Marubeni Hong Kong and South China Ltd v Government of Mongolia
| Jurisdiction | England & Wales |
| Judge | Lord Justice Carnwath,Sir Martin Nourse,Lord Justice Waller |
| Judgment Date | 13 April 2005 |
| Neutral Citation | [2005] EWCA Civ 395 |
| Docket Number | Case No: A3/2004/1494 and A3/2004/1519 |
| Court | Court of Appeal (Civil Division) |
| Date | 13 April 2005 |
[2005] EWCA Civ 395
Lord Justice Waller
Lord Justice Carnwath and
Sir Martin Nourse
Case No: A3/2004/1494 and A3/2004/1519
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN's BENCH DIVISION, COMMERCIAL COURT
MR JUSTICE CRESSWELL
Mark Howard QC and David Garland (instructed by Ashurst) for the Appellant
Antony White QC (instructed by Richards Butler) for the Respondent
Background
On 29 March 1996, the claimant ("MHK") entered into a Deferred Payment Sales Contract (the "DPS1 Contract") with Buyan Holding Company Limited ("Buyan"), a Mongolian company. The contract was for the purchase by Buyan of machinery, equipment and materials for a cashmere processing plant. The purchase price was US$18,811,670. The first instalment of the price was to be paid within 60 days of the signature of the contract, and the remaining amount was to be paid in 12 equal semi-annual instalments. The first of these was due on 19 October 1998.
The defendant is the Government of Mongolia. Its involvement arises in this way. The contract provided for a document described as a "guarantee" to be issued by the Mongolian central bank on behalf of the Mongolian Government ("the Government"), in the form set out in a Schedule to the contract. In the event, a letter in somewhat modified form was issued by the Minister of Finance, dated 11 th May 1996 ("the MMOF Letter"). On the same date, the Deputy Minister of Justice of Mongolia signed a document addressed to MHK, entitled "Legal Opinion of the Minister of Justice of the Government of Mongolia", referring to the "guarantee given by the Ministry of Finance, acting for and on behalf of the Government of Mongolia", and stating his opinion that the "guarantor" had "full power and authority" to enter into the guarantee.
The appeal concerns the effect of that letter as between MHK and the Government, in the dispute which has since arisen as to performance of the contract. For the background to the dispute it is sufficient to quote the judgment:
"11.Between October 1996 and May 1997 the claimant supplied machinery, equipment and materials to Buyan under the DPS 1 Contract. A dispute arose as to the quality and fitness for purpose of Mitsuboshi machines supplied by MHK to Buyan.
12. In 1998 there was a Rescheduling contained in six agreements dated 4 February 1998 between MHK and/or Marubeni and Buyan and in 1999 there was a further Rescheduling contained in five agreements of about April 1999 between MHK and/or Marubeni and Buyan. The defendant says that these refinancing packages involved a material variation of the transaction to which the guarantee related, such as to result in the discharge of the defendant's obligations under the MMOF Letter. The claimant says that there was no such material variation and the obligations were not discharged.
13. It is MHK's case that Buyan repeatedly failed to pay instalments due under the DPS 1 Contract and has made no payments at all after 19 April 2000. MHK gave formal notice to the defendant on 5 November 2001, requiring repayment of the sum of US$13,796,556 together with accrued interest by 12 November 2001. No payment was made.
14. These proceedings were issued in August 2001."
The MMOF letter
The material parts of the letter are in the following terms:
"To: MARUBENI HONG KONG LTD
In consideration of you entering into the Deferred Payment Sales Contract No 258500 (hereinafter called the "agreement") with Buyan Holding Company Ltd, a corporation duly organized and existing under the laws of Mongolia, with its principal office at I-4000–68–4 Ulaanbaatar, Mongolia (hereinafter called the "Buyer") for sales and purchase of a textile plant the contact (sic) price of which is United States Dollars Eighteen Million Eight Hundred Eleven Thousand Six Hundred Seventy (USD18,811,670), the undersigned Ministry of Finance of Mongolia unconditionally pledges to pay to you upon your simple demand all amounts payable under the Agreement if not paid when the same becomes due (whether at stated maturity, by acceleration or otherwise) and further pledges the full and timely performance and observance by the Buyer of all the terms and conditions of the Agreement. Further Ministry of Finance undertakes to hold indemnify and hold you harmless from and against any cost and damage which may be incurred by or asserted against you in connection with any obligations of the Buyer to pay any amount under the Agreement when the same becomes due and payable (whether at stated maturity, by acceleration or otherwise) or to perform or observe any term or condition of the Agreement or in connection with any invalidity or unenforceability of or impossibility of performance of any such obligations of the Buyer.
This covenant shall come to force from the date of implementation of this agreement and remain in full force and effect until all amounts due to you by the Buyer under the Agreement have been paid in full and all the terms and conditions of the Agreement have been fully performed and observed by the Buyer.
The Ministry of Finance hereby waives any right to require you to proceed against the Buyer or against any security received from the Buyer or any third party or to pursue any other remedy available to you…."
[[/bl]]
The letter also provided that –
"… all disputes related to this pledge shall correlate in accordance with the jurisdiction Courts of England."
It is common ground that the proper law of the contract constituted by the MMOF letter is English law. (By contrast, disputes under the DPS1 contract itself were to be decided by Japanese arbitration under Japanese law.)
The hearing before Cresswell J.
The judge was presented with an agreed list of 5 issues, the hearing of which took 10 days, including expert evidence on both sides on Mongolian law. Group A (Issues 1 to 4) was concerned with whether the Government was bound by the letter. The judge decided this question in favour of MHK. He held, in summary, that the guarantee was issued with express actual authority of the Government; that the authorisation was valid as a matter of Mongolian law; that, if it was not actually authorised, the Minister of Finance had apparent authority to enter into the guarantee on behalf of the Government; and that the Deputy Minister of Justice had actual or apparent authority to issue an opinion letter in relation to such a transaction.
This part of the judgment is not directly subject to appeal. However, some of the discussion is relevant to the issues which are raised by the appeal. In particular, the judge made clear that his findings as to both actual and apparent authority depended on the letter being correctly characterised as a "guarantee", that is as imposing a secondary rather than a primary liability. The significance of this distinction lies at the heart of the appeal.
Group B (Issues 5(1) and (2)) was concerned with whether the letter had been subsequently discharged. The agreed issues were:
"5. If the defendant is bound by the issue of the MMOF Letter, whether it was discharged as the result of refinancing agreements between the claimant and Buyan in February 1998 and April 1999; in particular:
(1) Whether, on a true construction of the MMOF Letter, the defendant has undertaken a primary liability (joint and/or several) to the claimant so that the rule in Holme v Brunskill (1878) 3 Q.B.D. 495 has no application.
(2) If the answer to 5(1) is no, whether the refinancing packages of February 1998 and April 1999 involved any material variation in the transaction to which the guarantee related such as to result in the discharge of the entirety of the defendant's obligations under the MMOF Letter."
The judge decided both issues against MHK, with the result that MHK's claim failed. His final comment was:
"This conclusion should not come as a surprise to any person experienced in the law and practice of domestic or international finance. A standard form bank guarantee will typically contain a number of provisions designed in an attempt to avoid the application of the rule in Holme v Brunskill…. Reschedulings would almost inevitably lead to the discharge of a surety from liability, unless the surety consented to the same. MHK recognised this but chose not to consult the defendant… "
The appeal
For MHK, Mr Howard helpfully summarised the central issue in the appeal. It turns on the correct characterisation of the MMOF Letter: was it an unconditional independent promise by the Mongolian Government to pay on demand all amounts payable under the sales contract (that is a demand bond), or was it a secondary or conditional promise to act as a surety? In the former case, the obligation to pay arises upon a simple demand or demand supported by a specified document. In the latter case, not only must the claimant prove the actual indebtedness of the debtor, but the guarantor has all the defences available to the debtor, and is discharged automatically (under the rule in Holme v Brunskill) if there is any variation of the arrangements with the principal debtor without his consent which might prejudice his interests.
Procedurally, MHK applied to the Court of Appeal for permission to appeal, initially only on the ground that the MMOF Letter was, on its true construction, "a demand guarantee or demand bond" creating primary...
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