Shipbuilding Refund Guarantees governed by English law - Proceedings in London and China

Shipbuilding Refund Guarantees governed by English law – Chinese Court prohibits Bank and its overseas branch from making any payment to Buyer under the Bank’s guarantees – English Court recognized Chinese Court judgement but ruled that Bank must pay Buyer.   

Spliethoff’s Bevrachtingskantoor BV v Bank of China Ltd [2015] EWHC 999 (Comm)  

Buyer claim against the Bank of China (BOC) under two refund guarantees issued by BOC to secure repayment obligations of a Builder (Chinese Shipyard) and Co-Seller (together “Sellers”) in respect of two shipbuilding contracts for construction of two new ships identified as Hulls 38 and 39. 

Proceedings in London: Buyer terminated the contract in respect of Hull 38 as the ship was not delivered on time, and claimed repayment of the instalments. Sellers commenced Arbitration in London, disputed Buyer’s right to cancel and contended that Buyer’s cancellation was a repudiatory breach of the Hull 38 Contract.

Delivery of Hull 39 was also late and in view of the arguments raised by Sellers in the Hull 38 proceedings, Buyer applied for a declaration that it was entitled to cancel the Hull 39 contract, whereupon Sellers are obliged to refund the instalments paid, failing which Buyer would be entitled to demand repayment from BOC. 

The buyer also applied to the English High Court for a declaration (a) that Sellers was obliged to refer its main engine claims (see below) to arbitration, (b) for anti-suit relief and (c) damages for breach of the arbitration clause.  

Proceedings in China: Separately, Sellers sued Buyer and Wartsila (engine manufacturers and suppliers) in Qingdao Maritime Court (QMC) for conspiring to supply and passing off as new second-hand and defective refurbished engines to the Sellers for installation in the ships. (Buyer challenged the jurisdiction of the Chinese Courts and but failed. Thereafter Buyer proceeded to defend the action).  

Award, Injunction and QMC Orders
Arbitral awards were given in Buyer’s favour and the Sellers was ordered to refund the instalments paid by Buyer in respect of both ships. An anti-suit injunction was granted against the Sellers but they continue to pursue the proceedings in QMC. QMC found Wartsila and Buyer liable for fraud and (a) ordered Buyer to provide a specified cash or other guarantees, (b) prohibited BOC and any domestic Chinese or overseas branch of BOC from making any payment anywhere under the guarantees to Buyer. 

Call on the Guarantees
The buyer called on the two Guarantees issued by BOC. BOC refused to pay on the grounds that it had been served with the QMC orders. Subsequently, it also included a defence that the demand in respect of Hull 39 was invalid.  

 Court Decision
Having concluded that the Guarantees were demand guarantees in the nature of a performance bond, and not by way of surety, the Court considered BOC’s defences (a) on the validity of the Hull 39 demand, (b) based on the orders of QMC and if required, whether the QMC orders justify a stay.

Mrs Justice Carr concluded that (a) BOC’s objection to the validity of the Hull 39 demand was misplaced, (b) the parties have agreed that BOC’s obligations would not be affected or prejudiced by any extraneous matters, including a finding of fraud against Buyer in favour of the Sellers under the Contracts and (c) the rule in Holme v Brunskill that any material variation of the terms of the principal contract ( between the creditor and the principal) will discharge the surety was not applicable in the present case.  Accordingly, she ruled in favour of the Buyer under both guarantees.    

Stay of Execution
The Judge also refused to grant BOC’s application for stay of execution as she was not satisfied that there are special circumstances which make it inexpedient to enforce the judgments against BOC.  She stated inter alia that Chinese legal experts called on behalf of the Parties agreed that BOC would not be at any real risk of criminal prosecution, given the lack of the necessary intention on the part of BOC to flout the QMC orders. One of the expert, Mr Li Hui also expressed his written opinion that “any payment by BOC made as a result of a compulsory enforcement measure by a foreign court should not be considered as violating the XXK notices of assistance and should not be subject to any legal liabilities, criminal, civil or of any other kind. As such the Judge did not accept that “BOC would face any real risk of criminal or civil sanction or double jeopardy if it were to make payment (or be subject to enforcement) pursuant only to an order of this Court.”

She concluded: 

“Finally, even if there were real risks in this regard, these are matters inherent in the risks which BOC agreed to undertake when entering into the Guarantees on the terms that it did. BOC is an international commercial organisation in the business of providing external guarantees in return for the taking of fees and security.  The clear scheme under the Guarantees …in respect of obligations under the Contracts (which are also governed by English law and the subject of English arbitration agreements) is that the obligation on the part of BOC to pay on demand should not be affected by extraneous matters such as the XXK orders (or judgments in fraud or otherwise against SBV in separate proceedings in China). 

This  conclusion  is  not  to  disrespect  in  any  way  the  Chinese  courts  (or  principles  of international comity) but rather to give effect to the contractual bargain between SBV and BOC and to recognise the commercial purpose behind that arrangement.”  

*(XXK notices/orders – Notices or Orders issued in Builder’s favour by the QMC) 

Cases cited:
Holme v Brunskill [1878] 3 QBD 495.
Marubeni Hong Kong and South China Ltd v Mongolia [2005] 2 Lloyd’s Rep 231.
Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629.
Caja de  Ahorros  v  Gold  Coast  Ltd  [2002]  CLC  397  para  16.
Meritz Fire & Marine Insurance Co Ltd v Jan de Nul NV [2011] 2 Lloyd’s Rep 379.
WS Tankship II BV v The Kwangju Bank Ltd and another [2011] EWHC 3103 (Comm). 
Gold Coast Ltd v Caja de Ahorros Del Mediterraneo and others [2002] 1 All ER (Comm) 142.
AES Ust-Kamenogorsk Hydropower Plant LLP v AES Ust-Kamenogorsk Hydropower Plant JSC [2012] 1 WLR 920 (at paragraph 150).
Philip Alexander Securities & Futures Ltd v Bamberger and others [1996] CLC 1757 Per Waller J (at pages 22 and 23). 
Altimo Holdings and Investment Ltd and others v Kyrgyz Mobil Tel Ltd and others [2012] 1 WLR 1804 at page121.
Kydon Compania Naviera SA v National Westminster Bank Ltd and others) (“The Lena”) [1981] 1 Lloyds Rep 61.
WSG Nimbus Pte Ltd v Board of Control for Cricket in Sri Lanka [2002] WGHC 104, (Singapore High Court).
HIH Casualty and General Insurance v Chase Manhattan Bank [2003] 1 All ER (Comm) 349.
Society of Lloyd’s v Wilkinson (No 2) [1997] 6 Re LR 289.
WRM Group Ltd v Wood [1998] CLC 189. 
Skipskreditforeningen v Emperor Navigation [1998] 1 Lloyds Rep 66.
Deutsche Bank (Suisse) SA v Khan [2013] EHWC 482.
Deutsche Bank AG v Unitech Global [2014] 2 All ER (Comm) 268. 
The Wardens and Commonalty of the Mystery of Mercers of the City of London v New Hampshire Insurance Co [1992] 2 Lloyds LR 365.
National Westminster Bank plc v Riley [1986] BCLC 268 (“Riley”) May LJ at 275 i).
Blest v Brown [1862] 4 DE G.F. & J 367.
Ralli Brothers v Compania Naviera Sota y Aznar [1920] KB 614.
Field J in Bankhaus Wolbern & Co (AG & CO KG) v China Construction Bank Corporation [2012] EWHC 3285 (Comm).
AES-3C Maritza East IEOOD v Credit Agricole Corporate and Investment Bank [2011] BLR 249.
Kleinwort Sons and Company v Ungarische Baumwolfe Industrie Aktiengesellschaft [1939] 2 KB 678. Libyan Arab Foreign Bank v Bankers Trust Co [1998] 1 Lloyds Law Rep 259.
Toprak Mahsulleri Ofisi v Finagrain Compagnie Commercial Agricole et Financiere SA [1979] 2 Lloyds Rep 98.   

Statute s. 32 of the Civil Jurisdiction and Judgments Act 1982. 

Books cited:
Andrews and Millett: The Law of Guarantees (6th ed 2012) (at paragraphs 1-015 and 16-001).)
Paget’s Law of Banking.
Briggs & Rees: Civil Jurisdiction and Judgments (5th Ed 2009).
Dicey, Morris & Collins: The Conflict of Laws (15th Ed 2012). 
The Law Relating to Estoppel by Representation (4th Ed 2004 at paragraph 1.2.3).
Chitty: Contracts (31st Ed) (“Chitty”) at paragraph 3-090).
The Modern Contract of Guarantee (2nd English Ed 2010) at paragraphs 8-17 and 8-18.

Chinese Statutes cited:
Article 29 of the Provisions of the Supreme People’s Court on Seal-Up, Detainment, or Freezing of Property in the Civil Enforcement by People’s Courts.
Chapter III of the Special, Maritime Procedure Law of the People’s Republic of China. Articles 12 and 16.
Civil Procedure Law of the People’s Republic of China, Chapter 9: Property Preservation and Advance Execution, Articles 92 and 94.
Article 168 of the Interpretations of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China (2015).
Article 105 of the Opinion of the Supreme People’s Court on Certain Issues Concerning the Application of the Civil Procedure Law of the People’s Republic of China (“the Judicial Interpretation”).
Provisions of the Supreme People’s Court on Certain Issues Related to the Application of Laws to Unsettled Cases after the Implementation of the Amended Civil Procedure Law. 
Article 1. Article 114 (4) of the CPL 2013 or Article 313 of the Criminal Law of the People’s Republic of China.
Article 37 of the Regulations of the Supreme Court about enforcement by People’s Court.  

Source: Bailii

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