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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Gold Coast Ltd v Caja De Ahorros Del Mediterraneo & Ors [2001] EWCA Civ 1806 (6 December 2001) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/1806.html Cite as: [2002] 1 Lloyd's Rep 617, [2002] 1 LLR 617, [2001] EWCA Civ 1806, [2002] 1 All ER (Comm) 142, [2002] CLC 397

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION COMMERCIAL COURT
(The Hon. Mr. Justice Thomas).

		Royal Courts of Justice Strand, London, WC2A 2LL Thursday 6th December 2001

LORD JUSTICE TUCKEY :

1. This is an appeal with the permission of the Judge by the ten Defendant Spanish banks from a decision of Thomas J who, on 2 May 2001, gave summary judgment for the Claimant under the terms of refund guarantees which the banks had given in connection with a shipbuilding contract. The issue before the Judge and before us is whether the guarantees were so called on demand guarantees independent of the shipbuilding contract or true guarantees where the guarantor's liability is dependent upon the liability of the principal debtor.
2. The Claimant (the Buyer), an Isle of Man company with no substantial assets other than the ship which it was to buy, is the assignee of the shipbuilding contract in question. Under this contract, which was made on 19 December 1997, the Spanish shipbuilder (the Builder) agreed to build a stainless steel chemical tanker of 22,000 dwt at their yard in Gijon for the peseta equivalent of US$38.5m. Stage payments were to be made as the building progressed with the final payment on delivery, at which time title to the vessel was to pass to the Buyer. The Buyer's obligation to make each stage payment was conditional upon the simultaneous delivery of a prescribed refund guarantee from issuers acceptable to the Buyer's bank in the amount of the payment. The Buyer's bank was Lloyds Bank who was providing all the finance for the transaction and whose security included a general assignment of the shipbuilding contract and the refund guarantees.
3. The vessel was to be delivered no later than 1 October 1999 extended by the aggregate of all permissible delays as defined by the contract. If the accumulated delay beyond the extended delivery date amounted to 240 days or more the Buyer was entitled to declare the contract in default and exercise its rights under Article 11.
4. Article 11.1 says :

If, in accordance with any of the provisions of this CONTRACT the BUYER declares the CONTRACT in default and/or rescinds the CONTRACT then, subject to any arbitration under Article 15, at the BUYER'S option, either

a) the BUILDER shall be liable to repay to the BUYER all monies paid by the BUYER for or on account of the Contract Price together with interest thereon …….. from the date when such monies were paid by the BUYER to the BUILDER up to the date of the repayment thereof ……..; or

b) make a demand under the Refund Guarantee(s); or

Sub-paragraphs c), d) and e) give the Buyer further options including the right to take possession of the vessel and sell it or continue its construction in another yard.

5. On 19 June 2000 the Buyer declared the Builder in default and rescinded the contract under Article 11 on the ground of delayed delivery. By this time the Buyer had made seven stage payments amounting to 80% of the price. The Builder denied that the Buyer was entitled to declare default contending that the right to do so would not have arisen until 1 August 2000 at the earliest, by which time it had tendered delivery of the vessel. In due course it declared the Buyer in default under Article 10 of the contract which gave it the right to do so in certain events : 'without prejudice to the Buyer's rights to go to arbitration pursuant to Article 15'. On the Buyer's default Article 10 gives the Builder the right to retain all payments made by the Buyer under the contract and to sell the vessel in its completed or uncompleted state accounting to the Buyer for any excess over the price which it would have received under the contract. The Builder has in fact sold the vessel for about US$33.5m. but has not yet accounted to the Buyer.
6. The dispute between the Buyer and the Builder has been referred to arbitration by Sir Christopher Staughton under Article 15 which makes English law the law of the contract and provides for London arbitration of any dispute 'arising out of or relating to the contract or its rescission'.
7. Refund guarantees in identical terms were issued by the Defendant banks to the Buyer when it made each of the seven stage payments. The relevant parts of the instrument are as follows :

In consideration of your payment to Naval Gijon, S.A. ("the Builder") of the …….. instalment (the "Instalment") under the Shipbuilding Contract we do hereby irrevocably and unconditionally undertake (except as provided below) that we will pay to you within five (5) days of your first written demand US$…….. together with interest thereon at the rate of two per cent (2%), per annum over LIBOR from the date of your payment of the instalment to the date of our payment to you of amounts due to you under this Guarantee if and when the instalment becomes refundable from the Builder under and pursuant to the terms and conditions of the Shipbuilding Contract.

This Guarantee is subject to the following conditions :

1. We shall pay any amount payable under this Guarantee upon receipt of a certificate issued by LLOYDS BANK PLC stating the amount of the Instalment paid to the Builder under the Agreements, the date of such payment that you have become entitled to a refund pursuant to the Agreements and that the Builder has not made such refund.

2. This Guarantee shall become null and void upon the earlier of

(a) …….. delivery and acceptance of the Vessel or

(b) …….. payment in full …….. either from us under this Guarantee or directly from the Builder, or

(c) 1 July 2000, provided that in this latter case if arbitration proceedings have been commenced by the Builder or you under Article 15 of the Shipbuilding Contract, then this Guarantee will remain in full force and effect until 21 days after the publication of the final award in those arbitration proceedings except that we shall not be liable under this Guarantee for any interest accruing on the instalment after 1 May 2001……..

5. Any variation, amendment to or waiver given in respect of the Agreements will not limit, reduce or exonerate our liability under this Guarantee, always provided such variation, amendment or waiver will not increase our maximum liability assumed under this Guarantee……..

8. This Guarantee shall be governed in every respect by English law. Any Dispute arising under or in connection with this Guarantee shall be referred to the exclusive jurisdiction of the English Courts.

8. Various attempts were made to demand payment under the guarantees following the Buyer's declaration of default. However, on 23 November 2000 demands were made accompanied by a certificate from Lloyds Bank which said:

We refer to the Guarantees …….. We hereby certify that Goldcoast Limited has become entitled pursuant to the Agreements (as defined in the Guarantees) to a refund of the instalments paid to the Builder under the Agreements on the dates and in the amounts set out below and that the Builder has not made such refund

The Judge held that this certificate satisfied condition 1 of the guarantee and this is now accepted. Before issuing this certificate Lloyds had taken legal advice and the case is to be approached on the basis that they had satisfied themselves that they had reasonable grounds for issuing the certificate and that they did so bona fide.

9. The Judge concluded that the on demand nature of the obligation assumed by the Defendant Banks and the terms of condition 1 were very strong indicators that once Lloyds were prepared to certify that the instalments were refundable the Defendant banks became obliged to pay on receipt of that certificate. He did not think that the indications to the contrary, notably in condition 5, outweighed this view of the instrument. He accepted that each side's arguments about commercial purpose had force, but concluded that they did not favour one construction over the other. He rejected the argument that the words "subject to arbitration" in Article 11(1 meant that the right to make a demand under the refund guarantee was postponed pending resolution of the disputes between the Buyer and the Builder by arbitration.
10. On demand guarantees or performance bonds have now been a feature of commercial life for many years. In the context of international trade. Lord Denning likened such instruments to a letter of credit. He said :

A bank which gives the performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contracted obligations or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice." (Edward Owen Limited –v- Barclays Bank [1978] 1QB 159, 171).

11. In the construction industry advance payment guarantees are often issued to employers who make stage payments to contractors. Similarly, refund guarantees are a common feature of the shipbuilding industry. However, as the Judge notes, there is no standard practice in relation to such guarantees; they can either be in the form of independent performance bonds (or stand-by letters of credit) or true 'see to it' guarantees. The question therefore is simply what is the nature of the refund guarantees in this case. This involves construing the instrument in its factual and contractual context having regard to its commercial purpose.
12. Mr. Richard Jacobs QC, for the Defendant banks, relied heavily on commercial purpose. He said that the Buyer's construction meant that they could walk away from the shipbuilding contract on a falling market by declaring a default and then obtain repayment of all the stage payments which they had made under the refund guarantees before the validity of their declaration of default and their right to repayments from the Builder under Article 11(1(a) had been determined by arbitration. In these circumstances the ship would not provide the Builder with adequate security and it would be pointless for it to arbitrate with a view to recovering the money from a no ship company whose bank had received the money in repayment of its loan.
13. On the other hand, if the Defendant banks' construction is correct, the Builder can keep the stage payments and the vessel pending the outcome of an arbitration which might take months or even years. Arbitrations about delay are notoriously time consuming. In the meantime the Buyer requires the money to be repaid because of its obligations to Lloyds which include a requirement immediately to repay the whole of their borrowing if the vessel is not delivered by 1 June 2000. The guarantees did not secure the repayment of interest after 1 May 2001.
14. I am inclined to think that these competing considerations tend to favour the Buyer's construction since, although the Builder may, through his counter-indemnities, have had to return the money paid by the Buyer, he has at least retained the vessel which he is able to sell. However, like the Judge, I am prepared to assume that commercial purpose does not favour one construction over the other.
15. Turning then to the instrument itself, I accept Mr. Jacobs' submission that the task is to decide the nature of the instrument by looking at it as a whole without any preconceptions as to what it is. Undoubtedly there are features of the document which favour each side's construction. Before considering these in more detail it is helpful to consider such guidance as there is in the cases and texts to which we have been referred.
16. In Paget's Law of Banking (11^th Edition) under the heading 'Contract of suretyship –v- demand guarantee' the authors say :

Where an instrument i) relates to an underlying transaction between parties in different jurisdictions, ii) is issued by a bank, iii) contains an undertaking to pay 'on demand' (with or without the words 'first' and/or 'written') and iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.

In the instant case features i), ii) and iii) favour the Buyer, but iv) favours the Defendant banks (condition 5).

17. There is a further feature which favours the Buyer and that is that payment is to be made against a certificate (condition 1). In I.E. Contractors –v- Lloyds Bank [1990] 2 Lloyds Rep 496, 500 Staughton LJ observed that :

There is a bias or presumption in favour of the construction which holds a performance bond to be conditioned upon documents rather than facts. But I would not hold the presumption to be irrebuttable, if the meaning is plain.

18. In Paget there is a further passage under the same heading to which I have referred which says :

In construing guarantees it must be remembered that a demand guarantee can hardly avoid making reference to the obligation for whose performance the guarantee is security. A bare promise to pay on demand without any reference to the principal's obligation would leave the principal even more exposed in the event of a fraudulent demand because there would be room for argument as to which obligations were being secured.

There is a passage to similar effect in Documentary Credits by Jack, Malek and Quest [2001] where the authors say at para. 12(57 :

In particular, …….. a (demand) guarantee will not be construed as payable only if a particular event has occurred, simply because the guarantee sets out, without more, the event or events following the happening of which it is intended that a demand may be made.

What is said in these passages is illustrated by Esal (Commodities) Limited –v- Oriental Credit Limited [1985] 2 Lloyds Rep. 546 where the words of the instrument were :

We undertake to pay the said amount on your written demand in the event that the supplier fails to execute the contract in perfect performance ……..

The court held that the bond was payable on demand despite the fact that it referred to the supplier's failure to perform the underlying contract about which there was a dispute. At page 549 Ackner LJ (with whom the other members of the court agreed) observed :

If the performance bond was so conditional, then unless there was clear evidence that the seller admitted that he was in breach of the contract of sale, payment could never safely be made by the bank except on a judgment of a court of competent jurisdiction and this result would be wholly inconsistent with the entire object of the transaction, namely to enable the beneficiary to obtain prompt and certain payment.

19. The only other case I need refer to is Trafalgar House Construction Ltd. –v- General Surety and Guarantee Co. Ltd. [1996] 1 AC 199 in which the House of Lords allowed an appeal from this court's decision that the instrument in question was not a 'see to it' guarantee. The instrument was a so called double bond issued by the appellants to the respondent main contractors to secure the performance of sub-contractors who had gone into liquidation. The obligation to pay was 'on default by the sub-contractors the surety shall satisfy and discharge the damages sustained by the main contractor'. The bond also contained terms similar in effect to condition 5 of the instrument in the instant case. In deciding that this was a true guarantee, Lord Jauncey (with whom the other members of the House agreed) said at page 205 :

Bonds in similar form have existed for more than 150 years and have been treated by the parties thereto and by the courts as guarantees……… In the first place the bond itself contains indications that it was intended to be a guarantee. The Appellants are described as 'the surety'. There is a provision to the effect that no alteration in the terms of the sub-contract should release the surety from liability. In the absence of such provision a surety would normally be released from his obligation by any subsequent material alteration to the contractual provisions agreed between the contractor and the sub-contractor.

20. As well as condition 5 Mr. Jacobs relies on the fact that the instrument in the instant case calls itself a guarantee, the 'if and when' part of the obligation to pay and that condition 2 extends the life of the guarantee if there is an arbitration. This fits, he says, with the words 'subject to any arbitration' which qualify all the provisions of Article 11, including the Buyer's right to call the refund guarantees. He accepts that condition 1 points the other way, but argues that it simply imposes an additional requirement on the Buyer before he is able to demand payment. It cannot have been intended, he submits, that the only requirement for payment was that Lloyds, whose self-interest was obvious, should say that the Buyer had become entitled to a refund under the shipbuilding contract. Indeed, he argues that condition 1 does not in fact require the bank so to certify because the word 'that' in the third line means 'to which' or 'in respect of which'. This makes sense, he says, because one could not reasonably expect a bank to be able to say whether or not its customer had become entitled to repayment under a shipbuilding contract for the construction of a vessel abroad.
21. I do not accept these submissions. The instrument has all the appearances of a first demand guarantee. It describes itself as a guarantee, but this is simply a label; it does not use the language of guarantee. Rather the obligation, which is expressed to be an 'irrevocable and unconditional undertaking', is that the bank's 'will pay' on a first written demand. The only express condition of payment is contained in condition 1. This requires a certificate but makes no reference to arbitration or underlying liability under the shipbuilding contract. The instrument contains its own dispute resolution provisions.
22. Mr. Jacobs' suggested construction of condition 1 does not work. Like the Judge, I agree that this term makes perfect sense if one adds a comma between the words 'payment' and 'that'. So the bank is required to certify that the Buyer has become entitled to a refund, but it is accepted that it can and should only do so in good faith. This must provide a measure of protection to the Defendant banks and the Builder. There is nothing unusual about such a condition in a first demand guarantee where often it is simply the contracting party who has to state that he is entitled to be paid the amount guaranteed in order to trigger payment. It might be unusual for a bank to undertake such a task but a first class bank will obviously have to do so conscientiously in the knowledge that it could expose itself to the risk of being sued if it does not. The bank does not, of course, have to issue the certificate if it does not feel able to do so, in which case any call under the refund guarantees would have to await resolution by arbitration or settlement of the underlying dispute.
23. I think the 'if and when' part of the instrument does no more than identify the contractual events which trigger the right to call the refund guarantees in the same way as the bond in Esal referred to the underlying liability. Reference to arbitration in condition 2, which deals with the duration of the obligation assumed by the instrument and not the obligation itself, is perfectly explicable on the basis that this is a necessary provision in the event of Lloyds deciding that it is unable to issue the certificate until after any dispute has been resolved by arbitration.
24. The reference to arbitration in Article 11(1 does not, I think, help the Defendant banks either. The Article does not say 'subject to any arbitration award', as the Defendant banks must contend and, if it did, it would not make sense. If the Buyer's options under Article 11(1 were all conditional upon an arbitration award, none of them could accrue until such time as an award was made, in which case there would be no dispute to refer to arbitration in the first place. It is the contract which creates rights and obligations. Once these have accrued any dispute about them can be referred to arbitration, but until that has happened there is nothing to arbitrate. Mr. Boyd, QC for the Buyer, suggests that the words 'subject to arbitration' in Article 11 were intended to have the same meaning as the opening words in Article 10, that is to say, that the options afforded to the Buyer under Article 11 are without prejudice to the Builder's rights to go to arbitration. I think he is right about this.
25. This leaves condition 5 which undoubtedly gives the Defendant banks their best point. Like the Judge however, I do not think it tips the balance in their favour. Such a clause was only one of the features which persuaded the House of Lords in Trafalgar House that the instrument in question was a true guarantee. For the reasons given by Lord Jauncey in the passage to which I have referred, there were other very compelling reasons for this conclusion, not least the language of suretyship, strikingly absent from the present case. There are, as Mr. Boyd suggested, possible reasons for including such a clause in an instrument which is intended to be autonomous. It might, for example, have been included to avoid any argument that variation of the shipbuilding contract by, for example, postponing a stage payment or remitting part of it in settlement of any cross-claim would imperil recovery under the refund guarantees. It could have been inserted simply to ensure that the rule applicable to true guarantees did not apply to this instrument.
26. Finally, the Buyer's construction of the instrument does provide a further measure of protection to the Defendant banks. They must pay on receipt of the Lloyds certificate. They can do so safely without having to be concerned with the underlying dispute. On their construction, however, their obligation is only engaged after the Builder's liability has been determined. If they paid in circumstances in which the Builder was able to contend that its liability had not been finally determined, the Defendant banks' right to recover under their counter indemnities would be impaired.
27. For these reasons I think this appeal should be dismissed.

LADY JUSTICE HALE :

28. I agree.

LORD JUSTICE SIMON BROWN :

29. I also agree.
Order: Appeal dismissed; appellant t pay respondent's costs; costs to be subject of detailed assessment unless agreed; permission to appeal to the House of Lords refused. (Order does not form part of the approved judgment)