The much criticized English Court of Appeal decision in Kookmin Bank v Rainy Sky SA has now been overturned on appeal by the Supreme Court (1) on 2nd November 2011. Numerous Lending institutions which provided pre-delivery finance to shipowners against the security of an assignment of the benefits of refund guarantees will be vastly relieved.
The Supreme Court gave judgment in favour of the buyer's claim for repayment under various refund guarantees. The Refund Guarantor had refused to make repayment. The Builder under a shipbuilding contract became insolvent and was unable to repay; the guarantor argued, on the particular wording of the refund guarantee, whilst the Builder was obliged to repay under the Contract, the refund guarantor had not guaranteed that particular obligation, nor was it obliged to re-pay.
The Supreme Court concluded that whilst 2 different interpretations were possible given the wording used, the Buyer’s construction was consistent with the commercial purpose of the Guarantees, whereas the Builder’s interpretation flouted common sense. The fact the repayment obligation of the Builder to repay in the event of insolvency fell under a separate heading of the shipbuilding contract did not restrict its application.
Notwithstanding the outcome of the appeal, whether negotiating shipbuilding contracts and refund guarantees, it remains prudent to bear in mind some of the following factors:
- Great care must continue to apply in the drafting of these guarantees to ensure the Builder’s refund obligations are fully secured, and advice should be sought. There is no escape route if incorrect language is used. The Supreme Court stated bluntly “Where the parties have used unambiguous language, the court must apply it.”
- Most shipbuilding contracts permit the return of advance installments in circumstances where the Buyer has lawfully "cancelled or rescinded" the shipbuilding contract according to its terms.
- The refund guarantee often mirrors that narrow expression and can be of restricted benefit; securing the Buyer’s repayment obligations, howsoever they arise may be preferable.
- It is rare (and the Gearbulk/Stocznia Gdynia shipbuilding contract is perhaps an exception) for a shipbuilding contract expressly to state it can be terminated by reason of the Builder's "material breach". Repayment obligations of the Builder for such a cause may not be secured by some refund guarantee wordings in use.
- Insolvency of the Builder should give rise to an entitlement to call for repayments. Whilst in the Kookmin Bank case, the insolvency of the builder ultimately did trigger a repayment obligation under the refund guarantee, insolvency regulations in the domicile of the Builder may suspend the Builder’s own obligation to repay (or that of a Parent company) and preclude the enforcement of security.
- The Supreme Court underlined that Buyers' Supplies, whilst their value is repayable by the Builder, are not secured by the usual refund guarantee wording which deal with the treatment of advance installments. Specific wording or separate guarantees must be utilized.
- In the case of a default on the part of the Buyer, the Builder may complete and sell the vessel to a third party by utilizing the advance payments; such sale proceeds may be sufficient to enable repayment by the Builder to the Buyer of a surplus element of the installment payments. However again, based upon the logic of the Kookmin Bank judgment, such refund may not be covered by the terms of a narrow refund guarantee.
The Commercial approach of the Courts
The Norwegian courts identify the underlying intent of the parties and for that purpose are willing to detect the parties’ true agreement from pre contractual negotiations. English decisions still show a reluctance to fully adopt this approach but are moving towards a more logical stance.
The Supreme Court applies the logic underpinning other, differently constituted, Courts of Appeal, who were prepared “to adopt the more, rather than the less, commercial construction” or to impose a "commercially rational objective reading" to assist in the interpretation of contract wording (2).
The approach now laid down in their 20 page judgment by the Supreme Court decision is that “where a term of a contract is open to more than one interpretation, it is generally appropriate to adopt the interpretation which is most consistent with business common sense”.
Clearly there is now more confidence that predictions about the outcome of English decisions on guarantees and contracts generally can be made with a greater degree of certainty.
Bill Clinton may have put it more succinctly when he said “It’s the economy, stupid!”
1 KOOKMIN BANK V RAINY SKY SA – [2011] UKSC 50 reversing [2010] EWCA Civ 582, Court of Appeal (Civil Division)
2 Cattles Plc v Welcome Financial Services Ltd [2010] EWCA Civ 599; Barclays Bank plc v HHY Luxembourg SARL [2010] EWCA Civ 1248.