Construction - Refund guarantees

Meritz Fire & Marine Insurance Co Ltd v Jan de Nul NV and another: Court of Appeal, Civil Division: 21 July 2011

The defendants entered into a total of three agreements with a Korean shipyard (HWS) for the building of dredgers. The defendants were obliged under those agreements to make advance payments of the purchase price of the vessels. The defendants secured advance payment guarantees (APGs) from the claimant insurers that, in the event of premature termination for any reason, as set out in cl 17 of the agreements (see [11] of the judgment), such advance payments would be returned with appropriate interest.

The claimant agreed with HWS that it would provide the APGs in return for a fee. Under the agreement between those two parties, HWS, without the consent of the claimant, was not to merge or consolidate with another corporation and nor would there be a change in ownership. The claimant and defendants were informed by HWS that it had merged with another company, B Ltd, and that all rights and obligations under the three shipbuilding agreements were to be transferred. The claimant had not been informed in advance.

B Ltd then decided to split, with the shipbuilding functions being transferred to a newly incorporated company (Asia). HWS had been dissolved by that time.

The defendants served notice of default under the shipbuilding agreements, citing the occurrence of termination events specified in cl 17, and demanded repayment of the advance payments that had been made. Asia did not pay any of the demands and was subsequently declared insolvent. The defendants then demanded payment by the claimant under the APGs. The claimant issued proceedings seeking a declaration that it was not liable under the APGs and that it should be discharged as a surety. It argued, inter alia, that it had guaranteed the obligations of HWS and not its corporate successors, consequently the APGs had been discharged on the day that the transfers had taken place. The court ruled that the defendants were able to enforce the APGs. The claimant appealed.

The issue to be determined was whether the APGs had been discharged on the day that the agreements had been transferred. The claimant submitted that, on the true construction of the APGs, it had guaranteed the obligation of HWS to make the repayment and not the obligation of anyone else. Once the obligation of HWS had disappeared, by consequence of the novation to B Ltd, the APGs no longer had any application.

The appeal would be dismissed.

On the true construction of the APGs, the defendants were entitled to repayment by the claimant. The defendants had made advance payments, the shipbuilding agreements had been terminated in accordance with the provisions of cl 17 and the defendants were entitled to a refund of the advance payments. In the absence of that refund, the repayment had had to be made by the claimant as guarantor. The APGs had been intended to operate on the basis that no refund had occurred and not on the basis that HWS had failed to make the refunds when it had been obliged to do so.

It did not matter that HWS had been dissolved and could not have paid the refund, it had still failed to make the refund as envisaged by the terms of the APG. Payment of the refund was to have been made against documents and the defendants had complied with the requirements of the APG in their request for a refund from the claimant (see [25]-[26], [30], [32]-[33] of the judgment).

Commercial Bank of Tasmania v Jones [1891-4] All ER Rep Ext 1652 considered. Decision of Beatson J [2011] 1 All ER (Comm) 1049 affirmed.

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.