Article

Note: Meritz Fire & Marine Insurance Co. Ltd. (Guarantor) issued three Advance Payment Guarantees subject to URDG458 (1992) covering payments advanced by Jan De Nul N.V. & ANR (Beneficiary/Buyer) in connection with a shipbuilding contract with Huen Woo Still Co Ltd (Builder/Applicant).

When Builder/Applicant subsequently merged with Xxien Environmental Company (Transferee) and partitioned its shipbuilding business to Asia Heavy Industries Co. Ltd. (Successors), Beneficiary/Buyer terminated the contract and demanded that advance payments be repaid with interest. When Successors failed to repay the payments to Beneficiary/Buyer, it demanded payment from Guarantor. Guarantor refused to pay on ground that the guarantees had been discharged when Builder/Applicant was dissolved in a merger and the shipbuilding contract transferred to Successors. Beneficiary/Buyer sued Guarantor for wrongful discharge. The High Court of Justice awarded judgment to Beneficiary/Buyer. On Guarantor's appeal, the Court of Appeal, in an opinion by Longmore, J., dismissed the appeal.

In determining whether the guarantees were "Performance Bonds" or "On-Demand" Bonds or "See-to-it" guarantees, the appellate court noted that they were subject to URDG458 (1992). The appellate court stated "the intention of the Rules...is that payment is to be made against documents without reference to the underlying contract between the Principal (here [Builder/Applicant]) and the Beneficiary (here the [Beneficiary/]Buyers). But if the parties expressly choose to make payment depend on the resolution of any dispute, they can agree (as [Guarantor] and the [Beneficiary/]Buyers did in Paragraph 6 of the [Advance Payment Guarantee]) that a relevant document against which payment is to be made can be an arbitration award."

Guarantor argued that the guarantees "were not like performance bonds in respect of which money was automatically due on the beneficiary's say-so but were traditional "see-to it" guarantees pursuant to which the beneficiary had to prove that the principal debtor was truly liable to his counter party under the original contract." The appellate court, noting that the guarantees were subject to URDG458, described this characterization as "extremely difficult."

Guarantor further argued that the guarantees no longer had application since Guarantor had only "guaranteed the obligation of [Builder/Applicant] to make the repayment and not the obligation of anyone else." The appellate court noted that Guarantor "ignore[ed] or overlook[ed] the fact that the payment under the [Advance Payment Guarantees] is to be made against documents [and that] there is no requirement that any assertion in the documents is correct in law."

Guarantor argued that Beneficiary could not make a demand in conformity with the underlying contract in light of the novation by Builder/Applicant to Successors. The appellate court noted that "it matters not whether there is a true liability to refund under clause 17, nor whether the Builder has, in fact, failed to make the refund. But since as a matter of fact no refund has been made it is, in any event, no abuse of language to say that the Builder has failed to make the refund...[even if Builder/Applicant] was not liable to make the refund but [one of the Successors] was."

The appellate court ruled that while a novation to Transferee and Successors may have occurred, a novation does not make the advance payment guarantees "a dead letter...unless the wording to that effect were clear." Questions surrounding the effect of a novation "are irrelevant to guarantees where payment is to be made against documents." Since Beneficiary/Buyer submitted documents saying Builder/Applicant failed to make any refunds, "paragraph 4 of the [Advance Payment Guarantees] is, therefore, operative."

Comment:

That adults should have to spend serious time and money arguing about whether a "guarantee" was independent is testimony to the entrenched position of those who thrive on confusion. Of course, the name used for the undertakings ("guarantee", "performance bond", etc.) are themselves confusion. The terms add considerably to the confusion, as well.

The wonder is that the beneficiaries put up with it. It is a relatively simple, off the shelf proposition to obtain an independent undertaking. The terms of the drawing may warrant some negotiation but these terms should not without considerable effort call into question its independence.

Yet year after year, sophisticated and high-ended transactions between major commercial parties end up in litigation over this fundamental yet elementary point.

TEXT: As reprinted in the opinion, the Guarantee provided:

[1] We hereby issue the irrevocable Advance Payment Guarantee (Letter of Guarantee Number ...) in favor [sic] of [Jan de Nul NV/Codralux SA] ...(hereinafter called "the Buyer") 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 buyer 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 Buyer shall become entitled to a refund of advance payments made to the Builder prior to the delivery of the Vessel, whereby irrevocably and unconditionally guarantee the repayment of the same to the Buyer within Thirty (30) days after demand is made not exceeding the sum [specified] ... together with interest ...

[3] Under no circumstances shall the amount of this Advance Payment Guarantee (Letter of guarantee) exceed [the specific sum, being an amount equal to 20% of the total Contract Price in the case 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 Buyer's demand for payment under this Advance Payment Guarantee (Letter of Guarantee) is payable upon our receipt of the Buyer's signed statement certifying that the Buyer'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 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 buyer of the sum guaranteed hereby or upon acceptance by the buyer 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 Buyer in accordance with the provision 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 Guarantees of the International Chamber of Commerce (ICC), ICC Publication No. 458.

[JEB/nso]

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