Advance Payment Guarantees - performance bonds or contracts of suretyship?
The claimant, an insurance company issued advance payment guarantees (“APGs”) to the defendants, (i.e. the first defendant and its subsidiary the second defendant), guaranteeing the repayment of payments made by the defendants under three shipbuilding contracts signed between the defendants and a Korean shipbuilder, Huen Woo Steel Co Ltd (“HWS”).
Later, HWS merged with another company, the new company was re-named Buyoung Heavy Industries Co Ltd (“Buyoung”). Some months later, Buyoung partitioned its shipbuilding business and its blockbuilding business. Buyoung continued took on the blockbuilding business while a newly incorporated company, Asia Heavy Industries Co Ltd (“Asia Heavy”) undertook the shipbuilding business. Subsequently, Asia Heavy went into financial difficulties and the defendants served notice of default, terminated the contracts and demanded repayment of the money paid under the contracts with interest. Asia Heavy Industries did not pay any of these demands and the defendants demanded payment from claimant under the three APGs. The defendants also demanded payment from Buyoung on the basis that it was jointly and severally liable in respect of the shipbuilder’s’ obligations to repay under the three contracts.
The claimant sought a declaration that it is not liable under APGs as it only guaranteed the obligations of HWS and not those of its corporate successors. Alternatively, it claimed that as a result of material variations to the shipbuilding contracts by reason of the changes in the corporate identity and extensions of the delivery time of the vessels, it had been discharged from liability. It also argued that as a result of the corporate changes, it was not possible, within the terms of the shipbuilding contracts and the APGs for a contractual demand to be made which triggered claimant’s liability under the APGs. The defendants maintained that the APGs are unconditional performance bonds and it is irrelevant which corporate entity failed to make the refund or whether there have been material variations to the shipbuilding contracts. Alternatively, they argued that if the APGs were classic contracts of suretyship, there was no material variations in the shipbuilding contracts because those contracts provided for changes in the delivery time of the vessels.
There were three issues before Mr Justice Beatson.
Later, HWS merged with another company, the new company was re-named Buyoung Heavy Industries Co Ltd (“Buyoung”). Some months later, Buyoung partitioned its shipbuilding business and its blockbuilding business. Buyoung continued took on the blockbuilding business while a newly incorporated company, Asia Heavy Industries Co Ltd (“Asia Heavy”) undertook the shipbuilding business. Subsequently, Asia Heavy went into financial difficulties and the defendants served notice of default, terminated the contracts and demanded repayment of the money paid under the contracts with interest. Asia Heavy Industries did not pay any of these demands and the defendants demanded payment from claimant under the three APGs. The defendants also demanded payment from Buyoung on the basis that it was jointly and severally liable in respect of the shipbuilder’s’ obligations to repay under the three contracts.
The claimant sought a declaration that it is not liable under APGs as it only guaranteed the obligations of HWS and not those of its corporate successors. Alternatively, it claimed that as a result of material variations to the shipbuilding contracts by reason of the changes in the corporate identity and extensions of the delivery time of the vessels, it had been discharged from liability. It also argued that as a result of the corporate changes, it was not possible, within the terms of the shipbuilding contracts and the APGs for a contractual demand to be made which triggered claimant’s liability under the APGs. The defendants maintained that the APGs are unconditional performance bonds and it is irrelevant which corporate entity failed to make the refund or whether there have been material variations to the shipbuilding contracts. Alternatively, they argued that if the APGs were classic contracts of suretyship, there was no material variations in the shipbuilding contracts because those contracts provided for changes in the delivery time of the vessels.
There were three issues before Mr Justice Beatson.
Issue 1: Are the APGs performance bonds?
After considering various authorities and counsels’ submission, the Judge rejected claimant’s submissions and concluded that the APGs are performance bonds or demand guarantees.
He noted that the broad structure of the APGs had three of the four attributes which will lead an instrument to be construed as a demand guarantee, namely; (a) the underlying transactions, the shipbuilding contracts, are between parties in different jurisdictions; (b) the APGs do not contain clauses excluding or limiting the defences available to a surety in a classic guarantee where the surety’s liability is secondary; and (c) the undertaking is to pay on demand, in this case, see paragraph [2], to pay “within thirty (30) days after demand is made”. He rejected claimant’s submission that as the APGs were not issued by a bank the strong presumption against them being performance bonds applies. His rationale was that while claimant’s primary business may have been as an insurance company, it was also providing financial instruments in return for a fee. Also, the definition of a “demand guarantee” in Article 2(a) of the ICC Uniform Rules for Demand Guarantees includes “any guarantee…by a bank, insurance company or other body…”.
He referred in particular to the fact that in the present case (a) payment is triggered by a demand upon presentation of specified documents, (b) the guarantee is stated to be irrevocable and unconditional, and (c) it is stated to be subject to the Uniform Rules. He also stated that the provision of the APGs satisfy the definition of “demand guarantee” in the Uniform Rules. The absence of any limitation to or exclusion of any of the defences which would be available to a surety is also a pointer to the instruments being demand guarantees or performance bonds.
Issue 2: If the APGs are contracts of suretyship, has the claimant been discharged from liability under them as a result of the changes in the corporate identity of the shipbuilder or material variations in the shipbuilding contracts?
The Judge stated that it is essential to construe whether there was an agreement by the defendants, to vary the shipbuilding contracts and, if there was, whether the claimant, the guarantor, affirmed the APGs with knowledge of such variation. With regard to changes in the corporate identity of the shipbuilder, the Judge held that the defendants did not agree to the changes as it resulted from the unilateral actions of HWS and then Buyoung. As such, the claimant was not discharged from liability under the APGs. He relied on Holme v Brunskill where Cotton LJ made it clear, at 505, that for the guarantor to be discharged there must be an “agreement between the principals with reference to the contract guaranteed”. Also, the Judge concluded that the claimant was not discharged from the APGs on the grounds of alleged postponement to the delivery dates under the contract as the claimant had affirmed the APGs during the exchange of relevant correspondences.
Issue 3: As a result of the corporate changes, could the defendants make a contractual demand which triggered liability under the APGs?
The Judge held that regardless of whether or not the APGs are performance bonds, the shipbuilding contracts gives the defendants the right to terminate the contracts and demand repayment on an insolvency event including “the dissolution…or liquidation of” the Builder. The APGs give the defendants a guarantee of the repayment of the advance payments upon a demand with a signed statement certifying that their demand for refund “is made in accordance with clause 17…and that the Builder has failed to make the refund”.
He then went on to state at paragraph 92 that : If, as I have decided, the APGs are performance bonds rather than classic contracts of suretyship, there is an additional reason. In the light of the evidence of Korean law, once the merger was effective, Buyoung succeeded to all of HWS’s rights and obligations (save in immaterial respects). Asia Heavy in turn succeeded to all Buyoung’s rights and obligations, although after the partitioning Buyoung remained jointly and severally liable. Accordingly, the defendants could honestly and validly self-certify in accordance with paragraph [4] of the APGs. They did so certify that the demand was in conformity with clause 17. In the absence of an allegation of fraud that is an end to the matter: … and Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159.
Source:
Meritz Fire and Marine Insurance Co Ltd v (1) Jan de Nul NV and(2) Codralux SA [2010] EWHC 3362 (Comm)
After considering various authorities and counsels’ submission, the Judge rejected claimant’s submissions and concluded that the APGs are performance bonds or demand guarantees.
He noted that the broad structure of the APGs had three of the four attributes which will lead an instrument to be construed as a demand guarantee, namely; (a) the underlying transactions, the shipbuilding contracts, are between parties in different jurisdictions; (b) the APGs do not contain clauses excluding or limiting the defences available to a surety in a classic guarantee where the surety’s liability is secondary; and (c) the undertaking is to pay on demand, in this case, see paragraph [2], to pay “within thirty (30) days after demand is made”. He rejected claimant’s submission that as the APGs were not issued by a bank the strong presumption against them being performance bonds applies. His rationale was that while claimant’s primary business may have been as an insurance company, it was also providing financial instruments in return for a fee. Also, the definition of a “demand guarantee” in Article 2(a) of the ICC Uniform Rules for Demand Guarantees includes “any guarantee…by a bank, insurance company or other body…”.
He referred in particular to the fact that in the present case (a) payment is triggered by a demand upon presentation of specified documents, (b) the guarantee is stated to be irrevocable and unconditional, and (c) it is stated to be subject to the Uniform Rules. He also stated that the provision of the APGs satisfy the definition of “demand guarantee” in the Uniform Rules. The absence of any limitation to or exclusion of any of the defences which would be available to a surety is also a pointer to the instruments being demand guarantees or performance bonds.
Issue 2: If the APGs are contracts of suretyship, has the claimant been discharged from liability under them as a result of the changes in the corporate identity of the shipbuilder or material variations in the shipbuilding contracts?
The Judge stated that it is essential to construe whether there was an agreement by the defendants, to vary the shipbuilding contracts and, if there was, whether the claimant, the guarantor, affirmed the APGs with knowledge of such variation. With regard to changes in the corporate identity of the shipbuilder, the Judge held that the defendants did not agree to the changes as it resulted from the unilateral actions of HWS and then Buyoung. As such, the claimant was not discharged from liability under the APGs. He relied on Holme v Brunskill where Cotton LJ made it clear, at 505, that for the guarantor to be discharged there must be an “agreement between the principals with reference to the contract guaranteed”. Also, the Judge concluded that the claimant was not discharged from the APGs on the grounds of alleged postponement to the delivery dates under the contract as the claimant had affirmed the APGs during the exchange of relevant correspondences.
Issue 3: As a result of the corporate changes, could the defendants make a contractual demand which triggered liability under the APGs?
The Judge held that regardless of whether or not the APGs are performance bonds, the shipbuilding contracts gives the defendants the right to terminate the contracts and demand repayment on an insolvency event including “the dissolution…or liquidation of” the Builder. The APGs give the defendants a guarantee of the repayment of the advance payments upon a demand with a signed statement certifying that their demand for refund “is made in accordance with clause 17…and that the Builder has failed to make the refund”.
He then went on to state at paragraph 92 that : If, as I have decided, the APGs are performance bonds rather than classic contracts of suretyship, there is an additional reason. In the light of the evidence of Korean law, once the merger was effective, Buyoung succeeded to all of HWS’s rights and obligations (save in immaterial respects). Asia Heavy in turn succeeded to all Buyoung’s rights and obligations, although after the partitioning Buyoung remained jointly and severally liable. Accordingly, the defendants could honestly and validly self-certify in accordance with paragraph [4] of the APGs. They did so certify that the demand was in conformity with clause 17. In the absence of an allegation of fraud that is an end to the matter: … and Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159.
Source:
Meritz Fire and Marine Insurance Co Ltd v (1) Jan de Nul NV and(2) Codralux SA [2010] EWHC 3362 (Comm)
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