By the International Trade, Transport & Energy Team at Shepstone & Wylie Attorneys

In the recent case of Spliethoff's Bevrachtingskantoor BV v Bank of China Ltd 2015, the Commercial Court looked at the nature of refund guarantees and whether or not  a foreign court order affects the bank’s liability to pay on demand.   The court confirmed that it did not have the discretion to refuse enforcing Chinese judgments in England, eventhough the claimant had submitted fully to Chinese jurisdiction.  The court rules that, in terms of issues arising out of refund guarantees, those governed by English law are akin to a performance bond and thus the obligation to pay on demand should not be affected by unrelated, peripheral matters (including fraud).

The case concerned two refund guarantees for two hulls (38 and 39) built for Spliethoff’s Bevrachtingskantoor BV (“the Claimant”).  The refund guarantees were provided by the Bank of China (“BOC”).  The vessels were not delivered on time, so the Claimant requested the repayment of instalments from the shipyard.  The Claimant claimed payment from BOC under the guarantees after obtaining arbitration awards for such payment.

Carr J found that the guarantees were in the nature of performance bonds and only secured the obligation of the sellers under the shipbuilding contracts to refund advance instalment payments in the event of cancellation.  He cited Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece 2012, where the Court of Appeal refered to Paget’s Law of Banking that states:

“Where an instrument (i) relates to an underlying transaction between the parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.”

The question of whether the English courts should recognise the Chinese judgments and orders, the court looked at whether the Claimant had submitted to Chinese jurisdiction.  The Claimant was found to have submitted through choosing to defend the claims against it in the Chinese proceedings.

Based on this case, companies must keep in mind that foreign judgments and orders against buyers in respect of the underlying shipbuilding contract are unlikely to provide a defence to the issuer of the guarantee (even if those judgments and orders are to be recognised by the English court).