In Meritz Fire & Insurance Co Ltd v (1) Jan De Nul NV (2) Codralux SA  EWHC 3362 (Comm), the High Court ruled that advance payment guarantees (APGs) issued by the claimant insurance company to the defendants, guaranteeing the repayment of payments made by the defendants under three shipbuilding contracts (the Contracts), were performance bonds or demand guarantees on which the claimant was liable without regard to the Contracts.
The defendants were two dredging companies that entered into the Contracts with Huen Woo Steel Co Ltd (HWS), a Korean shipbuilding company. The claimant, HWS's insurer, agreed with HWS that it would provide APGs to the defendants for the Contracts as a commercial transaction in return for a fee. HWS then merged and the shipbuilding business was later transferred to a newly incorporated company. On a number of alternative grounds, the defendants terminated the Contracts in accordance with their terms and sought repayment and the return of all owner-supplied goods under the Contracts. The new company was later declared insolvent. The defendants then sought repayment under the APGs. The claimant sought a declaration from the court that it was not liable under the APGs because: (1) the APGs were not performance bonds but were contracts of suretyship; (2) it had been discharged from liability under them as a result of material variations in the Contracts and changes in the corporate identity of the shipbuilder; (3) as a result of the corporate changes, the defendants were unable to make a contractual demand which triggered liability under the APGs.
Mr Justice Beatson gave judgment to the defendants finding the following: (1) the APGs were performance bonds or demand guarantees. They had three out of the four attributes identified by the editors of Paget's Law of Banking (13th ed. 2007), as suggesting that an instrument is a demand guarantee. The fourth attribute was that the instrument was issued by a bank. Although the insurance company was not a bank, it was providing financial instruments in return for a fee; (2) if the APGs were in fact contracts of suretyship, the claimant had not been discharged from liability as a result of material variations to the Contracts or changes to the corporate identity as it had affirmed the APGs thereafter; (3) the defendants were able to make a contractual demand for the repayments in conformity with the Contracts as they expressly provided for payment under the APGs in the case of the dissolution of HWS. It did not make any difference that HWS was dissolved as part of a reorganisation which put a new corporate entity in its place as the shipbuilder. The claimant was therefore liable under the APGs.
In this case the court noted that the presence or the absence of different features in the instrument were only indicative and not decisive of the nature of the instrument. The court emphasised the need to look beyond the terminology used in the instrument and instead construe the commercial document as a whole.