www.serlecourt.co.uk COMMERCIAL LITIGATION SerleShare

Judgment in Shanghai Shipyard Co Ltd v Reignwood International Investment (Group) Company Limited [2021] EWCA Civ 1147

In a succinct and forceful judgment, which he said did not assist commercial that there would have to be an the Court of Appeal has held that a certainty where some but not all of accounting between the buyer and the guarantee given to secure the payment the Paget conditions were met, and shipyard, and that the shipyard would by the buyer of the final instalment indicated that if presumptions had not be entitled to retain anything over under a shipbuilding contract is any place to play at all, it would only be and above the sums actually owed to a demand guarantee requiring where all the conditions were met. He it by the buyer, as suggested in Cargill payment on demand and not a “surety stressed that the primary focus should International SA v Bangladesh Sugar guarantee” payable only upon proof always be on the actual words used in and Food Industries Corporation [1998] that the buyer is liable to pay the final their context. 1 WLR 461 at 469B, 471G. It seems that instalment. Popplewell LJ (giving the the guarantor itself would have no direct only judgment) noted that while both The second issue in the case right to recover the overpayment from types of guarantee guard against concerned the application of a proviso the shipyard, and would have to look to “counterparty risk” (i.e. the risk that the in the guarantee that if there was a the buyer (its subsidiary in this case) to buyer, often a one-ship company with dispute as to the buyer’s liability to pay make it whole. no assets, will be unable to pay the the final instalment which was referred final instalment) a demand guarantee to arbitration, the guarantor would not Zoe O’Sullivan QC acted (leading Harry is also intended to provide cashflow be obliged to make payment until the Wright of 7KBW) for the guarantor protection. issue of the arbitration award. The Reignwood. Court held that this did not mean that As in many other guarantee cases the guarantor’s liability in such a case (as the courts have often pointed out) was secondary: it was still an obligation the guarantee was poorly drafted and to pay against a document, but the Zoe O’Sullivan QC contained language which pointed to document was an arbitration award both primary and secondary liability. rather than a written demand. In its earlier decision in Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank The Court also held that the proviso of Greece SA [2013] 1 All ER (Comm) would only come into effect where the 1191, the Court of Appeal had sought dispute had already been referred to to bring commercial certainty to this arbitration prior to the making of the difficult area of the law by commending demand under the guarantee, although reliance on a presumption set out in the clause did not spell this out in Paget’s Law of Banking. Under the express terms. The Court’s reasoning Paget presumption, if the guarantee was that if liability under the guarantee (i) relates to an underlying transaction arose immediately upon demand (as between the parties in different the Court had held it did), that liability jurisdictions, (ii) is issued by a bank, was not suspended simply because an (iii) contains an undertaking to pay arbitration was then commenced. To “on demand” (with or without the prevent liability arising on demand, the words “first” and/or “written”) and (iv) dispute had to be referred to arbitration does not contain clauses excluding before the demand was made: the or limiting the defences available to guarantor’s payment obligation would a guarantor, it will almost always be then be deferred until the award was construed as a demand guarantee. A issued. countervailing “strong” presumption that if the guarantee is issued outside The Court’s reasoning raises the the banking context, it is presumed possibility that the guarantor would not to be a demand guarantee, derives have to pay in full on demand, only for from the Court of Appeal’s decision in an arbitral tribunal to rule later that Marubeni Hong Kong and South China the buyer was not under any liability Ltd v Mongolian Government [2005] 1 to pay the final instalment under the WLR 2497. shipbuilding contract. How can the guarantor recover any overpayment in However, Popplewell LJ vigorously these circumstances? Popplewell LJ criticised the use of presumptions, expressed the view (without deciding)