Article

Factual Summary: B u y e r / B e n e f i c i a r y contracted with Builder/Applicant to construct a roro container vessel with a "Contract Delivery Date" of 15 December 2009. Article IV clauses 1(b)-(e) of the shipbuilding contract provided for "an adjustment of the contract price and for cancellation by [Buyer/ Beneficiary] in the event of late delivery." Pursuant to the contract, Guarantor issued refund guarantees for each installment at the request of Builder/ Applicant in favor of Buyer/Beneficiary containing an "irrevocable and unconditional" obligation to pay Buyer/Beneficiary which could arise in 3 different ways: 1) no dispute between Buyer/Beneficiary and Builder/Applicant on the cancellation of the shipbuilding contract; 2) the dispute on cancellation must have been referred to arbitration resulting in an arbitral award; and 3) Buyer/Beneficiary could make a demand if Builder/Applicant "delayed in the construction of the vessel for more than 270 days including force majeure but excluding other permissible delay as per terms of the contract".

Under this 3rd way, Buyer/Beneficiary was required to accompany its demand with a

"written statement signed by a person that is entitled to bind [Buyer/Beneficiary] by signature, stating (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 [Buyer/Beneficiary] to cancel the contract and to receive repayment of the advance payments, [and] (B) that you the buyer have pursuant to such right of cancellation duly cancelled the contract".

Addendum No.2 to the shipbuilding contract amended the "Contract Delivery Date" to 30 June 2011. Addendum No.3 amended the "Contract Delivery Date" to 30 October 2012 and deleted clauses 1(b)-(e) of Article IV (provisions on adjustment of the contract price and cancellation by Buyer/Beneficiary).

When Builder/Applicant failed on the refund guarantee to deliver by 30 October 2012, Buyer/ Beneficiary cancelled the contract and made a demand on 5 November 2012 under the 3rd way. The demand contained 3 sections. The 1st section requested payment due to "delay in delivery of the vessel in excess of 270 days" while the 2nd section requested payment because of "delay in construction of the vessel for more than 270 days". The 3rd section requested payment because "the vessel has not been delivered by the delivery date of 30 June 2011 or within 270 days of the same, that is by 26 March 2012." The demand read as follows:

"By a Shipbuilding Contract, as amended from time to time by addenda 1-4 ("the Shipbuilding Contract") dated 12 June 2007 between Sea-cargo Skips AS ("the Buyer/Beneficiary") and Bharati Shipyard Limited ("the Builder"), the Builder agreed to deliver and sell a Vessel to the Buyer/ Beneficiary. By way of a Notice of Cancellation dated 31 October 2012 the Shipbuilding Contract was terminated due to delay in delivery of the Vessel in excess of 270 days. The Buyer/ Beneficiary demanded repayment from the Builder of, amongst other things, the full amount of all sums paid on account of the vessel plus interest at the contractually agreed rate of 5%. The Builder has not repaid such sums to the Buyer/Beneficiary.

In accordance with the terms of the above referenced Refund Guarantees, in circumstances where the Builder, as here, has been delayed in the construction of the vessel for more than 270 days then the Buyer/Beneficiary is entitled to demand immediate repayment from you of the pre-delivery instalments. We accordingly hereby demand payment by you of the pre-delivery instalments paid with respect to the Vessel/Hull 357 in the amount of:

First instalment: US$4,340,000

Increased amount first instalment: US$ 100,000

Second instalment: US$4,440,000

Third instalment: US$4,440,000

Plus interest of: US$2,225,761

We confirm that the vessel has not been delivered by the delivery date of 30 June 2011 or within 270 days of the same, that is by 26 March 2012 and that the Buyer/Beneficiary has accordingly exercised their right to cancel the Contract.

We look forward to receiving payment within 5 banking days to the following account: ............"

Guarantor refused to honor the demand on the basis 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 [Buyer/ Beneficiary] was entitled to receive repayment of the advance payments."

Buyer/Beneficiary sued Guarantor for wrongful dishonor, and the court ruled in favor of Guarantor.

Legal Analysis:

1. Strict Compliance in Performance Bonds:

Buyer/Beneficiary argued that although its demand did not precisely track the language of the refund guarantee's requirements, it was obvious that the statements in the demand were of the same effect. The Judge reasoned that the demand was deficient in that it did not strictly comply with the requirements of the refund guarantee. The Judge stated "For my part I would respectfully doubt that there is less need for a doctrine of strict compliance in the field of performance bonds than in letters of credit. In the field of performance bonds, as in the field of letters of credit, the banks who provide the bonds deal with documents. Banks must honour their obligation to pay if documents which conform with the requirements of the bond are tendered. Thus the banks must determine, on the basis of the presentation alone, whether it appears on its face to be a complying presentation; see articles 6 and 19(a) of the ICC's Uniform Rules for Demand Guarantees 2010 Revision which are good evidence of banking practice."

2. Examination on the Face of the Documents:

Buyer/Beneficiary argued that although the demand did not use the exact language required by the refund guarantee, "it was sufficient that the demand was 'in substance' what was required." The Judge reasoned that Guarantor was obliged only to examine the demand on its face to determine whether it complied with the refund guarantee. Although "the demand did not have to repeat precisely the words of the refund guarantee . . . it was necessary . . . for it to refer to article IV 1(e) so that the Bank could see on its face that it was a compliant demand."

Comments:

TEXT OF THE GUARANTEE:

"1. We shall pay you the aforesaid amounts within 5-Five-banking days upon receipt by us of your first demand in writing accompanied by a written statement signed by a person that is entitled to bind the buyer by signature, stating (A) the causes that entitle the buyer to cancel the contract and to receive repayment of the advance payments, (B) that such cause/s has or have occurred, (C) that you the buyer have pursuant to such right of cancellation duly cancelled the contract, (D) that the builder has not disputed the cancellation of the contract, (E) that no arbitration proceedings have been initiated with reference to the cancellation and (F) that a demand for refund of the said amount of advance payment has been duly made upon the builder and the builder has failed to refund the amount of the said installments claimed by you, the buyer, or any part thereof at the date of the demand made by the buyer under this guarantee.

2. Where the dispute, if any, has been referred to arbitration in accordance with the contract, the request for payment by the buyer under this guarantee shall be accompanied by arbitral judgment award in an arbitration procedure evidencing the amount due to the buyer by the builder together with a statement that the amount claimed under this guarantee forms part of the arbitral award and that no part of the claim made under this guarantee exceeds the amount awarded under the arbitral award and that no part of the amount of the arbitral award has been received from the builder.

3. Notwithstanding anything to the contrary contained hereinabove, should builder be delayed in the construction of the vessel for more than 270 days including force majeure but excluding other permissible delay as per terms of the contract, then the buyer shall have the right to demand immediate payment from us under this guarantee, and we shall pay you the aforesaid amounts within 5-five-banking days upon receipt by us of your first demand in writing accompanied by a written statement signed by a person that is entitled to bind the buyer by signature, stating (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, we shall pay to the buyer the guaranteed amount within 5 banking days after the receipt of such written statement.

This guarantee shall not be affected but shall remain valid notwithstanding the contract being altered, amended, varied or supplemented from time to time."

[PT]

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