Rainy Sky SA and Others v Kookmin Bank

Heard on 27 July 2011

LORD CLARKE, (WITH WHOM LORD PHILLIPS, LORD MANCE, LORD KERR AND LORD WILSON AGREE)

This appeal raises a short question of construction of shipbuilder's refund guarantees given pursuant to six shipbuilding contracts ("the Contracts"). The Contracts, which were all dated 11 May 2007, were between each of the first to sixth claimants ("the Buyers") and Jinse Shipbuilding Co Ltd ("the Builder"). Under the Contracts the Builder agreed to build and sell one vessel to each of the Buyers. The price of each vessel was US$33,300,000, payable in five equal instalments of US$6,660,000 due at specified points of time, with the final instalment payable on delivery. 1 By Article X.8 of the Contracts it was a condition precedent to payment by the Buyers of the first instalment that the Builder would deliver to the Buyers refund guarantees relating to the first and subsequent instalments in a form acceptable to the Buyers' financiers. As envisaged by Article X.8, by letter dated 22 August 2007 the respondent, Kookmin Bank ("the Bank"), issued six materially identical "Advance Payment Bonds" ("the Bonds"), one to each of the Buyers. The seventh claimant ("the Assignee") is the assignee of the benefit of the Bonds.

On 29 August 2007, the Buyers each paid the first instalment of US$6,660,000 due under the Contracts. On 29 September 2007, the first claimant paid the second instalment of US$6,660,000 under the contract to which it is a party.

In 2008 the Builder experienced financial difficulties and in late January 2009 it entered into and/or became subject to a debt workout procedure under the Korean Corporate Restructuring Promotion Law 2007. On 25 February 2009 the Buyers wrote to the Builder notifying it that this development triggered Article XII.3 of the Contracts and demanding an immediate refund of all the instalments paid, together with interest at 7% per annum. The Builder refused to make any refund on the ground that Article XII.3 of the Contracts had not been triggered as alleged. The dispute between the Buyers and the Builder has been submitted to arbitration pursuant to Article XIV.3 of the Contracts.

On 23 April 2009, the Buyers wrote to the Bank demanding repayment under the Bonds of the instalments paid under the Contracts. The Bank refused to pay. It did so initially on the ground that it was not obliged to pay pending resolution of the dispute between the Buyers and the Builder. That argument was subsequently rejected by Simon J ("the Judge") and there was no appeal to the Court of Appeal against that part of his order: [2009] EWHC Civ 2624 (Comm). The Bank subsequently raised a separate, and logically prior, argument that, on their true construction, the Bonds did not cover refunds to which the Buyers were entitled pursuant to Article XII.3 of the Contracts.

That argument was also rejected by the Judge, who gave summary judgment for the Assignee, but succeeded in the Court of Appeal, which gave summary judgment for the Bank against the Buyers and the Assignee. In the Court of Appeal Sir Simon Tuckey agreed with the Judge but the majority, comprising Thorpe and Patten LJJ, held the Bank's argument to be correct: [2010] EWCA Civ 582. The orders of the Judge and the Court of Appeal were made on 29 October 2009 and 27 May 2010 respectively. The Court of Appeal refused permission to appeal.

The Buyers appeal to this Court pursuant to permission granted by the Court. The issue is whether, on the true construction of paragraph 3 of the Bonds, the Buyers are entitled to payment under the Bonds in respect of refunds to which they are entitled under Article XII.3 of the Contracts. No-one suggested that the successful parties should not have summary judgment in their favour.

I begin with the Bonds because it was common ground that all depends upon the true construction of the Bonds and that the terms and meaning of the Contracts are only relevant to the extent that they inform the true construction of the Bonds. The paragraphs in the letter comprising the Bonds were not numbered but both the Judge and the Court of Appeal referred to them by number for convenience of reference and I will do the same. As so numbered the relevant parts of each Bond were these:

"[1] We refer to the … Contract entered into between … the Builder and yourselves for the construction and delivery of … the 'Vessel' to be delivered before [31 July 2009]. Other terms and expressions used in this Bond shall have the same meaning as in the Contract, a copy of which has been provided to us.

[2] Pursuant to the terms of the Contract, you are entitled, upon your rejection of the Vessel in accordance with the terms of the Contract, your termination, cancellation or rescission of the Contract or upon a Total Loss of the Vessel, to repayment of the pre-delivery instalments of the Contract Price paid by you prior to such termination or a Total Loss of the Vessel (as the case may be) and the value of the Buyer's Supplies delivered to the Shipyard (if any) together with interest thereon at the rate of … (7%) per annum (or … (10%) per annum in the case of a Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of remittance by telegraphic transfer of such refund.

[3] In consideration of your agreement to make the pre-delivery instalments under the Contract and for other good and valuable consideration (the receipt and adequacy of which is hereby acknowledged), we hereby, as primary obligor, irrevocably and unconditionally undertake to pay to you, your successors and assigns, on your first written demand, all such sums due to you under the Contract (or such sums which would have been due to you but for any irregularity, illegality, invalidity or unenforceability in whole or in part of the Contract) PROVIDED THAT the total amount recoverable by you under this Bond shall not exceed US $[26,640,000] … plus interest thereon at the rate of … (7%) per annum (or … (10%) per annum in the case of a Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of remittance by telegraphic transfer of such refund.

[4] Payment by us under this Bond shall be made without any deduction or withholding, and promptly on receipt by us of a written demand (substantially in the form attached) signed by two of your directors stating that the Builder has failed to fulfil the terms and conditions of the Contract and as a result of such failure, the amount claimed is due to you and specifying in what respects the Builder has so failed and the amount claimed. Such claim and statement shall be accepted by us as evidence for the purposes of this Bond alone that this amount claimed is due to you under this Bond.

[5] Our liability under this Bond shall not be affected by … (v) any insolvency, re-organisation or dissolution of the Builder, or (vi) any other matter or thing which may operate to discharge or reduce our liability hereunder.

…"

The Bonds further provided that they were assignable, that they were governed by English law and that all disputes arising out of them were to be determined by the Commercial Court.

The resolution of the issue between the parties depends upon the true construction of paragraph [3]. The Bank promised to pay on demand "all such sums due to you under the Contract". The question is what was meant by "such sums". Only two possibilities were suggested. The Buyers said (and the Judge and Sir Simon Tuckey held) that the expression "such sums" referred back to the "pre-delivery instalments" in the first line. They said that the purpose of the Bond was to guarantee the refund of pre-delivery instalments and that the promise was therefore to refund pre-delivery instalments. By contrast the Bank said (and Thorpe and Patten LJJ held) that the expression "such sums" was a reference back to the sums referred to in paragraph [2], namely the repayment of the pre-delivery instalments paid prior to a termination of the Contract or a Total Loss of the vessel and the value of the Buyer's Supplies in the case of a Total Loss. On the Buyers' analysis the Bond guaranteed pre-delivery instalments which were repayable under Article XII.3 in the case of any insolvency event, whereas on the Bank's analysis it did not.

It is common ground that the terms of the Contracts are relevant to the true construction of the Bonds. They are referred to in the Bonds and provide the immediate context in which the Bonds were entered into. They are thus plainly an important aid to the meaning of the Bonds.

Article X of the Contracts provided, so far as material as follows:

"ARTICLE X: PAYMENT

5. REFUND BY THE BUILDER

…

The payments made by the Buyer to the Builder prior to delivery of the Vessel shall constitute advances to the Builder. If the Vessel is rejected by the Buyer in accordance with the terms of this Contract, or if the Buyer terminates, cancels or rescinds this Contract pursuant to any of the provisions of this Contract specifically permitting the Buyer to do so, the Builder shall forthwith refund to the Buyer in US dollars, the full amount of total sums paid by the Buyer to the Builder in advance of delivery together with interest thereon as herein provided within thirty (30) banking days of acceptance of rejection.

… The interest rate of the refund … shall be seven per cent (7%) per annum …

If the Builder is required to refund to the Buyer the...