Shipping Update - Refund Guarantees: 'all sums due'?


Refund guarantees are an increasingly important element of any shipbuilding contract. The trading environment for all parties remains difficult and there are clear advantages to obtaining security for key aspects of performance under a shipbuilding contract wherever possible.

In difficult market conditions, banks who may previously have regarded the provision of such guarantees as relatively low-risk business have found themselves exposed to significant liabilities. This has resulted in guarantee wordings coming under detailed legal scrutiny in the face of a large number of very significant claims.

This update considers the implications of the recent Court of Appeal decision in Kookmin Bank v Rainy Sky & others [2010] EWCA Civ 582 in which a bank refused repayment under "advance payment bonds" in respect of purchase price instalments, the shipyard having become insolvent.

The Facts

Kookmin bank issued six on demand advance payments bonds to secure certain obligations assumed by its shipyard customer under six shipbuilding contracts made with the claimants as buyers, each on materially identical terms.

Each shipbuilding contract required the buyer to pay the contract price in pre-delivery instalments, and entitled him, in the event of the shipbuilder's insolvency, to a refund of any instalments paid.

Paragraph 2 of the bond entitled the buyer, on certain specified grounds including rejection of the vessel, to repayment of any pre-delivery instalments. By para.3 of the bond, the bank guaranteed "all such sums due to you under the contract".

After the buyers had paid the first instalments the shipyard became insolvent and the buyers sought repayment of US$46,652,000 plus interest under the bonds. The bank argued that it was entitled to review "evidence" in relation to the underlying dispute and therefore form a view about the underlying merits. The buyers argued that this was a form of on demand guarantee which was payable immediately once notice was given in accordance with its terms, in the absence of fraud.

A further issue between the parties was whether the words "all such sums due to you under the contract" in para.3 of the bond referred to the instalments becoming repayable in any circumstances under the shipbuilding contracts (including the insolvency of the shipyard) or whether, as the bank contended, the guarantee was restricted to covering only the circumstances described in para.2 of the bond, namely;

"...upon your...

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