Article

Topics: Guarantee's Classification; Independence; URDG 458

Note: Jan de Nul NV (Purchaser 1/ Beneficiary) and Codralux SA (Purchaser 2/ Beneficiary) entered into separate contracts with Huen Woo Steel Co Ltd (Builder/Applicant) for it to construct oceangoing vessels. Because Purchasers were making advance payments, they sought and received advance payment guarantees on behalf of Builder/Applicant from Meritz Fire and Marine Insurance Co Ltd (Guarantor). A condition of the arrangement between Builder/Applicant and Guarantor was that, "without [Guarantor's] consent, [Builder/Applicant] should not merge or consolidate with another corporation."

Notwithstanding this provision, after the issuance of the guarantees Builder/Applicant merged with Xxien Environmental Company to form Buyoung Heavy Industries Co Ltd. (Merged Company). Merged Company subsequently partitioned its shipbuilding interests into a new company, Asia Heavy Industries Co Ltd (New Builder). When New Builder failed to fulfill its contract obligations and refused to refund the advance payments, Purchasers drew on the guarantees. Guarantor, however, refused to honor on the ground that Builder/Applicant had violated its reimbursement agreement by merging. Guarantor then sought declaratory relief indicating that it was not liable under the guarantees, while the Purchasers counterclaimed for wrongful dishonor. The Queen's Bench Division Commercial Court, Beatson J., found for the Purchasers, awarding the full amount of money owed under the guarantees plus six percent interest.

The Judge stated that because the transactions underlying the guarantees were between parties of different jurisdictions, contained no clauses that limited defenses available to surety, and required the undertaking to be paid on demand, they were properly classified as demand guarantees. The fact that the final guarantees contained a clause making them "subject to the Uniform Rules for Demand Guarantee of the International Chamber of Commerce (ICC)" appeared to the Judge as "an indication that the parties regarded [the Guarantees] as 'demand guarantees.'" The Judge also rejected the argument that Buyer/ Applicant's changed corporate identity and material changes in contracts discharged Guarantor from liability. The Judge observed that the Beneficiaries could not be held liable for the change in corporate form, because the change was a "unilateral action by [Builder/Applicant] and its effect under Korean law, and then by the unilateral act of [Merged Company] and the effect of the partitioning under Korean law but conducted unilaterally by [Applicant/ Builder] under Korean law."

Excerpts from the text of the Guarantee in [2010] EWHC 3362 (Comm) [21 December 2010, Queen's Bench Division, Commercial Court] quoted in the opinion:

"[1] We hereby issue the irrevocable Advance Payment Guarantee (Letter of Guarantee Number...) in favor of [Jan de Nul NV/Codralux SA]...(hereinafter called "the Purchaser") for the account of Heun Woo Steel Co., Ltd., a shipyard organized and existing under the laws of the Republic of Korea...(hereinafter called "the Builder") in connection with the shipbuilding contract...(hereinafter called "the Shipbuilding Contract") made by and between the Purchaser and the Builder for the construction [the Vessel is then identified by description and its Builder's Hull number]...(hereinafter called "the Vessel").

[2] If, in connection with the terms of the Contract, the Purchaser shall become entitled to a refund of advance payments made to the Builder prior to the delivery of the Vessel, we hereby irrevocably and unconditionally guarantee the repayment of the same to the Purchaser within Thirty (30) days after demand is made not exceeding the sum [specified[1]]...together with interest...

[3] Under no circumstances shall the amount of this Advance Payment Guarantee (Letter of Guarantee) exceed [the specified sum, being an amount equal to 20% of the total Contract Price in the case of HS1005 and HS1006 and 70% of the total Contract Price in the case of HS1007] plus interest thereon at the rate of Six percent (6%) per annum...

[4] The Purchaser's demand for payment under this Advance Payment Guarantee (Letter of Guarantee) is payable upon our receipt of the Purchaser's signed statement certifying that the Purchaser's demand for refund is made in conformity with Clause 17 of the Contract and that the Builder has failed to make the refund.

...

[6] Notwithstanding the provisions hereinabove, in the event that within Thirty (30) days from the date of your claim to the Builder referred to above, we receive written notification from either you or the Builder stating that your claim for refund hereunder is disputed by the Builder and has been referred to arbitration in accordance with the provision of the Contract, we shall, under this Advance Payment Guarantee (Letter of Guarantee), refund to you the sum as per the award issued under such arbitration immediately upon receipt from you of a demand for the sum so adjudged together with a copy of the arbitration award, and not before.

[7] This Advance Payment Guarantee (Letter of Guarantee) [shall] become null and void upon receipt by the Purchaser of the sum guaranteed hereby or upon acceptance by the Purchaser of the delivery of the Vessel in accordance with the terms of the Contract...

[8] This Advance Payment Guarantee (Letter of Guarantee) is valid from the date herein stated below until such time that the Vessel is delivered by the Builder to the Purchaser in accordance with the provisions of the Contract.

[9] This Advance Payment Guarantee (Letter of Guarantee) shall be governed by and construed under the substantive law of England and the undersigned hereby submits to the non-exclusive jurisdiction of the courts of England.

[10] ***** This Advance Payment Guarantee (Letter of Guarantee) is subject to the Uniform Rules for Demand Guarantee of the International Chamber of Commerce (ICC), ICC Publication No. 458."

[JEB/eml]

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