The true colours of English law governing refund guarantees

In the recent case of Spliethoff's Bevrachtingskantoor BV v Bank of China Ltd [2015] EWHC 999 (Comm), the Commercial Court considered the nature of refund guarantees and whether a foreign court order affects the bank's liability to pay on demand. The decision is timely, clarifying repeatedly occurring issues arising out of refund guarantees. It sends a clear message that English law governing refund guarantees is of the nature of a performance bond and the obligation to pay on demand should not be affected by extraneous matters, even, in some cases, fraud.

Background

Spliethoff's Bevrachtingskantoor BV (SBV), a Netherlands ship operator, brought two actions against Bank of China (BOC) in respect of refund guarantees issued by BOC in support of two shipbuilding contracts between SBV as buyer and Chinese sellers. Between October 2006 and July 2011, SBV paid instalments of US$28.68 million towards the purchase price, on terms that the instalments would be refunded with interest if the contracts were cancelled. The BOC guarantees secured the sellers' obligation to refund.

The ships were not delivered on time and SBV claimed repayment of the instalments from the sellers. This was disputed, so SBV obtained arbitration awards against the sellers.

Meanwhile, the sellers brought two sets of proceedings against SBV and the engine suppliers in China, alleging that SBV and the engine suppliers conspired fraudulently to provide defective refurbished engines to the sellers for installation aboard the ships. BOC was not a party to those proceedings. The sellers obtained ex parte orders from the Chinese court in 2011 prohibiting BOC from making any payment, anywhere in the world, under the BOC guarantees to SBV.

SBV unsuccessfully challenged the jurisdiction of the Chinese courts, citing the arbitration clauses in the shipbuilding contracts. Thereafter, it fully defended the claims in the Chinese proceedings, but again failed. In April 2013, the Chinese court awarded the sellers substantial damages for fraud. In April 2014 those judgments were upheld on appeal, becoming effective and enforceable.

SBV brought claims in England against BOC for payment under the guarantees. BOC defended the claim, on the basis that the Chinese judgments afforded BOC a defence to SBV's claims under the guarantees, or alternatively argued that a stay of enforcement was justified.

The wording of BOC refund guarantees

The BOC refund guarantees contain the following material...