Shanghai Shipyard v Reignwood (2021) – Court of Appeal cuts adrift attempt to avoid guaranteed payment
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Shanghai Shipyard Co. Ltd v Reignwood International Investment [2021] EWCA Civ 1147
Summary
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/âsee to itâ guarantee and highlighted important distinctions between these and demand guarantees, ultimately leading to the request of payment of the final instalment from a buyer.
Introduction
Shanghai Shipyard Co. Ltd. (âthe Appellantâ/âthe Builderâ) are a Chinese shipbuilding and repair company, part of the China State Shipbuilding Corporation, whilst Reignwood International Investment (âthe Respondentâ/âthe Guarantorâ) is part of an âinternational multi-industrial conglomerateâ 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 âabsolutely and unconditionallyâ paid upon delivery, the buyer failed to pay âas primary obligor and not merely as suretyâ. In a previous hearing in the Queenâs Bench Division, the court saw Knowles J decide in favour of Reignwood, on two preliminary issues that regarded the construction of the guarantee.
Shanghai Shipyardâs first appeal was to contend the guarantee being one of a surety/âsee to itâ 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 âpending and subject to the outcome of the arbitrationâ. The proviso about the manner and timeframe in which a dispute could be brought to arbitration â and payment subsequently withheld â was the cause of the second issue, with the Guarantor attempting to suspend a payment on demand.
Judgement
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 [2013] 1 All ER (Comm) 1191, which successfully referenced the four conditions for demand guarantees from Pagetâs Law of Banking. It is worth noting that in this example, the guarantor was a bank – and for a shipbuilding context, the guarantor neednât be one. The Court of Appeal instead stated here that any reference to Pagetâs should be kept to when all conditions are met. Despite Reignwoodâs reference to the Court of Appealâs decision in Marubeni Hong Kong and South China Ltd v Government of Mongolia [2005] 1 WLR 2497, in which a guarantee issued out of the banking context was thought not to be a demand guarantee. There were âmaterial differencesâ, 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 âan artificial and uncommercially short timeâ 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 âunclearâ language that caused disagreement. The Court of Appealâs 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 âsee to itâ 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 â a 100% subsidiary of Opus Tiger 1 (the âBuyerâ) – a year after Reignwood initially signed, the Buyer was demanded to pay the final instalment.
Application
This case provides evidence that guarantees outside of the banking context are in fact not always surety/ âsee to itâ guarantees, and that a presumptive attitude towards such can cause laborious, unwanted consequences. Although both types of guarantee offer sufficient protection against âcounterparty riskâ, demand guarantees also protect cashflow; an important â and often desired â 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.
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