The Claimant Buyers brought proceedings against the Defendant Bank under refund guarantees issued by the Bank in support of two shipbuilding contracts between the Buyers and Sellers. Pursuant to the contracts, the Claimant had paid instalments on terms that they would be refunded if the contracts were cancelled. When the ships were not delivered on time, the Claimant commenced arbitration against the Sellers claiming repayment of the instalments. It obtained awards in its favour. In the instant proceedings, it claimed payment from the Bank under the guarantees.
The Sellers had meanwhile commenced proceedings in China against the ships’ engine manufacturers and the Buyers, claiming that they had fraudulently agreed to the installation of second-hand engines in the ships. The Chinese court issued orders prohibiting the Bank from making payment under the guarantees. The Buyer unsuccessfully challenged the jurisdiction of the Chinese court, and the Bank was unable to have the orders set aside. The Chinese court ultimately found in favour of the Sellers in the fraud proceedings.
The issue for the English court to decide was whether the Bank could use the Chinese judgments as a defence to the Buyer’s claims under the guarantees. The court ordered the Bank to honour the guarantees.
The guarantees were performance bonds which created an independent, primary obligation to pay. They contained an undertaking to pay “on demand”, and made it clear that disputes between the Buyers and Sellers were irrelevant to the Bank’s obligation to pay.
The obligations to which the Chinese proceedings related were not part of the obligation guaranteed. The guarantees covered the single obligation on the Sellers to refund the advance instalment payments (plus interest) in the event of cancellation of the contracts. Any breach of other terms of the shipbuilding contracts could not as a matter of equity lead to discharge of the guarantees, which related to entirely separate obligations.
The judgment provides a useful summary of the nature and terms of the guarantees and their relationship to the shipbuilding contracts, including a consideration of “on demand” guarantees and the differences between performance bonds and sureties. It exemplifies the court’s preference to hold parties to the terms of their agreement, including their agreement as to jurisdiction. It followed the approach taken in the recent case of Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA  EWCA Civ 1629 in making it clear that disputes between the parties to a shipbuilding contract are separate from and irrelevant to a bank’s obligation to pay under a refund guarantee. It also includes a useful analysis of when a party is to be treated as having submitted to the jurisdiction of a foreign court.