A dispute over whether a shipbuilding contract guarantee was a ‘demand’ guarantee or a ‘see to it’ guarantee prompted Shanghai Shipyard Co Ltd v Reignwood International Investment (Group) Co Ltd – QBD (Comm Ct) [2020] EWHC 803 (Comm). Case summary written by Christopher Chane.
Background
The claimant (the Builder) was the beneficiary of a ‘guarantee’ agreement dated 17 November 2011 (the Guarantee) entered into with the defendant (the Guarantor). The Guarantee was given to secure a final payment of US$170 million (the Final Instalment) by the buyer (which was an SPV and indirect subsidiary of the defendant) under a shipbuilding contract dated 21 September 2011 (the Contract) in respect of a drillship, Hull No S6030 (the vessel).
Disputes arose and the buyer did not take delivery of the vessel under the Contract and refused to pay the final instalment. The Builder subsequently made a demand under the Guarantee. The Guarantor refused payment pending the outcome of an arbitration between the Builder and the Seller and an arbitration was commenced under the Contract on 13 June 2019.
The principal issue to be determined in this case was the true construction of the Guarantee, whether it was characterised as an on-demand or see-to-it guarantee.
The Guarantee provided:
“1. In consideration of [the Builder] entering into [the Contract] with [the Buyer] … for the construction of [the Vessel], [the Guarantor] hereby IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee[s] in accordance with the terms hereof, as the primary obligor and not merely as the surety, the due and punctual payment by [the Buyer] of the Final [I]nstalment of the Contract Price amounting to … US$170,000,000 …
…
3. [The Guarantor] also IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY guarantee[s], as primary obligor and not merely as surety, the due and punctual payment by [the Buyer] of interest on the Final Instalment guaranteed hereunder at the rate of … (5 per cent) per annum from and including the first day after the default until the date of full payment by [the Guarantor] of such amount guaranteed hereunder.
4. In the event that [the Buyer] fails to punctually pay the Final Instalment guaranteed hereunder in accordance with the Contract or [the Buyer] fails to pay any interest thereon, and any such default continues for a period of fifteen (15) days, then, upon receipt by [the Guarantor] of [the Builder's] first written demand, [the Guarantor] shall immediately pay to [the Builder] or [the Builder's] assignee all unpaid Final [I]nstalment, together with the interest as specified in paragraph (3) hereof, without requesting [the Builder] to take any further action, procedure or step against [the Buyer] or with respect to any other security which you may hold.
In the event that there exists dispute between [the Buyer] and the Builder as to whether:
(i) [The Buyer] is liable to pay to the Builder the Final Instalment; and
(ii)The Builder is entitled to claim the Final Instalment from [the Buyer],
and such dispute is submitted either by [the Buyer] or by [the Builder] for arbitration in accordance with Clause 17 of the Contract, [the Guarantor] shall be entitled to withhold and defer payment until the arbitration award is published. [The Guarantor] shall not be obligated to make any payment to [the Builder] unless the arbitration award orders [the Buyer] to pay the Final Instalment. If [the Buyer] fails to honour the award, then [the Guarantor] shall pay you to the extent the arbitration award orders.
…
7. [The Guarantor’s] obligations under this guarantee shall not be affected or prejudiced by:
(a) any dispute between [the Builder] and [the Buyer] under the Contract; …
…
(c) any variation or extension of their terms thereof; …
…
10. The maximum amount … that [the Guarantor is] obliged to pay to [the Builder] under this Guarantee shall not exceed the aggregate amount of … (USD171,416,666.67) being an amount equal to the sum of:
(a) The Final Instalment guaranteed hereunder …; and
(b) Interest at the rate of … (5 per cent) per annum on the instalment for a period of sixty (60) days …
11. All payments by [the Guarantor] under this Guarantee shall be made without any set-off or counterclaim and without deduction or withholding for or on account of any taxes, duties, or charges whatsoever …”
The Builder contended that the Guarantee was a demand guarantee, but even if it was a “see to it” guarantee, clause 4 only operated as a defence to a claim under the Guarantee if arbitration was commenced before the claim was made.
Held, that the Guarantee was a “see to it” guarantee, not a “demand” guarantee. The judge considered the guidance given by the CoA in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2014] 1 Lloyd’s Rep 266 and looked to the four criteria which would need to be satisfied in order for there to be a presumption that the guarantee is on-demand:
· The instrument relates to an underlying transaction between the parties in different jurisdictions;
· The instrument is issued by a bank;
· The instrument contains an undertaking to pay ‘on demand’; and
· The instrument does not contain clauses excluding or limiting the defences available to a guarantor.
The judge focused on the fact that the guarantee had not been issued by a bank and that as a result it fell outside the presumption notwithstanding the other elements of the presumption. Indeed, Knowles J further stated that “where an instrument is not given by a bank or other financial institution, cogent indications that the instrument was intended to operate as a demand guarantee will be required”.
The Guarantor was therefore entitled to refuse payment under clause 4 pending and subject to the outcome of an arbitration between the Builder and the Buyer in respect of a dispute as to the Buyer’s liability to pay and the Builder’s entitlement to claim that Final Instalment, regardless of when such arbitration was commenced.