English Commercial Court Interprets Buyer's Final Instalment Guarantee

• Published date: 10 June 2020
• Author: Mr Sapna Jhangiani
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Arbitration & Dispute Resolution
• Law Firm: Clyde & Co

In Shanghai Shipyard Co. Ltd v Reignwood International Investment (Group) Company Ltd [2020] EWHC 803 (Comm), Justice Knowles interpreted a guarantee providing for a refund of the buyer's final instalment due under a shipbuilding contract. The guarantee provided that, if a dispute arose between the buyer and the builder about whether or not the final instalment was due, and such dispute was submitted to arbitration, the guarantor would be entitled to withhold and defer payment until the publication of the arbitral award. The key issue before the Court was whether, on the wording of the clause, the arbitration had to be commenced before the demand for payment was made.

The Court also decided whether the guarantee was a demand guarantee (sometimes called a demand bond) or a "see to it" guarantee (also referred to as conditional payment obligation), and much has been written about the Court's decision in this regard. Whilst many shipyards may rely on the decision to seek to ensure that guarantees provided by buyers may be interpreted as "demand" guarantees, this will be of little assistance where there is a dispute about whether or not payment is due, and the guarantee provides - as most do - that payment is conditional upon an arbitration award which decides the dispute. It will be more important to ensure that there is clarity about whether or not arbitration must be commenced prior to the demand for payment being made.

Facts

Shanghai Shipyard Co. Ltd (the "Builder") and Reignwood International Investment (Group) Company Ltd (the "Defendant") entered into a shipbuilding contract (the "Contract") to build a drillship for a total price of US$200 million, of which US$170 million was to be paid upon delivery (the "Final Instalment"). The parties entered into a further agreement entitled "Irrevocable Payment Guarantee" (the "Guarantee") to secure this final payment. A Novation Agreement was also agreed whereby the Defendant was substituted by its indirect subsidiary, Opus Tiger 1 PTE Ltd (the "Buyer").

Following the Buyer's refusal to take delivery of the drillship on the basis that the vessel was not deliverable, the Builder requested the Final Instalment from the Buyer and subsequently demanded payment from the Guarantor under the Guarantee.

None of these requests were satisfied and as a result arbitration proceedings were commenced. The Commercial Court was asked to review preliminary issues in respect of the nature of the Guarantee and circumstances in...