Commercial Court applies strict approach to refund guarantees
Crystal Handy C S.A. and another v Woori Bank [20.06.18]
The Commercial Court rejected the defendant bank’s application for summary judgment to strike out the claimants’ claim in proceedings relating to a shipbuilding contract dispute and held that the claim should be stayed until the arbitration process had come to an end.
A ship owner (the Buyer) had commissioned the building of two vessels by a company (the Builder) under two shipbuilding contracts. The contracts were novated to the claimants (the novated Owners).
Under the shipbuilding contracts, the claimants agreed to make advanced payments to the Builder and sought to secure refund guarantees from the Woori Bank for those advanced payments. The Woori Bank guaranteed the repayments within 30 days of the claimants’ first written demand to the Builder, but only after it was provided with:
- Notification; and
- Written confirmation from the Builder that a request for a refund had been disputed and referred to arbitration, and an arbitration award had been settled.
The Builder sought to terminate the shipbuilding contracts and entered into a Korean insolvency process (known as “rehabilitation”) where receivers were appointed. The claimants failed to obtain the advance payments from the Builder. They subsequently claimed the sums from the Woori Bank in accordance with the refund guarantees.
The Woori Bank were informed by the Builder that it intended to arbitrate with the claimants on the basis that it disputed the claim for repayment. However, the Builder’s written confirmation stated that arbitration was being commenced against the Buyer, rather than the claimants, and its notice to arbitrate was unclear as to what the arbitration was about.
The claimants argued that as the Builder was in “rehabilitation,” it could not start valid legal proceedings and, therefore, challenged the arbitrator's jurisdiction on the basis that a valid arbitration had not commenced as the documents had not come from the receivers.
The Court’s decision
- Was the notification given to the Woori Bank objectively valid?
As the notification had not come from the receivers, but from the Builder, it was disputed that the condition in the refund guarantees had been fulfilled. Further, the legal capacity of the Builder to notify the Woori Bank of its intention to arbitrate was disputed.
The Court considered that the notice to arbitrate was incorrect as it was against the original Buyer (not the novated Owners). The notice to arbitrate failed to identify the specific issue, which did not adhere to the contractual arbitration clause or the condition under the Woori Bank’s refund guarantee. Woori Bank argued that the documents should be considered as one. However, this was not possible due to the fact the condition expressly said that two separate documents were required.
The Court held there was a real prospect of success for the claimants in arguing that the documents failed to conform to the required standards.
2 Was the reliance on the outcome of an arbitration award as set out in the last part of the condition (that the Woori Bank would refund the sum adjudged to be due pursuant to an arbitration award) valid?
The conditions of the refund agreement did not include provision for the scenario that had arisen in that the jurisdiction of the arbitrator had been challenged. If the jurisdiction of the arbitrator was successfully challenged, and so could not give the claimants an award which stated they were entitled to a refund, then on the interpretation of the condition the Woori Bank would not have had to fulfil its obligation under the refund guarantees.
The Court held that because the parties had agreed to allow the arbitration to run its course, the claim should be stayed until the completion of the arbitration. The Court also stated that it would seek to allow the parties to try mediation.
This case highlights one of pitfalls of the contractual structure of the scheme relating to refund guarantees. The usual wording of most refund guarantees is silent about what would happen if such challenge to arbitrator’s jurisdiction succeeded and no award on substantive issues was made - which therefore couldn’t meet the condition of the refund guarantee that the refund shall be made only against an award in favour of the buyer.
It is also worth noting that the Court took a strict approach when it interpreted the requirements of the conditions for notification and written confirmation. Parties should be very careful when they seek to comply with the notice provision of a contract.
It will be interesting to see what result the arbitration tribunal reaches on the substantive issues including the delay of delivery, the impact of the rehabilitation proceedings, termination of the contract, repudiatory breach and entitlement to the refund - if they eventually consider those issues. It appears that the challenge to arbitrator’s jurisdiction shall be dealt with first of all and it seems highly likely that the Court will resume the stayed proceedings if the arbitrator’s jurisdiction is successfully challenged.