Advance Payment Bond - Shipbuilding Contract

A recent case concerning advance payment bonds issued to secure repayment of instalments paid under shipbuilding contracts illustrate the need for clarity and precision when drafting such document. The issue before the Court of Appeal was whether the bond guarantees repayment of those instalments in all the circumstances specified by the shipbuilding contract or whether it is more limited than that.  The Bank’s case was that the guarantee covers the repayment of the instalments only in the circumstances described in paragraph (2) of the bond. 

Significantly, four judges were at odds in their decision. The judge at first instance and Sir Simon Tuckey (the minority in the Court of Appeal) agreed with Buyers, but the majority in the Court of Appeal (Patten LJ and Thorpe LJ) were persuaded by the bank’s argument.

Source: Kookmin Bank v Rainy Sky S.A. & 6 Others [2010] EWCA Civ 582
General Reading: Guarantees in Shipbuilding Agreement

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