Sea-Cargo Skips AS v State Bank of India
Sea-Cargo Skips AS v State Bank of India
English High Court: Queen’s Bench Division (Commercial Court): Teare J:  EWHC 177 (Comm): 26 June 2013
Mr Julian Kenny, instructed by Ince & Co LLP, for the Claimant (the Bank)
Mr Richard Coleman QC, instructed by Royds LLP, for the Defendant (the Buyer)
SHIPBUILDING CONTRACT: REFUND GUARANTEE: QUESTION OF CONSTRUCTION: WHETHER DEMAND WAS SUFFICIENT TO TRIGGER BANK’S LIABILITY: AMBIGUOUS DEMAND NOT COMPLIANT
The present case involved a demand made by a buyer of a vessel for payment by a bank under a refund guarantee. The Court held that whether the demand was sufficient to trigger the bank’s liability to pay was a question of construction, namely, what type of demand did the parties intend would trigger the Bank’s liability to pay. As the bank was not a party to the underlying shipbuilding contract, the demand should contain a statement that the delay which had occurred was as set out in article IV 1(e) of the shipbuilding contract. The demand did not contain such a statement, and was at best ambiguous. Thus, the demand was not compliant and the bank was not liable.
This note has been contributed by Ken T.C. Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong.
A shipbuilding contract dated 12 June 2007 (the Shipbuilding Contract) was entered into between the Claimant, Sea-Cargo Skips AS (the Buyer), and Bharati Shipyard Ltd (the Builder) for the construction and sale of a roro/container vessel.
Article IV provided for an adjustment of the contract price and for cancellation by the Buyer in the event of late delivery. Article IV 1(b)-(e) provided that:
“(b) If the delay in delivery of the Vessel shall continue for a period in excess of 180 days (but excluding Permissible Delay) after Delivery Date, the Buyer may at its option cancel the Contract…
(c) If the total accumulated delay of non Permissible Delay and of Force Majeure Delay, but excluding other Permissible Delay, amounts to 270 days or more, then in such event the Buyer may cancel the Contract…
(d) If it can be established beyond any reasonable doubt that the Vessel will be delayed for more than 180 days as per paragraph (b) above, or be delayed for more than 270 days as per paragraph (c) above, the Buyer shall have a right forthwith to cancel the Contract.
(e) In addition to the above, the Buyer shall also have the right to cancel the Contract if the Builder is delayed for more than 180 days as per paragraph (b) above, or be delayed for more than 270 days as per paragraph (c) above in reaching the Second, Third or Fourth stage [in the construction of the vessel]…”
The Defendant, the State Bank of India (the Bank), provided a refund guarantee (the Guarantee) which stated that:
“3… should builder be delayed in the construction of the vessel for more than 270 days including force majeure but excluding other permissible delay as per terms of the contract, then... we shall pay you the aforesaid amounts within 5-five-banking days upon receipt by us of your first demand in writing accompanied by a written statement… stating (A) that the vessel or the construction thereof is delayed with more than 270 days as set out in the contract article IV 1 (E) which entitles the buyer to cancel the contract and to receive repayment of the advance payments, (B) that you the buyer have pursuant to such right of cancellation duly cancelled the contract…”
By a Deed of Assignment dated 2 July 2007, the Buyer assigned to DnB Nor Bank ASA (DnB) its rights under the refund guarantee. Clause 2.1.2 of the Deed of Assignment provided that:
“unless and until a Default shall occur and the Agent [DnB] shall have given notice to the Builder, the Refund Guarantor and the Borrower that the Agent intends to enforce its rights under this Deed the Borrower shall be entitled to exercise all its rights under the Assigned Documents (subject as provided in this Deed) in all respects as if the foregoing assignment had not been made.”
Notice of the assignment of “all our beneficial interest” in the Guarantee was given by the Buyer to the Bank, and the Bank was instructed to hold the Guarantee to the order and at the disposal of DnB and “following receipt by you of notice from the Agent [DnB] that the Agent is entitled to enforce its rights under the Assignment, to pay to the Agent all sums which you may become due to pay to us under the Refund Guarantees.”.
Addenda to the Shipbuilding Contract allowed the Buyer to cancel the Shipbuilding Contract if the vessel was not delivered by 30 October 2012. The Buyer cancelled the Shipbuilding Contract when the vessel was not delivered by 30 October 2012. The Buyer made a demand on the Guarantee, stating that “the Shipbuilding Contract was terminated due to delay in delivery of the Vessel in excess of 270 days” and that “the Builder… has delayed in the construction of the vessel for more than 270 days”. It also stated that the Buyer had demanded repayment from the Builder but had not been paid. The Bank claimed that (a) the Buyer’s demand on the Bank was not in the required form so that it was not liable to honour it; and (b) the Buyer was not entitled to enforce the Guarantee in light of the assignment to DnB. The Buyer then initiated these proceedings.
The Court dismissed the Buyer’s claim.
Contrary to comments by Staughton LJ in I.E. Contractors v Lloyds  2 Lloyd’s Rep 496, Teare J doubted if there was less need for a doctrine of strict compliance in the field of performance bonds than in letters of credit. The bank which provided the bonds dealt with documents. Banks must honour their obligation to pay if documents which conformed with the requirements of the bond were tendered. Thus the banks must determine, on the basis of that presentation alone, whether it appeared on its face to be a complying presentation. The degree of compliance required by a performance bond was a question of construction of the bond. Whether the demand in the present case was sufficient to trigger the Bank’s liability to pay involved a question of construction, namely, what type of demand did the parties intend would trigger the Bank’s liability to pay.
The Court noted that the liability of the Bank did not depend on the actual position between the Builder and the Buyer, but on whether a demand for payment had been made containing the requisite statement by the Buyer. The Bank was not a party to the shipbuilding contract. Thus, it was likely that the parties to the Guarantee reasonably expected that the demand should contain a statement that the delay which had occurred was as set out in article IV 1(e) of the Shipbuilding Contract. It was not sufficient for the Buyer to state the delay was of more than 270 days in reaching the second, third or fourth stage. The parties would not expect the Bank to examine the Shipbuilding Contract to see if delay of that nature was as set out in article IV 1(e).
In the present case, the Buyer’s demand did not comply with the requirements of the Guarantee. It did not contain a statement that there had been 270 days delay as set out in Article IV 1(e). Further, when read as a whole, the demand referred to delay in delivery and not delay on the construction of the vessel. The reference to “delay in the construction of the vessel” appeared to refer to the completion of construction. Alternatively, it contained an ambiguous reference to the delay of the type in Article IV 1(e); it was inconsistent with the reference that the Shipbuilding Contract was terminated for delay in delivery of the vessel. An ambiguous demand could not be compliant: see Siporex v Banque Indosuez  2 Lloyd’s Rep 146.
The Court also rejected the Buyer’s argument that the any reasonable reader of the demand would understand that the statement that the Buyer demanded repayment from the Builder meant that the Buyer had lawfully demanded repayment from the Builder. The requirement for the Buyer to so state in the demand was salutary. It served to prevent abuse of the refund guarantee as it required the Buyer to state on its face that which the Bank could not be expected to investigate.
The Court rejected the argument about assignment. No notice was given under Clause 2.1.2 of the Deed of Assignment. Accordingly, the Buyer was entitled to exercise its rights under the Refund Guarantee. The Bank may well have wished to seek instructions from DnB before paying the demand, but that did not invalidate the demand made by the Buyer.