In the recent decision of Meritz Fire & Marine Insurance Co Ltd v Jan De Nul Nv & Anor [2011] EWCA Civ 827, the Court of Appeal dismissed the appeal by Meritz of the earlier High Court's decision, previously reported here, that Meritz was liable under advance payment guarantees (APGs) it had issued in respect of three shipbuilding contracts (Contracts) to the respondent Buyers, despite the fact that the Contracts had been novated to a new company. The APGs guaranteed the refund of advance payments made by the Buyers in the event of a premature termination within the terms of the Contracts.

The Court of Appeal's findings were as follows:

  • the question on appeal was what effect did the novation of the Contracts have on the APGs. Although the High Court trial oversaw the debate on the categorisation of the APGs, the issue on appeal was to be resolved primarily by looking at the wording used by the parties to define their obligations;
  • on a literal construction, the APGs were intended to operate against documents without regard to the underlying Contracts. In effect, the APGs operated on the basis that Meritz would be liable for returning the advance payments in circumstances where no refund had occurred, not on the basis that the shipbuilders had failed to fulfil their obligation to make that refund. The refund was due under the Contracts, the refund had not been made by the shipbuilder and the APGs were intended to guarantee that refund. Therefore, the fact that the shipbuilders had novated their liabilities under the Contracts to a new company was irrelevant and the Buyers were able to make a demand in conformity with the Contracts. The fact that the liability of the refund may have been transferred to the new company did not matter;
  • whilst this may appear to be an unjust result because Meritz had only intended to take on the insured's risk of default and not of any other persons whose financial integrity it had not previously assessed, the judge at First Instance had found that Meritz had not acted on an opportunity to appeal against the actions which led to the novation of the Contracts. Furthermore the Buyers could not have intended that the APGs were to stop operating on the sums already advanced in circumstances where the underlying contract ceased to exist or was materially varied, unless there was clear wording to that effect; and
  • Commercial Bank of Tasmania v Jones [1893] AC 313, which was relied on by Meritz, was a case of  a "see to it" guarantee (where a guarantor is not liable if the principal debtor is not), and thus, had no application in this appeal.