[2009] EWHC 2624 (Comm)

Rainy Sky (the Buyer) contracted to buy a vessel from a shipbuilding company (the Builder) and agreed to pay for the vessel in instalments before delivery. The Builder arranged for its Bank to issue an advanced payment bond (the Bond) to the Buyer so that the Buyer was entitled upon cancellation or rescission of the contract or on rejection or total loss of the vessel, to repayment of the pre delivery instalments. On demand by the Buyer, the Bank was obliged to pay all such sums due under the contract provided the Buyer specified how the Builder had failed to comply with its obligations under the contract. Similar terms were contained in the shipbuilding contract with the Builder obliged to repay the instalments if it experienced specified financial problems. The Builder did experience financial problems but refused the Buyer’s demand for payment and the Bank also refused to pay up in accordance with the terms of the Bond.

The court had to determine whether (i) the Bond covered sums which the Buyer claimed to be entitled to under the shipbuilding contract relating to the Builder’s financial difficulty; (ii) the Buyer was entitled to payment under the Bond irrespective of whether repayment of the instalments was due under the shipbuilding contract.

The Bank claimed (i) the Bond only covered repayments in respect of cancellation or rescission of the contract or on rejection or total loss of the vessel and NOT in respect of the financial difficulty of the Builder and (jj) the Buyer had not set out the specific details of the breach of the shipbuilding contract required in order for the Buyer to rely on the Bond (The Bank also disputed whether in fact the Builder had actually breached the shipbuilding contract).

The court held that (i) the definitions and terms used in the Bond had the same meaning in the shipbuilding contract and “all such sums due under the contract” was clear and unqualified and was intended to apply to the pre-delivery instalments. The Bank’s construction would have meant that the Buyer was unable to rely on the Bond when it was most likely to require the security of the Bank; and (ii) the requirement of a statement in respect of the Builder’s failure was thought to be satisfied in the Buyer’s demand for repayment of the instalments. It was not for the Bank to take a view on the underlying merits. The Bond provided for prompt payment on receipt of demand and the Bank’s interpretation was inconsistent with this, as well as being contrary to legal principle.