Shipbuilding - refund guarantees or conditional money back guarantees?



The object of a refund guarantee in shipbuilding is to ensure that Buyer can get their money back (usually from a bank) in the event that the shipbuilding contract is rightfully cancelled by Buyer. However, this assurance at best is tentative as the right to the money is not absolute.

Recent examples in shipbuilding cases where call on refund guarantees failed include invalid demand (Sea-Cargo Skips As v State Bank of India [2013] EWHC 177) and lack of authority (actual, ostensible or by ratification) to sign refund guarantees on the bank’s behalf (Sea Emerald SA v Prominvestbank).

In Sea-Cargo Skips As v State Bank of India, a demand on the refund guarantee issued in connection with a Shipbuilding Contract was held to be deficient. The guarantee required a statement from the Buyer that:

“(A) that the vessel or the construction thereof is delayed with more than 270 days as set out in the contract article IV 1 (E) which entitles the buyer to cancel the contract and to receive repayment of the advance payments,

(B) that you the buyer have pursuant to such right of cancellation duly cancelled the contract…….”

The Bank says that the demand failed to make reference to a delay within article IV 1 (e) of the Shipbuilding Contract and also failed to state that the Buyer was entitled to receive repayment of the advance payments.

The Judge agreed and stated that whether the demand was sufficient to trigger the bank’s liability to pay was a question of construction, i.e. what did the parties intend would trigger the Bank’s liability to pay. The relevant question is whether the demand complied with the refund guarantee and therefore bound the Bank to pay. He held that the demand was ambiguous and in the present case did not contain a statement that there had been 270 days delay as set out in article IV 1(e). Also, the Buyer did not state that he is entitled to repayment.

Comment:
Refund guarantees are sophisticated conditional money back guarantees, in view of the technicalities, please handle with care. Call in the professionals.

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