Shanghai Shipyard Company Ltd v Reignwood International Investment (Group) Company Ltd
| Jurisdiction | England & Wales |
| Judge | Robin Knowles J,Mr Justice Robin Knowles CBE |
| Judgment Date | 03 April 2020 |
| Neutral Citation | [2020] EWHC 803 (Comm) |
| Date | 03 April 2020 |
| Docket Number | Case No: CL-2018-000535 |
| Court | Queen's Bench Division (Commercial Court) |
[2020] EWHC 803 (Comm)
IN THE HIGH COURT OF JUSTICE
THE BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Robin Knowles CBE
Case No: CL-2018-000535
and
James M Turner QC and Peter Stevenson (instructed by SCA Ontier LLP) for the Claimant
Zoe O'Sullivan QC and Harry Wright (instructed by Onside Law) for the Defendant
Hearing date: 4 December 2019
Approved Judgment
I direct that pursuant to CPR PD39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic
Introduction
This is the Court's judgment on the trial of two preliminary issues.
The Claimant (“the Builder”) and the Defendant are parties to a contract entitled
“Irrevocable Payment Guarantee” dated 17 November 2011 (“the Guarantee”, an abbreviation the parties have been content to use in the course of argument).
The Guarantee was given to secure a final payment of US$170 million (“the Final Instalment”) by the buyer under a shipbuilding contract dated 21 September 2011 (“the Contract”) in respect of a drillship, Hull No S6030 (“the Vessel”).
The Defendant was originally the buyer under the Contract. It was replaced as buyer by the Part 20 Defendant (“the Buyer”) by a Novation Agreement dated 30 November 2012. The Buyer is an indirect subsidiary of the Defendant (“the Guarantor”).
The Buyer did not take delivery of the Vessel under the Contract. Its position was that the Vessel was not deliverable. The Builder claimed the Final Instalment from the Buyer and then on 23 May 2017 made a demand on the Guarantor under the Guarantee.
An arbitration was commenced under the Contract on 13 June 2019. If successful on the preliminary issues, the Guarantor seeks a stay of the proceedings in this Court pending the resolution of the arbitration.
The preliminary issues concern the nature of the Guarantee and the circumstances in which payment is required.
The Guarantee
The Guarantee is governed by English Law.
The Guarantee includes these provisions:
“1. In consideration of [the Builder] entering into [the Contract] with [the Buyer] … for the construction of [the Vessel], [the Guarantor] hereby IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee[s] in accordance with the terms hereof, as the primary obligor and not merely as the surety, the due and punctual payment by [the Buyer] of the Final [I]nstalment of the Contract Price amounting to … US$170,000,000 … .
…
3. [The Guarantor] also IRREVEOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee[s], as primary obligor and not merely as surety, the due and punctual payment by [the Buyer] of interest on the Final Instalment guaranteed hereunder at the rate of … (5%) per annum from and including the first day after the default until the date of full payment by [the Guarantor] of such amount guaranteed hereunder.
4. In the event that [the Buyer] fails to punctually pay the Final Instalment guaranteed hereunder in accordance with the Contract or [the Buyer] fails to pay any interest thereon, and any such default continues for a period of fifteen (15) days, then, upon receipt by [the Guarantor] of [the Builder's] first written demand, [the Guarantor] shall immediately pay to [the Builder] or [the Builder's] assignee all unpaid Final [I]nstalment, together with the interest as specified in paragraph (3) hereof, without requesting [the Builder] to take any further action, procedure or step against [the Buyer] or with respect to any other security which you may hold.
In the event that there exists dispute between [the Buyer] and the Builder as to whether:
(i) [The Buyer] is liable to pay to the Builder the Final Instalment; and
(ii) The Builder is entitled to claim the Final Instalment from [the Buyer],
and such dispute is submitted either by [the Buyer] or by [the Builder] for arbitration in accordance with Clause 17 of the Contract, [the Guarantor] shall be entitled to withhold and defer payment until the arbitration award is published. [The Guarantor] shall not be obligated to make any payment to [the Builder] unless the arbitration award orders [the Buyer] to pay the Final Instalment. If [the Buyer] fails to honour the award, then [the Guarantor] shall pay you to the extent the arbitration award orders.
…
7. [The Guarantor's] obligations under this guarantee shall not be affected or prejudiced by:
(a) any dispute between [the Builder] and [the Buyer] under the Contract; …
…
(c) any variation or extension of their terms thereof; …
…
10. The maximum amount … that [the Guarantor is] obliged to pay to [the Builder] under this Guarantee shall not exceed the aggregate amount of … (USD171,416,666.67) being an amount equal to the sum of:
(a) The Final Instalment guaranteed hereunder …; and
(b) Interest at the rate of … (5%) per annum on the instalment for a period of sixty (60) days …”
11. All payments by [the Guarantor] 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 …”.
The preliminary issues
The preliminary issues are in these terms:
“[W]hether on the true construction of the Guarantee:
a. As regards the Guarantor's liability thereunder:
i. It is a demand guarantee, such that – subject to issue b. below – the Guarantor's liability thereunder arose upon and by reason of the Demand, whether or not the Buyer was liable to pay the Final Instalment under the terms of the Contract; or
ii. It is a “see to it” guarantee or a conditional payment obligation, such that – subject again to the issue set forth in b. below – the Guarantor's liability thereunder arose upon the Demand only if the Buyer was liable to pay the Final Instalment under the terms of the Contract.
b. The Guarantor is entitled to refuse payment under Clause 4 pending and subject to the outcome of the arbitration between [the Builder] and [the Buyer] in respect of a dispute as to the Buyer's liability to pay and [the Builder's] entitlement to claim that Final Instalment –
i. Only if the arbitration has been commenced between those parties as at the date the Demand is made; or
ii. Regardless of when such arbitration is or may be commenced?”
Background, context and approach
Mr James Turner QC and Mr Peter Stevenson for the Builder emphasize the importance of demand guarantees in modern commerce, and their particular value in the context of international shipbuilding contracts.
They point out that the credit exposure of a shipbuilder to a buyer in relation to a final instalment of payment under a shipbuilding contract can be particularly significant where the buyer is a special purpose company whose sole asset is the shipbuilding contract.
Mr Turner QC and Mr Stevenson recognise that determining whether a guarantee is a demand guarantee can be difficult because there is significant commonality in the language used in the two different types of guarantee. As Longmore LJ observed in Wuhan Guoyo Logistics Group v Emporiki Bank of Greece [2014] 1 Lloyd's Rep 266 at [23], there are often “pointers in different directions”.
In Autoridad del Canal de Panama v Sacyr CA and others [2017] EWHC 2228 (Comm) at [81] Blair J valuably distilled a number of principles from the authorities. These included the following:
“(1) [A] first demand bond is in principle autonomous of the underlying contract – liability may arise simply on a conforming demand within the validity of the instrument. For this reason, it has been likened to a letter of credit … .
(2) What the instrument is labelled, the incorporation of terms such as a principal debtor clause, or terms imposing primary liability, both of which are very common in guarantees of all kinds, and the use of words such as “on demand”, may be of limited value in determining its legal nature. The practical question … is in substance whether the instrument is effectively payable on demand, with or without some supporting documentation: this can only be ascertained by examining its terms … .
(3) … [T]he court approaches the task of construing it by looking at the instrument as a whole ‘without any preconceptions as to what it is’. To take advance payment guarantees as an example, the issuance of such guarantees securing advance payments made by an employer to a contractor can be in either form — it depends on what the parties agreed … .
… .”
The Guarantor is a parent company and not a bank. It appears it is not simply a parent company, for in other proceedings in Singapore it has described itself as offering investment services. Even taking that into account the context here is not, or at least is not squarely, a banking context. In Marubeni Hong Kong and South China Ltd v Government of Mongolia [2005] 1 WLR 2497 at [30] the Court of Appeal had regard to the fact that the transaction there considered was outside the banking context. The absence of language in an instrument to describe it “in terms appropriate to a demand bond or something having similar effect” created, “in a transaction outside the banking context”, “a strong presumption against” interpretation as a demand bond in the view of the Court.
There are, inevitably, differences between the instrument under consideration in Marubeni and the instrument here. There is force in Mr Turner QC's point that in the shipbuilding industry the function of an instrument can be the same whether issued by a bank or a parent company. Any presumption can “more readily give way to language that indicates the contrary” where the context is a...
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