Sea-Cargo Skips AS v State Bank of India

EWHC [2013] 177 (Comm)

A demand was made under a refund guarantee. The Bank said the demand was not made in the required form and therefore the Bank was not liable to honour it. The guarantee required a statement from the Buyer:

“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, that you the buyer have pursuant to such right of cancellation duly cancelled the contract…”

The Bank said that the demand failed to make reference to a delay within article IV 1(e) of the shipbuilding contract and also failed to state that the Buyer was entitled to receive repayment of the advance payments. Mr Justice Teare looked at the wording used in the demand. He noted that the demand did not “slavishly follow” the wording of the refund guarantee.

The Buyer said that the demand was compliant and so bound the Bank to pay and unless the parties had contracted for a stricter degree of compliance it was sufficient if the demand set out in substance what was required. Mr Justice Teare made reference to Staughton LJ who said in the case of I.E Contractors v Lloyds [1990] 2 Lloyd’s Reports 496:

“The question is ‘What was the promise which the bank made to the beneficiary under the credit, and did the beneficiary avail himself of that promise?’ The degree of compliance required by a performance bond may be strict, or not so strict. It is a question of construction of the bond.““

So was the demand sufficient to trigger the Bank’s liability to pay?

The Judge noted that the Bank was not party to the shipbuilding contract. It could not be expected to investigate the position between the Buyer and the Shipbuilder. Its liability to pay did not depend on the actual position between the Shipbuilder and the Buyer but on whether a demand for payment had been made containing the requisite statement by the Buyer. Here the Judge was of the view that the demand did not contain a statement that there had been 270 days’ delay as set out in article IV 1(e). Whilst the Judge accepted that it was common ground that the demand did not have to repeat precisely the words of the refund guarantee, it was necessary for it to refer to article IV 1(e) so that the Bank could see on its face that it was a compliant demand. He said that:

“An ambiguous demand cannot be compliant; …It therefore appears to me that the demand did not comply with the terms of the refund guarantee.”

Therefore the demand was not one which, on the true construction of the demand, triggered the Bank’s liability to pay.