Rainy Sky SA & Ors v Kookmin Bank

Neutral Citation Number: [2009] EWHC 2624 (Comm) Claim No: 2009 Folio 1070 IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION COMMERCIAL COURT Royal Courts of Justice Strand, London, WC2A 2LL Date: 29/10/2009 Before: Mr Justice Simon __________ Between: Rainy Sky S. A. & others Claimants and Kookmin Bank __________ Defendant Mr Andrew Baker QC and Mr Socrates Papadopoulos (instructed by Ince & Co) for the Claimants Mr Guy Philipps QC and Mr James Cutress (instructed by Linklaters) for Defendant __________ Hearing date: 16 October 2009 __________ Judgment Mr Justice Simon: Introduction 1. 2. 3. 4. This is the hearing of an application and cross-application for summary judgment under CPR Part 24. The claim is brought by the Claimants against the Defendant Bank for a total sum of US$46,620,000 plus interest, under 6 documents in identical form headed ‘Advance Payment Bond’. The Bonds were issued in connection with 6 Shipbuilding contracts by which each of the 1st to 6th Claimants (‘the Buyers’) contracted to buy a vessel from Jinse Shipbuilding Co Ltd (‘the Builder’) for the sum of US$33.3m, payable in 5 equal instalments of US$6.66m. The 7th Claimant is the assignee of the benefit of the Advance Payment Bonds. It is common ground that the same issues arise in relation to each claim. The Bond is in the form of a letter (dated 22 August 2007) addressed by the Defendant Bank to the Buyers. I have enumerated the following four paragraphs for convenience [1] ... Other terms and expressions used in this Bond shall have the same meaning as in the Contract, a copy of which has been provided to us. [2] Pursuant to the terms of the Contract, you are entitled, upon your rejection of the Vessel in accordance with the terms of the Contract, your termination, cancellation or rescission of the Contract or upon a Total Loss of the Vessel, to repayment of the pre-delivery instalments of the Contract Price paid by you prior to such termination or a Total Loss of the Vessel (as the case may be) and the value of the Buyer’s Supplies delivered to the Shipyard (if any) together with interest thereon at the rate of ... (7%) per annum (or ... (10%) per annum in the case of Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of the remittance by telegraphic transfer of such refund. [3] In consideration of your agreement to make the pre-delivery instalments under the Contract and for other good and valuable consideration (the receipt and adequacy of which is hereby acknowledged), we hereby, as primary obligor, irrevocably and unconditionally undertake to pay to you, your successors and assigns, on your first written demand, all such sums due to you under the Contract (or such sums which would have been due to you but for any irregularity, illegality, invalidity or unenforceability in whole or in part of the Contract) PROVIDED THAT the total amount recoverable by you under this Bond shall not exceed US $[26,640,000] ... plus interest thereon at the rate of ... (7%) per annum (or ... (10%) per annum in the case of Total Loss of the Vessel) from the respective dates of payment by you of such instalments to the date of the remittance by telegraphic transfer of such refund. [4] Payment by us under this Bond shall be made without any deductions or withholding, and promptly on receipt by us of a written demand (substantially in the form attached) signed by two of your directors stating that the Builder has failed to fulfil the terms and conditions of the Contract and as a result of such failure, the amount claimed is due to you and specifying in what respects the Builder has so failed and the amount claimed. Such claim and statement shall be accepted by us as evidence for the purposes of this Bond alone that this amount claimed is due to you under the Bond. 5. 6. There were further provisions for the assignment of the Bond, for Governing Law of the Bond to be English law and for the jurisdiction of the Commercial Court in case of any disputed claim under the Bond. The Clauses of the Shipbuilding Contract are partly expressed in Roman numerals, which I have converted into Arabic enumeration for convenience. It will be necessary later in the judgment to refer to some of the provisions of this contract (which was dated 11 May 2007); but I note at this stage that Article 10 dealt with payment (including the terms of payment by means of advance payment instalments) and included, at Article 10.5 and 10.6, an obligation on the Builder to refund the advance payments in the event of termination, cancellation or rescission of the contract pursuant to terms permitting the buyer to do so, and in case of the Total Loss of the vessel. 7. By the terms of Article 10.8 the Builder was under an obligation to procure a Refund Guarantee: ... [the] Builder shall also deliver to the Buyer an assignable letter of guarantee issued by a first class Korean Bank ... acceptable to the Buyer’s Financiers for the refund of the respective instalments following the way of the payment stipulated in this Article. The refund guarantees by the Builder to the Buyer shall be indicated pre-delivery instalments plus interest as aforesaid to the Buyer under or pursuant to [Article 10.5] above in the form annexed hereto as Exhibit ‘A’ which is yet to be agreed. 8. 9. It is common ground that there was no form annexed to the Shipbuilding Contract; and that the terms of the Advance Payment Bond were agreed subsequent to the conclusion of the Shipbuilding Contract. Article 12 dealt with the Builder’s default under the contract; and provided, at Article 12.3: If the Builder shall apply for or consent to the appointment of a receiver, trustee or liquidator, shall be adjudicated insolvent, shall apply to the courts for protection from its creditors, file a voluntary petition in bankruptcy or take advantage of any insolvency law, or any action shall be taken by the Builder having any effect similar to any of the foregoing or the equivalent thereof in any jurisdiction, the Buyer may by notice in writing to the Builder require the Builder to refund immediately to the Buyer the full amount of all sums paid by the Buyer to the Builder on account of the Vessel and interest thereon at ... 7% per annum on the amount to be refunded to the Buyer ... and immediately on receipt of such notice the Builder shall refund such amount to the Buyer. 10. The following matters are in evidence on these applications: i) ii) iii) iv) The 1st-6th Claimants made pre-delivery instalments to the Builder totalling US$46,620,000. During the course of 2008 the Builder experienced financial difficulties; and in late January 2009 entered into and/or became subject to a ‘debt work-out procedure’ under the Korean Corporate Restructuring Promotion Law 2007. On 25 February 2009 the 1st-6th Claimants wrote to the Builder notifying them that this procedure triggered Article 12.3 of the Shipbuilding Contracts; and requiring them immediately to refund all the instalments which had been paid plus interest at 7%. The Builder declined to do so. On 23 April 2009 the 1st-6th Claimants wrote to the Defendant Bank making a demand for repayment of the instalments pursuant to the terms of the Advance Payment Bonds. The Defendant declined to do so. 11. 12. 13. 14. On 9th September 2009 the Claimants issued an application for Part 24 Summary Judgment on the basis that the Defendant had no real prospect of successfully defending the claim at trial. It is said in the Claimants’ skeleton (although this is not common ground) that on 11 September 2009, the Builder applied for protection from its creditors and the commencement of ‘rehabilitation proceedings’ under Chapter 2 of the Korean Debtor Rehabilitation and Bankruptcy Law 2006 at Busan District Court. On 30 September the Defendant issued a counter application for Part 24 Judgment on the basis that the Claimants had no real prospect of succeeding in their claim at trial. It is accepted by the Claimants (for the purposes of the present applications) that the Buyers were not entitled to exercise rights under Article 10 of the Shipbuilding Contract; and that they have exercised their rights under Article 12.3. The issues 15. Two short issues arise for determination: (1) Whether the Advance Payment Bond covers sums which the Claimants claim to be entitled to under Article 12.3 of the Shipbuilding contracts, and (2) Whether the Claimants are entitled to payment under the Bonds ‘regardless of any dispute as to whether repayment of the instalments is due under the shipbuilding contracts’? The arguments on issue 1 16. Mr Guy Philipps QC (for the Defendant) submitted, i) ii) iii) iv) v) Paragraph [3] of the Bond makes it clear that the Defendant is undertaking to pay ‘all such sums due to you under the contract’. This refers to the sums referred in paragraph [2] of the Bond: namely the pre- delivery instalments paid by the buyers which the Builder was liable to repay in particular circumstances. These circumstances were specifically confined to (i) the buyer’s rejection of the vessel, (ii) the buyer’s termination, cancellation or rescission of the contract, or (iii) upon the Total Loss of the vessel. Although Article 12.3 entitled the Buyer to repayment, it did not entitle the Buyer to repayment ‘upon rejection of the Vessel, termination, cancellation or rescission of the Contract or total loss’ (the words used in [2] of the Bond). It follows that the Bond does not cover the Builder’s obligation to pay under Art 12.3. The Bond was only apt to cover repayments which the Builder was liable to make under Article 10.5 - refunding in case of rejection, termination, cancellation or rescission; and/or Article 10.6(b) - refunding in the case of a Total Loss. These are the phrases which are used in paragraph [2] of the Bond; and demonstrate a clear intention that the Claimants’ rights under the Bond were confined to such eventualities. vi) This construction is reinforced by the fact that the Bonds were issued pursuant to the Builder’s obligation under Article 10.8 to procure an assignable Letter of Guarantee from a First Class Korean Bank in relation to the instalments. 17. For the Claimants Mr Andrew Baker QC submitted, i) ii) It would be odd, and highly uncommercial, if the Bond were to be treated as intended to respond to some but not all cases where the Shipbuilding contract provided for a refund of pre-delivery instalments. The words covered by the Bond in paragraph [3] define the subject matter of the Defendant’s obligation: ‘all such sums due to you under the Contract’. This plainly includes pre-delivery instalments which may be due to be repaid under the contract in the cases falling within Article 12.3. Discussion and conclusion on Issue 1 18. In my judgment Mr Baker is plainly correct in his argument on this issue. i) ii) Paragraphs [2]-[4] of the Bond set out a clear structure. Paragraph [1] shows that the terms used in the Bond have the same meaning as used in the Shipbuilding contract. Paragraph [2] is a preamble, in the sense that it sets out some (but not all) of the Claimants’ rights against the Builder. It does not set out the Claimants’ rights against the Defendant: those are contained in the next paragraph. Paragraph [3] sets out the Defendant’s obligation to pay sums due the Buyers under the Shipbuilding contract. Paragraph [4] describes both the nature of the obligation, and when and how it becomes due. The Defendant’s obligation to pay arises specifically under paragraphs [3] and [4]. The phrase ‘all such sums due under the contract’ in paragraph [3] (emphasis added) is clear and unqualified. ‘Such sums’ are not defined; but it makes better grammatical sense if they were intended to apply to ‘the pre- delivery instalments’ in the same sentence, rather than the repayment obligation recited as a pre-amble in the preceding paragraph [2]. As Mr Baker noted, the ‘value of the Buyer’s Supplies’ appears not to be covered by the Bond at all. iii) The Defendant’s construction has the surprising and uncommercial result that the Buyers would not be able to call on the Bond on the happening of the event which would be most likely to require the First class security. The arguments on issue 2 19. Mr Baker submitted that a number of cases established clear principles which applied when construing ‘On Demand’ guarantees: Esal (Commodities) Ltd and Reltor Ltd v. Oriental Credit Bank and others [1985] 2 Lloyd’s Rep 546; I. E. Contractors Ltd v. Lloyds Bank Plc and Rafidain Bank [1990] 2 Lloyds Rep 496; Gold Coast v. Caja de Ahorros [2002] EWCA (Civ) 1806; and IIG v. Van der Merwe [2008] EWCA (Civ) 542. He submitted that these authorities established a number of relevant principles. i) ii) The task of the Court is to determine the nature of the document in question without any preconceptions as to what it is. Where an instrument (a) relates to an underlying transaction between parties in different jurisdictions, (b) is issued by a bank, (c) contains an undertaking to pay ‘on demand’ and (d) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee, see the Gold Coast case at [16] citing with approval a passage from Paget on Banking (11th Edition). iii) In such cases, ... a bank is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not, the only exception being where there is clear evidence both of fraud, see the Esal Commodities case at 549r. iv) v) There is a presumption in favour of a construction which holds a performance bond to be conditioned on documents rather than facts, see the I. E. Contractors case at page 500 and the Gold Coast case at [17]. An ‘On Demand’ guarantee will often make reference to the obligation for whose performance the guarantee is security. A bare promise to pay on demand without any reference to the principal’s obligation would leave the principal even more exposed in the event of a fraudulent demand because there would be room for argument as to which obligations were being secured. See the Gold Coast case at [18], again citing with approval another passage in Paget. 20. Mr Baker submitted that there was nothing exceptional about the wording of the Advance Payment Bond in the present case. Although it referred to the underlying obligations this was not an invitation to the Defendant to investigate the underlying merits of the claim that the Builder was in breach of the Shipbuilding contract. He referred to a similar provision of the Performance Bond in the Esal Commodities case to reinforce his submission that this type of Bond was likely to refer to breaches of contract, but that this did not affect its status as a Demand Guarantee. 21. Mr Philipps did not dispute the legal principles which apply to the construction of Performance or Advance Payment Bonds; but submitted that the terms of this Advance Payment Bond posed a problem: if the statement that the Builder was in breach was intended to be conclusive, there would have been no need for the statement which triggers the obligation to ‘[specify] in what respects the Builder has so failed.’ He submitted that this further requirement obliged the Claimants to set out the material facts (or ‘evidence’) of the alleged breach so as to enable the Defendant to satisfy itself that the facts constituted a breach of the Shipbuilding contract. In the present case the Defendant relied on a facsimile dated 12 June 2009 sent by Linklaters in which it was disputed that there was in fact any default under Article 12.3 since the debt work-out procedure was not a circumstance falling within that Article. Discussion and conclusion on Issue 2 22. In my judgment Mr Baker is correct in his submissions. 23. What was required by the express terms of the Bond was a statement by the Claimants specifying in what respects the Builder had failed to fulfil the terms and conditions of the contract. This was done in the Claimants’ letter of 23 April 2009. The terms of the Bond, and the reference to ‘evidence’ in the last sentence of paragraph [4] did not give rise to an entitlement in the Defendant to form its own view about underlying merits. Absent fraud the Defendant was obliged to pay against a demand in the form in which it was made. 24. In my view the Defendant’s construction is inconsistent with the terms of the Bond, which provides for prompt payment on receipt of the demand in the terms specified, is contrary to legal principle and would deprive the Advance Payment Bond of its commercial utility. Conclusion 25. Since the Claimants have succeeded on both issues, they are entitled to Summary Judgment and the Defendant’s application must be dismissed. 26. I will hear the parties on the form of the Order which should be made.