Shanghai Shipyard Co. Ltd v Reignwood International Investment  EWCA Civ 1147
A recent unanimous decision by the Court of Appeal overturned previous rulings on two preliminary issues regarding the type of guarantee and the obligation of the buyer to pay the last instalment of a shipbuilding contract that they had not previously paid. The case proved to show that not all guarantees outside of a banking context are subject to the nature of a surety/“see to it” guarantee and highlighted important distinctions between these and demand guarantees, ultimately leading to the request of payment of the final instalment from a buyer.
Shanghai Shipyard Co. Ltd. (‘the Appellant’/“the Builder”) are a Chinese shipbuilding and repair company, part of the China State Shipbuilding Corporation, whilst Reignwood International Investment (‘the Respondent’/“the Guarantor”) is part of an ‘international multi-industrial conglomerate’ based in Hong Kong, offering investment services. A total of $200 million was agreed as the price of Shanghai Shipyard building an offshore drillship for Reignwood; paid in three instalments, and despite the final US$170 million meant to be “absolutely and unconditionally” paid upon delivery, the buyer failed to pay “as primary obligor and not merely as surety”. In a previous hearing in the Queen’s Bench Division, the court saw Knowles J decide in favour of Reignwood, on two preliminary issues that regarded the construction of the guarantee.
Shanghai Shipyard’s first appeal was to contend the guarantee being one of a surety/“see to it” guarantee. The contract between the Builder and Guarantor contained many poorly-drafted sections, including that of the proviso in cl.4, which originally stated that the Guarantor could refuse payment “pending and subject to the outcome of the arbitration”. The proviso about the manner and timeframe in which a dispute could be brought to arbitration – and payment subsequently withheld – was the cause of the second issue, with the Guarantor attempting to suspend a payment on demand.
Unsurprisingly, the inadequately drafted contract alluded at both primary and secondary liability. Repetitive reference was made to Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA  1 All ER (Comm) 1191, which successfully referenced the four conditions for demand guarantees from Paget’s Law of Banking. It is worth noting that in this example, the guarantor was a bank – and for a shipbuilding context, the guarantor needn’t be one. The Court of Appeal instead stated here that any reference to Paget’s should be kept to when all conditions are met. Despite Reignwood’s reference to the Court of Appeal’s decision in Marubeni Hong Kong and South China Ltd v Government of Mongolia  1 WLR 2497, in which a guarantee issued out of the banking context was thought not to be a demand guarantee. There were “material differences”, and so the application of such an example was misplaced. The proviso in cl.4 was found to reinforce the instrument being a demand guarantee.
The use of presumptions was overtly criticised by The Judge and the court heard that emphasis should be placed on the actuality of words used in specific contexts, rather than speculative semantics. This was a particular offense with the second issue, in which there was very little reference to other cases that was not misplaced and instead points about “an artificial and uncommercially short time” for a window to proceed with arbitration, as well as the very existence of a dispute alone meaning that the last instalment was no longer payable on demand. As in many other cases, it was the ‘unclear’ language that caused disagreement. The Court of Appeal’s decision further elucidates on arbitration carve outs and that given the absence of such an explicit and suitable timeframe for arbitration, the instrument is likely not to be a “see to it” guarantee.
Appeal was granted on both the first and second issue, in favour of Shanghai Shipyard Co. Ltd. As the contract was novated to OOL – a 100% subsidiary of Opus Tiger 1 (the “Buyer”) – a year after Reignwood initially signed, the Buyer was demanded to pay the final instalment.
This case provides evidence that guarantees outside of the banking context are in fact not always surety/ “see to it” guarantees, and that a presumptive attitude towards such can cause laborious, unwanted consequences. Although both types of guarantee offer sufficient protection against ‘counterparty risk’, demand guarantees also protect cashflow; an important – and often desired – factor, as shown in the context of a shipbuilding contract. It is likely that this decision will be warmly received by other parties that rely on (protecting) similar cashflows.Contact Us