Refund Guarantees

In the following case the Court of Appeal had to consider the effect of a refund guarantee in the context of a shipbuilding contract.

Kookmin Bank v Rainy Sky SA & Others [2010] EWCA Civ 582

The buyers entered into six materially identical shipbuilding contracts made with Jinse Shipbuilding Co Ltd (the Builder). Kookmin Bank (the Bank) issued six materially identical on demand advance payment bonds or guarantees to secure certain obligations assumed by the Builder.

Each shipbuilding contract entitled the buyers to require the Builder to refund the full amount of all advance payments made in the event of the Builder's insolvency or the like.

The issue for the court was whether the obligation on the Builder to refund the advance payments following its insolvency was an obligation which was covered by the bonds issued by the Bank.

The ship-building contracts

Each shipbuilding contract was for the construction of a specified vessel for a price of US$33,300,000 and required 20% of the price (US$6,660,000) to be paid within three days of signing the contract. The remainder of the contract price was to be paid by three further 20% pre-delivery instalments at various stages during the construction of each vessel and a final payment on delivery.

Each shipbuilding contract entitled the buyer to require the Builder to refund the full amount of all advance payments made in the event of the Builder's insolvency or the like (Article XII.3).

The bonds

Each bond was in the form of a letter from the Bank to the buyer and was in the following terms:

ADVANCE PAYMENT BOND "... (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 ... to repayment of the pre-delivery instalments of the Contract Price paid by you prior to such termination ... together with interest thereon at the rate of seven per cent (7%) per annum .... (3) In consideration of your agreement to make the pre-delivery instalments under the Contract ..., 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 ... PROVIDED THAT the total amount recoverable ... under this Bond shall not exceed US$[26,640,000] ...."

The buyers paid the first instalments due under the contracts but the Builder then entered into or became...