“Sea Emerald SA V Prominvestbank - Joint Stockpoint Commercial Industrial And Investment Bank” [2008] EWHC 1979 (Comm): Dispute Relating To Refund Guarantee In Shipbuilding Contracts

In the shipbuilding industry, the refund guarantee is often

an essential document because it allows the buyer and its

financiers to hold security from the shipyard which will

respond in the event that the ship is not delivered. The exact

wording of the refund guarantee is normally a matter of

negotiation between the buyer and the shipyard.

In this case, the buyer was a Panamanian company that was

part of a group of companies (the "Group") with

extensive shipping interests and a fleet of about 80 vessels,

including refrigerated cargo vessels and smaller tankers. The

shipyard was in the Ukraine. In the 1990s, the Group placed

several contracts with the yard, ordering a total of 19 ships

for over US$200 million. Each ship was the subject of a

separate contract, entered into by a different company in the

Group that was intended to own and operate the ship. All the

contracts provided for the yard to provide a refund guarantee

to the purchasing company.

The contract that resulted in this dispute was for the

construction and purchase of a refrigerated cargo vessel. The

contract stated it was governed by English law and provided for

English arbitration. Inter alia, the contract provided for the

yard to furnish a refund guarantee to be issued by the

yard's bank, "the State Commercial Industrial Bank, -

Nikolaev Branch" within 30 days from the signing of the

contract, failing which the buyer had the option to declare the

contract null and void. It was also stated that "the

furnishing of this Guarantee is to form an integral part of

this Contract".

The guarantee in question was signed by S, head of the

Nikolaev regional branch of the bank, and the Director General

of the yard. It provided that in consideration of the payment

of the instalments under the shipbuilding contract, the

Nikolaev branch of the bank would "at the request of the

Builder, hereby irrevocably and unconditionally guarantee the

payment to you [the buyer] by the Builder" the total

maximum sum of US$9.9 million or any amount to be paid to the

yard as the instalments under the contract. The bank's

liability under the guarantee was "limited to the total

sum of the instalments or any lesser amount mutually

agreed" between the buyer and the yard and actually paid

by the buyer. The guarantee was stated to be governed by

English law.

The bank subsequently extended substantial amounts of credit

to the yard, including credit for the purpose of constructing

the vessels for the Group. S subsequently left the bank but the

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