XXK proceedings after the final dismissal of its jurisdictional challenges in the Supreme Court, SBV is to be treated as having "otherwise submitt[ed]" to the jurisdiction of the Chinese courts, subject to s.33(1)(c) of the CJJA addressed below. As Dicey & Morris puts it (at paragraph 14-070) :
- Here, having unsuccessfully challenged jurisdiction, SBV appeared at trial and made substantive submissions on the facts and the law. When it lost in the QMC, it appealed to the Shandong High Court and then applied to the Supreme Court for a retrial. Under English law principles of private international law, that was submission.
- So much is clear from the evidence for SBV from Ms Luo Congrui, a lawyer for SBV in China, in particular. She refers expressly to the "simple choice" facing SBV after its jurisdictional challenges had been exhausted. Whether or not it was "Hobson's choice", and whether or not SBV continued to object to jurisdiction during the remaining proceedings, is nothing to the point. It was still a free choice, no doubt taken after careful consideration of SBV's options and no doubt taken in the hope of avoiding judgment in the XXK proceedings. Had SBV been successful in so doing, it would no doubt have regarded that as conclusive and the judgment as binding and to be recognised in that regard.
- SBV seeks to rely on s.33(1)(c) of the CJJA on the basis that it should not be regarded as having submitted because it appeared in China to protect or obtain the release of property seized or threatened with seizure in the proceedings. The difficulty for SBV is that, whilst it did submit for the purpose of seeking to lift the XXK orders, it was unsuccessful in doing so and then went on to defend the claims fully on the merits. Paragraph 14-071 of Dicey & Morris confirms that in those circumstances, there will have been submission by express reference to s.33(1)(a), (b) and (c) :
- I therefore conclude that SBV is to be treated as having submitted to the jurisdiction of the Chinese courts.
- Assuming that it is held so to have submitted, SBV contends that the court should carry out an evaluative exercise of judgment as to whether or not to recognise the XXK judgments and orders, based on the comments of Rix LJ in AES Ust-Kamenogorsk Hydropower Plant LLP v AES Ust-Kamenogorsk Hydropower Plant JSC [2012] 1 WLR 920 (at paragraph 150 (v)) :
- These remarks were based expressly on the parties' concession that a general residual discretion existed (and were also obiter). They have been criticised as insupportable : see Dicey & Morris (at paragraph 14-098 footnote 383) :
- I respectfully agree that there is no broad evaluative exercise to be carried out once a defendant is found to have submitted under s.32 to the overseas jurisdiction as a matter of English law, for the reasons given and as stated by the authors of Dicey & Morris.
- That leaves SBV with the contention that the XXK judgments and orders should not be recognised as a matter of public policy. There is no doubt that XXK acted in flagrant disregard of the arbitral anti-suit injunctions in pursuing the XXK proceedings after 20th December 2011. Nor is it suggested that there has been any waiver nor is there any estoppel binding SBV so as to prevent it arguing for non-recognition. SBV thus invites the court to conclude that it would be contrary to public policy to recognise judgments obtained by XXK in defiance of English decisions reached in accordance with English law where the parties have chosen English law and submitted to English jurisdiction.
- Dicey & Morris states at rule 51:
- In Philip Alexander Securities & Futures Ltd v Bamberger and others [1996] CLC 1757 Waller J stated (at pages 22 and 23) :
- In Altimo Holdings and Investment Ltd and others v Kyrgyz Mobil Tel Ltd and others [2012] 1 WLR 1804 ("Altimo Holdings") Lord Collins stated :
- In WSG Nimbus Pte Ltd v Board of Control for Cricket in Sri Lanka [2002] WGHC 104, the Singapore High Court held that in circumstances where the defendant had been aware of an anti-suit injunction, had chosen to ignore it and failed to comply with an agreement to arbitrate in Singapore :
- Whilst helpful in general terms, these authorities can only be of limited assistance for present purposes. Either it is not clear on the facts to what extent, if at all, the relevant party had submitted to the jurisdiction on the merits, as SBV has done in China; and/or the judicial remarks are obiter; and/or the comments only go so far as to indicate that non-recognition would be arguable on grounds of public policy. Moreover and perhaps most significantly, nowhere does it appear to have been argued that, once there has been submission for the purpose of s.32(1)(c), there can be no objection on public policy grounds to recognition on the basis of a breach of jurisdiction or arbitration clause.
- In my judgment, the ground of public policy invoked by SBV is recognised fully in s.32. Contrary to SBV's submissions, s.32 cannot simply be ignored for the purpose of considering questions of public policy in the context of recognition of foreign judgments achieved in proceedings brought in breach of jurisdiction or arbitration clauses. Sections 32 and 33 of the CJJA set out the clear parliamentary intention as to when and in what circumstances foreign judgments are to be recognised by the English courts when there has been a breach of jurisdiction or arbitration clauses. That must be relevant to the question of when it would and would not be contrary to public policy to recognise a foreign judgment on the same or directly related grounds.
- Under s.32, a foreign judgment arising out of proceedings brought without agreement and in breach of a jurisdiction or arbitration clause against a party will not be recognised by the United Kingdom, provided that that party has not counterclaimed or otherwise submitted to the jurisdiction of the foreign court. But once it has so (counterclaimed or) submitted, there can be no objection on public policy grounds to recognition by reference to the jurisdiction or arbitration clause. The arbitral anti-suit injunctions are founded on and there to give effect to the jurisdiction and arbitration clauses in the Contracts. Those clauses are the very subject-matter of s.32(1)(a). The arbitral anti-suit injunctions cannot lead to a separate (and opposite) conclusion to that to be reached by a proper application of s.32.
- The public policy within the CJJA under s.32 is clear. If a party submits for the purpose of s.32(1)(c), then it loses its shield against recognition under s.32 by reference to jurisdiction or arbitration clauses. SBV contended that this conclusion would be to denude anti-suit injunctions of any content. This, however, ignores the fact that anti-suit injunctions may be granted for many and varied reasons wholly unrelated to arbitration or jurisdiction clause, for example on grounds of oppression.
- In these circumstances, having found voluntary submission on the part of SBV for the purpose of s.32, there can be no valid public policy objection to recognition of the XXK judgments and orders by reference to the arbitral anti-suit injunctions.
- In conclusion on the "framework" issues :
- Against these conclusions I turn to consider the merits of BOC's two defences and, if relevant, BOC's application for a stay.
- The background to this defence is set out in the narrative above. For ease of reference the key events are as follows. Hull 39 was not delivered by her Delivery Date (or within two hundred and ten days thereof). The Sellers having alleged that SBV had repudiated the Hull 38 Contract by cancelling it in the same circumstances, SBV did not wish to cancel without confirmation of its right to cancel. The Sellers did not take up the invitation in correspondence to confirm SBV's right to cancel, and SBV referred the dispute to arbitration in November 2010. SBV claimed a declaration that it was entitled to cancel, that if it did so the Sellers would thereupon become obliged to refund the instalments paid, and that if the Sellers failed to pay, SBV would be entitled to demand repayment from BOC.
- By letter dated 23rd December 2010, the material terms of which are quoted in paragraph 34 above, SBV wrote to BOC informing it of the arbitration and requesting confirmation that the Hull 39 Guarantee was automatically extended in accordance with the 8th Paragraph of the Hull 39 Guarantee. BOC gave that confirmation on 24th January 2011.
- On 9th February 2012 the Hull 39 Award was published. The tribunal declared that SBV was entitled to cancel the contract, that if it did so the Sellers would thereupon become obliged on demand to refund the instalments paid, and that if the Sellers failed to pay, SBV would be entitled to demand repayment from BOC, that upon notice from SBV that it had terminated the Hull 39 Contract, the Sellers should forthwith refund to the Buyer, in full, all sums paid by SBV (totalling US$16.392 million) together with interest thereon.
- SBV then cancelled the Hull 39 Contract on 15th February 2012 and demanded repayment from the Sellers. The Sellers failed to pay and on 12th March 2012 SBV demanded payment from BOC. The Sellers did not refer any dispute arising out of this cancellation to arbitration (whether in respect of SBV's right to cancel, liability to repay the instalments or SBV's right to made a demand on BOC or otherwise).
- BOC declined to pay on the ground that it had, by then, been served with the XXK orders.
- By way of its Defence dated 13th July 2012, BOC now also takes issue with the validity of the demand of 12th March 2012 :
- In my judgment, BOC's objection to the validity of the Hull 39 demand is misplaced.
- No award, let alone a monetary award, was required in order for SBV's demand of 12th March 2012 to be valid and to trigger BOC's liability to pay under the Hull 39 Guarantee.
- Irrespective of whether or not the dispute referred to Hull 39 Reference 1 fell within the Proviso, such dispute was resolved and concluded by the Hull 39 Award (published on 9th February 2012). Thereafter, in the absence of any fresh dispute being raised by the Sellers in relation to SBV's subsequent cancellation of the Hull 39 Contract (on 15th February 2012) and their resulting obligation to refund the instalments, there was no dispute for the purpose of the Proviso, which was accordingly not engaged. The Proviso was, in effect, an irrelevance at the time of the demand. No award was required in order for the demand of 12th March 2012 to be valid.
- BOC submits that this approach ignores the wording of the Proviso : once a dispute falling within the Proviso is referred to arbitration, BOC waits for an award and is then obligated to make payment to the extent ordered by the tribunal. Effectively BOC is "locked in" to the arbitration award.
- In my judgment, this is not a fair or correct construction of the Proviso or the terms of the Guarantee as a whole. Reference to arbitration suspends the timing for BOC's obligation to pay during the currency of the dispute, but does not prevent an obligation to pay irrespective and independently of any award arising on the part of BOC subsequently. Here, after cancellation of the Hull 39 Contract and in the absence of any dispute then being referred to arbitration under the Proviso, the terms of the Proviso were not in play.
- This conclusion renders it unnecessary to consider SBV's alternative case, namely that the Court should treat the Hull 39 Award as an award for the purposes of the Proviso. The Hull 39 Award specifically declared that, upon termination, the Sellers should forthwith refund the four instalments totalling US$16,392,000 together with interest (which was unsurprisingly not quantified). In this sense it was an order (albeit conditional) that the Sellers make repayment. Once SBV terminated the Hull 39 Contract, and the Sellers failed to repay the instalments, BOC was obliged to pay. As SBV put it, anything else would amount to a "disjunct" : the Hull 39 Reference 1 would be held to trigger the Proviso, but the Hull 39 Award would not be held to be an award for the purpose of the Proviso.
- The difficulty in this submission is the requirement in the Proviso for BOC to pay within 30 days of the tribunal award. This is on its face unworkable on a conditional award. SBV is thus driven to contend that, on a proper commercial construction in the context of a conditional award, that period must be treated as running from when the contingency, here the cancellation of the contract, was engaged. Its better point may be that this difficulty simply serves to emphasise the correctness of SBV's approach on its primary case, as set out above.
- The above conclusion renders it strictly unnecessary for me to address SBV's fall-back position based on estoppel by representation or convention. I nevertheless do so for the sake of completeness and as briefly as possible.
- As for estoppel by representation, SBV contends that its exchanges with BOC on 23rd December 2010 and 24th January 2011 (set out at paragraphs 34 and 35 above) created an estoppel preventing BOC from now contending that the Hull 39 Reference 1 Award was not an award for the purpose of the Proviso.
- The legal requirements of an estoppel by representation of fact are well known : (i) a representation which is in law deemed a representation of fact, (ii) that the precise representation was in fact made, (iii) that the later position taken contradicts in substance the original representation, (iv) that the original representation was of a nature to induce and was made with the intention and result of inducing the party raising the estoppel to alter his position on the faith of it and to his detriment, and (v) that the original representation was made by the party sought to be estopped and was made to the party setting up the estoppels (see for example Spencer Bower : The Law Relating to Estoppel by Representation (4th Ed 2004 at paragraph 1.2.3). The representation must be clear or unequivocal, or precise and unambiguous (see Chitty : Contracts (31st Ed) ("Chitty") at paragraph 3-090).
- In my judgment, BOC did not make any clear or unequivocal, or precise and unambiguous, representation to SPL that the (prospective) Hull 39 Award was one which would comply with the requirements of the Proviso. On 23rd December 2010 SBV asked BOC for confirmation of an automatic extension to the validity of the Hull 39 Guarantee pursuant to Amendment No. 1, the Hull 39 Reference 1 having been commenced. In response on 24th January 2011 BOC simply gave that confirmation. BOC did not provide any comment or confirmation as to the nature of the arbitration or any resulting award.
- For these reasons, and before any considerations of reliance and prejudice, I would dismiss SBV's defence based on estoppel by representation.
- SBV's case for estoppel by convention is a more promising one. Estoppel by convention may arise where both parties to a transaction act on an assumed state of facts or law, the assumption being either shared by both or made by one and acquiesced in by the other. The parties are then precluded from denying the truth of that assumption, if it would be unjust or unconscionable to allow them (or one of them) to go back on it. The assumption must be unambiguous and unequivocal; the mistaken assumption of the party claiming the benefit of the estoppel must have been shared or acquiesced in by the party alleged to be estopped; both parties must have conducted themselves on the basis of such a shared assumption : the estoppel requires communications to pass across the line between the parties (see generally Chitty at paragraphs 3-107 and following).
- At the outset I reject the submission for BOC that SBV was acting in an underhand manner by choosing "not to be transparent" in its dealings with BOC. SBV (and its lawyers) may at times have presented the situation to BOC in a manner designed to minimise the risks to SBV, but it did not set out to mislead BOC. So, for example, whilst the letter of 23rd December 2010 from SBV's solicitors to BOC was designed to maximise the chances of procuring BOC's consent, the scope of the dispute being referred was not inaccurately stated in any way. It was made clear that SBV had yet to cancel the Hull 39 Contract. And whilst the letter did not spell out SBV's concerns as to whether or not the dispute fell within the scope of the Proviso, the existence of such a concern was implicit in the request for what was an automatic extension. In any event, there was no obligation on SBV to inform BOC of its concerns.
- As to whether BOC was misled in any way, as set out below, there is no evidence that it was. BOC was at all times a large commercial organisation with unrestricted access to both Chinese and UK lawyers and in possession of the Hull 39 award itself from 14th March 2012 onwards. (The Hull 39 award was sent to BOC by courier under cover of a letter dated 13th March 2012. It was also emailed to Mr Kai Sheng of BOC ("Mr Sheng") on 14th March 2012 following a conversation between him and Ms Lu of SBV that day. Mr Sheng, who was BOC's only witness of fact and who was not required for cross-examination, gives no evidence as to the content of the discussion nor as to what he did with the Hull 39 award upon receipt.)
- It is difficult to imagine that the sealed letter from BOC's International Settlements Department to Electronics sent out on the same day, 14th March 2012, was written without careful consideration on the part of BOC. It stated :
- Turning to the witness and other documentary evidence, I am satisfied that at all material times both SBV and BOC were proceeding (both before but more importantly for present purposes after) the Hull 39 award on the basis that the award fell within the terms of the Proviso.
- This is the evidence of Mr Nietzman for SBV, which I accept, and which is wholly consistent with SBV's conduct. There is nothing in the evidence for BOC, namely the witness statement of Mr Sheng, to suggest that BOC was not proceeding on the same assumption both before and after the Hull 39 award was issued. Indeed all the contemporaneous material from BOC suggests that it was – see for example its submissions to the QMC of 26th September 2011, 18th November 2011, 12th March 2012, 21st March 2012 and 21st May 2012, and its letter to the Sellers of 14th March 2012 already referred to above.
- More importantly, in terms of "crossing the line", BOC was also clearly acting on this assumption in its dealings direct with SBV. In particular, on 23rd March 2012 BOC wrote to SBV as follows :
- I accept the evidence of Mr Nietzman that, had BOC raised an issue with SBV as to the validity of the Hull 39 award before 26th March 2012, he would have raised fresh arbitral proceedings against the Sellers under the Proviso and so been able to avoid the objection now taken by BOC.
- For BOC it is said that, whilst it may have been proceeding on that assumption, it was simply doing so on the basis of what it had been told by SBV, namely that the Hull 39 award was as required by the Hull 39 Guarantee and had ordered (immediate) repayment. First, there is no evidence to support this assertion. Secondly, the assertion is inconsistent with the involvement of lawyers for BOC. (Mr Sheng gave no evidence as to the involvement of lawyers for BOC, but it is apparent that UK lawyers were involved by 21st May 2012 at the latest and not credible that at least in-house legal advice was not taken before 26th March 2012. It is clear from Mr Sheng's evidence that BOC's legal and compliance department was involved in the applications to the QMC to lift the XXK orders, including at a hearing before the QMC on 12th March 2012. There is no evidence that BOC (and/or its lawyers) did not look at the form of the Hull 39 award upon receipt because, for example, it was simply relying on SBV's representations.) Thirdly, in any event, SBV did not represent to BOC that the content of the Hull 39 award was for an immediate monetary award (as opposed to a conditional one) that met the requirements of the Proviso. None of the communications relied on by BOC (including the SWIFT messages of 20th February and 12th March 2012) went that far. Finally, even if SBV did represent to BOC that the Hull 39 award was sufficient to trigger the Proviso, that is because that is what it believed at the time and what it believed had been agreed with BOC (as set out in the evidence of Mr Nietzman).
- BOC relies on Kydon Compania Naviera SA v National Westminster Bank Ltd and others) ..."The Lena") [1981] 1 Lloyds Rep 61 to support the submission that in circumstances where the onus was on SBV to obtain an award in the necessary form and having the benefit of legal advice as to the requirements of the Proviso, no estoppel can arise where a demand is rejected on one basis but there is also another. There (at page 79) Parker LJ stated :
- However, the court in The Lena was dealing with a plea of estoppel by representation rather than estoppel by convention. The issue here is that the fact that only the XXK orders were relied on by BOC by way of explanation for non-payment (without, for example, a general reservation of rights) evidences the parties' shared (clear and unequivocal) assumption that the demand of 12th March 2012 was a valid one for the purposes of the Proviso. The Lena takes nothing away from that proposition.
- Thus, but for my primary conclusion on the validity of the demand of 12th March 2012, I would have found it to be unconscionable for BOC to be allowed after expiry of the Hull 39 Guarantee to resile from the parties' shared assumption that the Hull 39 award was an award for the purpose of the Proviso.
- For these reasons, I dismiss defence 1 and, subject to defence 2, SBV is entitled to payment from BOC under both the Hull 38 and Hull 39 Guarantees.
- As set out above, a performance bond creates a primary and unconditional liability, independent of the underlying contract, and not a secondary liability. Thus the usual guarantor's equities do not apply in favour of a bank providing a performance bond. In the light of my findings that the Guarantees are performance bonds, this potential defence thus falls away.
- If, however, I am wrong in my conclusion that the Guarantees are performance bonds, and BOC is in fact to be treated as a surety, for the sake of completeness, I turn to consider BOC's contention that the Guarantees are discharged pursuant to the rule in Holme v Brunskill and/or by reason of a not insubstantial departure from the terms of the Contracts made without BOC's consent.
- In my judgment, even if the Guarantees are true guarantees and not performance bonds, their express terms exclude discharge even for fraud such as that of which SBV has been found culpable in the Chinese courts. It is to be noted at the outset that there is no question of liability for fraud on the part of SBV under the Guarantees : contrast the position in HIH Casualty and General Insurance v Chase Manhattan Bank [2003] 1 All ER (Comm) 349 which concerned the purported exclusion of a right to rescind for fraud inducing the insurance contract in issue. Rather the fraud relates to the delivery of second-hand, as opposed to new, engines. Moreover, this fraud had nothing to do with SBV's right to cancel the Hull 38 and Hull 39 Contracts for non-delivery. There is no suggestion that the delay in delivery was caused in any way by the nature of the engines, the faulty nature of which was not discovered until very much later.
- It is common ground that it is open to parties to a guarantee to exclude the usual equities that operate in favour of a guarantor, provided that sufficiently clear wording is used.
- The words in the no dispute provision are in clear, wide and unequivocal terms which I repeat for ease of reference :
- BOC contends that the word "dispute" is not wide enough to cover a judgment between buyer and seller, and that the phrase "variation or extension" is not wide enough to cover fraud. I reject the submission that the word "dispute" does not cover a situation where there has been judgment following a dispute, such as judgment in the XXK proceedings. The clear intention of the no dispute provision, objectively construed, is that any dispute between buyer and seller, resolved or unresolved, should not affect BOC's obligations under the Guarantees.
- The breadth of the exclusion intended by the parties is emphasised by the express wording of the closing lines of the clause which exclude "discharge by any act, omission, fact or circumstance whatsoever which could or might but for the foregoing diminish in any way" BOC's obligations under the Guarantees.
- By the no set-off provision "any" set-off or deduction for counter claim was excluded. Again, the words are clear and unequivocal. Even if set-off is no longer strictly relevant, the breadth of the clause is consistent with a wide and unqualified interpretation of the no dispute provision.
- In my judgment, a proper reading of the Guarantees is that the parties agreed that BOC's obligations would not be affected or prejudiced by any extraneous matters, including a finding of fraud against SBV in favour of the Sellers under the Contracts. SBV was entitled to its refunds in any circumstances whatsoever, save where the Proviso was engaged.
- Again, it is important to note that SBV is not seeking to exclude its liability for fraud to XXK. It seeks rather only to prevent BOC from relying on that liability to defend its claim under the Guarantees. There is an analogy to be drawn with the reasoning of the Court of Appeal in Society of Lloyd's v Wilkinson (No 2) [1997] 6 Re LR 289 and subsequent authorities addressing the proper ambit of no set-off provisions in the context of fraud claims : WRM Group Ld v Wood [1998] CLC 189; Skipskreditforeningen v Emperor Navigation [1998] 1 Lloyds Rep 66; Deutsche Bank (Suisse) SA v Khan [2013] EHWC 482; Deutsche Bank AG v Unitech Global [2014] 2 All ER (Comm) 268. The courts there were dealing with "procedural insulation" of claims, rather than exclusion of claims. They made it clear that cross-claims in fraud can be excluded by a standard no set-off provision. So for example in Deutsche Bank Hamblen J stated (at paragraphs 323 to 329) that a conventional no set-off provision "fulfils a legitimate commercial function by entitling the creditor to prompt payment of monies due and payable so that cross-claims (which may or may not have merit) cannot be used to withhold or delay payment".
- Defence 2 would thus fail at the first hurdle.
- If this conclusion were wrong, it would be necessary to consider the defence raised by reference to Holme v Brunskill. I do so briefly and again for the sake of completeness only.
- The rule in Holme v Brunskill is that any material variation of the terms of the principal contract (ie between the creditor and the principal) will discharge the surety.
- BOC accepts that this is not a classic Holme v Brunskill position, namely a situation where there has been a consensual variation. But it contends that there has been a breach of an implied term of the Contracts (to the effect that SBV would not prevent or hinder XXK from performing its obligation to deliver a ship with a new engine). It goes on to contend that that breach is equivalent to a variation in the effect that it has on the guarantor and so falls with the Holme v Brunskill rule. For this it points to a passage in Andrews & Millett (at paragraph 9-017) :
- I am not persuaded that this is a Holme v Brunskill situation at all. The passage quoted above appears under the heading "Discharge of surety by breach of contract by creditor" and a separate section to that dealing with the rule in Holme v Brunskill. The fact that the effect of a breach of a material term leads to a variation of the surety's obligations does not meant that breach falls within the rule in Holme v Brunskill. That the two principles are different is made clear in the Court of Appeal's decision in The Wardens and Commonalty of the Mystery of Mercers of the City of London v New Hampshire Insurance Co [1992] 2 Lloyds LR 365 ("Mercers"). There it was accepted on appeal that there was no variation to the principal contract and the appeal was advanced instead on the basis that there had been breach of a material term (see page 367).
- In my judgment, what the dispute really turns on is a different principle which allows discharge by breach in certain circumstances. It is common ground that here what would be required for the principle to be engaged would be a not insubstantial breach by SBV of terms of the Contracts, which terms have been embodied into the Guarantees.
- Thus, in National Westminster Bank plc v Riley [1986] BCLC 268 ("Riley") May LJ stated (at 275 i) :
- In Mercers the defendant relied on a four week delay in giving possession under a building contract as discharging the guarantee that it had provided. The guarantee was held to be a performance bond. But, addressing the alternative possibility that it was a true guarantee, the Court of Appeal found that there would have been no discharge. The breach could not be of a term of the principal contract embodied in the guarantee, not least because the date for possession had not been finalised when the guarantee was given.
- Scott LJ stated (at page 377) :
- SBV denies committing any breach of contract. Rather it has been held to have committed a tort, namely conspiracy, under Chinese law. It points to the fact that, for the purpose of the XXK proceedings, XXK went to great lengths to disassociate itself from any contractual claims in order to avoid the arbitration clause in the Contracts.
- I, however, accept in principle (albeit on this hypothetical alternative basis) that there was an implied term of the Contracts that SBV would not deliberately prevent or hinder performance by the Sellers of their obligations to provide each ship in accordance with the contractual specifications and in working order under Article 1 of the Contracts (see generally Chitty at paragraph 13-013) ("the alleged implied term"). By being involved in arranging the supply of second hand engines, SBV breached that negative requirement. This is a generous assumption in BOC's favour since, as SBV points out, SBV could hardly have complained about the installation of second hand engines on delivery, since it was fully aware of their installation.
- But even if SBV committed a breach of the Contracts amounting to a not insubstantial departure from a term of the Contracts (which it would be for BOC to prove), I am not persuaded that the relevant term was "embodied" or "incorporated" or "stipulated for" in the Guarantees so as to discharge them.
- BOC submits that the threshold for embodiment is not a high one and that in Riley mere reference to the principal contract was held to be sufficient. And, as for the material parts of the Court of Appeal's reasoning in Mercers, the alleged implied term must have been a significant part of the basis on which BOC would have assessed its risk.
- I disagree that a fair reading of the decision in Riley is that mere reference to the principal contract is necessarily sufficient for embodiment. Blest v Brown [1862] 4 DE G.F. & J 367 was a very different type of case. It was held that the suppliers of flour could not against a baker's surety allege ignorance of the terms of the baker's contract with the government contract in circumstances where that contract was referred to in the bond. The suppliers were held from the terms of the bond to know the nature of the government contract and that they had engaged to supply the baker with the flour which the government contract required from the baker. This was because the recital to the bond made the bond conditional on the flour being of such a quality that the baker could honour his contract to supply bread to the government.
- It seems to me that more than mere reference to the Contracts in the Guarantees is required for the equitable defence relied upon by BOC to bite. In the Guarantees, there is reference to the Contracts, but only as a descriptive necessity. And the only rights and obligations under the Contracts referred to are SBV's obligations to pay advance instalments and the Sellers' obligations to refund those instalments in the event that SBV becomes entitled to cancel. There is no reference to the Sellers' many other obligations including to deliver the ships to specification and in good working order. It does not seem to me that the alleged implied term in the Contracts (which is in any event a very general one) was stipulated for, embodied or incorporated in the Guarantees in any meaningful sense.
- This approach is consistent with the views expressed in Phillips: The Modern Contract of Guarantee (2nd English Ed 2010) at paragraphs 8-17 and 8-18 :
- Further, if one were to adopt the approach of Scott LJ in Mercers, the fact that the contractual obligation allegedly broken was not part of the obligation guaranteed means that the Guarantees would not be discharged. The Guarantees cover the single obligation on the Sellers to refund the advance instalment payments if SBV became entitled to cancel the Contracts. Any breach of other terms of the Contracts, such as an implied term that SBV would not prevent the Sellers from delivering Ships of an appropriate standard and specification, cannot as a matter of equity lead to discharge of the Guarantees which related to quite separate obligations. There is force in the submission for SBV that BOC's position is artificial : the Sellers' ability to deliver the Ships on time to SBV was not in fact affected in any way because of any defect in the engines. This in turn casts significant doubt on whether the existence of what is at best only ever an implied, not an express, term of the Contracts would be a significant part of the basis on which BOC assessed the risk it was undertaking.
- For any or all of these reasons, I would therefore have dismissed defence 2 in any event.
- For these reasons, I dismiss defences 1 and 2 and grant judgment in favour of SBV, subject always to the question of a stay.
- In the event that it is found liable under either or both of the Guarantees, BOC seeks a general stay of enforcement (with liberty to SBV to apply to lift the stay). The application falls to be assessed in the context of my findings that the XXK orders are to be recognised, that the QMC currently regards the XXK orders as live, and that that view is in any event one that cannot be ignored out of hand. In so far as necessary, BOC also relies on the fact of the Electronics orders (even if the Electronics orders are not formally to be recognised here at law).
- It is common ground that the Court has a discretionary power to stay enforcement. CPR 83.7(4) provides as follows :
- It is also common ground that BOC does not have a defence based on the principle that the Court will not require, but rather will excuse, performance by a defendant where such performance would be illegal by reference to the lex loci solutionis (see Ralli Brothers v Compania Naviera Sota y Aznar [1920] KB 614 ("Ralli Brothers")). Here there is no suggestion that China is the place of performance or that Chinese law is the lex loci solutionis.
- Rather, BOC merely invites the Court to have due regard to the XXK orders, amongst other things, as a matter of international comity. It contends that it is an innocent third party in a dispute which can ultimately only be resolved in China and where SBV has been found to have conspired in a fraud after a trial in which it fully participated. The XXK orders would be lifted were SBV to pay the damages ordered against it in China whilst, without a stay, BOC would be exposed to the risk of double jeopardy. In those circumstances, it would be unjust not to grant a stay.
- Various authorities have been referred to by the parties.
- BOC relies on the decision of Ramsey J. in AES-3C Maritza East IEOOD v Credit Agricole Corporate and Investment Bank [2011] BLR 249. There the claimant sought summary judgment on two demands under an on-demand performance bond given by a French bank ("Calyon"). There were orders granted in France prohibiting payment by Calyon. Calyon submitted that the court should not grant judgment because of the prohibitory orders, in reliance on the Ralli Brothers principle. Ramsey J, however, granted judgment but on terms of a stay, stating (at paragraphs 67 and 68) :
- The court was proceeding there on the basis that the principle in Ralli Brothers was fully engaged, that is to say that performance was illegal by the lex loci solutionis. As set out above, and centrally, that is not the case here. Moreover, the question was whether or not to grant judgment at all in those circumstances, since the Ralli Brothers principle fully engaged normally affords a complete defence. In circumstances where the illegality relied upon was expected to be only temporary (since it was anticipated that the French courts would lift the relevant injunction at the next return date), the decision of Ramsey J was to grant judgment despite the Ralli Brothers principle but on terms of a stay.
- SBV relies on the decision of Field J in Bankhaus Wolbern & Co (AG & CO KG) v China Construction Bank Corporation [2012] EWHC 3285 (Comm). There a ship buyer sued a Chinese bank which had issued a refund guarantee in support of a shipbuilding contract. After succeeding in arbitral proceedings against the shipbuilder, the buyer demanded payment from the bank. In the meantime the builder had brought proceedings before the QMC and obtained judgment and a two year property preservation order against the bank. The bank applied for a stay of the buyer's claims on the basis of forum non conveniens, which application Field J rejected, stating at paragraph 16 :
- Again, this authority falls to be distinguished on the basis that it was a jurisdictional application for stay, not an application for a stay of execution. Further, Field J expressly left open the possibility of an application for a stay of execution in due course.
- SBV also relies on a series of authorities to support its submission that, since English law only excuses performance of an English law contract if performance would be illegal by the lex loci solutionis, in circumstances where performance is only illegal by the law of a country that is not the place of performance, the granting of a stay would be inappropriate : Kleinwort Sons and Company v Ungarische Baumwolfe Industrie Aktiengesellschaft [1939] 2 KB 678; Libyan Arab Foreign Bank v Bankers Trust Co [1998] 1 Lloyds Law Rep 259; Toprak Mahsulleri Ofisi v Finagrain Compagnie Commercial Agricole et Financiere SA [1979] 2 Lloyds Rep 98. In each of these cases, the fact that the defendant was being required to do something illegal by the law of its place of domicile was held to be irrelevant (by reference to the principle in Ralli Brothers). So, submits SBV, BOC should not be granted a stay in circumstances when its effect would be to relieve BOC of the obligation to pay because of illegality abroad when, absent illegality by reference to the lex loci solutionis, such illegality should be treated as irrelevant. There is some force in this submission, but the position must nevertheless be considered in the round and by reference to all relevant factors.
- Thus ultimately, whilst these authorities may provide helpful illustration, the exercise of discretion will turn always on the facts of each case.
- In my judgment, the correct approach on the facts of this case is to refuse a stay of execution for the following reasons.
- The Guarantees (whether performance bonds or guarantees) were to provide for repayment of the significant sums paid by SBV in advance instalments without delay and without recourse to the Sellers or the Chinese legal system. They were intended to protect SBV's cashflow.
- Despite its lawful and valid cancellation of the Contracts in 2009 (on Hull 38) and 2012 (on Hull 39), SBV has to date not received any refund of such advance instalments. The amount outstanding under the demand on BOC under the Hull 38 Guarantee is now US$12.294 million with accrued interest of some US$1.5 million. The amount outstanding under the demand on BOC under the Hull 39 Contract is now US$16.392 million with accrued interest of some US$3 million. The Guarantees were intended to prevent such a situation arising. The imperative for a commercial court such as this must be to restore the cash to SBV.
- I do not accept that principles of international comity can avail BOC. As Ralli Bros and the associated cases referred to above make clear, when considering an English law contract, English law regards illegality by the place of the performing party's domicile or place of business as irrelevant. Nor do I accept, as BOC suggested, that there is any principled or material distinction to be drawn between illegality by reference to a general tenet of foreign law and illegality by reference to a specific order against a party.
- Additionally, I do not accept that BOC would face any real risk of criminal or civil sanction or double jeopardy if it were to make payment (or be subject to enforcement) pursuant only to an order of this Court. In this respect I prefer the views of Mr Li as being more legally realistic than those of Mr Chen.
- On any view, BOC has done everything it can to avoid making payment under the Guarantees to SBV. The experts effectively agree that BOC would not be at any real risk of criminal prosecution, given the lack of the necessary intention on the part of BOC to flout the XXK orders[1], though Mr Chen is of the view that BOC might have to continue to make funds available in China, such that any payment in England could effectively be disregarded.
- As for breach of the XXK orders, Mr Chen opines that payment by BOC even pursuant to an English judgment would be a breach of the XXK orders. Whilst Mr Li appeared on occasion during cross-examination to agree that there would be a breach, a fair and proper assessment of his written and oral evidence overall is that he disagrees (as set out in his written evidence and in oral re-examination). Mr Li was able (albeit with assistance from time to time of an interpreter) to listen to questions and answer in English, but he clearly struggled at times both to understand and to reply fully or accurately in English. When he was clear as to the question (both in cross-examination and in re-examination) he clearly answered that BOC would not be in breach in such circumstances. His view is that the money in such circumstances is not being paid away by BOC but being taken away from BOC. And on any view Mr Li never accepted that there would be a breach by BOC in any culpable sense.
- Thus Mr Li maintains his views as set out in writing as follows : any payment by BOC made as a result of a compulsory enforcement measure by a foreign court should not be considered as violating the XXK notices of assistance and should not be subject to any legal liabilities, criminal, civil or of any other kind.
- It is very difficult to see how enforced payment by BOC pursuant to an English judgment could in any way be seen as a "refusal" on the part of BOC to provide assistance to the QMC (for the purpose of Article 114 (4) of the CPL 2013 or Article 313 of the Criminal Law of the People's Republic of China) and thus a breach of the XXK orders. Mr Chen also points to Article 37 of the Regulations of the Supreme Court about enforcement by People's Court as follows :
- But under an English judgment, whilst BOC would be at risk of execution (and having its monies taken away), BOC would not have to "make payment" thus exposing itself to a risk of being ordered to reconstitute the fund under Article 37.
- Even if there were a real risk of breach of the XXK orders, that does not without more lead to a real risk of double jeopardy. As a matter of English law, if a payment is made pursuant to the Guarantees by BOC, the Guarantees are discharged. As Mr Li says, whether pursuant to an English court order or not, if BOC pays under the Guarantees, SBV's rights against BOC under the Guarantee are reduced or satisfied accordingly. The amount available for enforcement of the XXK judgments is also reduced accordingly. There would be nothing left for Article 105 of the Judicial Interpretation, on which Mr Chen relies, to engage with or, as Mr Li puts it, there would be nothing left for BOC to assist the QMC with.
- Further, even if, on a worst case scenario, BOC were forced, after execution in England, to pay monies into the QMC to satisfy XXK's judgments, there is the very real prospect of onward subrogated recovery by BOC (through its securities).
- Finally, even if there were real risks in this regard, these are matters inherent in the risks which BOC agreed to undertake when entering into the Guarantees on the terms that it did. BOC is an international commercial organisation in the business of providing external guarantees in return for the taking of fees and security. The clear scheme under the Guarantees (which are governed by English law) in respect of obligations under the Contracts (which are also governed by English law and the subject of English arbitration agreements) is that the obligation on the part of BOC to pay on demand should not be affected by extraneous matters such as the XXK orders (or judgments in fraud or otherwise against SBV in separate proceedings in China).
- This conclusion is not to disrespect in any way the Chinese courts (or principles of international comity) but rather to give effect to the contractual bargain between SBV and BOC and to recognise the commercial purpose behind that arrangement.
- For all these reasons I am not satisfied that there are special circumstances which make it inexpedient to enforce the judgments against BOC, and I decline to exercise my discretion in favour of a stay.
- I therefore grant judgment for SBV under both Guarantees and dismiss BOC's application for a stay.
- I invite the parties to agree an order reflecting the above and any other consequential matters, including costs, so far as possible. I also record my gratitude to all counsel for their focussed and able submissions.
Mrs Justice Carr :
Introduction
a) require SBV to provide a cash or other guarantee in the amount of US$16,392,000;
b) prohibit BOC and any domestic Chinese or overseas branch of BOC from making any payment anywhere under the Guarantees to SBV.
The Contracts and the Guarantees
"4. CURRENCY
Any and all payments by the BUYER to the SELLER under this Contract shall be made in United States Dollars in freely transferable funds. Any refunds made by the SELLER to the BUYER for any reason whatsoever shall be made in United States Dollars in freely transferable funds.
5.METHOD OF PAYMENT
The BUYER shall remit the instalments in accordance with Article II, Pararaph 3a,)b),c)and d) by telegraphic transfer to a BANK as receiving bank nominated by the SELLER and accepted by the refundment guarantor, for credit to the account of the SELLER with the BUYER requesting SWIFT advice."
"6. REFUND GUARANTEE
All payments made by the BUYER to the SELLER prior to delivery of the VESSEL shall be in the nature of advance to the SELLER, and in the event this Contract is cancelled by the BUYER, all in accordance with the specific terms of this Contract permitting such cancellation, the SELLER shall refund to the BUYER in United States Dollars the full amount of all sums already paid by the BUYER to the SELLER under this Contract, if applicable, together with interest (at the rate set out in the respective provisions hereof) from the respective payment date(s) to the date of remittance by telegraphic transfer of such refund to the account specified by the BUYER. All transfer and other bank charges shall be for the SELLER'S account. As security to the BUYER, the SELLER shall deliver to the BUYER a Refund Guarantee to be issued by Bank of China, Shandong branch or EXIM bank, and or other first class international bank acceptable to the BUYER's bank in it's absolute discretion substantially in the form as attached in Exhibit "A" ".
"(c) If delay in delivery of the VESSEL should continue for a period of one hundred eighty (180) days after the thirty (30) days allowance from the Delivery Date as defined in Article VII, Paragraph 1(a) of this CONTRACT as extended by any period of permissible delay as defined in Paragraph 3 of Article VIII, not by any period of Force Majeure and/or non-permissible delay each as defined in Paragraphs 4 and 5 respectively of Article VIII then in such event and after the aforementioned one hundred eighty days period has expired the BUYER may terminate this CONTRACT in accordance with the provisions of Article X of this CONTRACT. "
"A. Law and jurisdiction of this CONTRACT
The terms and conditions of this CONTRACT and all other agreements relating thereto and any disputes arising out of or in connection therewith shall be subject to and governed by English law.
[…]
C. Arbitration
(1) Save as expressly provided elsewhere in this CONTRACT any dispute arising under or by virtue of this CONTRACT, may be referred to arbitration in England by either party. In any such arbitration, the laws and rules of England shall govern as to all matters of substantive law and procedure and the same shall be subject to the Arbitration Act 1996…
(5) The award of the two arbitrators nominated by the parties hereto shall be final and conclusive and shall have the same force and effect as if rendered unanimously by all three arbitrators…"
"ARTICLE XVIII – NOTICE
Any and all notices and communications in connection with this CONTRACT shall be in writing and addressed as follows:
To the BUYER:
TO THE SELLER:
CHINA NATIONAL ELECTRONICS IMP/EXP SHANDONG COMPANY
No.54, Maanshan Road, Jinan, China 250002
Tel No: +86 532 83893719
Fax No: +86-532 83893708
E-Mail: shipceiec@163169.net; zhangdq@ceiecsd.com.cn
Attention: Mr Zhang Daqiang
And BUILDER
Rongcheng Xixiakou Shipyard
Xixiakou, Rongcheng, Shandong, China 264321
Tel No: +86 631 783 1284
Fax No: +86 631 783 1684
E-Mail: shipyard@xixiakou.com Attention: Mr Su Bo
To the Buyer:
Spliethoff's Bevrachtingskantoor B.V.
Radarweg 36
1042 AA AMSTERDAM
The Netherlands
Tel no: +31 20 4488400
Fax no: +31 20 4488501
E-mail: b.oele@spliethoff.nl f.louwers@spliethoff.nl
Attention Mr F.Louwers
Any Notice and communications send by CNEISC or the BUILDER alone to the BUYER shall be deemed as having been seen by both CNEISC and the BUILDER. Any Notice and communications send by the BUYER to the CNEISC or the BUILDER alone shall be deemed as having been send to both CNEISC and the BUILDER
Any notice sent by telex or fax or confirmed E-mail shall be effective on the date the telex or fax or confirmed E-mail is received unless specified otherwise in this CONTRACT. Any and all notices and communications in connection with this CONTRACT shall be written in the English language.
Any notice given shall only be valid if it specifically refers to the Paragraph in this CONTRACT to which it relates and includes any information required by such Paragraph to be incorporated therein."
"[…] in consideration of your agreeing to pay the Seller, the instalments before delivery of the vessel, under the shipbuilding contract […] dated June 3rd 06 (Hereinafter called the Contract) […] we, Bank of China, Shandong Branch, as the primary obligor, not as security, do hereby irrevocably, unconditionally and absolutely guarantee repayment to you by the Seller of an amount up to but not exceeding a total amount of USD16,392,000 […] plus interest thereon representing the 1st, 2nd, 3rd and 4th instalments of the contract price of the vessel, as you may have paid to the Seller under the Contract prior to the delivery of the Vessel, if and when the same or any part thereof becomes repayable to you from the Seller in accordance with the terms of the contract…"
("1st Paragraph")
""Should the Seller fail to make such repayment, we shall pay you the amount the Seller ought to pay with interest on that amount at the rate of […] 6 month LIBOR + 2 pct per annum if the cancellation of the contract is exercised by you for the delay caused by non-permissible delays […] in accordance with the provisions of article II 1 (C) […] within 30 days after our receipt of the relevant written demand from you for repayment. Such demand ('an authenticated demand') may be made by you in writing by any one or more of the following means:
1. By you through your bank and duly authenticated by your bank, or
2. By your bank on your behalf through authenticated SWIFT …"
("2nd Paragraph")
"Our obligations under this guarantee shall not be affected or prejudiced by any dispute between you as the Buyer and the Seller under the Shipbuilding Contract or by the Seller's delay in the construction and/or delivery of the Vessel due to whatever cause or by any variation or extension of their terms thereof or by any security or other indemnity now or hereafter held by you in respect therefore, or by any time or indulgence granted by you or any other person in connection therewith, or by any invalidity or unenforceability of the terms thereof, or by any act, omission, fact or circumstances whatsoever, which could or might, but for the foregoing, diminish in any way our obligations under this guarantee…"
("the no dispute provision")
"However, in the event of any dispute between you and the Seller in relation to:
1. Whether the Seller shall be liable to repay the instalment or instalments paid by you and
2. Consequently whether you shall have the right to demand payment from us,
And such dispute is submitted either by the Seller or by you for arbitration or appeal in accordance with article XIII of the contract, we shall be entitled to withhold and defer payment until the arbitration award or court order is published. We shall not be obligated to make any payment to you unless the arbitration award or court order orders the Seller to make repayment. If the Seller fails to honour the award or court order, then within thirty (30) days after the publication of award or court order we shall refund to you to the extent the arbitration award or court order orders but not exceeding the aggregate amount of this guarantee plus the interest described above. "
("the Proviso")
"The said repayment shall be made by us by means of authenticated SWIFT transfer in United States Dollars… "
("5th Paragraph")
"This letter of guarantee shall remain in force until the Vessel has been delivered to and accepted by you or full refund or refund to the extent the arbitration award or court order orders has been made by the Seller or ourselves, or until September 30 2009, whichever occurs earlier. […] However, in the event we have been informed, either by you or the Seller before above mentioned expiry date of this guarantee that there exists arbitration or appeal between you and Seller, then the validity of this guarantee shall be automatically extended until the date falling on the forty fifth (45th) calendar day after the arbitration award or court order is published …"
("8th Paragraph")
"Any payment by us under this guarantee shall be made without any set off or counterclaim and without deduction or withholding for or on account of any taxes, duties, or charges whatsoever unless we are compelled by law to deduct or withhold the same. In the later event we shall make the minimum deduction or withholding permitted and shall pay such additional amounts as may be necessary in order that the net amount received by you after such deductions or withholdings is equal to the amount which would have been received had no such deduction or withholding been required to be made…."
("the no set-off provision")
"This letter of guarantee shall be governed by, and construed in accordance with, the laws of England … "
("11th Paragraph")
Background to the Demands
Hull 38
Hull 39
"There is clearly a dispute between you and our clients as to whether the Delivery Date has been extended, and accordingly whether the date on which our clients became entitled to terminate the Contract has now passed. Our client's position is that the Delivery Date...has not been extended, and that the 210 day period…therefore expired on 29th August 2009 (or has in any event by now already expired… It is our client's intention to terminate the Contract once the present dispute has been resolved and they have obtained an Award declaring that they are entitled to terminate the Contract…
Please treat this letter as a demand for arbitration of the above dispute pursuant to Article XIII C (3) of the Contract. For the purposes of the same clause, the general nature of the dispute is whether the Delivery Date under the Contract has been extended, and if so whether and on what basis our clients are entitled to terminate the Contract. Our clients will, without limitation, seek declaration from the Tribunal to reflect their position in the dispute outlined above, including a declaration that they are entitled to terminate the Contract."
"By this letter, we inform you that there now exists an arbitration between the Buyer and the Seller. By way of summary, the dispute submitted to arbitration relates to the Delivery Date under the Shipbuilding Contract referred to in the Guarantee; whether the Buyer is entitled to terminate the Contract forthwith (if it has not already done so by the date of the Award); whether upon the exercise [of] that right, the Seller shall be liable to repay any instalments paid by the Buyer; and consequently whether, should the Seller fail to make such repayment to the Buyer, the Buyer shall have the right to demand payment from you under the Guarantee, together with interest, pursuant to the terms of the Guarantee. The Buyer also seeks from the Tribunal an order that [the Sellers] must jointly and severally make repayment of the above-mentioned instalments upon notice from the Buyer that it has exercised its rights to terminate the Shipbuilding Contract, as aforesaid. We would accordingly be grateful for your confirmation that the validity of the guarantee has been automatically extended until the date falling on the fourth-fifth...day after the arbitration award has been published.
We look forward to receiving the requested confirmation by return."
"WE CONFIRM THAT THE VALIDITY OF A/M GUARANTEE IS EXTENDED UNTIL THE DATE FALLING ON THE FORTY-FIFITH (sic) CALENDAR DAYS AFTER THE ARBITRATION AWARD OR COURT ORDER IS PUBLISHED."
Proceedings in China and further proceedings in England
"...Therefore in order to ensure that the applicant has the lawful right and interest to avoid further losses, they specifically apply to the court to freeze and prohibit [BOC]…to make payment relating to the principle [sic] amount and interests to the respondent…"
Summary of the issues
a) the true nature and proper construction of the Guarantees. As to the nature of the Guarantees, there is an issue as to whether or not the Guarantees are to be treated as guarantees by way of surety or performance bonds. This is material because, amongst other things, if the Guarantees are in truth performance bonds, then BOC's defence based on Holme v Brunskill [1878] 3 QBD 495 ("Holme v Brunskill") does not arise;
b) whether or not the XXK Orders are still in force, or whether they lapsed in September 2013 on the expiry of a two-year term. In the light of the narrowing of issues between the parties, this issue is now relevant only to the question of stay and no longer a hard-edged question for outright determination. A broad assessment of the question nevertheless remains material, as set out below;
c) whether or not the Chinese judgments against SBV in fraud in the XXK proceedings and the XXK and Electronics orders fall to be recognised in this jurisdiction. This is material both to BOC's defence based on Holme v Brunskill and to its application for a stay.
a) that the award in the Hull 39 Reference 1 did not trigger any obligation on the part of BOC to pay under the Hull 39 Guarantee and thus BOC has no liability under that Guarantee ("defence 1");
b) on the basis that the Guarantees are true guarantees, that they have been discharged as a result of the findings of fraud against SBV in China and/or by reason of a not insubstantial departure from the terms of the Contracts made without BOC's consent ("defence 2"),
and will also be material to BOC's application for a stay.
a) for SBV : Mr Li Hai ("Mr Li") of Henry & Co, law firm of Guangdong;
b) for BOC : Mr Zhensheng Chen ("Mr Chen") of Panocean Law Firm of Shanghai.
The Framework issues
The true nature and proper construction of the Guarantees
a) the question of whether a document such as each of the Guarantees is a true guarantee or a performance bond is a matter of construction to be determined on a case-by-case basis;
b) there are certain factors which may be indicative of the nature of the instrument, but these are not necessarily decisive;
c) the question that the Court will always be faced with is what, objectively, the parties to the contract intended;
d) in the modern commercial world, parties are capable of drafting agreements that are clear and that oblige the surety to pay regardless of the existence of any underlying liability if that is what they intend.
"25. In deciding whether the document is a traditional "see to it" guarantee or an "on-demand" guarantee, it would be obviously absurd to say that there are six pointers in favour of the former and only four pointers in favour of the latter and it must therefore be the former. But if the law does not permit boxes to be ticked in this way, commercial men will need some assistance from the courts in determining their obligations. The only assistance which the court can give in practice is to say that, whilst everything must in the end depend on the words actually used by the parties, there is nevertheless a presumption that, if certain elements are present in the documents, the document will be construed in one way or the other.
26. It is exactly this kind of assistance that the editors of Paget's Law of Banking have endeavoured to provide. In the 11th edition of that work these words appeared under the heading of "Contract of suretyship v demand guarantee :
"Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay "on demand" (with or without the words "first" and/or "written") and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.
[…]
In construing guarantees it must be remembered that a demand guarantee can hardly avoid making 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…"…
27. The words "will almost always be" amount to a presumption which was by then fully justified by the authorities…
28. Paget's presumption was in due course approved by this court in Caja de Ahorros v Gold Coast Ltd [2002] CLC 397 para 16, where the document was held to be an on-demand guarantee although (as in this case) the fourth element of the presumption was absent but the others were present.
29. The fact is that guarantees of the kind before the court in this case are almost worthless if the Bank can resist payment on the basis that the foreign buyer is disputing whether a payment is due."
"116. Kwangju Bank's argument on [the proviso] is to the effect that the reference to an arbitration award is an indication that its liability is secondary…This provision does not in my view imply in any way that the guarantor's liability is secondary. The instrument is conditioned either up on the certification in the demand, or (if the dispute as to cancellation/refund goes to arbitration) the amount of the award. Essentially the same argument on very similar provisions was rejected in Meritz…"
"25……It might, for example, have been included to avoid any argument that variation of the shipbuilding contract by, for example, postponing a stage payment or remitting part of it in settlement of any cross-claim would imperil recovery under the refund guarantees. It could have been inserted simply to ensure that the rule applicable to true guarantees did not apply to this instrument."
"30. Turning to the MMOF Letter, the starting point in my view is that it is not a banking instrument, and it is not described, either on its face or in the supporting Legal Opinion letter, in terms appropriate to a demand bond or something having similar legal effect. The Legal Opinion describes it as a guarantee. The terminology is not of course conclusive. However…if MHK had wanted the additional security of a demand bond, one would have expected them to have insisted on appropriate language to describe it, in both the instrument itself, and in the Legal Opinion. The absence of such language, in a transaction outside the banking context, creates in my view a strong presumption against MHK's interpretation…"
Currency of the XXK Orders
"Chapter III Preservation of Maritime Claims
Section I General Provisions
Article 12
Preservation of maritime claims means the compulsory measures taken by a maritime court on the application of a maritime claimant against the property of the person against whom a claim is made, for the purpose of ensuring fulfilment of the claim of the maritime claimant…
Article 16
The maritime court, having entertained an application for preservation of a maritime claim, may enjoin the maritime claimant to provide security. If the maritime claimant fails to do so, the court shall reject the application."
The Civil Procedure Law of the People's Republic of China in force at the time that the XXK orders were made ("the CPL 2007") provides materially as follows :
"Chapter 9: Property Preservation and Advance Execution
Article 92
In the cases where the execution of a judgment may become impossible or difficult because of the acts of either party or for other reasons, the people's court may, at the application of the other party, order the adoption of measures for property preservation. In the absence of such application, the people's court may of itself, when necessary, order the adoption of measures for property preservation.
In adopting property preservation measures, the people's court may enjoin the applicant to provide security; if the applicant fails to do so, his application shall be rejected.
After receiving an application, the people's court must, if the case is urgent, make an order within 48 hours; if the order for the adoption of property preservation measures is made, the execution thereof shall begin immediately…
Article 94
Property preservation shall be limited to the scope of the claims or to the property relevant to the case.
Property preservation shall be effected by sealing up, distraining, freezing or other methods as prescribed by the law.
After the people's court has frozen the property, it shall promptly notify the person whose property has been frozen.
The property that has already been sealed up or frozen shall not be sealed up or frozen for a second time."
"Article 1
When sealing up, detaining, or freezing the movable property, real property, or other property rights of a person subject to enforcement, a people's court shall make a decision and serve the decision on the person subject to enforcement and serve the notice on the person who provides assistance to the enforcement together with a duplicate of the written decision. The written decision and the written notice shall become legally effective upon the service…
Article 4
Where property preservation measures are taken prior to or during an action, or in an arbitration, such measures shall, after entering into enforcement procedure, be automatically transformed to the measures of seal up, detainment or freezing in enforcement, and the provisions on seal-up, detainment or freezing in Article 29 of these Provisions."
"Article 29
The time period where a people's court freezes the bank deposits and other funds of a person subject to enforcement shall not exceed six months, the time period for seizing or detaining movable properties shall not exceed one year, and the time period for seizing real property and freezing other property rights shall not exceed two years, except as otherwise specified by laws or judicial interpretations.
Where the applicant applies for an extension of the time period, the relevant people's court shall go through the formalities for continuous seal-up, distrainment or freezing prior to the expiry of the time period of the seal-up, distrainment or freezing, provided that the extension of the time period shall not exceed one half of the time period specified in the preceding paragraph."
"(105)Where the debtor's property fails to satisfy the request for preservation but the debtor has due creditor's rights against a third person, a people's court may, on the basis of the creditor's application, make a decision prohibiting the third person from repaying the debt to the debtor concerned in the case. Where the third person submits a request to repay the debt, the property or price shall be placed in escrow with the people's court…"
"(109) The preservation of the property in litigation shall remain in force until the effective legal document is enforced. Where, in the course of proceedings, the preservation measures need to be cancelled, a people's court shall, on a timely basis, render a decision to cancel the preservation measures."
"It has been asserted by [SBV] that the injunctions that relate to the [Guarantees] have expired in light of the provisions in the Interpretations of the Supreme People's Court on Property Sealing Up, Distraining and Freezing in Civil Enforcement by the People's Courts, in particular Articles 29 and 30 thereof. We respectfully request that the Court confirm in writing the legal validity of the above mentioned injunctions, together with any detailed reason for your conclusion."
"Such injunctions were a preservation measure granted by this Court of prohibiting certain acts in accordance with applicable laws. An issue of expiration would not arise from a preservation measure of prohibiting certain acts. Article 100 of the Civil Procedural Law of the People's Republic of China provides that:
"If the enforcement of a judgment to be issued in an action might be hampered or the interest of a party to an action might be damaged by any act of a party to such action or for any other reasons, the people's court may, upon the request of the other party to the action, issue an order to take preservation measures against its property, or to require it to take certain actions or prohibit it from taking certain actions; even if no party files any request for such preservation measures, the people's court may nevertheless decide to take such preservation measures as it deems necessary."
The issuance of the notices of assistance in enforcement by this Court to you, which prohibited you from paying to Spliethoff's Bevrachtingskantoor BV any USD amount under the relevant letters of guarantee or any interest thereon, was in compliance with the statutory provisions described above, and was appropriate…
..As [SBV] has not provided such security or guarantees required by this Court, the Injunctions provided by this Court, as a preservation measure of prohibiting from taking certain actions, prohibiting making the payments at issue, have remained in force. As this Court and the Shandong Provincial High People's Court have ruled in favour [sic] of [XXK]...in the proceedings of the first instance and the second instance respectively, the case has been at the enforcement stage. In accordance with applicable laws, the Civil Ruling in relation to the injunctions above will continue to be effective. ..."the QMC confirmation")."
a) the XXK orders were granted early on in the engine proceedings to enable effective enforcement, should SBV be found liable;
b) the XXK orders did not on their face express any time limit. Mr Chen stated that he would have expected to see a time limit, if there were one;
c) the XXK orders can properly be treated as being based on Article 105 and not falling within the Seal-Up Regulation. They did not seal-up or seize any property. Nor did they freeze any property as such. Rather, they prohibited BOC from paying under the Guarantees;
d) it is to take too narrow a view of "the law" as referred to in Article 94 of the CPL 2007 to exclude the Judicial Interpretation;
e) the wording of SBV's applications for the XXK orders (which included a request for freezing) cannot be determinative (not least since the orders themselves did not use the same terminology);
f) Mr Chen's views are supported by the writings of Mr Wang Shengming, deputy director of the Legislation Working Committee of the National People's Congress Standing Committee (in his treatise "Interpretations of the Civil Procedure Law of the People's Republic of China");
g) Mr Chen's evidence was that numerous injunctions of a similar nature have been issued by the Chinese Courts in respect of letters of credit where neither in law nor in judicial practice were any time limits imposed.
"Article 1
The amended Civil Procedure Law shall be applicable to unsettled cases as at January 1 2013, unless otherwise provided for in these Provisions…"
Recognition of the judgments in the XXK proceedings and of the XXK and Electronics orders
a) whether or not SBV is to be treated as having submitted to the jurisdiction of the Chinese Courts in the XXK proceedings by reason of its actions after dismissal of its jurisdictional challenges by the Supreme Court on 30th November 2012 for the purpose of s. 32 of the Civil Jurisdiction and Judgments Act 1982 ("s.32") ("the CJJA");
b) if SBV is to be treated as having so submitted :
i) whether or not the court should carry out an evaluative assessment in the round in deciding whether or not to recognise the XXK judgments and orders and decide not to recognise as a result;
ii) whether or not the English courts should nevertheless decline to recognise the XXK judgments and orders on grounds of public policy, because they were obtained in breach of the anti-suit injunctions ordered by the arbitral tribunals on 20th December 2011 ("the arbitral anti-suit injunctions").
"32. Overseas judgments given in proceedings brought in breach of agreement for settlement of disputes.
(1) Subject to the following provisions of this section, a judgment given by a court of an overseas country in any proceedings shall not be recognised or enforced in the United Kingdom if
(a) the bringing of those proceedings in that court was contrary to an agreement under which the dispute in question was to be settled otherwise than by proceedings in the courts of that country; and
(b) those proceedings were not brought in that court by, or with the agreement of, the person against whom the judgment was given; and
(c) that person did not counter claim in the proceedings or otherwise submit to the jurisdiction of that court.
33(1) For the purposes of determining whether a judgment given by a court of an overseas country should be recognised or enforced in England and Wales…the person against whom the judgment was given shall not be regarded as having submitted to the jurisdiction of the court by reason only of the fact that he appeared (conditionally or otherwise) in the proceedings for all or any one or more of the following purposes, namely ….
a) to contest the jurisdiction of the court;…
c) to protect, or obtain the release of, property seized or threatened with seizure in the proceedings."
"Submission by voluntary appearance
7.49 If the defendant appears and defends the merits of the claim he will, in general be held to have submitted to the jurisdiction. Whether he has submitted by virtue of his voluntary appearance, or his participation in the action, is in the first place determined by recourse to the common law…
As to whether the acts of the defendant constituted a submission, the usual approach is to ask whether the defendant took a step in the action to contest the merits : if he did, his act will be seen as a submission. It may not be necessary that the step be one which unequivocally demonstrates a submission to the merits jurisdiction of the court. Instead, the court is more likely to ask the question the other way round : were the acts of the defendant which are pointed to "obviously and objectively" inconsistent with the defendant's submission to the jurisdiction of the foreign court: if they were, they will not be characterised as submission…but otherwise they will. In principle, at least, an act should not be interpreted as a submission if it would not be so regarded under the law of the foreign court : it would appear be a little odd for an act to be regarded as submission to a court which does not consider itself to have been submitted to. But this should, perhaps, not be pressed too far. For one thing, a foreign court's concept of submission may be quite different from that of English law……Submission is found or found to be absent by reference to English, not foreign law…"
"A foreign defendant who raises no objection to jurisdiction and files a defence is to be taken to have accepted that the Chinese court has jurisdiction over him."
"Where the defendant contests the jurisdiction of a foreign court, the position is regulated by s.33 of the [CJJA]. If his challenge to the jurisdiction of the foreign court is successful, no question of submission arises. If it is unsuccessful and he goes on to contest the case on the merits, he will have submitted to the jurisdiction of the foreign court."
"If the defendant in the foreign court fails on any of these issues, but nevertheless goes on to defend the case on the merits, he will be regarded as having submitted."
"v) In this connection s.32(3) also states that in such a case, i.e. in a case where the general rule does not apply – for where it does the rule is that the foreign judgment "shall not" be recognised or enforced – it is for the UK to decide "whether a judgment given by a court of any overseas country should be recognised or enforced". It was common ground before the judge, and it has been common ground in this court, that section 32(3) gives to the English court discretion whether to recognise or enforce in circumstances where the general rule does not apply. I am not sure that discretion is the right concept here; it may be that it would be better to say that whether the foreign judgment should be recognised or enforced is a matter for evaluative judgment. "
"The suggestion (obiter) in AES Ust-Kamenogorsk Hydropower Plant LLP v AES Ust-Kamenogorsk Hydropower Plant JSC [2011] EWCA Civ 647, [2011] 2 Lloyd's Rep 233, [149], that if the defendant has, as a matter of English law, submitted to the jurisdiction of the foreign court, the English court may, but is not bound to, recognise or enforce the foreign judgment, is not supportable. If proceedings are brought in a foreign court contrary to a jurisdiction agreement, but the defendant submits to the jurisdiction of the foreign court, he loses the shield which s.32 might otherwise have afforded him; and the judgment is to be recognised by reason of his submission to the jurisdiction of the court."
"A foreign judgment is impeachable on the ground that its enforcement or, as the case may be, recognition, would be contrary to public policy."
and at paragraph 14-156 :
"It will in principle be contrary to public policy to recognise or enforce a judgment which has been obtained in disobedience of an injunction not to proceed with the action in a foreign court."
"There are cases where it is in blatant disregard of an arbitration provision that a party has commenced proceedings abroad and where the party is acting vexatiously and oppressively. In such cases, judgments obtained on the substance of the dispute (it can be argued) should not be recognised…It would seem to be me prima facie that if someone proceeds in breach of, and with notice of, an injunction granted by the English court to obtain judgments abroad, those judgments should not, as a matter of public policy, be recognised in the UK."
"121.....It is also arguable that, even if the April and December 2005 judgments were relied on as assignments, they should not be recognised on public policy grounds, in the light of the way in which Fellowes obtained the judgments in breach of a[n] English arbitration agreement and of orders of the English and BVI courts, and in the light of the way in which the Krygyz courts dealt with the case."
"65…It would be manifestly against public policy to give recognition to the foreign judgment at the behest of the defendants who have procured it in breach of an order emanating from this court."
This authority is of course not binding, though it is cited without disapproval in Dicey & Morris (at footnote 562).
Conclusions on the "framework" issues
a) the Guarantees are in the nature of performance bonds;
b) the current considered view of the QMC is that the XXK orders have not lapsed, as set out in the QMC confirmation. The view that they have not lapsed (whether for the reasons identified by the QMC and/or for the reasons identified by Mr Chen) could in any event not be disregarded as being obviously unsustainable;
c) the judgments in China in the XXK proceedings and the XXK orders fall to be recognised by this Court.
Defence 1 : Validity of SBV's demand on Hull 39
a) it requires proof of termination and that the Sellers were duly served with notice of cancellation. This point has not been pursued with any vigour. On the evidence of Mr Frank Nietzman ("Mr Nietzman") for SBV in particular, I find that the notice of termination was sent as required to the Sellers;
b) it contends that the Hull 39 award is not a monetary award for the purpose of the Proviso and thus SBV's right to make a demand on the Hull 39 Guarantee did not accrue. Whether the Guarantees are performance bonds or true guarantees, the Proviso is an express term of the Hull 39 Guarantee with a clear and straightforward requirement which can only be construed to mean what it says.
"Following verification by our bank, there are no material discrepancies in the claim documents. In accordance to the terms of the guarantee, our bank shall make the payout prior to April 10, 2012…The full amount of the monies claimed must be deposited into your company's bank guarantee account no later than April 9 2012…"
"RE YOUR DEMAND UNDER OUR ADVANCE PAYMENT GUARANTEE…WE REGRET TO INFORM YOU THAT YOUR DEMAND FOR PAYMENT HAS NOT BEEN HONORED BY US, BECAUSE THERE ARE COURT INJUNCTION ORDERS …PROHIBITING US…AT HOME AND ABROAD FROM PAYING YOU UNDER THIS GUARANTEE. WE, AS THE GUARANTOR…, APPLIED TO THE DOMESTIC COMPETENT COURT [QMC] FOR LIFTING THE PAYMENT INJUNCTION, HOWEVER, THE APPLICATION WAS REJECTED BY THE COURT ON 120306, SO ALL PAYMENT UNDER THE A/M GUARANTEE SHALL NOT BE EFFECTED BY US WITHOUT LIFTING THE INJUNCTION."
"With the exception of the final letter from the Janata Bank sent in response to a specific request to give reasons, I can find nothing which could be regarded as amounting to a representation. Having found what, at the particular times, they considered to be good and sufficient reasons for rejection, the Janata Bank specified them. To hold that they thereby made any representation would in my view involve a radical departure from the accepted legal position and would seriously undermine the whole system of documentary credits, for banks would be obliged, for their own protection and the protection of their customers, always to scrutinise with the utmost care every document presented from beginning to end, notwithstanding that they may find in the first few lines of the first document at which they looked one or more good and sufficient reasons for refusal to pay…It is for the beneficiary to see that the documents are all in order and he has no cause for complaint if the bank rejects as soon as they find one or more defects or if they reject again on finding further defects, and so on…"
Defence 2 : the effect of the findings of fraud against SBV in China
"Our obligations under this guarantee shall not be affected or prejudiced by any dispute between you as the Buyer and the Seller under the Shipbuilding Contract or by the Seller's delay in the construction and/or delivery of the Vessel due to whatever cause or by any variation or extension of their terms thereof or by any security or other indemnity now or hereafter held by you in respect therefore, or by any time or indulgence granted by you or any other person in connection therewith, or by any invalidity or unenforceability of the terms thereof, or by any act, omission, fact or circumstances whatsoever, which could or might, but for the foregoing, diminish in any way our obligations under this guarantee."
"A non-repudiatory breach of contract by the creditor, that is, a breach sounding in damages only, will not discharge the surety unless it involves a "not unsubstantial" departure from a term of the principal contract which has itself been incorporated into the guarantee. Discharge of the surety in these circumstances is explicable on the basis of a variation of the surety's obligations."
"…I do not think that a non-repudiatory breach of the principal contract will, with nothing more, discharge a surety who has guaranteed that contract. A repudiatory breach, if accepted, will certainly do so, but a non-repudiatory breach will not unless it can be shown in fact to amount to a "departure" from a term of the principal contract which has been "embodied" in the contract of guarantee…"
May LJ went on to say (at 276 b) :
"…Further, in my opinion the case of Blest v Brown…was an "embodied term" case, because the guarantee then in suit refers specifically to the principal contract, in fact one with the government, payment where under the surety guaranteed, even though the surety contract did not set out the terms of that principal contract."
"Not only was the breach non-repudiatory and intrinsically insubstantial but the contractual obligation broken was not part of the obligations guaranteed and was not, in my judgment, a significant part of the basis on which New Hampshire assessed the risk it was undertaking."
"A general reference in the guarantee to the terms of the general contract will not, however, be sufficient to "embody" those terms within the guarantee. Thus in [Mercers] it was held that the terms of principal transaction should not be "treated as embodied or incorporated in the contract of guarantee" simply where the guarantee referred to the principal building contract, and the guarantee was given as security against the failure of the builder to perform "in accordance with the terms and conditions" of the building contract. More specific wording of incorporation is required.
Matters relevant to determining whether the terms of the principal contract are embodied in the guarantee are the fact that the two documents (the guarantee and the principal transaction) are physically annexed and that both the guarantor and the principal execute one instrument, which constitutes both the principal transaction and the guarantee. But, again, these matters are probably insufficient in themselves without clear words of incorporation."
In the present case, the Contracts were not annexed to the Guarantees, nor were the Contracts and the Guarantees executed in one instrument, nor were there in any event clear words of incorporation.
Judgment
Stay
"If the court is satisfied that :
there are special circumstances which render it inexpedient to enforce the judgment…
then… the court may stay the execution of the judgment.., either absolutely or for such period and subject to such conditions as the court thinks fit..."
"67. I accept the submission [for Calyon] as to the principle to be derived from the decision in Ralli Bros. However, I consider that there is a distinction to be drawn between a judgment which determines what, as a matter of contractual obligation, a party is obliged to do and the enforcement of any payment obligation under that judgment. In this case, as a matter of contractual obligation Calyon is obliged to pay AES the sum of E 96.604, 166.83. I see no reason why this court cannot express a judgment in those terms. What the French injunctions do is to prevent Calyon from currently complying with their obligations under the bond or that judgment. What Ralli Bros establishes is that the English court will not, in such circumstances, require Calyon to act in a manner which is illegal under French law because of the existence of the injunctions.
68. The expectation would be that on the basis of this judgment, handed down by a court which has jurisdiction to determine liability under the bond, the French court would discharge the injunction. That however, is [a] matter for the French court."
"16….I am firmly of the view that justice does not require a stay of these proceedings on jurisdictional grounds……(5) if the Court gives judgment in favour of the Claimants this would be judgment for a sum of money and would not be in the form of a compulsory order breach of which would be a contempt of court; (6) whilst the Preservation Order is in force it is inconceivable that the Claimants would be able to enforce a judgment in their favour in the RPC; (7) it seems very doubtful that execution of a judgment by a third party debt order or charging order in London where CCB has a branch would render CCB liable to criminal or financial sanctions under Chinese law; (8) in any event, following a judgment in favour of the Claimants, if the Preservation Order is in force it would be open to CCB to apply for a stay of execution either generally or within the RPC."
"After receiving the notice issued by the court with regard to the assistance of enforcement, if a unit still make payment to the person subject to enforcement or other person despite the order, the people's court shall order them to recover the payment within a period of time; if no payment could be recovered by that person or unit, the people's court shall rule that that person or unit shall be liable for the amount of payment in which it have paid for others."
Conclusion
Note 1 It may in fact be more accurate to refer to breach of the notices to assist which accompanied the XXK orders. Mr Li stated that the notices to assist were only civil rulings, whilst the XXK orders were orders only between the parties to the proceedings. Ultimately, however, the distinction is not material. [Back]