Meritz Fire and Marine Insurance Co Ltd v Jan De Nul NV (Rev 1) [2010] EWHC 3362 (Comm) (21 December 2010)

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England and Wales High Court (Commercial Court) Decisions

You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Meritz Fire and Marine Insurance Co Ltd v Jan De Nul NV (Rev 1) [2010] EWHC 3362 (Comm) (21 December 2010)
URL: http://www.bailii.org/ew/cases/EWHC/Comm/2010/3362.html
Cite as: [2011] TCLR 2, [2010] EWHC 3362 (Comm), [2011] 1 All ER (Comm) 1049, [2011] 1 CLC 48, 134 Con LR 252, [2011] BLR 320

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		Neutral Citation Number: [2010] EWHC 3362 (Comm)
		Case No: CLAIM NO. 2009 FOLIOS 501 & 502

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

21/12/2010

B e f o r e :

THE HONOURABLE MR JUSTICE BEATSON
____________________

Between:

	Meritz Fire and Marine Insurance Co Ltd	Claimant
	- and -
	Jan de Nul NV	1st Defendant
	-and-
	Codralux SA	2nd Defendant

____________________

David Oliver QC and Richard Nowinski (instructed by Thomas Cooper) for the Claimant
Iain Milligan QC and Mark Humphries (instructed by Linklaters LLP) for the Defendants
Hearing dates: 29 November 2010 - 1 December 2010
____________________

HTML VERSION OF JUDGMENT
____________________

Mr Justice Beatson :

I. Introduction

The claimant, Meritz Fire and Marine Insurance Co Ltd ("Meritz"), seeks a declaration that it is not liable under Advance Payment Guarantees ("APGs") it issued to the defendants guaranteeing the repayment of payments made by the defendants under three shipbuilding contracts and is discharged as a surety. The defendants are dredging companies. Jan de Nul NV, the first defendant, is a Belgian company. Codralux SA, the second defendant, a Luxembourg company, is its subsidiary. In respect of two of the contracts the sum guaranteed is US$6.3 million per contract. In respect of the third contract it is €15.05 million. The payments made by the defendants to the shipbuilder exceed these sums. The defendants maintain the claimant is liable to pay them the sums guaranteed and contractually specified interest. There are three issues for decision. First, are the APGs performance bonds or classic contracts of suretyship? If the latter, has Meritz been discharged from liability under them as a result of material variations in the shipbuilding contracts and changes in the corporate identity of the shipbuilder. The third issue arises whether or not the APGs are performance bonds. It is whether, as a result of the corporate changes, the defendants were unable to make a contractual demand which triggered liability under the APGs.

Two of the APGs were issued to the first defendant, in respect of payments under two shipbuilding contracts ("HS1005" and "HS1006") both dated 10 August 2006 with a Korean shipbuilding company, Huen Woo Steel Co Ltd ("HWS"). The third APG was issued to the second defendant in respect of payments under a shipbuilding contract ("HS1007") with HWS entered into on 4 April 2007. Save as will be explained, the terms of the three shipbuilding contracts are materially the same. They provide (clauses 5 and 19, and Annex 3) that APGs in a specified form be given to the first and second defendants and that "no instalment will be paid" by them to the builder until they receive an APG in the specified form.

On 1 September 2006 Meritz agreed with HWS that it would provide APGs for contracts HS1005 and HS1006. This was a commercial transaction for a fee. Clauses 5.11 and 5.12 of their agreement, the "Basic Agreement", provided that HWS pay Meritz "all costs, fees, taxes, charges and expenses" incurred in connection with the negotiation, preparation and execution of the APGs and any enforcement costs. Clauses 5.9 and 5.10 provided that, without Meritz's consent, HWS should not merge or consolidate with another corporation, that there be no change in its ownership, and that named persons be maintained as officers of HWS during the period of the APGs. By clauses 3(d) and 4(g) HWS warranted that financial information it was required to provide to Meritz was true. On the same day Meritz executed the APGs in respect of those two contracts. On 13 October 2006, HWS's shareholders entered into a share pledge agreement with Meritz. Some five months later, on 22 February 2007 Meritz entered a 70% reinsurance contract with Exporters Insurance Company (EIC). Contract HS1007 was signed on 4 April 2007, the APG in respect of that contract was executed on 27 April 2007, and Meritz took out reinsurance on 26 July 2007.

On 26 April 2007 HWS agreed to merge with Xxien Environmental Company ("Jacksien"). The shareholders' resolution approving the merger was passed on 27 April, and notice to the public was given on 7 May 2007. With effect from 8 June, the company was re-named Buyoung Heavy Industries Co Ltd ("Buyoung"). On 16 June Buyoung advised Meritz that "as of" 31 May HWS "has been merged" with Jacksien. On 18 June Buyoung informed the defendants of the merger. It stated that it replaced HWS "as of 1 June" and that all HWS's rights and obligations under the three shipbuilding contracts "are to be transferred".

A few months later, on 10 December 2007 Buyoung's board resolved that its shipbuilding business and its blockbuilding be partitioned. Buyoung was to continue to undertake the blockbuilding business but the shipbuilding business was to be transferred to a newly incorporated company, Asia Heavy Industries Co Ltd ("Asia Heavy"). The proposal was approved by the shareholders on 28 December 2007 and was registered at the court on 5 February 2008. The partitioning became effective on registration and Asia Heavy informed the defendants of it on 21 March.

Not long afterwards it became apparent to Meritz and the defendants that Asia Heavy was in financial difficulties. At that time its only shipbuilding projects were under the three contracts with the defendants. Between April 2008 and early March 2009 there were numerous communications between Asia Heavy, the first defendant, and Meritz about the partitioning, delays in the construction, and Asia Heavy's financial position. These are summarised at [27] – [47].

In letters dated 26 November and 4 December 2008 the defendants served notice of default under contracts HS1007 and HS1005 on Asia Heavy, stating they reserved their rights to terminate the contracts. In a letter dated 9 March 2009 the first defendant terminated HS1005 and demanded that Asia Heavy repay the money paid by it under the contract with interest. In a letter dated 10 March 2009 the second defendant terminated HS1007 and demanded the repayment of all money paid and the return of items it had supplied to the shipbuilder. In a letter dated 2 April 2009 the first defendant terminated HS1006 on the ground that an item had been seized by a third party creditor. This letter stated it had been informed steel plates intended for use in construction of HS1006 had been sold. It also required the repayment of monies paid with interest. Asia Heavy Industries did not pay any of these demands. On 9 April, the first and second defendants demanded payment from Meritz under the three APGs. They also wrote to Buyoung claiming that Buyoung was under a joint and several liability in respect of the shipbuilder's' obligations to repay under the three contracts.

These proceedings were issued on 17 April 2009. On 16 June Asia Heavy was declared bankrupt. The defendants sent further termination letters both before and after that date relying on alternative grounds. On 19 May the first defendant purported to terminate HS1006 on the ground of a delay of 150 days after the due date for launching, Milestone 3 under the contract. They also wrote on 18 and 19 June terminating the contracts on the ground of Asia Heavy's bankruptcy.

I have referred to the three issues that fall for decision. The claimant's case is that it is not liable under the three guarantees. Its primary case is that it guaranteed the obligations of HWS and not those of its corporate successors. Alternatively, its position is that, if it guaranteed the obligations of Asia Heavy, it has been discharged from liability as a result of material variations to the shipbuilding contracts by reason of the changes in the corporate identity and extensions of the delivery time of the vessels which it claims were agreed between Asia Heavy and the defendants. It also maintains that when HWS ceased to exist once the merger with Jacksien was complete and Buyoung came into existence, it was not possible, within the terms of the shipbuilding contracts and the APGs for a contractual demand to be made which triggered Meritz's liability under the APGs.

The defendants' case is that the APGs are unconditional performance bonds and it is irrelevant which corporate entity failed to make the refund or whether there have been material variations to the shipbuilding contracts. Its alternative position is that, if the APGs are classic contracts of suretyship, in the language of Lord Diplock in Moschi v Lep Air Services Ltd [1973] AC 331 at 348, "see to it" guarantees, in which Meritz's obligation as guarantor is secondary to the primary obligation of the principal debtor there were no material variations in the shipbuilding contracts because those contracts provided for changes in the delivery time of the vessels.

II. The Evidence

There were no witnesses of fact. Statements had been produced but shortly before the hearing the parties agreed to withdraw them on terms. They agreed that:

1) Neither of the defendants knew of the existence of the Basic Agreement, the share pledges, the personal guarantees, or the reinsurance contracts on the dates when the APGs were issued;

2) Neither of the defendants was aware of the proposal to merge HWS into Buyoung Heavy Industries Co Ltd or to partition Asia Heavy Industries from Buyoung until after those events respectively had occurred; and

3) The defendants were free to rely on the documents as evidence in support of their contention that Meritz affirmed the APGs.

Two expert witnesses gave evidence on Korean law. Professor Joongi Kim of Yonsei Law School, Seoul, gave evidence on behalf of the claimant. His report is dated 1 July 2010. Professor Kon Sik Kim of the School of Law, Seoul National University, gave evidence on behalf of the defendants. His report is dated 27 May 2010. The joint statement by the experts is dated 21 July 2010. Supplemental reports by each dealt with Korean law as to the effect on the APGs of the changes in the corporate structure of the shipbuilder. It was, however, common ground between Mr Milligan QC and Mr Oliver QC that, because the APGs are governed by English law, the evidence of the experts as to the impact of the reorganisation on them is irrelevant.

It was also common ground that, under Korean law, on merger, Buyoung succeeded to all the rights and obligations of HWS. Professor Joongi Kim's report referred to three exceptions to what he agreed was a general rule. Those concerning employment contracts and criminal liability (see paragraphs 24 and 27 of his report) do not apply. As to the exception in the case of obligations that are tied to the "exclusive characteristics" of a dissolved company, there was a difference between the experts as to whether this exception was confined to public law rights and obligations. Professor Joongi Kim stated it was unclear whether this was so. There was, however, no challenge to Professor Kon Sik Kim's evidence that it was so confined. In any event, since there is no case advanced by the claimant that Buyoung's creditworthiness was inferior to that of HWS, the circumstances which might bring the suggested exception into play if it has any application to private law rights and obligations do not apply. As to the evidence concerning the effectiveness of the merger, it was common ground that, since the claimant was informed of the merger on 16 June, it had an opportunity to annul it under Article 529(1) of the Korean Commercial Code. As it did not do so within the specified six month period, it was too late to do so, the merger was effective and the claimant was deemed to have consented to it.

As far as the partitioning is concerned, the experts agreed that, if Buyoung succeeded to all the rights and obligations of HWS under the shipbuilding contracts, Asia Heavy in turn also succeeded to those rights and obligations. They also agreed, in the light of the partitioning and the merger plan, that Buyoung remained jointly and severally liable in respect of those obligations. The consequence of the expert evidence and the relevant English conflict of laws rule is that English law recognises that HWS was succeeded as "the Builder" under the shipbuilding contracts, first by Buyoung, and then by Asia Heavy: see National Bank of Greece v Metliss [1958] AC 509, 525 and 528-9.

III. The three Shipbuilding Contracts

HS/1005 and HS/1006 were made between Jan de Nul NV, referred to in the contracts as the "Owner" and HWS, referred to in the contracts as the "Builder". HS1007 was made between HWS, as the "Builder", and Codralux SA, as the "Owner". Clause 24.1 of each of the contracts provides that it will "be governed by and construed under English law". Clause 24.2(c) provides for arbitration in London.

The APG provision is contained in clause 19.1 of the contracts. It provides:

"As soon as possible after the signature of this Contract, the Builder shall at his expense provide to the Owner through a First-Class Bank a guarantee in the form as per Annex 3 to guarantee the faithful and timely performance of the Builder's obligations under the Contract."

The pro forma in Annex 3 is headed "Advance Payment Guarantee (Letter of Guarantee)".

Clause 5 deals with payment of the price. By clause 5.1, with the exceptions of the last two instalments due upon the delivery of the vessel, payment "shall be made in full by the owner into [an] escrow account by several instalments as per the instalment table in Annex 2". Clause 5.1 also provides that "no instalment will be paid by the owner and the owner shall be entitled to defer any payment that may fall due under the contract until…receipt by the owner of the original of the APG in the form as per Annex 3".

Annex 2 also contains the "Milestone Programme" for each contract, identifying the milestones and the dates for their completion. For HS1005 and HS1006 there are four; commencement of the steel cutting works for the vessel, completion of the first block of the vessel, launching/floating of the vessel, and delivery of the vessel. In the case of HS1007 there is an additional Milestone 3, the time the main engines have been integrated into the hull so that the launch is Milestone 4 and delivery of the vessel is Milestone 5. Clause 10.1 provides that "the design, construction, completion and trials of the vessel shall proceed strictly in accordance with the Milestone Programme; as such programme may be adjusted from time to time in accordance with the terms of this contract". It also provides that "strict compliance with the Milestone Programme and timely delivery of the vessel are of the essence under the contract".

In the case of HS1005 the delivery date is 31 August 2008; in HS1006 it is 30 November 2008; and in HS1007 it is 15 December 2008. The definition clause of the three contracts defines "Take Over Date" as the specified delivery date for each of the contracts "or such other date as may become applicable pursuant to the contract". Clause 5.1 provides that "in the event the completion of a Milestone is delayed by more than fifteen (15) Days, the dates in the instalment table in Annex 2 shall automatically accordingly be postponed".

Clause 5.5 provides that the use of the instalments paid into the escrow account "shall be limited only to the purchase of services, goods…and [other] expenses…for the purpose of constructing the vessel". The builder is required to make a written report to the owner about the use of sums disbursed from the account.

Clause 13.1 makes provision for the time for delivery to be extended by the total accumulated time of the delays caused by the contingencies (including war, requisition, strikes and other force majeure) listed. Clause 13.2 defines those delays as "permissible delays" and provides for other "permissible delays", including (clause 13.2(c)) "extensions of the Take Over Date as shall be agreed by the parties in writing".

Clause 17 deals with defaults by the Builder. In contracts HS1005 and 1006 its material parts are:

"17.1 The Owner may immediately terminate the Contract by notice to the Builder if at any time before takeover of the Vessel:

(a) The Owner demonstrates that the Builder is in delay on any one of the Milestones…by more than one hundred and fifty (150) Days; or

…

(d) The Builder has a receiver, administrator or administrative receiver, trustee, liquidator or like person appointed over any substantial part of its assets under any jurisdiction or law relating to the reorganisation, arrangement or adjustment of debts or the dissolution, administration or liquidation of corporation.

17.2 In the event of such termination of the Contract the Owner shall have the option – at its discretion – either (i) to take possession of the Vessel as it is constructed and to take over all the materials, equipments, design and services purchased by the Builder for this project and have it completed by a third party, whereby the Builders shall promptly repay the Owner all sums not used in the construction of the Vessel plus the extra costs incurred in the completion thereof up to the amount guaranteed under the [APG], [or] (ii) the Builder shall refund to the Owner the amount of all monies paid by the Owner under the Contract together with interest…

In the event the Owner opts for scenario (ii) under the previous paragraph, the builder shall…either return to the Owner such Owner-Supplied Items as indicated by the Owner, at the Builder's cost and expense, or reimburse the purchase and delivery value thereof to the Owner. If and when any Owner-Supplied Item has not been returned under this provision to the Owner within sixty (60) Days from termination of the Contract or the Owner – as applicable – has not received repayment under this provision within ten (10) Days from termination of the contract, the Owner shall be entitled to draw on the [APG] provided by the Builder and be reimbursed all monies remaining on the escrow account without prejudice to any other remedy at law or otherwise.

17. 3 The refund as provided in the foregoing paragraph 17.2 by the Builder to the Owner shall forthwith discharge all the obligations, duties and liabilities of each of the parties thereto to the other, without prejudice however to any obligations, duties and liabilities under Common Law. … "

Clause 17 in HS1007 is structured differently. The Owner, that is the second defendant, is given the right immediately to terminate the contract if inter alia (17.1(a)) it demonstrates that the Builder "is in delay on any one of the milestones (except Milestone 3…)…by more than one hundred and fifty (150) days" or the Builder has a receiver, administrator or other like person appointed (17.1(d)). Milestone 3 is the point in time when the main engines have been integrated into the hull. By clause 17.2, in the event of a termination under clause 17.1 before the achievement by the Builder of Milestone 3, the Owner has discretion to remove all Owner-Supplied Items from the Builder's possession (items principally relating to the dredging equipment), to take possession of the Vessel and "to draw on the full amount of the [APGs] that were provided by the Builder to the Owner" under the Contract, or to remove all Owner-Supplied Items from the Builder's possession and "to draw on the full amount of the [APGs]". By clause 17.3, in the event of a termination after the achievement of Milestone 3 the Vessel, designs and documents concerning the design and construction shall belong to the Owner. Clause 17.3 also provides that the Builder shall return to the Owner such Owner-Supplied Items as indicated by the Owner and "reimburse all monies remaining in the escrow account". Additionally, "the Owner shall be able to draw on the replacement guarantee provided by the Builder". Clause 19.1 provides that, after transfer of title to the vessel to the second defendant, the APGs are to be returned to the shipbuilder provided the shipbuilder provides the second defendant with a "replacement guarantee" with a value of 5% of the contract price in the form set out in Annex 8 to the contract.

IV. The Advance Payment Guarantees

Again these, all, as I have stated, headed "Advance Payment Guarantee (Letter of Guarantee)", are in materially the same terms. The two in respect of HS 1005 and HS 1006 were issued by Meritz to Jan de Nul. That in respect of HS1007 was issued to Codralux. Their material terms (with paragraph numbers in square brackets added for ease of reference) are:

"[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 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, we hereby 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^[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 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 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 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 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."

V. Post-Contractual exchanges concerning the Shipbuilding Contracts:

These fall into four categories. Three are communications about the corporate reorganisation and partitioning, and the delays in construction between; (a) the shipbuilder and the claimant; (b) the defendants and the claimant; and (c) the defendants and the shipbuilder. The fourth category is communications between the claimant and Continental Insurance Brokers Ltd and Marsh Korea, respectively its reinsurance and insurance brokers. The case proceeds on an agreed factual basis (see [11]) that the defendants did not know of the existence of the reinsurance contracts on the dates the APGs were issued, and that the defendants did not see the claimant's correspondence with the shipbuilder and the claimant's reinsurance and insurance brokers.

(a) Communications between the shipbuilder and the claimant about the corporate reorganisations

I have referred (see [4]) to the fact that Buyoung advised Meritz of the merger between HWS and Jacksien on 16 June 2007. This was (see [3]) almost four months after Meritz entered into its reinsurance contracts for HS1005 and HS1006 and a month before that for HS1007. A memorandum dated 8 April 2008 from Asia Heavy to Meritz referred to a discussion in mid-January in which it had informed Meritz of the partitioning of Buyoung. The memorandum mentioned that the defendants had asked for confirmation by Meritz that the existing refund guarantees applied to Asia Heavy and requested that Meritz issue such a letter. In a memorandum to Asia Heavy dated 20 October 2008, Meritz stated that due to the spin-offs, the merger and a change of the CEO without the written consent of Meritz "Meritz reserves the right to cancel the RG".

(b) Communications between the defendants and the claimant about the delays and the corporate reorganisations

By the spring of 2008 the defendants were aware of delays in the construction of the vessels. By the end of April so was Meritz: see [44] – [45]. In the autumn of 2008 the first defendant informed Meritz that "the current situation at the yard is very critical": see letter dated 7 October referring to a meeting in Seoul on 18 September. The letter stated construction was more than three months behind the contractually scheduled milestones; the shipyard seemed to lack the resources to execute and complete critical parts of the construction; and Asia Heavy's financial situation was so weak that unless additional funding was found it would run out of cash and risked bankruptcy. The letter also stated:

"We have understood that Meritz is aware of and, in view of its commitment under the advance payment guarantees, very concerned by the current situation."

and

"…To better assess the range of options available, we would very much appreciate if Meritz could indicate us what type of additional financial support it would be ready to provide in order to cover any advance payment acceleration or extra financial resources needed to finalise the vessels".

Meritz was sent a copy of a letter to Asia Heavy dated 16 October: it is summarised at [36]. Meritz thus knew that the first defendant considered that a "hard reality check" was needed on timing as a result of the delays, and that a suggested revised schedule was stated to be sent without prejudice and was not a waiver of the first defendant's rights under the contract. In December 2008 there were further communications between the first defendant's Korean lawyers and Meritz. In an email dated 9 December the defendant's lawyer records that Mr Cho of Meritz had asked whether a newly issued repayment guarantee "in addition to the existing R/Gs from Meritz remaining in place" would be acceptable to the defendants. Meritz's Executive Vice-President and a colleague met the first defendant's lawyers on 16 December. A note of the meeting states:

"1) Meritz will exert its best efforts within its business scope to come up with a solution so that the loan can be facilitated to [Asia Heavy] with the goal of completing the construction and delivery the three vessels…

2) In this regard, Meritz would like to ask [Jan de Nul] to wait in making any claims for pay-out on the R/Gs issued by Meritz until such options have been attempted.

3) In reply to this, Meritz was advised that there is not much time left to pursue other options since [Asia Heavy] is currently insolvent with no money to continue its operations, so it is uncertain how much longer [Jan de Nul] would be able to wait in pursuing its own courses of action, such as making claims for pay-out on the R/Gs. …"

Meritz wrote to the first defendant on 19 December stating it was making its best efforts to issue "additional refund guarantees". Its letter also referred to what it described as the first defendant's "delivery bonus of US$1 million per vessel" and asked the first defendant to confirm that the contract price for the vessels will be increased by that amount "subject to our refund guarantee". There is no suggestion by Meritz that the reorganisation and the delays put the enforceability of the APGs into question. The reference to the "delivery bonus" is to an offer made by the defendants to Asia Heavy at a meeting on 23 and 24 October and in faxes dated 3 December 2008, on which see [37] and [39].

The first defendant responded on the same day, stating that Meritz's proposal was unacceptable. It also reiterated its position "stated many times in our previous meetings and correspondence [that] we are not prepared to amend the contract terms of the shipbuilding contracts with [Asia Heavy]", and that "an increase of the contract price as such is unacceptable". In a further letter, dated 8 January 2009, it stated that in the absence of "a conclusive proposal from Meritz" it would have no option other than to terminate the contracts. On about 2 February the first defendant's Korean lawyers informed it that Meritz's reinsurer had queried the applicability of the repayment guarantees to Asia Heavy because they were issued when HWS was the shipbuilder.

Representatives of Meritz and the first defendant met on 17 February 2009. The minutes record that Asia Heavy's organisation was collapsing and that there were important technical and financial problems. In response to a point made by Meritz the first defendant is recorded as denying that it agreed to any postponement of the delivery dates of the contracts. The discussion of ways to address the difficulties included assigning the contracts to a third party shipyard with Meritz bearing part of the additional costs and executing new repayment guarantees. The minutes (paragraphs 2.6) state Meritz would bear one third of additional costs and the refund guarantees "shall remain in place" (emphasis added). They also state (paragraph 3) that Meritz confirmed that all parties recognised that at worst the damage might be higher than the amounts covered "under the Refund Guarantees". Not long after this meeting, a letter dated 4 March 2009 from Meritz to the first defendant, after referring to the meeting in February, stated:

"in our view Jan de Nul has agreed to extend the captioned contracts with Asia Heavy Industries without our consent. Therefore please understand that we reserve the right to take necessary actions to preserve our legal rights".

Five days later, on 9 March the first defendant terminated HS1005. The next day it terminated HS1007 and, on 2 April it terminated HS1006: see [7]. On 11 March Mr Min of Meritz e-mailed the first defendant asking for a draft of its refund guarantee claim which its lawyers were anxious to see. On 9 April the defendants wrote to the claimant demanding payment under the APGs and certifying that the demands for payment are "made in conformity with clause 17 of the contract whereby the Builder has failed to make the refund". The claimant issued these proceedings on 17 April

(c) Communications between the defendants and shipbuilder about the corporate reorganisations and the delays

On 18 June 2007, the day Buyoung informed the defendants of the merger of HWS and Jacksien, the first defendant replied stating:

"Could you please confirm our understanding that this name change procedure implies that only the name of the legal entity that is currently building the vessels has changed and not that Buyoung Shipbuilding Co Ltd is a wholly new legal entity existing separately from [HWS] to which all the contracts need to be transferred".

After Asia Heavy informed the defendants of the partitioning (see [5]), the first defendant (in a letter dated 2 April 2008) expressed its concern that this occurred without prior submission of proper documentation to and consultation with the defendants. It asked for information to enable it to assess the consequences for the contractual obligations. It also asked for "written confirmation by [Meritz] that the Performance Bond on the contracts HS1005-1006-1007 effectively covers Asia Heavy Industries Co Ltd". Twelve days after this (see [44]) Meritz asked Marsh Korea to obtain its reinsurers' agreement to the amendment so that it could issue its "endorsement to the assured".

I have referred to the delays which became evident over the spring and summer of 2008. In a letter to Asia Heavy dated 2 September 2008 the first defendant stated that HS1005 should have been launched on 30 June 2008 and stated that "strict compliance with the Milestone Programme is of the essence". The letter also asked that there be no additional delays and that everything should be done to make up arrears. Letters dated 19 September and 13 October stated inter alia that "progress on the vessels under construction is still insufficient", the APGs provided by Meritz should reflect the change of name to Asia Heavy, that timely delivery is of the essence, and liquidated damages are payable for delay.

I have also referred ([28]) to the first defendant's letter dated 16 October to Asia Heavy (and copied to Meritz). This letter stated that the projects "require[d] a hard reality check on timing of completion and required resources" because the contractual Take Over Date for HS1005 had passed and there was no firm Take Over Date in sight. It enclosed a draft of a detailed schedule of completion prepared by the first defendant on the basis of Asia Heavy's progress and past track record. The result of the exercise was stated to be "very sobering" and the revised earliest Take Over Dates produced were "of course unacceptable". After setting out the problems and the information and action the first defendant required from Asia Heavy, the letter stated it was "sent without prejudice and does not constitute any waiver in respect of our rights under the contract".

The defendants and Asia Heavy met in Busan on 23 and 24 October 2008. The minutes of the meetings state:

"Actions, decisions, considerations, etc by [Jan de Nul] in the frame of the meetings are undertaken for purpose of having the vessels completed – circumstances permitting – and cannot in any whatsoever way be interpreted as waiver of its rights and title under the contracts."

The minutes also state that Asia Heavy submitted new milestone dates earlier than those in the dates estimated in the schedule in the first defendant's "reality check" letter and record discussion about the various matters in that letter. Item 10 recorded:

"As an incentive for timely completion according to the revised delivery dates offered by [Asia Heavy], a bonus system of 1 million USD for each vessel is tabled. A thirty days grace period would apply with respect to these dates. In the event without prejudice to its continuing right to terminate the contract for reason of [Asia Heavy's] default as originally agreed in the contract, [Jan de Nul]would also postpone its claim for liquidated damages and link application thereof to the new delivery dates…" (emphasis added)

The first defendant reiterated its concern about the halting of engineering works for HS1005-1006 on 28 October. There was another meeting between the parties on 25 November. Asia Heavy asked for an early payment of the next instalment. On 26 November the second defendant informed Asia Heavy that 150 days had passed beyond Milestone 3 and required strict compliance with the contract including doing everything to make up the arrears.

The first defendant's letter dated 3 December stated:

"[Jan de Nul] is not willing to alter the terms of the shipbuilding contracts and as a result is not willing to make an early payment of next instalment. As [Asia Heavy] is well aware, this was clearly agreed and accepted by [Asia Heavy] last week."

There are other letters dated 3 December faxed by the first and second defendants to Asia Heavy. These confirmed an agreement with Asia Heavy that, if it successfully completed and delivered the vessels before new delivery dates specified in the letter, "no penalties will be levied on [Asia Heavy] and a delivery bonus of 1,000,000 USD shall be paid to [Asia Heavy]". The new delivery dates specified were 30 August 2009 for HS1005, 28 February 2010 for HS1006, and 30 November 2009 for HS1007. The next day, the first defendant wrote stating that the letter is "to clarify" that the letters dated 3 December were sent on a "without prejudice" basis and, referring inter alia to the meetings on 23 and 24 October. This letter asked Asia Heavy to note again "that the shipbuilding contracts that we have signed…are not amended in any whatsoever way by this correspondence and the Owner does not waive any whatsoever rights, remedies etc. under the provisions of these contracts that continue to have full legal standing". The second defendant wrote in identical terms about HS1007.

On 4 December 2008 and 12 February 2009 the defendants respectively informed Asia Heavy that 150 days had passed since the launch date milestones for HS 1005 and HS1007 (milestones 3 and 4 respectively) and reserved their rights under clause 17 of the contracts. On 9 December 2008 the first defendant had again refused a request by Asia Heavy for early payment of the next instalment and stated that it "is not willing to alter the terms of the shipbuilding contracts".

In a letter dated 2 March 2009 Asia Heavy made proposals for additional payments into the escrow account by its shareholders and submitted revised delivery dates. The letter stated this was Asia Heavy's "best proposal". On 9 March the first defendant wrote to Asia Heavy terminating HS 1005 pursuant to clause 17.1 on the ground of a delay of more than 150 days of Milestone 3. The letter also stated:

"We … require (i) in accordance with clause 17.2(ii)…[Asia Heavy] to refund to the Owner the amount of all monies paid by the Owner under the contract together with interest at the interest rate; and (ii) to return to us, at your cost and expense, all owner-supplied items as listed in the schedule to this letter."

On 10 March the second defendant wrote terminating HS 1007 pursuant to clause 17.1. The letter mistakenly referred to delay by more than 150 days of Milestone 2, when the default in fact specified in the second defendant's letter dated 12 February (see [39])) was Milestone 4. The mistake was corrected in a letter dated 26 March. The letter of 10 March also stated that it required "in accordance with clause 17.2(ii), the Builder to return to the Owner the owner-supplied items listed in the schedule to this letter and to refund the owner the amount of all monies paid by the Owner under the contract together with interest at the interest rate". Subsequently (see [8]) the defendants sent further termination letters on other grounds including Asia Heavy's bankruptcy. Asia Heavy stated (see letter dated 6 April 2009) it could not agree on the reasons for the termination because the parties had agreed to new delivery dates for all three vessels at their meeting on 23 and 24 October 2008. Accordingly, the milestones for HS1005 and HS1007 had not been delayed by more than 150 days.

(d) The correspondence between the claimant and the reinsurance and insurance brokers

Since there was no reinsurance concerning HS1005 and HS1006 before the APGs about payments under those contracts had been issued, this correspondence all occurred after those APGs were issued, and the defendants did not know of the existence of the reinsurance contracts, this can be dealt with briefly. In summary, in January 2007 Mr Zhao, an account manager at Continental Insurance Brokers, informed Meritz that EIC, the reinsurers, did not write "on demand financial guarantees" but would offer cover on standard terms and conditions for failure to return advance payments in the event of failure to deliver the vessels. EIC also informed Mr Zhao and through him the claimant that it could not "simply insure Meritz against a call on their guarantee".

Thereafter Mertiz, in the light of the defendants' request for a statement that the APGs effectively covered Asia Heavy, asked the reinsurers to consent to the APGs being amended to show this: emails dated 14 April and 11 August 2008 from Meritz to Mr Zhao and to Marsh Korea. Through the brokers, the reinsurers requested information about the corporate reorganisations and asked whether the shipbuilding schedules were being maintained (email 25 April 2008). Meritz replied (email 6 May 2008) that due to a delay in obtaining building materials for HS1005 it would take "two or more months longer than anticipated to complete".

Meritz later asked for an extension to the reinsurance in view of the delays in the delivery dates (email dated 30 July 2008 from Meritz to Marsh Korea) and in an email dated 1 August 2008 stated it had been advised by Asia Heavy that Asia Heavy had obtained consent from the buyers for the extension of the delivery date of HS1007. During September and early October 2008 the reinsurers asked further questions about the partitioning. They also asked why, since Meritz had originally underwritten the business before it had reinsurance in place, it was not extending the APGs without reinsurance support.

In an e-mail dated 12 December 2008 Meritz informed Marsh Korea that there was no agreement in place between it and the defendants about amending the APGs to cover Asia Heavy. It reiterated this in a letter dated 28 January 2008 which, it was common ground, should be 2009 and stated it would not agree to this without confirmation from the reinsurers. These communications also set out Meritz's understanding of the effect of the corporate reorganisations. This was (12 December 2008) "the newly spun-off company is required to guarantee the obligations of the residual company and vice-versa under Korean law" and "the RG [repayment guarantee] is irrevocable so long as the shipbuilding contract remains valid", and (28 January 2009) Asia Heavy "would be regarded as a matter of Korean law as being the same legal entity as HWS" and that the contractual rights and obligations of HWS "should be treated as continuing".

Meritz's letter also responded to a question about written confirmation from the first defendant that the delivery dates had been extended. It stated that "last December [it] received the documents from Asia Heavy in which the Owner [Jan de Nul] confirmed their agreement with AHI regarding the rescheduling of delivery dates…". There is, however, no document which states this. Meritz appears to have been referring to the revised schedule the first defendant sent Asia Heavy in its "reality check" letter (see [36]) and its proposal that a bonus of US$1 million be paid for each vessel completed within the revised schedule. The communications about those matters, however, made it clear (see item 10 at [37]) that the schedule was sent and the proposal was made in order to get the vessels completed and that they did not constitute a waiver of the defendants' rights under the shipbuilding contracts.

VI. Discussion:

Issue 1: Are the APGs performance bonds?

It is common ground that, if the APGs are performance bonds or demand guarantees, absent fraud, the entity which issues them must honour them without regard to the relations between the party to whom the instrument is issued (here the defendants) and the counterparty to the underlying transaction (here the shipbuilder): see Edward Owen Ltd v Barclays Bank [1978] 1 QB 159, 171; Gold Coast Ltd v Caja de Ahorros del Mediterraneo [2002] 1 Lloyd's Rep 617 at [10].

It is also common ground that the terminology used in an instrument is not conclusive. So, although in Marubeni Hong Kong v Government of Mongolia [2005] 2 Lloyd's Rep 231 Carnwath LJ (at [20]) stated that in ordinary legal language a "guarantee" imposes a secondary liability, he also recognised (at [30]) that that terminology is not conclusive. In Gold Coast Ltd v Caja de Ahorros del Mediterreaneo at [21] Tuckey LJ stated that the fact that the instrument described itself as a "guarantee" was simply "a label" and that the language of the obligation imposed had all the appearances of a "first demand guarantee". It is necessary to look beyond the terminology to the substance of the instrument as a whole.

Mr Oliver's submissions as to the general approach to the construction of the APGs can be summarised as follows:-

(1) The APGs, as guarantees, are to be strictly construed so that no liability is imposed upon the guarantor which is not clearly and distinctly covered by their terms. He relied on Blest v Brown (1862) 4 De G, F & J 367 at 376 (Lord Campbell); Coghlan v SH Lock (Australia) Ltd (1987) 3 BCC 183, at 189 (Lord Oliver); and General Surety and Guarantee Co Ltd v Francis Parker Ltd (1977) 6 BLR 18, 21 (Donaldson J).

(2) Any ambiguity in the construction of an instrument should be construed in favour of the surety: Coghlan v SH Lock (Australia) Ltd at 189.

(3) It is the substance of an instrument and not the terminology it uses that determines its nature. The question thus is whether the obligation of the guarantor (Meritz) in the APGs is in substance secondary to the primary obligation of the principal debtor, the shipbuilder, or whether Meritz's obligation is a primary obligation.

(4) The APGs were not issued by a bank and are not banking instruments. Accordingly, the cases concerned with banking instruments issued by banks and described as or assumed to be performance bonds are of limited or little guidance: Marubeni Hong Kong v Government of Mongolia [2005] 2 Lloyds Rep 231 at [28]. Carnwath LJ stated those cases "provide no useful analogy for interpreting a document which was not issued by a bank and which contains no overt indication of an intention to create a performance bond or anything analogous to it".

(5) In a transaction outside the banking context, the absence of language either in the face of the instrument or in the supporting legal opinion letter describing the instrument as a "demand bond", although not conclusive, creates a strong presumption against the instrument being construed as a "demand bond" or "performance bond": Marubeni Hong Kong v Government of Mongolia at [30].

Mr Oliver's submissions on the wording of the APGs can be summarised as follows:-

(1) The APGs do not state that the claimant's obligation is that of a principal and not a surety as the guarantee in IIG Cpital LLC v Van der Merwe [2008] 2 Lloyds Rep 187 did. They were not issued by a bank and (see [50](5)) the strong presumption against them being performance bonds referred to by Carnwath LJ applies.

(2) The words "irrevocably and unconditionally" in paragraph [2] of the APGs do not suggest they are performance bonds. In Marubeni v Government of Mongolia at [31] the use of the terms "unconditionally pledges" and "simple demand" did not displace the presumption that the instrument was not a demand bond.

(3) The APGs do not contain a number of provisions which courts have regarded as indicating the obligation in an instrument to pay is an independent obligation. Thus, by contrast with the instruments considered in Bache & Co (London) Ltd. v Banque Vernes et Commerciale de Paris SA [1982] QB 84 and IIG Capital LLC v Van der Merwe [2008] 2 Lloyds Rep 187, the APGs do not provide that a bank certificate is the trigger to payment, that a refusal to refund the advance payments is to be conclusive evidence of default, or that the demand cannot be challenged.

(4) The word "if" in paragraph [2] of the APGs is a positive indication that points to the claimant's liability being secondary. A provision that, "if" the defendants become entitled to a refund of advance payments to the shipbuilder, the claimant guarantees repayment imposes liability on a contingency. The language is thus consistent with a "see to it" guarantee, that is secondary liability.

(5) The provision in paragraph [6] of the APGs is another positive indication that the liability of the claimant under the APGs is secondary. This is because, if the claim/demand for refund from the shipbuilder is challenged in arbitration, the liability of the claimant is dependent on the determination in the arbitration of the underlying obligations between the defendants and the shipbuilder. Additionally, payment under the APGs is stated to be "the sum as per the award issued under such arbitration". That sum may differ from the amount claimed/demanded from the shipbuilder in accordance with paragraph [4] of the APG. There are thus material differences from the position in the Gold Coast case, where a provision for arbitration did not preclude an instrument from being construed as a performance bond. In that case the sum was certain, and arbitration only provided an opportunity to change the date on which it was paid.

(6) The provision in paragraph [7] of the APGs that upon receipt by the defendants of the sum guaranteed or upon their acceptance of the vessel the APGs "shall become null and void" is also language consistent with a secondary rather than a primary obligation.

(7) The reference to the ICC's Uniform Rules for Demand Guarantees in paragraph [10] of the APGs cannot change the nature of the obligation in them. That is to be determined by the substance of the language in them: see [50(3)] above.

Mr Oliver also submitted the background to the APGs indicated that the liability imposed on the claimant was a secondary liability. He relied on the shipbuilding contracts, the Basic Agreement between the claimant and HWS, the share pledge agreement between it and HWS's shareholders, and the correspondence between the claimant and its reinsurers and reinsurance intermediaries. The Basic Agreement, he argued, showed the claimant attached importance to the financial status of HWS. The correspondence with the reinsurers showed that both the claimant and the reinsurers regarded the corporate changes as sufficiently material to warrant enquiry and the claimant did not agree that the APGs covered Asia Heavy.

The structure of clause 17 of the shipbuilding contracts and the relationship of that and the requirements in the APGs was at the centre of this part of Mr Oliver's submissions. He placed considerable reliance on the fact that clause 17 provides that the defendants' ability to make a demand depends upon two contingencies; the existence of the specified circumstances and the defendant not opting to take possession of the vessel. He submitted that the requirement (see paragraph [4] of the APGs) that the defendants certify that their demand for refund was made in conformity with clause 17 and that the shipbuilder had failed to make the refund can only be understood as proceeding on the basis that the shipbuilder is liable as principal and that the claimant's obligation under the APGs is a secondary liability. Liability under the APGs, he argued, also depends on a contingency, that is a demand for a refund in accordance with the shipbuilding contracts and a failure by the shipbuilder to make that refund.

Mr Oliver also relied on the form and the terms of the Defects Liability Guarantee in Annex 6 to HS1005 and HS1006, which requires the guarantee to be given by "an international bank rated at least BBB" and, in the case of HS1007, significant differences between the APG and the Replacement Guarantee required by clause 19.1. As to the former, the bank is required to pay on written demand "unconditionally and notwithstanding any objections that may be made by the builder" any sums the first defendant "declares to have claimable against the builder up to the amount of the guaranteed sums". As to the latter, the specified form of replacement guarantee in Annex 8, headed "Performance Guarantee". Mr Oliver submitted that the differences between these forms and the form set out in Annex 3 for the APGs is also a pointer to the APGs being a classic contract of suretyship with the liability of the guarantor being secondary.

As far as the general approach to the construction of the APGs is concerned, Andrews and Millett's Law of Guarantees (5^th ed.) at 101-102 identifies two lines of authority. The first (primarily consisting of older and Commonwealth cases) is that contracts of guarantee should be strictly construed so that no liability is imposed on the surety "which is not clearly and distinctly covered by the terms of agreement". Lord Campbell's judgment in Blest v Brown in 1862, on which Mr Oliver relied, is an example of this approach. Suggestions, such as that by Lord Oliver in Coghlan v SH Lock (Australia Ltd) (1987) 3 BCC 183, at 189, that such contracts are to be construed in favour of the surety are probably reflections of the combined effect of a strict approach to construction and the application of the contra proferentem principle. Earlier in Lord Oliver's judgment he linked the two when stating that a guarantee "falls to be construed strictly; it is to be read contra proferentem; and, in the case of ambiguity, it is to be construed in favour of the surety": see ibid at 187, and see also Andrews and Millett, at 102.

The status of the contra proferentem principle has been discussed in a number of recent cases. Discussion of its status and role is not new: see Jessel MR's doubts in Taylor v Corporation of St Helens (1877) 6 Ch. D. 265. The recent discussion and reassessment is in the light of the approach of Lord Hoffmann in ICS Ltd v West Bromwich Building Society [1998] 1 WLR 1257 and the recognition that using the principle too early in the process of construing a contract can risk assuming an ambiguity where there is not one. While the principle may have a more limited role today, it survives and, where there is ambiguity or uncertainty about the intention of the parties, the approach reflected in it remains useful: see Whitecap Leisure Ltd v John H. Rundle Ltd [2008] 2 Lloyds Rep 216 at [20] per Moore-Bick LJ.

Subject to these caveats and the effect of the cases discussed in the next two paragraphs, it can be said that, in its classic formulation, the contra proferentem principle will generally apply in favour of a surety because the terms of most guarantees are drafted by the creditor for whose benefit they operate. This appears to be so in the present case. The form of the APGs was specified by Annex 3 to the shipbuilding contracts which were made, in the case of HS1005 and HS1006 three weeks before the relevant APGs, and, in the case of HS1007 over three months beforehand: see [2] – [3]. Meritz was not a party to those contracts and there are no indications that the specified form was either drafted by Meritz or provided to the shipbuilder (the debtors) or the defendants (the creditors) by Meritz.

The second line of authority identified by Andrews and Millett are cases which indicate that contracts of suretyship are to be construed in the same way as any other contract. For two examples, see the decisions of the Court of Appeal in Static Control Components (Europe) Ltd v Aegon [2004] 2 Lloyds Rep 429 and the decision of the majority in Kookmin Bank v Rainy Sky SA [2010] EWCA Civ 582 at [36]. Both cases rely on the approach of Lord Hoffmann in ICS Ltd v West Bromwich BS, that the words used should be construed in a way which gives them the meaning which the document would convey to a reasonable person knowing all the background knowledge which would have been available to the parties in the situation they were in at the time of the contract. Both cases state that the principles set out by Lord Hoffmann apply to the construction of a guarantee as well as to that of other types of contract.

In Static Control Components Holman J stated (at [19]) that the task of the court is "simply ascertainment of the meaning of the document by the objective approach described by the House of Lords" in ICS Ltd v West Bromwich BS and, "that being the task, it may be that the concept that a guarantee should be 'strictly construed' now adds nothing". Arden LJ stated ([37]) that, since the scope of the guarantee was a question which could be resolved by referring to relevant background evidence, the rule of contra proferentem has no place.

In the present case it is not necessary to resolve the differences in the two lines of authority. What does seem clear is that a guarantee has to be construed as a whole as a commercial document: see, for example, Stanley Burnton J in Barclays Bank v Kingston [2006] 2 Lloyds Rep 59. He stated (at [29]) that he did not approach the provisions of the guarantee "with the hostility traditionally shown to exemption clauses". As Andrews and Millett observe, op cit at 107-08, even in the line of Privy Council cases which deals with whether the liability of the principal debtor covered by the guarantee includes a contingent liability incurred by the debtor as a surety for a third party, and provides support for a "strict construction" can be found, the decisions were all in favour of the creditor, although in some of the lower courts, the application of the "strict construction" approach produced a different result. In Coghlan v SH Lock (Australia) Ltd this was so even though the guarantee was a personal guarantee given by two directors.

Moreover, in both Static Control Components and Kookmin Bank the court (albeit in the latter by a majority) considered that the language of the document (construed in the light of the principles set out by Lord Hoffmann) was not ambiguous: see [2004] 2 Lloyds Rep 429 at [18] and [37] and [2010] EWCA Civ 582 at [36], [41], [50] and [51]. Having found the language was not ambiguous, there was little scope for the operation of the "strict approach" which is generally used as a means of resolving ambiguities. In Coghlan v SH Lock (Australia) Ltd itself Lord Oliver referred to resolving ambiguity. He also made it clear (see 187 and 189) that the principle that a guarantee should be construed strictly did not mean that where parties have deliberately chosen "to adopt wording of the widest possible import" that wording is to be ignored or to "oust the principle that where wording is susceptible of more than one meaning regard may be had to the circumstances surrounding the execution of the document as an aid to construction".

Although generally only the creditor and the guarantor will be parties to a guarantee, the fact that a guarantee always also concerns the debtor, a third party, may justify a more cautious approach to the use of the surrounding circumstances as an aid to its construction. Lord Hoffmann's formulation requires the background to "have been reasonably available to the parties", but, as in the present case, not all those concerned may have in fact known of all the circumstances which constitute the background. The creditor may not know of all that has transpired between the debtor and the guarantor or between the guarantor and third parties, and the guarantor may not know all that has transpired between the debtor and the creditor. So, in this case, the defendants did not know of the Basic Agreement between HWS and Meritz, the share pledges, or the arrangements for reinsurance.

In the present case, as in the Gold Coast case, there are features in the APGs which favour each side's construction. The authorities show that the presence or absence of these features are factors which are indicative and not decisive. I have concluded that, for the reasons set out below, the APGs are performance bonds or demand guarantees.

Looking at the broad structure of the APGs and, at this stage standing back from an analysis of their particular wording, it is noteworthy that they have three of the four attributes which the editors of Paget's Law of Banking (13^th ed. 2007) 34-4, at 865 state will lead an instrument "almost always [to] be construed as a demand guarantee": see also Andrews and Millett, op cit at 575-576. The three attributes are: (a) the underlying transactions, the shipbuilding contracts, are between parties in different jurisdictions; (b) the APGs do not contain clauses excluding or limiting the defences available to a surety in a classic guarantee where the surety's liability is secondary; and (c) the undertaking is to pay on demand, in this case, see paragraph [2], to pay "within thirty (30) days after demand is made".

The fourth of the attributes referred to by the editors of Paget and Andrews and Millett is that the instrument is issued by a bank. Meritz is not a bank. It is an insurance company. Mr Oliver placed considerable weight on this. He observed that insurance companies, unlike banks, are accustomed to pay if the insured event has occurred rather than against documents. He relied on the statements of Carnwath LJ in Marubeni Hong Kong v Government of Mongolia to which I referred when summarising his submissions: see [50(4) and (5)]. Carnwath LJ's statements, however, were made in the context of an instrument issued by the government of Mongolia, an entity which, as was submitted on its behalf ([17]) was "not in the business of providing irrevocable financial instruments in return for a fee or commission". His Lordship's approach and his statement must be seen in that context.

In the present case, while Meritz's primary business may have been as an insurance company, it was also providing financial instruments in return for a fee. The definition of a "demand guarantee" in Article 2(a) of the ICC Uniform Rules for Demand Guarantees provides that it "means any guarantee…by a bank, insurance company or other body…". Andrews and Millett, op cit at 577, state that "the fact the document is issued by a bank or other financial institution, or by an insurer or professional bond issuer" will, if it is conditioned on a demand, point to it being a performance guarantee" (emphasis added). While there may be a distinction to be made between an instrument issued by a bank and one issued by another commercial entity which provides financial instruments in return for a fee, it is much more nuanced than suggested by Mr Oliver.

I now turn to the particular terms of the APGs. I first observe that paragraph [10] provides that they are "subject to the Uniform Rules for Demand Guarantees of the International Chamber of Commerce". Subjecting the APGs to the Uniform Rules is an indication that the parties regarded them as "demand guarantees". Mr Oliver submitted that the reference to the Uniform Rules cannot change the nature of the instruments. He argued that has to be determined by the substance of the language in the remainder of the document. This approach, in effect asks that the remainder of the instrument be construed ignoring paragraph [10] and that, if the result of that process leads to the conclusion that the instrument is not a demand bond, paragraph [10] cannot have the effect of turning it into one.

Mr Oliver's approach has some similarity to the approach under the now long discredited doctrine of substantive fundamental breach under which the "core" of the contract was determined without regard to exemption and limitation clauses. But, while recognising that there may be an argument based on inconsistency between different provisions in an instrument, as in the context of fundamental breach the answer to the question must be that the instrument as a whole must be construed. If authority for this proposition is required, see Gold Coast Ltd v Caja de Ahorros del Mediterreaneo [2002] 1 Lloyds Rep 617 at [15] (Tuckey LJ) and IIG Capital LLC v Van der Merwe [2008] 2 Lloyds Rep 187 at [7] and [30] (Waller LJ). To do otherwise and to treat the incorporation of the Uniform Rules in the way that Mr Oliver submits it should be treated would, as Mr Milligan observed, allow the tail to wag the dog.

Is there inconsistency between the provisions of the Uniform Rules and paragraphs [1] – [9] of the APGs? By Article 2(a) the Uniform Rules a demand guarantee:

"[m]eans any guarantee, bond or other payment undertaking, however named or described, by a bank, insurance company or other body or person…given in writing for the payment of money on presentation in conformity with the terms of the undertaking of a written demand for payment and such other document(s) (for example, a certificate by an architect or engineer, a judgment or an arbitral award) as may be specified in the guarantee, such undertakings being given

(i) At the request or on the instructions and under the liability of a party…or

(ii) At the request or on the instructions and under the liability of a bank, insurance company or any other body or person…acting on the instructions of a principal to another party…"

It is clear that the provisions of the APGs satisfy the definition of "demand guarantee" in the Uniform Rules and there is no inconsistency between them and the Uniform Rules. The APGs are payment undertakings, issued by an insurance company, in writing, for the payment of money on presentation in conformity with the terms i.e. a written demand for payment: see (paragraphs [2] and [4]). The written demand must be accompanied by a statement certifying that it is made in conformity with clause 17 of the shipbuilding contract (paragraph [4]) or the arbitration award (paragraph [6]) and the buyer has failed to make the refund. The APGs were issued "for the account of" HWS in connection with the shipbuilding contracts: paragraph [1].

The obligation to pay under the APGs is triggered on the demand being made in the specified form. The fact that the obligation is (paragraph [2]) to pay within "30 days after demand is made" affects timing but not the nature of the obligation. The fact that the obligation to pay is (see paragraph [4]) conditioned by the presentation of a specified document rather than proof of the underlying facts is a pointer in favour of primary liability: see Gold Coast Ltd v Caja de Ahorros del Mediterreaneo at [17]. Moreover, it is clear from the authorities that the fact that an instrument makes reference to the contractual performance for which it is security and the circumstances which constitute default does not prevent it being a demand guarantee or performance bond: see Esal (Commodities) Ltd v Oriental Credit Ltd [1985] 2 Lloyds Rep 546, 549 per Ackner LJ referred to with approval by Tuckey LJ in Gold Coast Ltd v Caja de Ahorros del Mediterreaneo at [18]. This is also the position under the Uniform Rules. Article 2(b) provides that "guarantees by their nature are separate transactions from the contract(s) or tender conditions on which they may be based, and guarantors are in no way concerned with or bound by such contract(s)…despite the inclusion of a reference to them in the guarantee….".

A number of the factors, the absence of which were relied on by Mr Oliver as indicating that the APGs imposed a secondary obligation, are clearly not conclusive. So, the instrument in Gold Coast described itself as a "guarantee" but Tuckey LJ stated that was simply a label. The emphasis in IIG Capital on the fact that the instrument stated that the guarantor's obligation was "as principal obligor and not merely as surety" (at [31]) was in the context of considering whether the presumption that applied against the instruments in that case being demand bonds was rebutted. The Van der Merwes who provided the guarantees in that case were the owners of the business which was the debtor. They were not in the business of providing irrevocable financial instruments in return for a fee or commission. Whatever the difference between a bank and an insurance company issuing financial instruments for a fee as part of its business, the position of the claimant in the present case differs greatly from that of the Van der Merwes in IIG Capital.

Similarly, although Mr Oliver relied on the absence of third party certification, as is clear from the Gold Coast case, self-certification is not an obstacle. Tuckey LJ stated (at [22]) that "often it is simply the contracting party who has to state that he is entitled to be paid the amount guaranteed in order to trigger payment". And in IIG Capital the requirement of third party certification is the last factor mentioned by Waller LJ. While it was stated to put the matter beyond doubt, it was given less emphasis than other factors, in particular that the obligation was to pay "upon demand", "unconditionally" and as "principal obligor".

In the Marubeni case, apart from the strength of the presumption that an instrument not issued by a bank or financial institution operating for profit is not a demand guarantee, there were positive indications in the instrument which reinforced that presumption. The first was that the instrument provided that the government "pledge[d] the full and timely performance and observance by the buyer of all the terms and conditions of the agreement". It was not suggested (see [32]) that those words indicated anything other than a secondary obligation. Secondly, the government's obligation only arose if "the amounts payable under the agreement [are] not paid when the same becomes due". Although, in an instrument issued by a bank in Esal (Commodities) Ltd v Oriental Credit Ltd, similar wording was held insufficient to displace the ordinary effect of what was admittedly a performance bond, Carnwath LJ stated (at [31]) that the starting point in Marubeni – it not being an instrument issued by a bank – was different and there was no reason for reading the words in other than their ordinary meaning.

What of the factors relied on by Mr Oliver as positive indications of the secondary nature of the guarantor's liability? These are the conditionality in paragraph [2] and the particular way arbitration is dealt with in paragraph [6]. Mr Oliver's submissions on these matters, and in particular on the wording of paragraph [6], undoubtedly have force. However, in the light of all the other indications to which I have referred and their strength, these do not tip the balance against construing the APGs as demand guarantees. I refer in particular to the fact that (a) payment is triggered by a demand upon presentation of specified documents, (b) the guarantee is stated to be irrevocable and unconditional, and (c) it is stated to be subject to the Uniform Rules. The absence of any limitation to or exclusion of any of the defences which would be available to a surety is also a pointer to the instruments being demand guarantees or performance bonds.

As far as paragraph [2] is concerned, I accept Mr Milligan's submission that, although the word "if" means that it is a conditional provision, the condition is not default by the shipbuilder but the defendants' right to repayment. As I have observed, a reference to the contractual performance for which the instrument is a security does not necessarily point to the instrument being a "see to it" guarantee rather than a demand guarantee. As has been stated in the cases, the absence of such reference would remove an important safeguard from the guarantor. The editors of Paget observe (at 865) that "a bare promise to pay on demand without any reference to the principal's obligations would leave the principal even more exposed in the event of a fraudulent demand because there would be room for the principal to assert that the drawing was in respect of obligations which had not been guaranteed". That passage was approved in the Gold Coast case at [18]. Moreover, paragraph [2] of the APGs must be read together with paragraph [4]. Paragraph [4] makes it clear that it is self-certification and demand and not the fact of default which triggers the obligation to pay. The implication from that is reinforced by the provision in Article 2(b) of the Uniform Rules which I have set out and which, by paragraph [10], applies to the APGs.

As to paragraph [6], in the Gold Coast case reference to arbitration in the instrument did not preclude it from being a demand guarantee. But (see Gold Coast [23]) the reference to arbitration in that case was in the provision in the instrument which dealt with the duration of the obligation assumed by it and not with the obligation itself. In the light of the requirement of certification by a bank, the court considered it explicable as a necessary provision in the event of the bank deciding that it was unable to issue the certificate until after any dispute had been resolved by arbitration. In the present case, however, the provision refers to "the award issued under such arbitration" and that award may differ from the amount demanded by the defendants. Although the point is not without difficulty, I accept Mr Milligan's submission that this provision does not condition the obligation to pay on the default of the shipbuilder. The obligation to pay is triggered by the award and the sum stipulated in the award is the sum that the claimant is obliged to pay. Although that might be different from the sum demanded by the defendants pursuant to paragraph [2], the APGs enable certainty to be achieved either by self-certification in accordance with paragraph [4] or by the arbitrator's award. Certainty is thus achieved by one of two documents, neither of which involves a determination of whether the shipbuilder is in default.

I do not consider that the provisions of the Basic Agreement or the post-APG communications between the claimant and its reinsurers and reinsurance intermediaries are of assistance in determining whether the APGs are performance bonds or classic contracts of guarantee. The defendants knew nothing of these matters and the communications with the reinsurers and the intermediaries occurred after the first two APGs were issued.

As far as the shipbuilding contracts themselves are concerned, I do not consider that their terms support Mr Oliver's submissions on this issue. The absence of an express reference to recourse under the APGs in respect of the instalments paid was contrasted by Mr Oliver with the reference to the APGs in the context of claims in respect of owner-supplied items. I accept Mr Milligan's submission that, given the purpose of the APGs, it would be extraordinary to construe the failure expressly to refer to recourse to them in the material parts of clause 17 of the shipbuilding contracts as meaning that there is no ability to do so. That is what the pro forma set out in Annex 3 to the contract provides.

Mr Oliver is not, in my judgment, assisted by the contrast he makes between Annex 3 and Annex 6 to HS1005 and HS1006. The Defects Liability Guarantee in Annex 6 is not subject to the Uniform Rules. It also excludes the defences available to a surety, a factor which is one of the indications that it is a contract of suretyship rather than a performance bond. In the case of HS1007, Mr Oliver submitted that the Replacement Guarantee is more obviously a performance guarantee. However, although, unlike the APGs, it is described in the heading to Annex 8 as "performance guarantee" and its last paragraph subjects the performance guarantee to the Uniform Rules, its provisions differ from those in the APGs.

Finally, I do not consider that the provision that the advance payments be paid into an escrow account is material. Clause 5.5 of the shipbuilding contracts and Annex 1 provide the means by which such payments may be dispersed to the shipbuilder for the purposes of construction and, because the second paragraph of clause 5.1 identifies these payments as payments to be covered by the APGs, the fact that the defendants had some additional measure of protection from the escrow accounts is, in this context, not material.

Issue 2: If the APGs are contracts of suretyship, has the claimant been discharged from liability under them as a result of the changes in the corporate identity of the shipbuilder or material variations in the shipbuilding contracts?

The question here is whether there has been a material variation of the principal contracts. The submissions on behalf of the claimant that there has been such a variation and that it has been discharged from liability under the APGs have two strands. The first concerns the effect of the corporate reorganisations. The second concerns the claim that the defendants agreed with the shipbuilder to defer the delivery dates of the vessels and thus increased the period of the claimant's exposure under the APGs. What is important in this context is whether there was an agreement by the creditor, here the defendants, to vary the shipbuilding contracts and, if there was, whether the claimant, the guarantor, affirmed the APGs with knowledge of such variation.

I first deal with the changes in the corporate identity of the shipbuilder. The defendants did not agree to this. The changes in the identity of the shipbuilder occurred in the first place because of the unilateral action by HWS and its effect under Korean law, and then by the unilateral act of Buyoung and the effect of the partitioning under Korean law. Accordingly, absent a specific breach of duty by the defendants, which is not the way the claimant's case has been put, the principles set out in Holme v Brunskill (1877) 3 QBD 495; Commercial Bank of Tasmania v Jones [1893] AC 313; and First National Finance Corporation Ltd v Goodman [1983] BCLC 203 do not apply. In Holme v Brunskill Cotton LJ made it clear, at 505, that for the guarantor to be discharged there must be an "agreement between the principals with reference to the contract guaranteed".

The fact that the defendants did not enforce any rights they may have had against the various corporate iterations of the shipbuilder does not suffice to discharge the APGs. It is well established that the voluntary act of forbearance by a creditor against his counterparty will not discharge the guarantor: see Moschi v Lep Air Services Ltd [1973] AC 331 at 348G (albeit in the context of steps to obtain timeous performance by the debtor) and China and South Sea Bank Ltd v Tan Soon Gin [1990] 1 AC 536 at 544A-C and 545E-G.

Moreover, in circumstances in which the claimant did not take the opportunity it had to challenge the merger in the Korean courts and so under Korean law is deemed to have agreed to it, it is unattractive for it now to contend that it has nevertheless been discharged from liability under the APGs because of the merger. This is so, even if, since the APGs are subject to English law, Korean law is not relevant to their construction. As to the subsequent partitioning, the evidence of the experts was that both Buyoung and Asia Heavy were jointly and severally liable to perform the obligations of the builder under the shipbuilding contracts. In the light of that, the partitioning could not have put Meritz in a worse position than it was in when Buyoung alone was liable.

Before leaving this issue, I add that Mr Oliver relied on Meritz's reservation of its right to cancel the repayment guarantees in its memorandum dated 20 October 2008 to Asia Heavy (see [26]). He also relied on the fact that the claimant did not reissue the APGs to make it clear that they applied in respect of Asia Heavy's position. However, the memorandum dated 20 October was not communicated to the defendants and is irrelevant to considering their position vis a vis the claimant. Moreover, the communications between the claimant and the defendants as they sought to address the problems caused by Asia Heavy's financial position did not at any stage include the claimant making it clear to the defendants that, in the light of the changes in the corporate identity of the shipbuilder, it reserved its rights under the APGs.

I turn to the claim that the defendants agreed to a postponement of the delivery dates of the vessels. Mr Oliver submitted that the agreement by the defendants was confirmed in the faxed letters from the defendants to Asia Heavy on 3 December 2008: see [39]. Mr Oliver submitted that the agreement to new delivery dates one year or more later than the contractual ones constituted a material variation to the shipbuilding contracts and thus engaged the rule in Holme v Brunskill. Although the faxed letters dated 3 December upon which Mr Oliver relied were unqualified, Mr Milligan submitted that when seen in the full context of the exchanges between the claimant and the defendants over the entire period (including the correction on the next day), it is clear that they are not agreements to extend the delivery dates. All the exchanges were in the context of the claimant's recognition that it was bound by the APGs, and very concerned about this in view of Asia Heavy's financial position. The communications by the defendants made it clear that the steps that they were willing to contemplate and the proposals they made were contemplated and made in a context in which they were not prepared to vary the shipbuilding contracts and were concerned to preserve their rights under them.

Mr Milligan submitted that, at worst, the letters dated 3 December were conditional offers of variation provided there was performance by the specified dates. Since there had been no such performance, that condition was not satisfied. There was, accordingly, no contractual variation. He relied on two old cases, Hollier v Eyre (1842) 9 C & F 1 at 57-58 (Lord Cottenham) and Clark v Birly (1889) 41 Ch D 433-4 (North J). He also submitted that the offers made by the defendants could only have been beneficial to the claimant because given Asia Heavy's financial position it was going to default and thus trigger the claimant's obligations under the APGs but the letters gave it an incentive to perform and, if the targets were met, to relieve the claimant of liability under the APGs. Moreover, Mr Milligan relied on the definition clause in the three shipbuilding contracts that defines "Take Over Dates" as the "specified delivery date" or alternatively "such other date as may become applicable pursuant to the contract" and the provision in clause 13.2(d) that "permissible delays" include extensions of time agreed by the parties in writing. He submitted that the shipbuilding contracts themselves provided for an extension and (see Andrews and Millett at 364) a variation expressly contemplated in a contract does not discharge the guarantor.

I have concluded that the claimant was not discharged from the APGs as a result of the communications about delivery dates. There is considerable force in Mr Milligan's submission that there was no contractual variation or that if there was it was subject to a condition which was not satisfied. But, in view of the unqualified nature of the letters dated 3 December on which Mr Oliver relied and the formulaic but not consistent use of "without prejudice", I rest this part of my decision on affirmation by the claimant of the APGs after 3 December 2008, rather than the absence of a variation or the presence only of a contemplated variation. By 3 December the claimant knew both about the merger and partitioning and about the proposed changes to the delivery dates. I accept Mr Milligan's submissions that acts of affirmation by the claimant are found in the request made by Mr Cho which was conveyed to the defendants by their Korean lawyers in the e-mail dated 9 December and at the meeting between the claimant and the first defendant's Korean lawyers on 16 December to which I have referred, see [28]. There is also the reference to "our refund guarantee" in the claimant's communication (see [31]) dated 19 December. Mr Milligan also relied on Mr Min's e-mail dated 11 March (see [32]) but that, standing on its own, is not an unequivocal affirmation of the contract as opposed to a request to see how the first defendant was putting its claim.

Issue 3: Once HWS ceased to exist were the defendants able to make a contractual demand which triggered liability under the APGs?

I have referred (see [7], [32], and [41] – [42]) to the notices of termination and demands for repayment made to Asia Heavy and, after Asia Heavy failed to pay the demands by the first and second defendant for payment by Meritz under the three APGs.

Mr Oliver submitted that because of the manner in which the definitions in the shipbuilding contract and the APGs interacted, after HWS ceased to exist it was impossible for a demand to be made on HWS and for it to satisfy it. His starting point is the definition in the shipbuilding contracts of the first and second defendant as "the Buyer" and HWS as "the Builder". He submitted that, in the light of the definition of "Builder" and the use of that term throughout the shipbuilding contracts, after HWS ceased to exist, the provisions of clause 17 ceased to be workable. Accordingly, a demand for repayment made to Asia Heavy could not be made "in conformity with clause 17". Since the same definitions are used in the APGs, with HWS being defined as "the Builder", the references to "the Builder" in paragraphs [2] and [4] are to be read accordingly. The consequence is that demands upon Asia Heavy could not trigger the obligation under the APGs.

There is a short answer to this point whether or not the APGs are performance bonds. Clause 17.1(d) of the shipbuilding contracts gives the defendants the right to terminate the contracts and demand repayment on an insolvency event including "the dissolution…or liquidation of" the Builder. The APGs give the defendants a guarantee of the repayment of the advance payments (paragraph [2]) upon a demand with a signed statement certifying that their demand for refund "is made in accordance with clause 17…and that the Builder has failed to make the refund". The contract thus expressly provides for payment under the APGs in the case of the dissolution of HWS, the shipbuilder. It cannot make any difference that HWS is dissolved as part of a reorganisation which puts a new corporate entity in its place as the shipbuilder. As Mr Milligan observed, if Mr Oliver is right, the APGs would not be available when they are most needed.

If, as I have decided, the APGs are performance bonds rather than classic contracts of suretyship, there is an additional reason. In the light of the evidence of Korean law, once the merger was effective, Buyoung succeeded to all of HWS's rights and obligations (save in immaterial respects). Asia Heavy in turn succeeded to all Buyoung's rights and obligations, although after the partitioning Buyoung remained jointly and severally liable. Accordingly, the defendants could honestly and validly self-certify in accordance with paragraph [4] of the APGs. They did so certify that the demand was in conformity with clause 17. In the absence of an allegation of fraud that is an end to the matter: see [51] above and Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159.

VII. Conclusion

For these reasons judgment is given in favour of the defendants for the sums counterclaimed and interest at 6% as stipulated in the three APGs. In the case the APGs in respect of HS1005 and 1006 the sums counterclaimed are US$6,300,000 per contract. In the case of HS1007 it is €15,050,000.

Note 1 In the case of HS1005 and 1006 the specified sum is US$6,300,000; in the case of HS1007 it is €15,050,000. [Back]

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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Meritz Fire and Marine Insurance Co Ltd v Jan De Nul NV (Rev 1) [2010] EWHC 3362 (Comm) (21 December 2010) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2010/3362.html Cite as: [2011] TCLR 2, [2010] EWHC 3362 (Comm), [2011] 1 All ER (Comm) 1049, [2011] 1 CLC 48, 134 Con LR 252, [2011] BLR 320