Spliethoff’s Bevrachtingskantoor BV v. Bank of China  EWHC 999 (Comm)
A Dutch ship operating company, SBV, brought claims against a Chinese bank, BOC, for payment under two refund guarantees governed by English law. BOC withheld payment in reliance upon orders made by a Chinese court preventing BOC from making payment under the guarantees. In this decision, the English Court ordered BOC to make payment to SBV, giving effect to the contractual bargain between SBV and BOC. This important decision brings the relationship between English and foreign courts into focus once again.
The background facts
SBV had entered into two shipbuilding contracts as the Buyers. SBV paid US$28.68m by way of advance instalments towards the purchase prices due for the ships. Pursuant to the contracts, the advance instalments would be refunded if the contracts were cancelled. The refund guarantees issued by BOC secured the Sellers' obligation to refund.
The ships were not delivered on time and SBV cancelled the contracts. SBV unsuccessfully claimed repayment from the Sellers, and then pursued and obtained English arbitral awards against the Sellers in their favour and sought payment from BOC under the guarantees.
Meanwhile, the Sellers alleged fraud in the underlying shipbuilding contracts due to second-hand and defective refurbished engines, which had been allegedly passed off as new and provided to the Sellers as such. The Sellers pursued Chinese proceedings notwithstanding an anti-suit injunction obtained by SBV in England.
The Sellers obtained various interim orders and two judgments issued by Chinese courts in their favour, which were, at the time of the hearing in England, due to be heard on appeal by the Supreme Court in China. The effect of those orders was to prohibit BOC and any domestic or overseas branch of BOC from making any payment anywhere under the guarantees to SBV. On that basis, BOC withheld payment to SBV under the guarantees.
The central issue was whether the Chinese court orders afforded BOC a defence to SBV’s claims under the guarantees and whether, if BOC had no defence, those orders nevertheless warranted a stay of execution in the English Court proceedings, i.e. whether BOC could continue to withhold payment pending the outcome of the Chinese Supreme Court proceedings.
The Commercial Court decision
The claim under the guarantees
The English Commercial Court held that BOC had no valid defence to SBV’s claims. BOC’s obligation to pay under the guarantees was independent of any underlying dispute between SBV and the Sellers under the shipbuilding contracts. SBV had obtained arbitration awards in its favour, and SBV was therefore validly entitled to repayment of the instalments under the terms of the guarantees.
The English Court carefully considered the effect of the Chinese judgments. Even though the judgments were issued in breach of an English law arbitration clause and in breach of an anti-suit injunction obtained by SBV, the Court found that SBV had in fact submitted to the jurisdiction of the Chinese courts by participating in the Chinese proceedings. The Court recognised the Chinese judgments, and there could be no public policy reason for not doing so.
Nevertheless, the Court found that the Chinese judgments could not offer BOC a defence under the guarantees. A guarantee was a performance bond creating primary and unconditional liability. BOC’s obligations under the guarantees were not affected by any extraneous matters. A finding of fraud in favour of the Sellers under the shipbuilding contracts, which had nothing to do with SBV’s right to cancel the shipbuilding contracts, could not affect BOC’s obligations under the guarantees. There had been no allegation of fraud committed against BOC under the guarantees.
BOC invited the Court to have due regard to the Chinese orders and, as a matter of international comity, impose a general stay of enforcement of the judgment, in the event that BOC was found liable under the guarantees. The Court declined to exercise its discretion in favour of a stay.
When considering an English law contract, any illegality in the place of a party’s domicile or place or business– in this case, China - was irrelevant, although any illegality in the place of performance of the obligations could have been relevant. Here, China was not the place of performance.
The guarantees were intended to protect SBV's cash-flow by providing for repayment of the significant sums paid by SBV in advance instalments without delay and without being affected by extraneous matters, whether due to the Sellers or the Chinese legal system. SBV having lawfully and validly cancelled the contracts, the Court held that they were entitled to immediate reimbursement of their instalments.
BOC's exposure under the guarantees was secured by the fact that it obtained security to protect its exposure under the guarantees. In any event, these were risks that BOC had agreed to undertake and the Court was bound to give effect to the contractual bargain between SBV and BOC.
This decision furthers the on-going debate surrounding the relationship between English and foreign courts. Once a party has submitted to the jurisdiction of a foreign court, the English Court has no discretion as to whether that foreign judgment should be recognised. Further, that party cannot seek to rely on public policy arguments to avoid recognition of a judgment of that foreign court, even if the foreign judgment was obtained in breach of an English law arbitration clause and in breach of an anti-suit injunction.
The decision is also a reminder of the English courts’ willingness to give effect to contractual agreements. This decision was not intended to disrespect the Chinese courts and judgments, but rather to give due recognition to the commercial purpose behind the parties’ arrangements and the parties’ choice of English law and jurisdiction.
Here, there was no question of fraud by SBV under the guarantees and the Court did not fully explore this point. However, if there had been a fraud (or alleged fraud) against BOC under the guarantees, rather than in the underlying shipbuilding contract, the outcome may have been different.