Sea Emerald SA v Prominvestbank- Joint Stockpoint Commercial Industrial & Anor

This is a claim under a “Refund Guarantee” (the “Guarantee”) that was signed by the late Mr N T Skock, an employee of Commercial Industrial Investment Bank (Joint Stock Company), which trades as Prominvestbank, (“the Bank”). The Guarantee was provided to Sea Emerald SA (“the Buyer”) and was in respect of obligations of the “shipyard named after 61 Communars” of Nikolaev, Ukraine (“the Yard”) under a shipbuilding contract dated 9 December 1993 (“the Contract”). The Buyer seeks (along with other relief) payment of US$17,258,750.63 as being due under the Guarantee. The Bank says (i) that Mr. Skock was not authorised (either actually or ostensibly) to give the Guarantee on its behalf; (ii) that, even if the Guarantee was binding upon it when given, it has been discharged because the Contract was varied by the parties and not carried out according to its original terms; and (iii) that, in any case, the greater part of the Buyer’s claim is not covered by the Guarantee.

The Bank was incorporated under Ukrainian law on 26 August 1992 when the Articles of Association were registered. On the same day a state-owned bank in the Ukraine called State Commercial Industrial and Construction Bank (“SCICB”), with a regional department in Nikolaev, ceased to exist. The Bank was not the legal successor to the SCICB, but in commercial terms it took over the business: many of the former customers of SCICB, including the Yard, became customers of Bank, and many of the employees of SCICB, including Mr. Skock, became employees of the Bank. Records about SCICB’s customers were transferred to the Bank.

The Bank’s head office is in Kiev, and it has a network of Divisions or branches and above them Departments that manage regions and the Divisions in them. One such Department is that for the Nikolaev region, a region where, in the early 1990s, there were some seven branches as well as the regional central office. Nikolaev is an industrial region and the Department’s customers included two other shipyard companies as well as the Yard and also a large alumina plant. The Nikolaev Department of the Bank had a foreign currency department that provided foreign currency transaction services for industrial clients. Mr. Skock was the Head of the Nikolaev Regional Department of the Bank from August 1992 when the Bank was formed, having held the corresponding position with SCICB since 1987. He held this position until the end of April 1994, shortly before his death in May 1994.

The Buyer is a Panamanian company. It is in the Laskaridis group (the “Group”), which has extensive shipping interests, and manages a fleet of some 80 merchant vessels, many of them refrigerated cargo vessels and smaller tankers. The Group’s President is Mr. Athanassios Laskaridis.

In 1991 the Group bought from a Swiss seller a ship which had been built at the Yard. Mr. Laskaridis was impressed with her and approached the Yard about constructing vessels for the Group. In the summer of 1992, after the Ukraine had declared itself independent of the Union of Soviet Socialist Republics on 24 August 1991 and the leaders of the Russian, Ukrainian and Belarus Republics had announced the dissolution of the Union on 21 December 1991, the Yard sent a delegation, led by its General Director, Mr. I N Ovdienko, to Greece to discuss the possibility of the Yard building ships for the Group. During that visit, on 22 August 1992, the Group agreed to buy six vessels from the Yard, and took and exercised an option for three more. More specifically, the Group bought three deep freezer ships each costing US$7.8 million, one of which (hull no 1135) was available for immediate delivery and two of which (hulls nos 1136 and 1137) were to be constructed; three deep freezer ships (hulls nos 1138, 1139 and 1140) for the carriage of fruit were to be constructed for US$10.03 million each; and, by the exercise of the option, three similar deep freezer ships (hulls nos 1141, 1142 and 1143), each costing US$10.03 million, were also to be built.

In due course the Group placed further contracts with the Yard and in total 19 ships were ordered for a total of over US$200 million. Each ship was the subject of a separate contract, entered into by a different company in the Group that was intended to own and operate the ship. The contracts all stipulated that the Yard was to provide to the purchasing company a refund guarantee.

Only two of the contracts dated 22 August 1992 were available at the trial, and one of those, that for hull no 1140, is incomplete, the provisions relating to the price being missing. The contract that is complete, that for hull no 1143, provided for payment of US$10,030,000, compromising US$130,000 by way of commission for the buyers; US$3.5 million to be paid to suppliers of the imported equipment for the vessel; and US$6.4 million to be paid to the Yard. The sum of US$6.4 million was payable in four instalments: US$1 million within 7 days of the signing of the contract; US$1 million within 7 days after keel-laying of the vessel; US$1 million within 7 days after the vessel was launched; and US$3.4 million within 7 days of the vessel being completed and the ‘Acceptance Act’ being signed. I infer that the other five contracts similarly provided for four instalments to be paid to the Yard. (Mr. Laskiridis explained in his evidence that this was the “industry norm”.)

As I have said, the Contract which gives rise to this litigation was dated 9 December 1993. It was for the construction and purchase of hull no 1148, a refrigerated cargo vessel. An English version of the Contract was signed by Mr. Ovdienko on behalf of the Yard and by Mr. Laskaridis on behalf of the Buyer. There was also an unsigned Russian version, but neither party has relied upon that before me.

The Contract states that it is governed by English law. There is an arbitration agreement, providing for disputes to be “referred to arbitration by either party, such arbitration to be governed by English law and take place in London”, (with a different procedure for certain technical disputes). The Contract has an Entire Agreement clause at Article XX paragraph 3:

“This Contract contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, undertakings and agreements or any subject matter of this Contract, except by mutual agreement in writing of subsequent date signed by any duly authorised representative of each party hereto.”

The Buyer submitted that this provision does not purport to regulate or restrict how the contracting parties can vary the Contract, and that it is directed only to providing that the parties can agree in writing to include in the Contract pre-contractual negotiations, representations, undertakings and agreements. This does not seem to me to be the natural interpretation of the paragraph: the closing words, I think, are to be read as qualifying the provision that the Contract contains the entire agreement

The agreed contract price was US$20.5 million, and payment was to be made in US dollars. The price consisted of:

Paragraph 2 of Article II provided as follows:

“Payment of the Contract Price shall be made by the Buyer by instalments as follows:

1.

U.S. Dollars 1.300.000. – (one million and three hundred thousand US$) to the Shipyard within 8 (eight) months from the date this Contract becomes effective.

2.

U.S. Dollars 1.580.000. – (one million and five hundred and eighty thousand US$) within 7 working days after successful launching of the Vessel.

3.

U.S. Dollars 5,520,000. – (five million five hundred and twenty thousand US$) to the Shipyard within 7 working days after signing the Acceptance Act and the Vessel is ready in all respects for delivery.

4.

U.S. Dollars 10.000.000. – (ten million US$) to the various Suppliers of the imported equipment as per enclosure N.1

5.

U.S. Dollars 2.100.000. – (two million and one hundred thousand US$) to the Buyer being Buyer’s address Commission.

It is hereby specifically agreed between the Buyer and the Seller that any equipment whatsoever imported into the Republic of Ukraine for the construction of the Vessel and paid for by the Buyer according to the contracts between the Seller and the Suppliers of equipment shall, at all times up to Vessel’s delivery to Buyers remain the sole property of the Buyer.”

Enclosure No 1 to the Contract was a list of 33 items of “foreign-made equipment and material for Hull no 1148”, which the parties agreed should be imported into the Ukraine and “used for the construction of this vessel”. 17 of the 33 items were stipulated to be “Main Imported Equipment”. The list included such equipment as cranes, but also material that would become an inseparable part of the vessel herself when applied, most obviously, perhaps, paints for the outer shell. Enclosure No 1 concluded “In addition the Seller shall have the right, with the prior written consent of the Buyer, to stipulate further equipment to be purchased outside CIS countries and to request the Buyer to pay for such additional equipment”. I do not interpret this as qualifying the introductory words of enclosure no 1 that stated that the equipment should be “used for the construction of this vessel” or to contemplate that the Enclosure might be amended so that equipment for other vessels should be bought under the Contract and paid for by the Buyer: it is naturally understood, I think, as recognising that the Yard might require further imported equipment for hull no 1148. After all, the provision that title in equipment should pass to the Buyer applied to what was imported “for the construction of the Vessel” and “up to Vessel’s delivery”: there was no such provision directed to equipment bought under the Contract for other vessels.

Article XVII dealt further with the equipment that was to be imported into the Ukraine “for the construction of the Vessel, under individual contracts of supply to be signed between the [Yard] and the Supplier”. The Buyer’s agreement was to be obtained before any contract for supply of the Main Imported Equipment was signed, but the Yard was to be “responsible for the delivery time, the quality, efficiency and/or performance of the Supplier’s equipment subject to compliance with dates of payment by the Buyer as stipulated in the contracts with the Suppliers”. The Article provided that the Buyer “shall effect payment of the imported equipment within the stipulated time under the contracts between the Seller and the Suppliers”.

Article III dealt with adjusting the contractual price in the event of delayed delivery of the vessel or in the event that she did not achieve the specified speed, that her fuel consumption was excessive or that her deadweight was deficient. It provided that, if the delivery was delayed for 180 days or more, the Buyer had the option to rescind the Contract.

Article V of the Contract was headed “Modifications, Changes and Extras”. It was concerned with how “The Specifications and the Plan may be modified and/or changed by written agreement of the parties”.

Article VII provided that the vessel should be delivered at the berth of the Yard safely afloat not later than 31 December 1996 (subject to a machinery for the postponement of the delivery date in defined circumstances). The vessel remained the property of and at the risk of the Yard until delivery. Paragraph 3 of Article VII dealt with “When and how [delivery of the vessel was] effected”, and stipulated that it was to be effected by the delivery by the Yard to the Buyer of the Acceptance Act, by reference to which US$5.52 million was payable. Article VIII dealt with delays in and extensions of time for the delivery of the vessel.

I go next to Article XI, which is headed “Default”, and first set out part of paragraph 1 of Article XI, which was headed “Definition of Default by the Buyer”:

“The Buyer shall be deemed to be in default of performance of its obligations under this Contract in the following events:

(a)

The Buyer fails to pay the full amount of any of the 1^st, 2^nd, 3^rd instalments to the Seller as and when any such instalments becomes due and payable; or

(b)

The Buyer fails to pay the full amount of the last instalment to the Seller concurrently with the delivery of the Vessel by the Seller to the Buyer; or…”

The paragraph contemplates on its face that the Buyer is to pay a total of four (not three) instalments of price to the Yard. In this respect it follows the wording of the other contracts between the Group and the Yard, including the two contracts for hulls nos 1140 and 1143 dated 22 August 1992. Apparently, the parties to the Contract, and other later contracts, simply adopted the definition of default by the buyer from the earlier contracts without amending it to reflect the different terms for payment. As will be seen, the Guarantee similarly refers to four instalments of the price to be paid to the Yard under the Contract.

Paragraph 7 of Article XI dealt with the effect of default on the part of the Yard, which was deemed to take place if, for example, the Yard failed to complete and deliver the vessel in accordance with the Contract or if the Yard ran into in financial difficulties which in the justifiable opinion of the Buyer rendered the completion of the Contract impossible. In the event of such default continuing unremedied for 14 days, the Buyer was entitled to rescind the Contract by notice and upon receipt of such notice the Contract forthwith terminated and “all amounts received by the Seller [sc the Yard] from the Buyer at the time of such rescission shall forthwith become due and payable back to the Buyer”.

Article X was concerned with “Rescission by Buyer”. It provided that the Buyer should only be entitled to rescind the Contract in accordance with the express rights granted by it and “subject to the general principles of English law”. Upon rescission the Seller was, by paragraph 2.1, promptly to refund to the Buyer the full amount of “all sums paid by the Buyer or by order of the Seller on account of the Vessel prior to such rescission, unless the Seller proceeds to Arbitration…”; and provided the Seller did not go to Arbitration, the Seller was also to pay the Buyer “interest at the rate of [8%] per annum on the amount required to be refunded to the Buyer, computed from the respective dates on which” the Buyer paid the relevant sums to the date of payment (except if the Contract was rescinded for excessive delay arising from force majeure). Paragraph 3 of Article X provided that “The refundment by the Seller to the Buyer as provided in Paragraph 2 above shall be the sole remedy of the Buyer in any case whatsoever resulting or arising from any cause from which the Buyer shall have the right to rescind this Contract. Upon such refundment, all liabilities of each of the parties hereto to the other under this Contract shall forthwith by [sic] completely discharged”.

A question arises whether upon rescission the Buyer was to recover only what it had paid to the Yard or whether it was also to recover anything that it had paid to suppliers of equipment. I agree with the Bank’s submission that the Yard was not obliged to pay to the Buyer the amounts of payments made to suppliers. First, it does not seem to me, as a matter of the natural interpretation of the wording of Article X, that the Contract provided for the Yard to pay these amounts; they were not payments to the Yard nor, to my mind, were they payments made “by order of the Seller”, being made under agreements with third parties to which the Buyer had had to consent. Moreover, paragraph 3 of Article X emphasised that the limits of the Buyer’s rights upon rescission are defined by paragraph 2. Secondly, it seems to me that this interpretation is required by the structure of the Contract. It contemplated that the equipment in enclosure no 1 was to become the property of the Buyer pending delivery of the vessel and was never to become the property of the Yard. If the Buyer were to have property in the equipment and also to recover the price paid for it, it would be doubly compensated. Admittedly the question when property passes from the supplier would be determined by the contracts made by the supplier, but under the Contract the Buyer was in a position to insist that they did not expose it to risk in this regard. It is also true that by including in the enclosure such items as paint which (under English law) would lose their separate identity upon application, the Buyer’s protection might be incomplete, but I cannot accept that this affects the parties’ intention as to the structure of the arrangements as evinced in the Contract.

Article X paragraph 2 also provided that:

“The Seller will furnish the Buyer within latest 30 days from the date of signing of this Contract a refund Guarantee to be issued by Seller’s Bank, the State Commercial Industrial Bank – Nikolaev Branch.

The Original of this Guarantee must reach the Buyer latest by 15^th January 1994 and the furnishing of this Guarantee is to form an integral part of this Contract.

No payment whatsoever under this Contract, or the various imported equipment contracts, shall become due and payable prior to the provision of a proper refund Guarantee.”

Article XIX provided that the Contract should become effective as from the date of its execution, but if the Seller failed to provide “proper Refund Guarantee” as stipulated in Article X, the Buyer had an option to elect that the Contract be null and void.

The Yard and the Group made three other contracts of the same date for further vessels: for hull no 1147 (for delivery by 30 September 1996); for hull no 1149 (for delivery by 31 May 1997); and for hull no 1150 (for delivery by September 1997). The contracts for hulls nos 1147 and 1149 were in terms generally similar to that for hull no 1148, and although that for hull no 1150 is not in evidence, I infer that that too was in generally similar terms. However, there were differences in the amounts to be paid to the Yard and the amounts payable by way of address commission: and, although in each case the payments to the Yard were in three instalments payable by reference to when the contract was made, when the vessel was launched and when the Acceptance Act was signed and the vessel ready for delivery, there were differences in the amounts and the precise timing of the payments. In the case of hull no 1147, US$8,150,000 (not US$8,400,000, as for hull no 1148) was to be paid to the Yard, the instalments being US$1,200,000 payable six months from the date of the contract, US$1,505,000 within seven working days of the vessel being launched and US$5,445,000 within seven working days of the signing of the Acceptance Act and the vessel being ready for delivery.

Drafts for the wording of the contracts and guarantees were provided to the Yard by Mr. Laskaridis. Mr. Laskaridis explained in his evidence that the form of contract was very similar to contracts that the Group had made when buying vessels from Japan, and he described the draft for the Guarantee as “a simplified version of the refund guarantees we had from the Japanese bank”. He said that, although he is not a lawyer but an engineer, he had simplified it himself “so that it could be very short and very understandable and dispensing with what might cloud the issues”.

Although all of the ship building contracts that are in evidence provided for a refund guarantee of the Yard’s obligations, they did not stipulate the terms or the amount of the guarantees. I infer that the contracts which are not in evidence were similar in this respect.

The refund guarantees in respect of the nine vessels ordered in August 1992 were obtained from SCICB by Mr Ovdienko, who gave evidence. When he retired as Director General of the Yard in December 1993, he was replaced by Mr. V O Lavrinenko in January 1994. Mr Lavrinenko died earlier this year, but, according to a statement dated 20 November 2006 made for the purpose of proceedings in Ukraine, he obtained from Mr. Skock the Guarantee, and also refund guarantees for hulls nos 1144, 1145, 1146 and 1147. In the event, refund guarantees were not given by the Bank in respect of the contracts for hulls nos 1149, 1150, 1151 and 1152.

The Guarantee was signed by Mr. Skock and by Mr. Lavrinenko in both a Russian version and an English version. Both had the name of the Bank and the branch typed at the top. Mr. Skock signed under the words (in the English version) “Joint Stock Commercial Industrial Investment Bank Nikolaev Branch”. Both versions had company stamps by the signatures: the stamp by Mr. Skock’s signature read (in translation) “Ukrainian Joint-Stock Commercial Industry Investment Bank, Nikolaev Regional Department”. At the top of the Guarantee is a third stamp, which was in English and read “Bank of Industry and Construction of the USSR, Nikolaev”. Mr. Skock signed and stamped it when Mr. Lavrinenko went to the offices of the Nikolaev Department of the Bank. He retained a copy. There were no direct dealings between the Bank and the Buyer then or at any time before 2006. (In so concluding, I do not overlook that Mr. Lavrinenko said in his statement that the Guarantee was issued “according to the format which was agreed between Nikolaev region branch of [the Bank] and Mr. Laskaridis”. If by this he means more than that it followed a form previously used for guarantees given by Mr. Skock for the Group, I do not consider the evidence to be reliable.)

I set out the English version of the Refund Guarantee:

“LETTER OF GUARANTEE

Messrs:

SEA AMERALD [sic] S.A.

In consideration of your payment of the instalments under Shipbuilding Contract dated 9^th day of December 1993 (hereafter referred to as the “Contract”), entered into by and between you and “Shipbuilding Yard named after 61 Communards” for the construction, sale and purchase of one (1) single screw refrigerated cargo carrier of about 500,000 c.f., Project No. 13450, Shipyard Hull No. 1148 (hereafter referred to as “the Vessel”), we, JOINT STOCK COMMERCIAL INDUSTRY INVESTMENT BANK, NIKOLAEV BRANCH, at the request of the Builder, hereby irrevocably and unconditionally guarantee the payment to you by the Builder of the total maximum sum of USD – 9 900 000 (Nine Million Nine Hundred Thousand U.S.D) or any amount to be paid to the Builder as the first, second, third and fourth instalments under the Contract and any supplement, amendment, charge [sic] or modification made thereto together with interest thereon at the rate as provided for the Contract and any supplement, amendment, charge or modification made thereto from the date of payment to refundment (if and any or all of the said instalments become refundable from the Builder) all strictly in accordance with the terms and conditions of the Contract and any supplement, amendment, charge or modification made thereto as aforesaid (hereby expressly waiving notice of any such supplement, amendment, charge or modification as may by agreed to by the Buyer and confirming that this guarantee shall be fully applicable to the Contract as so supplemented, amended, changed or modified.

Our liability under this letter of guarantee shall be limited to the total sum of the instalments or any lesser amount mutually agreed by and between you and the Builder and actually paid by you as aforesaid, plus interest as stipulated above.

This letter of guarantee shall become null and void upon receipt by you of the full amount for which we are liable hereunder or upon acceptance by you of Vessel delivery in accordance with the terms of the Contract, and in either case this letter or guarantee shall be returned to us for cancellation without demand.

This letter of guarantee is governed by and is to be issued in in [sic] full accordance with the laws od England. We hereby irrevocably appoint Fleet Services Limited [address] London EC3N 1AL England – Tel [number], Tlx [number], Fax [number] as our agent in England to accept service of proceedings on our behalf.”

Neither the English nor the Russian version of the Guarantee was dated, and neither was on headed paper. No expiry date for the Guarantee is specified. The English version (at least) had typing errors.

The guarantee in respect of hull no 1147, like that in respect of hull no 1148, was signed by Mr. Skock and bore similar stamps. Its wording was the same as that for hull no 1148, except that the maximum sum was stated to be US$9,650,000 (not US$9,900,000). It is possible that this difference is in some way connected with the different payments to be made to the Yard for hulls nos 1147 and 1148, but that is speculation: there was no evidence explaining the difference. According to the evidence of Mr. Laskaridis and Mr. E Galanopoulos, a marine engineer employed by the Group who was entrusted with responsibility for these vessels, the Bank had simply refused to sign guarantees for hulls nos 1149 and 1150, but they did not give evidence of any reason given by the Bank for so refusing. They said that the maximum sum stated in the Guarantee was explained as being because “the Bank had simply refused to go any higher, since it had to limit the value to less than US$10,000,000”. I accept their evidence about this, but these explanations must have been conveyed to the Group by the Yard since, as I have said, the Group had no direct dealings with the Bank.

The Group initially proceeded with the contracts for all four vessels, hulls nos 1147 to 1150, although, as I shall explain, the contracts for hulls nos 1149 and 1150 were later cancelled. However, the contracts did not progress as planned. In the years following the dissolution of the Soviet Union, Ukraine faced difficult economic circumstances with a fall in demand for its heavy industry, including ship construction. State support for the industries led to high levels of inflation, interest rates were very high, and few loans were available. The Bank gave particular support to the shipbuilding industry, a significant part of which was in the Nikolaev region, and its accounts for the year ended 31 December 1998 stated this:

“The bank has a significant concentration of credits to three entities involved in the shipbuilding industry. These loans were issued by the Bank under the Government’s shipbuilding support programme. At 31 December 1998, the bank had Hryvnia and currency loans extended to these customers amounting to US$54,353,000 (1997 US$54,983,000). The management of the Bank has recognised that these loans are non-performing and is in the process of negotiating with the government for repayment of these amounts from state budgets. In view of the uncertainties both in respect of the Ukrainian economy and the worldwide shipbuilding industry, the bank has made full provision against these loans.”

It is clear that the Bank extended substantial amounts of credit to the Yard, including credit for the purpose of constructing the vessels for the Group. In a letter dated 3 March 1993, the Yard wrote to Mr. Skock that “For the implementation of the integrated programme for the construction of refrigerator vessels and floating hotels for export … the [Yard] obtained loans at preferential rates in 1992 in the sum of 2,789 million karbovanets”, the equivalent, I was told, of over US$13 million. (Karbovanets were a new unit of currency introduced in 1992 in place of the rouble. It was subject to hyperinflation as the Government provided support for state-owned industries in the first half of the 1990’s. Karbovanets were replaced by another new unit of currency, the hryvna, in the mid 1990s.) As is clear from its pleading, the Bank, generally if not entirely through Mr. Skock, made these loans available to the Yard in 1992 and 1993: by agreement of 9 July 1992 a loan of 1.5 billion roubles; on 20 September 1992 a loan of 157 million roubles; by agreement of 28 October 1992 a loan of 262 million roubles; by agreement of 21 December 1992 a loan of 870 million karbovanets for “the performance of complex scientific technical programmes … to perform the programme of building transport refrigerator vessels and floating hotels for export”; by agreement of 6 April 1993 a loan of 2.720 billion karbovanets for similar purposes; and by agreement of 21 May 1993 a loan of 1.2993 billion Karbovanets “for the performance of the complex programme … of designing, engineering and technical research, production of equipment for expansion of merchant shipbuilding, development and production of new consumer goods...”.

The Bank continued to make loans to the Yard for constructing the vessels ordered by the Group after Mr. Skock was no longer Head of the Nikolaev Department. The lending was supported by the National Bank of Ukraine. On 5 August 1994 the Yard wrote to Mr. Skock’s successor, Mr. D M Khomich, and explained that it was not in a position to repay debts “arising from the special-purpose loan for the construction of refrigerated cargo ships for export” by the due date and asking for the loan to be extended until 10 January 1995. In September 1994, the Yard again wrote to Mr. Khomich asking for further “preferential-rate credit resources for the implementation of our export programme for a term of 6 months”, explaining that money was needed to make progress upon hulls nos 1141 to 1145. More funds were lent by the Bank on 12 and 28 September 1994, and further substantial loans were made thereafter. The Yard provided security for its borrowing, for example by mortgage agreements dated 14 June 1994, 16 December 1994 and 7 August 1995. The full details of the amount and terms of the Yard’s borrowing from the Bank are not clear, but it was not repaid. A letter from the Bank to the Yard dated 8 October 1998 referred to an agreement of 6 July 1998 with a new repayment schedule. On 15 June 2000 the Bank rejected a further rescheduling request, stating that the Yard had taken not “effective measures to repay its long-term debts” since 1994.

The Buyer relies on a letter of Mr. Khomich dated 15 November 1995. It was addressed to the Director of the Nikolaev Regional Board of the Aval Bank and also sent to the National Bank of the Ukraine, the Regional Tax Inspectorate and the Yard. It asserted that the Aval Bank and the Yard were attempting “to wimple revenues and advanced payments for building a series of ships as foreign investments and mislead in such a way the controlling bodies and creditors of the Yard”. It continued:

“Unfounded is an attempt of the Shipyard to persuade Prominvestbank and “Aval” Bank, that the Yard and the Greek Company Laskaridis Shipping Group carry out joint economic activities with attraction of foreign investments.

… In this case built ships as a result of the Yard activity are not subject to the distribution between the parties, … . Both the Bank and the Yard understand that we deal with an ordinary contract of sale-and-purchase of a number of ships concluded between Ukrainian Yard and the Greek Company.

In compliance with the Contract the Yard undertakes to build and deliver ships to the customer and the latter undertakes to receive them and pay. This Contract specifies subject of the Contract (refrigerator ships of 13476 M project (order 1141-1146, 1151), 13450 project (orders 1147-1149), terms of their delivery, procedure of acceptance, price and procedure of payments, and other terms.

In order to ensure uninterrupted building of the ships the parties envisaged transfer of a portion of advanced payments depending on completion of the order and final settlements after acceptance of the ship. But the Yard decided to transfer advance payments and proceeds from the foreign purchaser not to the single settlement account with the Prominvestbank but to hide it on another account opened with your bank.”

The details of the Bank’s complaint to Aval Bank are not important. The Buyer relies on the letter as evidence of knowledge within the Bank of the arrangements between the Group and the Bank for the vessels that were being built, including the Contract. The Bank suggested that, because Mr. Khomich refers to a single contract, he is to be taken to be unaware that there were a series of contracts between the Group and the Yard, which would indicate that he was unfamiliar of the business relationship between them. To my mind, this is reading too much into the precise wording of the letter: it would be unrealistic to suppose that Mr. Khomich might have had in mind and been referring to some overarching contract between the Group and Yard, which has not been disclosed and is not in evidence: it was not suggested to any of the Buyer’s witnesses that there might have been such a contract.

The Bank’s disclosure does not include any documents that show the limit of the amount that could be lent to any one borrower by a Department of the Bank. However, there were such limits: that was the evidence of Mrs Natalya Kovtun, an accountant and the Deputy Head of the Bank’s Currency Operations Department in Kiev who worked at the Nikolaev branch of SCICB and then the Bank from 1984 until she moved to Kiev in 1994. Although her answers about this (given through an interpreter) were a little obscure, she said that the Bank had a limit upon the amount that a Department might lend to any one borrower, and this is confirmed by a “protocol” approved by the Board of the Bank and dated 15 July 1994 that provided for an increase in the limits of lending that might be made at Departmental level. Certainly Mrs. Kovtun said that it was not unusual for information about loans made at Departmental level to be reported to the Governing Board of the Bank, and permission for a loan was sometimes required. Although there is no evidence about the level at which the limits were set at the relevant times, the loans to the Yard were so large that they must have required authorisation from Head Office.

It seems that the Bank knew at the highest level about the loans to the Yard. For example, on 23 August 1996, Mr. Khomich wrote to the Deputy Chairman of the Board of the Bank referring to the Yard’s serious financial difficulties and asking about the possibility of the Bank providing a guarantee for advance payments made to it by customers. The Deputy Chairman replied asking for further information.

In its pleading the Bank says that as a “corporate entity” it became aware of the Contract only in July 2006 when the Buyer made its claim, and that it was previously unaware of any specific contract between the Yard and the Group or its terms; and that it knew only that the Group had placed a large shipbuilding order with the Yard, because this was general public knowledge. The Bank also denies that it provided any loan or credit facility to the Yard “for the identified purpose of undertaking the construction of the Laskiridis vessels” or where that was one of the identified purposes. I conclude, however, that the refrigerated vessels referred to in the loan agreements of 21 December 1992 and 6 April 1993 were those ordered by the Group. Moreover the Yard described one loan in a letter to Mr. Khomich dated 5 August 1994 as a “purpose loan against building the reefers”. In another letter to him dated 19 September 1994 it referred to and asked for a loan against the “export scheme of building refrigerated freighters”, and the letter also referred to money received to “complete the ongoing orders 1141 to 1145”. Further, it is clear from the letter of 15 November 1995 that Mr. Khomich as Head of the Nikolaev Department was aware of the Contract and its terms. In any case, the Bank was lending money to support the construction of the vessels and intended the loans to be so used, and I cannot accept that the Nikolaev Department of the Bank would have known only that the Yard was building reefer vessels in general terms and nothing more about the Yard’s purpose in building them or for whom they were being built. I do not believe that the Department would have lent such large sums without knowing at least that much about its customer’s business.

The Buyer submits that the Bank’s Head Office too is likely to have known not only about the loans to the Yard but also the purpose for which they were made: that is to say, that it knew about the orders that the Group had placed because of the Yard’s borrowings and not simply as a matter of public knowledge. I accept this submission. After all, the Bank was receiving through the Deutsche Bank account held by the Nikolaev Department substantial amounts of valuable foreign currency. I cannot believe that the Head Office was not interested in and aware of the source of these receipts, or that the Nikolaev Department would not have reported this information to Head Office. In any case, it is likely, given the size of the loans made to the Yard, that the Bank’s Head Office knew that their purpose was to support the Yard in building ships for the Group. Even though the credit was, at least to some extent, supported by the National Bank of Ukraine, the Bank was administering the loans and, as it appears, assumed the risk of considerable exposure, and I cannot believe that the Head Office did not know why they were being made and therefore knew that the Group had placed the shipbuilding orders with the Yard.

Despite support from the Bank, the Yard was in financial difficulties. On 14 January 1994 it informed the Group that it could not obtain the funds necessary to build the vessels, and specifically that it could not pay for equipment and materials for them. It therefore asked that the Group consider allocating “the amount of about USD 1m for 1994 from the funds that are defined by the Contracts as money to be paid by the Buyer directly to various suppliers of imported equipment and to use this amount during the year for the purpose of settling our urgent invoices for purchasing the materials and equipment for reefers in Ukraine, replenishing our circulating assets in minimum (basically for payment for gas, electric power and other vitally important supplies) as well as payment of salary to the workers”. The Yard said that in return it would “pay the equivalent amounts in USD for imported ship equipment according to corresponding contracts with the suppliers from the instalments that we will receive from you as Buyers at definite stages”. Mr. Laskaridis agreed to this request in a letter dated 24 January 1994, although he recognised that the Group was “running a considerable risk involving the funds as advanced payments” and referred to a meeting at which the Yard’s “proposal was found as contradicting the terms and conditions of the contracts concluded between us ...”.

Thereafter the Yard requested advance payments on a number of occasions. On 20 July 1995, the Group wrote complaining that the only idea that the Yard had to respond to its problems was that “Laskaridis must pay earlier than contractually obliged”, and that it had already done this “far too many times” even though it went “directly against our contractual interest”. Nevertheless, the Yard continued to prevail upon the Group to assist in this way. Payments were made and attributed to the Contract although nothing was due from the Buyer under it.

On one occasion in September 1995 there was a curious barter type arrangement: a boat load of herring was provided to the Yard and the Group paid for it in that it treated the delivery as discharging a debt owing to it by the supplier of the herring. This was brought into account as a payment of US$1.56 million made by the Buyer in respect of hull no 1148.

In around July 1997 the Yard was put into administrative bankruptcy, apparently a form of receivership, by an order of the Ukrainian court on the grounds of its insolvency. There has been little activity on the Yard’s accounts with the Bank since 1997.

The dealings between the Yard and the Group were structured on the basis that there were separate contracts between the Yard and a different company in the Group in respect of each vessel. There was no “umbrella” contract between the Yard and the Group governing these separate contracts or providing a contractual link between them. Correspondingly, Mr Skock was asked for and, in the case of some but not all of the contracts, issued discrete refund guarantees in respect of the Yard’s obligations under individual contracts for the benefit of different companies in the Group.

However, as a result of the Yard’s financial difficulties and the request that the Bank made of the Group for funds to be advanced before they were contractually due, the regime whereby the different buying companies were to make payments in respect of a specific vessel according to the progress of that vessel and to pay for equipment for that vessel was compromised. This was not only because the Yard asked for and received advance payments under individual contracts. It was also because the Group and the Yard did not maintain the distinction between the separate contracts as far as payments made to the Yard and for equipment for the vessels were concerned.

First, the Group made payments to the Yard for the purpose of constructing vessels other than hull no 1148 and brought them into account as payments under the Contract. The Bank says and the Buyer does not dispute that they amounted to something over US$5 million. For the most part they were made in 1997 and early 1998, but the first such payment was made in March 1995, and it exemplifies these payments: the Yard wrote to the Group asking for a remission of US$200,000 “In order to facilitate the construction of reefer vessels according to the Program of [the Group] in particular the completion of Hull 1145, and in view of the difficult situation with salaries of workers at the yard”, and requesting that it be paid “from the budget of 1148”. The Group paid and accounted for the payments as requested. I shall consider these payments further later in my judgment, but the fact that the sums were requested specifically to enable other hulls to be constructed shows how far the parties were departing from the contractual scheme that payments should relate to the progress in construction of the vessel which was the subject of the contract under which she was built.

Secondly, sometimes the Yard asked the Buyer to pay suppliers of equipment for other hulls and the sums so paid would, similarly, be accounted for as payment against the contract price for hull no 1148. Payments of this kind were made in 1997 and early 1998. Again, the Buyer does not dispute the Bank’s calculation that payments of this kind exceeded US$5 million.

Thirdly, the Group and the Yard drew up agreements, which have been referred to as “protocols”, by way of agreed accounts as to the state of the account under the contracts for each of the hulls under construction (and so between it and each of the purchasing companies, including the Buyer). They were signed by the Yard and Laskaridis Shipping Co Ltd, as agents.

The first such protocol in evidence was dated 23 May 1997. It is introduced by the words, “Having taken all mutual accounts for Hulls nos 1146-1150 and having taken into consideration all payments effected so far, it was mutually agreed between [the Yard] and “Laskaridis Shipping Co Ltd”, the latter acting as agents to the owning companies of the above Hulls, that present balance for each Hull is as follows:…”. With regard to hull no 1148, the protocol records that the balance “still due” to the Yard was US$11,313,167, and this was calculated by bringing into account as payments under the Contract some US$500,000 said to be “overpaid for Hull 1147” and some US$719,000 said to be on an “open account”. Although the amount of US$11,313,167 was said to be “still due”, this does not, it is clear, refer to payments that had accrued due by way of instalments under the Contract.

A further protocol agreement was dated 10 April 1998. It was introduced by similar wording, but referred to hulls nos 1148 to 1152 (rather than hulls nos 1146 to 1150). It recorded in respect of hull no 1148 that payments paid amounted to US$18,998,782, representing an overpayment of US$598,782, that the overpayment had been transferred to the Yard’s “Equipment Account” for hull no 1149, and accordingly “all due amounts have been paid and the balance has become zero”.

A protocol dated 2 June 2000, however, recorded an agreement that payments made on 3 March 1997 and 24 March 1998, which had been “previously allocated to the account of Hull no 1148”, had been transferred to the account of hull no 1151, and that therefore there was now US$1,096,172 “due” to the Yard. A note signed by both parties and dated 5 June 2000 explained that this transfer to the account of hull no 1151 was “due to very long delay in completion of Hull No 1148”, whereas hull no 1151 was “under completion”. By a protocol dated 20 December 2000, it was agreed that further payments made in 1997 and “previously allocated to the account of Hull no 1148” had been transferred to the account of hull no 1151, and the balance “due” to the Yard had increased to US$1,740,823.

The last protocol is dated 3 March 2004. It recorded that hull no 1151 was delivered in January 2001, that there had been overpayments under the contracts for hulls nos 1151 and 1152 and that the balance of the accounts for the two hulls which were cancelled, nos 1149 and 1150, were nil. The amounts of the overpayments for hulls nos 1151 and 1152 were therefore transferred to the credit of the Buyer in respect of what was to be paid under the Contract. The protocol stated that consequently US$17,138,605 had been paid for hull no 1148, leaving a balance of US$1,261,395.

Mr. Galanopoulos explained that these protocols were agreed because several vessels were being built by the Yard at the same time and payments were made to the Yard not only for materials and equipment but for other purposes as such energy bills and salaries. On occasions, the contract price for a hull was fully paid before the hull was completed, and then “its account was reduced to zero and closed, and further payments were allocated to the next hull to be delivered”. Essentially, therefore, the parties were agreeing something in the nature of a settled account between them which, while presumably reflecting the total payments made by the Group to the Yard or to suppliers of equipment for the vessels, did not reflect and was not intended to reflect under which of the individual contracts payments were made.

By an agreement dated 4 June 1997 (the “Joint Venture Agreement”), entered into with the encouragement of the Ukrainian government, a joint venture was formed to allow a Ukrainian company called Yugreftransflot Joint Stock Company (“Yugreftansflot”) to have an interest in vessels being built at the Yard, hulls nos 1146 to 1152. It gave a nominee company of Yugreftransflot called Status a 50% shareholding in Dynamic Commander SA, the holding company that owned the shipowning companies in the Group, including the Buyer. The agreement contemplated that the Buyer and other shipowning companies should appoint Laskaridis Shipping Company Limited as project manager and representative to supervise the construction of the vessels, and although there is no direct evidence that these appointments were formally made, I infer that they were, but the fact remains that neither the Yard nor the Buyer was party to the Joint Venture Agreement itself.

On 29 May 1998, the Group, Yugreftranslot, the Yard and various Ukrainian state bodies entered into an agreement which is referred to as the “Master Graphic”. It was stated to be without prejudice to the rights of the Group in respect of late delivery, and provided for revised delivery dates for the vessels which were still being built, hulls nos 1147-1152. The date for delivery of hull no 1148 was revised to September 1999. The Master Graphic also provided for funding to be made available for the Yard by the Ukrainian state and for an increase of US$ 2 million in the price of hull no 1148, conditional upon a State refund guarantee being provided to the Buyer. The agreement reflects the scale upon which money had been paid to the Yard before it was contractually due: hull no 1147 was shown to be 81% complete and hull no 1148 was only 20% complete, but the Yard had been paid fully for both.

The Group entered into the Joint Venture Agreement and then into the Master Graphic arrangement in the hope that the Ukrainian Government would inject funds into the Yard. In a Protocol of Discussion dated 17 July 1998 which referred to the Master Graphic and signed by the Ukrainian Minister of Industrial Policy, by the Governor of the Ukrainian National Bank and by Mr. Laskaridis, it was noted, “The Customer have reached agreement with Ministry of Industrial Policy, Fisheries Committee and Local Administration of Nikolaev on the requirements for the completion of the Refrigerated Ships Project …”. The Group continued to receive reassurances from the highest levels of the Government. One example will suffice: as late as 24 February 2004 the Prime Minister of Ukraine wrote, “… please be assured that by joint efforts necessary measures will be taken to complete construction of the vessel Hull 1148 – for the successful completion of the Reefer Construction Program as a whole for the Joint Venture…”. However, according to Mr. Laskaridis and as I accept, the requisite government funding was not provided to the Yard.

Nevertheless, 16 of the 19 ships were eventually delivered. Of the four hulls that were the subject of contracts dated 9 December 1993, hull no 1147 was delivered on 12 December 1998. As I have said, the contracts for hulls nos 1149 and 1150 were cancelled but the date (or dates) of cancellation is not clear from the evidence. Hull no 1148 was not completed and has not been delivered.

Early in 2006 the Group learned that the Ukrainian state had suspended financial support for the Yard. On 11 July 2006 the Buyer, by its solicitor, wrote to the Yard that it was in default under Article XI of the Contract and that the Buyer had paid to the yard “US$17,138,605 together with a further advance of €99,000”, and exercised its right to rescind the Contract. On 14 July 2006 it made demand on the Bank under the Guarantee. The Bank rejected the claim by letter dated 19 July 2006, stating that it had reasons to consider the Guarantee to be “a fraud”. Whatever precisely was meant by that, it is not suggested in these proceedings that Mr. Skock’s signature on the Guarantee is a forgery.

Arbitration proceedings were brought by the Buyer against the Yard. The Yard did not participate in the reference, and on 29 November 2006 an interim final award was published to the effect that the Buyer was entitled to rescind the Contract and that the Yard was to reimburse the Buyer in the sum of US$17.258m and ordering an account and delivery up of the Vessel and all equipment.

On 5 September 2006 the Bank brought proceedings in the Nikolaev Regional Economic Court against the Buyer and the Yard for a declaration that the Guarantee was invalid and not binding on it. The Buyer challenged the jurisdiction of the Ukrainian court and brought these proceedings on 19 October 2006. On 16 January 2007 the Nikolaev Regional Economic Court rejected the Buyer’s challenge to its jurisdiction and upheld the Bank’s claim that the Guarantee was invalid, concluding, among other things, that the Regional Administration of the Bank, and therefore Mr. Skock, had not been shown to have authority to enter into it. The Buyer appealed unsuccessfully to the Economic Court of Appeal in Odessa, who concluded that there was no agreement with the Bank on which the Buyer could sue, although it appears that reasoning of the Appeal Court decision differed from the first instance judgment. The Buyer further contested this appeal ruling and on 26 July 2007 the High Commercial Court of Ukraine held that, because the Guarantee provided that it was governed by English law and provided for service of proceedings in England, the claim was not subject to the jurisdiction of the commercial courts of the Ukraine. That decision was upheld on appeal to the Supreme Court of the Ukraine in a ruling of 20 September 2007.

At one time the Bank argued that the decisions of the Ukrainian courts give rise to an issue estoppel but, in view of the decisions of higher courts, that is no longer contended. The reasoning of the Ukrainian courts is not particularly clear from the papers before me, but, in view of the way that the issues have been crystallised between the parties, that does not present any difficulty.

The Bank contends that Mr. Skock was not authorised to enter into the Guarantee on its behalf. The Buyer raise three arguments in reply to this contention: (i) that Mr. Skock had actual authority; (ii) that his action was ratified by the Bank; and (iii) that he had ostensible authority.

The question whether Mr. Stock had actual authority to give the Guarantee is governed by Ukrainian law, and the parties exchanged reports from Ukrainian lawyers and had permission to adduce their evidence. However, in the end there was no disputed issue between the parties about Ukrainian law, and expert evidence about it was not adduced.

The objects clause of the Bank’s Articles of Association included that, “On the instructions of the government, the Bank will finance centralised capital investments for accounts of the state budget, and will also be entitled to carry out, with the assistance of the state budget, the preferential credit activity of state programmes”. This clearly covered support for the Ukrainian shipbuilding industry. The General Meeting of the Bank’s shareholders on 29 March 1996 was told that one of its aims was “to direct credit support on such priority areas of the industry as shipbuilding, aircraft construction, power generation, mechanical engineering, metallurgy and other industries”.

The Bank’s Articles of Association provided by article 3(6) (according to the agreed translation) that the Bank should “open its branches and local offices within Ukraine and outside its borders in compliance with current law, and will vest with them rights and authority within the scope of the Bank’s competence as per the Provision regarding branch offices”.

The Bank was entitled (by article 4) to carry on “foreign economic activity”, and (by article 7) to “grant …guarantees and other liabilities on behalf of third parties that envisage their fulfilment in monetary terms”. Within the scope of authority granted to it by the General Meeting and subject to the control of the Council, the Management Board of the Bank was the executive body managing its day-to-day affairs. The Chairman of the Management Board was to manage the affairs of the Management Board and (by article 7(9)) was entitled to act on behalf of the Bank without a power of attorney. The Articles of Association contain no comparable provision authorising any other officer or employee of the Bank to act without a power of attorney. It is common ground that therefore Mr Stock had actual authority to issue the Guarantee on behalf of the Bank only if (i) he was so authorised by the Provision to which article 3(6) refers (“the Provision”), or (ii) if he was authorised by a special permit together with a power of attorney.

The Provision is entitled “Regulations on Regional Departments and Divisions of [the Bank]”. It was approved by the Decision of the Management Board on 18 February 1993.

As I have said, Mr. Skock was the Head of the Nikolaev Department in January 1994. He was also a director of the Bank until his death, having been so appointed at the Bank’s Founders Meeting in April 1992, but the Buyer does not rely upon his position as a director in support of its case that he had actual authority under the Provision. Its argument is that he had authority under article 5 of the Provision as Head of a Department, and the Buyer puts this argument forward on two alternative bases.

First, it contended that article 5(5) conferred authority on Mr. Skock to enter into the Guarantee on behalf of the Bank. It is said that, since by article 7 the Head of a Department was authorised to do all that the Department could do under article 5(2), article 5(5) is to be understood to some confer some additional authority. Given this and given the extent of foreign economic activity and work involving foreign currencies that article 5(1) contemplated will be undertaken by Departments and Divisions, article 5(5) and in particular the expression “foreign economic agreements” are to be given a sufficiently wide interpretation to cover entering into the Guarantee.

The difficulty with this argument is that it proves too much. It would, on the face of it, mean that the Head of a Department was authorised to enter into any agreement at all involving a commitment of any size, provided only that it was one “involving foreign economic activity”, subject to a requirement that the Bank be subsequently notified. Such wide authority would be the more remarkable because the Head of a Department would not have had authority to enter into comparable guarantees or other agreements of a purely domestic nature. It would be expected that an employee or other agent would have more limited authority with regard to business involving foreign currency than purely domestic business, the more so in view of the foreign exchange difficulties that the Ukraine was facing during this period. I cannot accept that article 5.5 was intended to confer the authority for which the Buyer contends. (In so concluding, I do not overlook the evidence of Mr. Laskaridis and Mr. Galanopoulos about why the Guarantee and the refund guarantee in respect of hull no 1147 were limited in amount, and the suggestion of some limit placed upon Mr. Skock’s or the Department’s authority to issue guarantees of this kind. This provides no proper basis for giving article 5(5) a wider meaning than is justified by the wording of the Provision itself, or would not explain a wider authority for international than for domestic transactions.)

The Buyer’s alternative contention is as to the authority conferred upon Mr. Skock by the Provision is this: that article 7 conferred the requisite authority because the Department was entitled to enter into the Guarantee by article 5(2)(b), this being covered by the words authorising the Department to “effect settlements connected with clients’ export and import operations in the form of … other formats used in international banking practice”. This expression, it is said, is broad enough to encompass issuing a refund guarantee, a document recognised by international banking practice, which is required as a pre-condition to the Bank’s customer receiving foreign currency payments.

I am unable to accept this argument, not only because it faces difficulties similar to the contention based upon article 5(5) but also because, to my mind, it is not justified by the wording of article 5(2)(b). The expression “other formats used in international banking practice” refers to methods of making payment comparable to the other methods specifically mentioned in article 5(2)(b): letters of credit, collection of payments and bank transfers. A refund guarantee is not a method of making payment but a collateral contractual commitment.

I therefore do not consider that the Provision conferred any relevant authority upon Mr Skock. Although this forms no part in the reasoning that leads me to this conclusion, I am comforted in it because of the nature of the Guarantee. As I shall explain, it was, at the least, not usual for Departments to issue guarantees of any kind at the relevant time. I should have found it difficult to believe that the Provision is to be interpreted as authorising the Head of a Department to enter on behalf of the Bank into a commitment such as the Guarantee: a contingent commitment unlimited in time to pay a large amount of scarce foreign currency, and moreover one governed by a foreign law about which, as I conclude from the evidence of Mr Ovdienko and Mr Lavrinenko, Mr Skock took no advice.

As I have said, the Buyer acknowledges that, as a matter of Ukrainian law, if the Provision did not give Mr. Skock authority to issue the Guarantee, he would have been so authorised only if the Management Board of the Bank so decided and he held a relevant power of attorney. It was not suggested in cross-examination to the Bank’s witnesses, who included Mr R P Soversheny, the Head of the Division in the Bank’s Legal Department that is responsible for dealing with this litigation, that documents of this kind had been suppressed by the Bank when making disclosure, but there is no direct documentary or other evidence that Mr. Skock had any such permission or held a power of attorney (although I do not overlook that the Bank did not call evidence from any member of its Management Board at the relevant time). Nevertheless, the Buyer submits that it is to be inferred that Mr. Skock was authorised to issue the Guarantee.

The Buyer invites this inference despite three considerations that, to my mind, need to be weighed against it. First, it would have been unusual for a Ukrainian bank at the relevant time to confer authority to issue a guarantee by way of permission of the Management Board and a power of attorney. The Bank’s expert Ukrainian banking witness was Mr Sergii Iaremenko, an economist who had been involved in banking in Ukraine since 1978 and during the relevant period, between 1992 and 1995, was the Chairman of the Board of the State Export-Import Bank of the Ukraine in Kiev. He explained that banks throughout the country had provisions similar to the Bank’s (deriving from the state banks of the Soviet era) that defined what transactions could be conducted by branches, and that they did not authorise branches to issue guarantees. (Mr. Iaremenko drew no distinction between Departments and Divisions. Mr E Z Stepanov, the Buyer’s expert in Ukrainian banking, told me that, as far as he remembered, at the relevant time only the Bank had regional Departments.) Mr. Iaremenko also said that it was very rare for the head offices of banks to issue special permits for branches to issue guarantees: he pointed out that there was little point in a bank providing such special authorisation to the branch rather than to issue them from head office.

The evidence of Mr Stepanov also makes it clear that it would have been unusual for the Bank to confer authority upon Mr. Skock in this way. Mr. Stepanov went into banking in the early 1990s after working as an accountant in industry. From 1992 to 1997, he was the Head of the Board of a Ukrainian bank called Nikkombank. He said that it was rare in the early 1990s for a bank to confer authority on an official by a power of attorney. It is of some interest that Mr. Khomich made loan agreements with the Yard which recited that he was making it under a power of attorney: the first such agreement that is in evidence is dated 27 February 1995. (The mortgage agreement dated 15 June 1994 recited that Mr. Khomich made it “pursuant to …POA No ---- of ---”, but the details of a power of attorney were not completed.) The earlier loan agreements made by Mr. Skock in 1992 and 1993 do not recite that he was acting under a power of attorney, and neither, of course, do any of the guarantees.

Secondly, the evidence of Mrs Kovtun was that she knew nothing of the refund guarantees issued by either SCICB or the Bank. She said that, had they been properly issued, she would have known of them: she would have seen the Guarantee and the associated documentation because of her responsibility for making returns to which I shall refer. She also said that she would, in any event, have heard mention of the refund guarantees from daily conversations within the Department: she explained that at least in the days of SCICB only some hundred people worked there.

I do not overlook the criticisms of Mrs Kovtun’s evidence made by Mr David Foxton QC, who represented in Buyer. In particular, he submitted that her evidence was unreliable because she said that she was unaware in 1992 that a Greek shipowner had placed a large number of orders with the Yard. This is said to be incredible given the amount of foreign currency that the order brought into the Nikolaev Department. I do find it hard to accept that in 1992 Mrs Kovtun did not know more about the orders placed by the Yard than she now acknowledges, but, whatever the explanation for this, I am unable to accept that this undermines the credibility or reliability of her evidence generally. For the most part I found her answers in cross-examination clear and credible and I consider that she was trying to assist the court.

Thirdly, the Bank has disclosed copies of none of the refund guarantees that the Buyer says Mr Skock issued to the Group and no documents relating to or referring to them. If proper procedures for issuing the refund guarantees were followed by Mr Skock, a significant number of documents would have been generated, as is shown by evidence of Mrs Kovtun which I accept. According to the Bank’s procedures the customer’s application for a guarantee should have been in writing, and the copies of it would have been sent to the currency division and the legal division for their consideration and observations. The Bank’s Head Office would also have reviewed the application and passed it to the Board for a decision whether to grant it. If the Board did so, its decision would have been in writing and that decision document and the requisite power of attorney would have been sent to the Department and kept with the customer’s application in a specific transaction file. A copy of the guarantee, the decision and the power of attorney would also have been kept at Head Office.

Moreover, if the Bank had issued a guarantee, it would have charged a fee and thereafter made an annual charge of 6% of the value of the guarantee for as long as it is valid. The Bank also would have taken security equivalent to at least the maximum liability of the Bank under the Guarantee, and documentation relating to the security would have been kept on the customer’s file. The Bank has not produced any document reflecting such charges or such security.

After a guarantee had been issued, the potential liability of the Bank under it should have been reflected in returns made internally within the Bank. The procedure was that a monthly report was made to Head Office and this included the total value of outstanding guarantees that had been issued as at the accounting date. This information was also entered into an annual balance sheet to Head Office. The Head Office would in turn make a report to the National Bank of Ukraine. Mrs Kovtun explained that, being contingent liabilities, guarantee liabilities were not included in the balance sheet, but recorded in a designated account in accordance with a direction of the National Bank of Ukraine dated 1 January 1994.

Mrs Kovtun was involved in preparing these reports for the Nikolaev Department and was responsible for the entries dealing with guarantee liabilities: she did not report any potential liability under the Guarantee or the other refund guarantees because she did not know of them. The Bank has not disclosed the Nikolaev Department’s reports to Head Office for 1994 or the off balance sheet records for that year. Those reports and records, Mrs Kovtun explained, would have been destroyed in accordance with its usual procedures after 10 years. However, in support of Mrs Kovtun’s evidence, the Bank relied upon off balance sheet returns for the Nikolaev Department for later years, which should have reflected not only commitments entered into in the year to which they relate but also the Bank’s overall outstanding contingent commitments from previous years. The return for 1996 shows that there was no contingent guarantee liability outstanding as at 1 January 1997 and the return for 1997 similarly shows no such liability.

The records of off balance sheet liability for guarantees for the whole Bank also are consistent with the picture given by Mrs Kovtun’s evidence. As at 31 December 1994 the off balance sheet commitments for guarantees for the whole Bank were some 75 billion karbovanets, the equivalent of about US$715,000, and clearly the Guarantee was not included in that total. As at 1 January 2006 the total guarantee liability of the Bank was recorded as 459,319.11 hryvna, some US$90,000, and none of that related to the Yard. Further, according to Mrs Kovtun, the Bank’s records showed as at 1 January 1998 a contingent liability of 4,122,734 hryvna (something less than the equivalent of US$1 million for the whole Bank in respect of guarantees), and that contingent liability was in respect of Ukrainian currency guarantees, none of which were issued by the Nikolaev Department. Some doubt was cast upon this last figure because the audited figures for the Bank as at 31 December 1997 included a figure in respect of liability for guarantees of 105 million hryvna - it is unclear whether this figure represented, for example, total contingent liability, or total unsecured guarantee liability, or was simply what the auditors estimated to be a proper provision in the accounts. Whatever the explanation for this, the overall pattern of the Bank’s returns is that they gave figures in respect of contingent liability for guarantees that were much too small to cover the refund guarantees for the Group, or even just the Guarantee. (The Bank relied upon the fact that the returns for 1998 and subsequent years do not reflect security for refund guarantees given for the Yard as they would have done, according to Mrs Kovtun, if the guarantees had been properly issued and proper procedures followed. However, this point provides no convincing support for the Bank’s argument because, as the Buyer points out, the returns also do not reflect security provided by the Yard for its borrowing from the Bank. )

The Bank therefore relies upon the fact that it has no documentation recording or reflecting the guarantees or any potential liability under them in order to support its contention that they were not properly issued and were not issued with its authority. The Buyer responds that this is of no real significance because the Bank has failed to make disclosure of many documents that it must have generated in relation to its dealings with the Yard and other relevant documents, despite being ordered by HHJ Mackie QC on 14 January 1998 to carry out a search for and make disclosure of specific documents: namely, files relating to the Yard held at the Nikolaev branch or its Head Office for the period 1994 to 1998 (which would, of course, include documents relating to loans made by or through the Nikolaev Department to the Yard), and documents relating to guarantees issued by the Nikolaev branch for the period 1993 to 1998. The Bank disclosed no documents relating to guarantees and only a few documents relating to the loans made by the Bank to the Yard.

As far as guarantees are concerned, the Bank’s answer is simply that the Nikolaev branch issued none during the relevant period. Mrs Kovtun gave evidence that no guarantees were issued by the Nikolaev branch at this time, and this is consistent with the returns for off balance sheet contingent liabilities to which I have referred. It is also consistent with the evidence of Mrs Maryna Kozhukhariova, who is now the Director of the Bank’s Currency Transactions Department and who worked at the Donestsk Department of SCICB and then the Bank between 1989 and 1998. She told me that the Donestsk region did not issue any guarantees before 1996. Mrs Kovtun accepted that another Department of the Bank had issued a guarantee for another Ukrainian shipyard, the Kerson Yard: but the date of this guarantee is not in evidence and it could have been issued some time after 1994.

On the face of it, this seems surprising, the more so because the Nikolaev Department covered an industrial area and it might be expected that the Department would have needed to issue guarantees to support the business of its industrial customers. However, the evidence of Mr Iaremenko put this into its context. He said that bank branches (again including in this expression Regional Departments) did not issue guarantees of the type under consideration in this case. With regard specifically to foreign currency guarantees he explained that in the period 1992 to 1994 the majority of international payments went through the State Import-Export Bank of Ukraine. In the early 1990s banks in the Ukraine lacked qualified personnel and developed procedures for foreign currency transactions, and concentrated their foreign currency transactions at the head offices because branch offices did not have the professional experience to carry out such transactions. I found this evidence convincing.

I need hardly add that none of this means that it would have been unusual for a customer who required a bank’s assistance for a transaction involving foreign currency to approach a branch office and deal with a branch office. It does not follow from this that the branch office would have the authority to carry out the transaction as opposed to transmit the request to head office and the head office’s decision to the customer, or that the branch office would usually carry out the transaction itself.

Against this the Buyer relies upon some factual evidence of Mr. Stepanov. He said that the Nikolaov Department were “actively involved in issuing commercial guarantees for business clients” because on one occasion he and Mr. Skock together issued guarantees on behalf of their banks for Okean Shipyard, a customer of both banks: one such guarantee was written to enable the yard to buy engines from Czech suppliers. He also said that he understood from the director of an alumina plant, who had held a position in Nikkombank, that the Bank issued guarantees to support the import of bauxite from Africa.

I found it difficult to understand the precise nature of the commitments by the Bank that Mr. Stepanov was describing. He apparently understood that they were given in respect of specific imports, and the arrangements that he described did not appear to be comparable to the sort of long-term commitment that the Guarantee entailed. It suffices to say that I was not persuaded by this evidence that the general picture given by Mr. Iaremenko was misleading. In light of this and the evidence of Mrs Kovtun, I do not consider that it reflects significantly upon the Bank’s disclosure that it did not disclose guarantees following the order of HHJ Mackie QC.

The Bank has produced fewer documents relating to lending to the Yard than would be expected. Some documents have been disclosed, but, for example, there are not, as I understand it, documents relating to the Yard’s applications for loans and relating to the support for the loans from the Bank of Ukraine.

The Bank’s explanation for the paucity of documentation about its loans to the Yard was its policies for destroying documents after a number of years. After all, the Buyer did not, as far as the evidence goes, mention the Guarantee (or any of the refund guarantees) to the Bank for more than 12 years after it was provided (and when it did so, the Bank promptly denied its authenticity). This is not to say that the Group had forgotten about the refund guarantees. For example, it alluded to them in 1997, when Mr. Laskaridis was in discussions with various Ukrainian government entities: it is apparent from a letter to Mr. Laskaridis from the Ministry of Industrial Policy that the failure of the Yard to provide guarantees in respect of hulls nos 1151 and 1152 was an “issue raised” by Mr. Laskaridis, and this is also listed as a “main issue” by Mr. Laskiridis in his notes for a meeting on 27 May 1997. But there is no suggestion that the Group contacted the Bank about guarantees (or anything else) before 2006, and the Buyer’s complaint about the Bank’s disclosure is to be assessed against this background.

Mrs Kovtun explained that broadly the same policy relating to documentation was adopted in 1994 as today. Day-to-day transactions on an account were filed by reference to the date of the transaction and such records are routinely archived shortly thereafter and destroyed some five years later. Files relating to a specific transaction – and refund guarantees and associated documentation would be put upon such a file – were archived only once the employee responsible for the transaction was sure that it was concluded and that the documents could properly be destroyed. In the case of a document such as the Guarantee, that would be only after it had expired. Mrs Kovtun explained that some documents relating to the bank’s dealings with the Yard in the 1990s might have survived because employees working on the transactions might have copied them and (for some reason or for no reason at all) not have disposed of them.

This goes some way to explaining the Bank’s failure to produce documentation relating to the loans to the Yard: for example, documents relating to the account with Deutsche Bank and, as mentioned above, off balance sheet records for years before 1996. However, on any view the destruction policy falls far short of providing a full and satisfactory explanation for the failure to produce documents relating to the consideration by the Bank’s Head Office of the lending to the Yard if only because, the lending being unpaid, the relevant documentation should not have been destroyed. The position is the more obscure because the Bank’s register of destroyed documents does not correspond with the evidence about the Bank’s document destruction policies.

However this may be, the explanation for the Bank not disclosing documents is not what is important for the Buyer’s submission, and, as I have said, it was not put to the Bank’s witnesses that documents were deliberately withheld. Whatever the explanation, it provides the Buyer with a response to the Bank’s contention that it is to be inferred that the Guarantee and the other refund guarantees were not issued in accordance with proper procedures because they are not to be found among the Bank’s records. I see force in that argument, but the fact remains that the contingent commitment was not reflected in the returns for off balance sheet liabilities.

The Buyer submits that it is unlikely that Mr. Skock would have taken it upon himself to enter into commitments of this size unless he had authority to do so. After all, Mr. Skock had been a state employee and manager of the Nikolaev Regional Office of the SCICB, and become a member of the Board of the Bank. This submission is supported by two further considerations. First, as I conclude, Mr. Skock apparently ensured that he observed some limitations as to the maximum amount of the guarantees that he gave in January 1994. This in itself suggests that he had in mind some restriction upon what he or the Department was permitted to do, or at the least upon what he believed he could properly do. Secondly, as I find on the basis of Mrs Kovtun’s evidence, the stamp used on the Guarantee next to Mr. Skock’s signature was kept in a safe by the Chief Accountant and it was his responsibility to ensure that it was properly applied. (Mr. David Foxton QC also referred to the other stamp at the top of the Guarantee giving the name of “Bank of Industry and Construction of the USSR, Nikolaev” and the evidence of Mrs Kovtun that that stamp was kept by one of the employees in the foreign currency department, but, since apparently that stamp was in any case applied in error, I do not attach any significance to that.) Even if the refund guarantees should not properly have been given, it seems to me that this is unlikely that Mr. Skock kept what he was doing secret from everyone else in the Bank.

I have concluded that Mr Khomich, as well as Mr Skock, knew of the terms of the contracts between the Group and the Yard. The contracts referred to the requirement for a guarantee from the Bank (or its predecessor). I cannot accept that Mr Khomich would not have noticed it or that he was or remained unaware of the refund guarantees that had been issued. I have also concluded that the Bank’s Head Office knew of the lending by the Bank and knew of the contracts placed by the Group with the Yard. It does not follow from this that the Bank’s Head Office knew the terms of the contracts or the terms in them requiring refund guarantees, and I am not persuaded that there is a proper basis for concluding that it did. Nor am I persuaded that anyone at the Bank’s Head Office was aware of the refund guarantees. It might be said, I suppose, that this involves attributing to the Bank’s Head Office incompetence in agreeing to such large loans to the Yard without sufficient information about the contracts that the Bank was supporting. However, there would seem to me a question about its competence if it accepted without demur the undated and open-ended refund guarantees. Moreover, even if some at the Head Office knew of them, the Buyer has not shown that the Bank’s Chairman or its Management Board knew that the Guarantee and the other refund guarantees issued by Mr. Skock.

I am persuaded by the Buyer, despite the lack of documentation about the refund guarantees and the fact that no contingent liability under them was reflected in returns made by the Department, that it is unlikely that Mr Skock entered into them without anyone else in the Bank being involved. However, that is not enough to show that before the guarantees were given proper procedures were followed and the Bank had formally authorised Mr Skock to issue them by a decision of the Management Board and by providing a power of attorney. After all, even if proper procedures required that the Department be authorised with similar formality to lend money in excess of its own borrower’s limit (and there is no proper basis for assuming that similar formality was required), it does not follow that in its early years, the formal procedures were followed within the Bank.

In my judgment there simply is not sufficient evidence to conclude that the Bank took the unusual course of conferring on Mr. Stock authority to enter into the refund guarantees (and in particular the Guarantee) and that it executed a power of attorney for that purpose. I should have come to this conclusion in any event but it is, to my mind, supported by the evidence of Mrs Kovtun, including what she said about the returns made to Head Office of off balance sheet liabilities. I accept her evidence that she knew nothing of the guarantees and that if she had known of them, she would have completed the returns differently. I recognise that, given that Mr Skock was not acting secretly, it is in any event rather surprising that Mrs Kovtun did not hear about the guarantees, but it would be the more remarkable if formal procedures had been followed.

This is not to attribute any improper motive to Mr. Stock. The commitments were given when the Bank had no relevant written procedures in place and he might well have been unfamiliar with guarantees of this kind. He might understandably have wished to support a customer who was earning important foreign currency. As I understood Mrs Kovtun’s evidence, this was a period when the Bank, and other banks in the Ukraine, were learning to develop new services required by their customers in the post-Soviet era. When customers approached the Bank for a new service, the customer was not simply turned away, but the Bank would try to accommodate the customer’s request, and might consult Head Office as to how it might do so. None of this, however, assists the Buyer to establish that Mr. Stock had authority to give the Guarantee.

The Buyer argues that, if Mr. Skock did not have actual authority to enter into the Guarantee, the Bank ratified what he did, because it knew that he was giving this and other refund guarantees to the Group and did not disclaim them. The question whether the Bank so ratified what Mr. Skock did is, as is common ground between the parties, to be determined according to English law, the governing law of the Guarantee.

The Buyer’s pleaded case with regard to ratification is that the Guarantee was “known to the [Bank] and/or the [Bank’s head office]” and that the “Bank’s silence and/or acquiescence in the [Buyer’s] mistaken belief that the Guarantee was valid amounted to a ratification of the Guarantee”. It does not allege any positive act of ratification.

The principles governing ratification by a purported principal of an act done in his name were considered by Waller J in Suncorp Insurance and Finance v Milano Assicurazioni SPA¸ [1995] 2 Lloyd’s Rep 225 esp at p.234 and by Moore-Bick J in Yona International Limited v La Reunion Francaise SA, [1996] 2 Lloyd’s Rep 84 esp at pp.103 and 106. Ratification may be implied as well as express, and there is no requirement that it be communicated to either the agent or the person with whom the agent entered into the contract: it operates as a unilateral manifestation of will. Mere acquiescence or inactivity may be sufficient to constitute ratification. However, it involves a conscious decision to adopt an unauthorised act, and in order for there to be ratification:

In the Yona International case, Moore-Bick J said this (at p.106), which to my mind has some application to this case:

“The essence of ratification is a decision by the principal to adopt the unauthorized act as his own, … It does not therefore depend on communication with or representation to the third party and is thus in principle distinct from estoppel, but since the intention to ratify must be manifested in some way it will in practice often be communicated to and relied upon by the other party to the transaction. Ratification can no doubt be inferred without difficulty from silence or inactivity in cases where the principal, by failing to disown the transaction, allows a state of affairs to come about which is inconsistent with treating the transaction as unauthorized. That is probably no more than a form of ratification by conduct. Where there is nothing of that kind, however, the position is more difficult since silence or inaction may simply reflect an unwillingness or inability on the part of the principal to commit himself. For that reason it will not usually be sufficient to evidence ratification, nor will it amount to an unequivocal representation sufficient to give rise to an estoppel.”

In order to establish that the Bank ratified Mr Skock’s act in entering into the Guarantee, therefore, the Buyer would have to show that it was adopted by the Chairman of the Bank or by the Management Board of the Bank. I conclude that the Bank’s Head Office in Kiev knew of the lending to the Bank and of the contracts between the Group and the Yard, but even assuming that this was known to the Chairman and the Management Board, it has not been shown that they knew of the terms of the contracts. Moreover, even that knowledge would not be sufficient to support a case that the Guarantee had been ratified. It would be necessary to show that the Chairman or Management Board knew of the Guarantee and, as it seems to me, to show either that they knew the terms of the Guarantee or at least to show that they were content to adopt the Guarantee whatever its terms. The Buyer has not shown that either the Chairman or the Management Board had such knowledge.

For this reason, I reject the Buyer’s argument that the Bank ratified Mr. Skock’s act in entering into the Guarantee. However, even if I had concluded that anyone who was in a position to ratify the Guarantee on behalf of the Bank had the requisite knowledge, I do not consider that he or they manifested an intention to adopt it. This is not a case in which the purported principal remained silent in the context of continuing dealings or exchanges with the other contracting party. It seems to me that silence about the Guarantee is in the circumstances no less explicable by a belief that the Buyer was unlikely to call upon it, not least perhaps in light of Government assurances of support for the Yard and for the Group’s contracts with it, and that it could only cause unnecessary difficulty to renounce the Guarantee than by a decision tacitly to adopt it. I do not discern an unequivocal manifestation of such a decision.

The question whether Mr Skock had ostensible authority to give the Guarantee is also governed by English law. The Buyer contends that the Bank held out the Nikolaev Department and Mr. Skock as its Head as having authority to enter into “such financial transactions as would ordinarily fall within the scope of the authority of the main regional office of a major commercial bank”, or at least of a major commercial bank in the business of providing services to the shipbuilding industry; and that it relied upon that in “accepting the terms of the Guarantee”. Thus, it says that this is one of those cases described by Lord Keith in Armagas Ltd v Mundogas SA, [1986] 1 AC 717 at p.777B: “…In the commonly encountered case, the ostensible authority is general in character, arising when the principal has placed the agent in the position which in the outside world is generally regarded as carrying authority to enter into transactions of the kind in question”. The Buyer contends:

Clearly the Bank conferred upon Mr. Skock some authority of the kind described by Lord Keith: it conferred upon him authority to provide some banking services and held him out as having authority to provide them to shipyards amongst other customers, but that states the authority that Mr. Skock had and was held out as having at too high a level of generality to assist in deciding whether the Bank held Mr. Skock out as having authority to enter into the Guarantee on its behalf. It also seems to me to pitch the question at too general a level to ask whether he was held out as having authority to provide “guarantees” without stating what guarantees. The relevant question is more specific: whether the Bank held him out as having authority to enter into a refund guarantee of the kind and in the amount of the Guarantee. It does not assist the Buyer that in Ukraine legislation permitted guarantees to be given and that the Bank’s charter provided for guarantees to be given. Nor is the Buyer’s case assisted by general observations about Mr. Skock being held in high regard in Nikolaev (such as Mr. Lavrinenko telling Mr. Soversheny, “when Skock was the director, he was king, God and lord in the city”). Nor does it assist the Buyer to point out that customers of the Bank were expected to deal with the Bank through the Departments and not the Head Office: that did not amount to the Bank holding the Department (or the Head of the Department) out to deal with customers in ways in which it (or he) was not authorised to deal: it has not been suggested that this was a case like First Energy (UK) Ltd. v Hungarian International Bank Ltd., [1993] 2 Lloyd’s Rep 194 in which the bank manager was held out as having authority to communicate to the customer decisions of the bank’s head office.

It is therefore not sufficient for the Buyer to contend that it was within the ordinary scope of the authority of the main regional office of a major commercial bank, and so of Mr. Skock as head of the main regional office, to provide commercial gaurantees. It would be necessary, at the least, for the Buyer to show that it was within the ordinary scope of their authority to provide a refund guarantee to cover potential liability by the supplier to the customer for money paid to him. The Buyer’s case about the scope of the usual authority of a regional office and its head depends upon the expert evidence of Mr. Stepanov. However, Mr. Stepanov did not give evidence that in his experience it was usual for the regional administration of banks in the Ukraine at the relevant time to issue refund guarantees such as the Guarantee. He said that the regional offices of banks gave guarantees, without specifying the types of guarantees that he had in mind, except that he gave examples which were, as I understood his evidence, guarantees for the payment of the price of goods imported into the Ukraine. It is true that he expressed the opinion that “the issuance of commercial guarantees of this kind was within the normal scope of activity of a main regional office of [the Bank]”, but this was not, I think, evidence about his experience or knowledge of the usual scope of the authority of bank departments or bank officials.

However, if there is any significant difference about this between the evidence of Mr. Stepanov and that of Mr. Iaremenko, then I prefer the more reasoned evidence of Mr. Iaremenko. He said that the common form of Provision conferring authority upon regional offices of banks did not include general authority to provide guarantees, and there is no evidence that I accept either that it was usual for officials to be given specific authority to issue guarantees or that it was usual for officials at regional offices to give guarantees although they were not properly authorised to do so. In my judgment, the Buyer has not shown that it was within the ordinary scope of the authority of the main regional office of a major commercial bank to provide commercial guarantees.

There is a further difficulty facing the Buyer’s contention about ostensible authority. There is no evidence that it was in the scope of the usual authority of an official in Mr. Skock’s position to enter into a contingent commitment as large as the Guarantee. Indeed, Mr. Stepanov acknowledged that no other bank would have had the resources to do so. His reasoning is that, since the Bank had greater resources than others, it was to be expected that an official of the Bank such as Mr. Skock would have had authority to enter into greater commitments than those in a comparable position in other banks. I do not find this reasoning compelling, but in any case, it does not amount to evidence as to the usual authority of bank departments or officials. Mr. Stepanov did not explain why the Bank’s Department should be expected to issue a Guarantee for as much as US$9.9 million. His evidence did not support a contention that the Bank, by appointing Mr. Skock to his position, held him out as having authority to issue the Guarantee.

The Buyer put forward an alternative argument in support of its contention that the Bank held Mr. Skock out as having authority to issue the Guarantee on its behalf, arguing that, if the Bank knew that Mr. Skock had issued refund guarantees on behalf of SCICB, then by keeping him employed in a similar position within a similar structure, it represented that he had authority to act on behalf of the Bank as he had acted for SCICB. I reject this argument. The authority of Mr. Skock to enter into guarantees when he was employed by SCICB was, as far as it goes, no greater than his authority when employed by the Bank and there is no evidence that the Chairman or the Management Board or any other relevant official or organ of the Bank knew about SCICB guarantees. In any case, the Bank was a separate legal entity from SCICB and was not its successor in any formal legal sense. There is no sufficient evidence that its structure was the same. I do not accept that in appointing Mr. Skock to his position as Head of the Nikolaev Department the Bank represented that he had the authority to do all that he was authorised to do, or all that he had in fact done, when employed by the SCICB

I therefore reject the Buyer’s contention that the Bank held Mr. Skock out as having authority to issue the Guarantee or made any relevant representation about his authority to do so. I would also reject its case about ostensible authority because I do not accept that the Buyer relied upon any representation by the Bank as to Mr. Skock’s authority, or indeed the Yard did so.

I accept the evidence of Mr. Laskaridis that he saw the Guarantee with Mr. Skock’s signature and the Bank’s stamp, but I am not satisfied that Mr. Laskaridis knew the identify or the position of the signatory of the Guarantee. In his oral evidence Mr. Laskaridis said that he had been told that Mr. Skock was the head of SCICB in Nikolaev, and of his standing there. I am unable to accept that evidence: it was not in his witness statement and he was unconvincing about the source of this information. He first said that it was from the Yard and later, when pressed about this, he said that it had been, or might have been, from the Group’s technical people in Nikolaev. On the face of it, it is improbable that the technical staff would have discussed with the Group’s president who signed the Guarantee. But even if Mr. Laskaridis was told this, I do not believe that he or anyone else in the Group accepted the Guarantee or acted in any other way in reliance upon Mr. Skock’s position. In any case, this evidence was concerned with Mr. Skock’s position when he was with SCICB, and not about his position in the Bank. During his evidence, Mr Laskiridis said that: “who this bank is and how it [sc. the refund guarantee] comes about is really not the job of the shipowner or the legal entity that order the ship”. This, in my judgment, reflects the attitude of the Group to the refund guarantees, and its view that it was not for the Group to be concerned about how the guarantees came about or who issued them.

The Buyer has an alternative argument that it is sufficient if the Yard relied upon Mr. Skock’s position. (It is pleaded that Mr. Lavrinenko and Mr. Ovdienko so relied, but it was Mr. Lavrinenko, not Mr. Ovidenko, who obtained the Guarantee.) The Yard having obtained the Guarantee from Mr. Skock, it is contended that ostensible authority can be established where “the third party [the Buyer] reasonably believes that the actor [Mr. Skock] has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations”: see the American Restatement, Third, at paras 2.03, 3.03. Let it be assumed that this properly states English law because Mr. Ali Malek QC, who represented the Bank, did not argue otherwise (but it is not uncontentious: see Bowstead & Reynolds on Agency (2006) 18^th Ed paras 8-014 and 8-029). Nevertheless, I am unable to accept that Mr. Lavrinenko, or indeed anyone else acting for the Yard, said to the Buyer anything about Mr. Skock’s position in the Bank. Nor is there any evidence that Mr. Lavrinenko (or Mr. Ovdienko) thought that Mr. Skock had the requisite authority or that explains on what basis he might so have thought. In his statement, Mr. Lavrinenko does mention that Mr. Skock had previously issued guarantees, but there is no sufficient evidence that he thought that as Head of the Nicolaev Department Mr. Skock was authorised to issue the Guarantee. The Buyer has simply not been able to present evidence to support this part of its case.

I add that in reaching this conclusion I place no reliance upon the evidence of Mr. Soversheny that in an unrecorded telephone conversation in November 2007 Mr. Lavrinenko told him that, in the statement that he had given and upon which the Buyer relies, he had “guessed” that Mr. Skock did not have authority to issue a bank guarantee. This evidence of Mr. Soversheny was quite inconsistent with other conversations that he had with Mr. Lavrinenko that were recorded, and I conclude that the evidence of Mr. Soversheny about the conversation that was not recorded was untruthful.

I therefore conclude that Mr. Skock had neither actual nor ostensible authority to give the Guarantee and that the Bank did not ratify his issuing it. If I am right about this, the claim fails. However, I shall consider the other issues on the basis that I am wrong and the Guarantee is binding upon the Bank.

The claim for US$17,258,750.63 is put forward on the basis that it represents the sum of US$17,138,605 that is recorded in the protocol of 3 March 2004 as being paid under the Contract together with a payment of some US$120,000 made on 7 February 2006. That is to say, the claim brings into account (i) sums paid to suppliers of equipment as well as sums paid to the Yard; (ii) sums paid to the Yard in respect of hull no 1148 but not in accordance with when the Contract provided for payments to be made; (iii) sums paid in respect of other hulls or for equipment for other hulls; and (iv) adjustments to the account under the protocols.

The only sum that fell contractually due to the Yard under the Contract was US$1.3 million payable within three months of the effective date of the Contract, that is to say by August 1994. US$1.2 million was paid on or shortly after 23 August 1994 as payment of the first instalment under the contract for hull no 1147. That payment was then, in October 1994, treated as having been made by way of part payment of the first instalment under the Contract, leaving US$100,000 to be paid. There is no evidence of any payment made specifically to discharge this, although in due course far more than a further US$100,000 was brought into account between the Group and the Yard under the Contract.

It is agreed between the parties that in 1998 a further US$427,072 was paid to the Yard on the basis that the payment related to hull no 1148 and this was brought into account as a payment under the Contract. As far as payments to suppliers of equipment are concerned, it is agreed that US$165,377.75 was paid in respect of equipment for hull no 1148, and this was also brought into account as paid under the Contract. It is not clear whether other payments were made under the Contract, and had I reached other conclusions about the Bank’s liability, I would have invited further submissions about this.

The Bank raises a number of questions of construction of the Guarantee.

The Bank contends that its maximum liability under the Guarantee is US$9,900,000. At the start of the trial, the Buyer’s contention was that the Guarantee was not so limited but (in the words of its Reply) “The maximum sum (exclusive of interest) recoverable under the Guarantee was … the sum actually paid to the Yard and/or to third party suppliers under the Contract”. This contention was based upon the use of the disjunctive “or” in the sentence “we, … hereby irrevocably and unconditionally guarantee the payment to you by the Builder of the total maximum sum of USD – 9 900 000 (Nine Million Nine Hundred Thousand U.S.D) or any amount to be paid to the Builder as the first, second, third and fourth instalments under the Contract and any supplement, amendment, charge or modification made thereto”.

During the hearing the Buyer modified its position. First it said that, whatever the true meaning of the Guarantee, it could not maintain its pleaded contention because, even if it were correct as a matter of construction, the Buyer could meet it with an argument based upon estoppel by convention or rectification because of the evidence of Mr. Laskaridis as to the explanation for the Guarantee specifying a maximum amount. However, in his closing submissions Mr. Foxton accepted that as a matter of construction the maximum amount payable under the Guarantee is US$9.9 million, subject to a question about interest: whether the maximum amount of US$9.9 million is inclusive or exclusive of any contractual interest payable by the Yard.

In view of my conclusions upon other issues of construction between the parties, my determination of this question does not affect the amount for which, in my judgment, the Bank would be liable under the Guarantee (even if I had upheld the Buyer’s case about authority): the ceiling of US$9.9 million would not on any view be reached. However, it seems to me that the maximum amount of US$9.9 million is naturally understood to stipulate the maximum amount of the guaranteed payment that would fall to be made by the Yard in the event of rescission, whether it be payable by the Yard by way of principal or interest. After all, the second paragraph of the Guarantee links the interest element to the sum payable by way of instalments without indicating that it might be payable in addition to the maximum sum, and the obvious purpose of the maximum amount is to define an upper limit to the Bank’s exposure. This purpose would be undermined by any other interpretation of the Guarantee, especially given the absence of any expiry date for the Guarantee (and so the possibility that the Buyer might be entitled to large sums by way of interest). Further, if the Guarantee be ambiguous in this regard, given that the Group (through the Yard) presented the form of the Guarantee to the Bank, the principle of construing contra proferentem reinforces my conclusion that the maximum amount includes any liability of the Yard for interest upon what is to be refunded. I consider that the only interest payable in addition to the sum of US$9.9 million (if that amount or more is payable by the Yard) would be statutory interest from the date that Bank’s liability under the Guarantee accrued.

The application of the Guarantee is expanded by the provision that it covers not only what is paid under the Contract but also what is paid under “any supplement, amendment, charge or modification made thereto”; and the Guarantee is stated to be “fully applicable to the Contract as so supplemented, amended, changed or modified”. (I shall refer to these and similar expressions in the Guarantee as providing for “variations”.) It is convenient next to deal with an argument of the Bank that the provisions of the Guarantee that contemplate variations have a limited application. As would be expected in a shipbuilding contract, article V of the Contract provided that there might be agreed changes or modifications to the Specifications and Plan for the vessel, and recognised that such alterations might lead to changes to the price among other things. Such changes were to be agreed in writing. The Bank submits that the variation provisions in the Guarantee apply only to modifications and changes to the Contract made under article V.

I am unable to accept that the variation provisions of the Guarantee are to be interpreted so narrowly. Article V of the Contract is headed “Modifications Changes and Extras”, and its wording correspondingly refers to the Specifications and the Plan being “modified” and “changed”. The variation provisions in the Guarantee additionally refer to any “supplement” and any “amendment” to the Contract, and they refer to variations to the Contract and not just to the Plans and Specifications. Thus, the wording of the Guarantee does not track that of article V and to my mind does not evince any intention to refer to it. This is the clearer because the Contract itself at article XX contemplates as it might be amended by agreement in writing. However, I cannot interpret the wide terminology of the variation provisions in the Guarantee as being limited even to agreements that are in writing. There is no such restriction in the wording of the Guarantee and no proper reason to introduce such a limitation by implication. (Of course, article XX might bear upon a question whether the parties to the contract intended to introduce a change or modification orally or by their conduct, and so to whether the Guarantee applied in such circumstances, but that is another matter.)

As I have said, the first instalment of US$1.3 fell due under the Contract, and no other payments to the Yard accrued due. (I leave aside for present purposes payments to suppliers of equipment.) The Bank does not dispute that the amount of the first instalment is covered by the Guarantee, if the Buyer is entitled to claim upon the Guarantee at all. There is an issue whether it covers other sums paid to the Yard. In my judgment it does not.

The Contract contemplated payment to the Yard of two further instalments, falling due according to the progress of the vessel. The Guarantee covers the payment of “any amount to be paid to the [Yard] as the first, second, third and fourth instalments under the Contract … and any supplement, amendment, charge or modification made thereto”. The sums paid to the Yard from time to time before any payment was contractually due were not, to my mind, instalments within the meaning of the Guarantee. I shall have to consider later the significance of the reference to four instalments, but on any view the reference is to stage payments such as the Contract specified.

This leads to the questions whether the payments are covered because they were paid under a “supplement, amendment, charge or modification made thereto”. I am unable to accept that they are.

First, the payments did not purport to be made under any agreed variation of the Contract. I have referred to the letters from Mr. Laskaridis dated 24 January 1994 and 20 July 1995 in which he stated that in agreeing to make early payments the Group was going beyond its contractual obligations. There are many other references in the documents to the advance payments being by way of “advances in excess of customers’ contractual obligations”. (The Bank cited De Nicholls v Saunders (1870) LR 5 CP 589, 594 in support of the submission that the juridical nature of these payments is that they are loans or advances. But whatever the legal analysis, it suffices that they are not covered by the wording of the Guarantee.)

Secondly, the Guarantee contemplates that the contractual instalments might be varied or supplemented. It would cover a case where the timing of an instalment was changed and, I think, where an instalment was specifically divided so that it was not all payable at the same time. However, I am unable to accept that the expression “any supplement, amendment, charge or modification made [to the contractual instalments]” was intended to cover the position where, as here, the Buyer and the Yard abandoned the underlying scheme of payment to the Yard by way of instalments referable to the progress of the vessel.

The Buyer argues that it is nothing to the point that the reason that the Yard sought early payments from the Group was in order to meet commitments unconnected with hull no 1148. I agree that the purpose of the request for advance payments is not important. Nor is the reason that the Buyer acceded to the requests. But this does not mean that the early payments that the Buyer made were covered by the wording of a Guarantee.

For similar reasons, I am unable to accept that the Guarantee, properly construed, is to be understood to cover sums which, although not paid to the Yard in respect of the Contract, were later brought into account, by agreement between the parties, in particular under the protocols. The Guarantee covers payments made under the Contract, and not under other shipbuilding contracts made between the Group and the Yard. To my mind it envisages that the Buyer will make payments distinctly by reference to the Contract, and that the Guarantee will cover payments under the Contract. In effect, by entering into the protocols, the Group (including the Buyer) was party to agreements that treated payments made under the various contracts between the Group and the Yard as interchangeable between them. I cannot accept that the Guarantee was intended to apply to what was recorded against the Contract under such accounting arrangements. It cannot be said that a claim made under the Guarantee on the basis of such arrangements is directed to what was paid “under the Contract”, and I cannot accept that the expression “any supplement, amendment, charge or modification made [to the contractual instalments]” was intended to cover such accounting arrangements as the protocols.

For the reasons that I have explained, I do not consider that, upon the true construction of the Contract, in the event of it being rescinded the Yard was liable to refund any funds paid under it to suppliers of equipment for the vessel. Similarly, in my judgment, the Guarantee does not require the Bank to pay the amount of such payments in the event that the Buyer calls upon the Guarantee. A guarantee gives rise to a secondary obligation. An interpretation of the Guarantee that required the Bank to pay sums which the Yard was not liable to refund would involve interpreting it to that extent not truly as a guarantee but as a commitment by the Bank to a primary obligation. I do not consider that the Guarantee bears this interpretation. This view is reinforced, to my mind, because the Guarantee itself refers to payments to the Yard: it guarantees the payment of “any amount paid to the Builder” and in the second paragraph limits the Bank’s liability to the sum of the instalments or any lesser sum agreed between the Buyer and the Yard and “actually paid by [the Buyer] as aforesaid”.

The Buyer advances two main arguments on this issue. First, it relies upon the reference to “the first, second, third and fourth instalments under the Contract…”, and submits that, since the Contract provided for only three instalments to be paid to the Yard, the fourth “instalment” must refer to the series of payments that the Contract contemplates will be made to those who supply equipment for the vessel that is to be imported into Ukraine. I am not persuaded by this submission. The word “instalment” is not an expression that naturally covers such payments, let alone all such payments cumulatively. The explanation for the reference to a fourth instalment (like the comparable reference in the Contract) is no doubt that previous contracts for which refund guarantees had been issued had provided for four price instalments to be paid to the Yard. If necessary, I would take the view that, although the parties to the earlier refund guarantees in respect of the 1992 contracts for hulls nos 1136-1143 were different from those to the Guarantee for hull no 1148, the earlier guarantees are a proper aid to construing it: they were given by Mr. Skock (who was the Bank’s agent in issuing the Guarantee) to the Group (who acted throughout for the Buyer). But even without that consideration, I would not interpret the “fourth instalment” as referring to the payments to be made to suppliers of equipment.

The Buyer’s second argument is that the “total maximum sum” of US$9.9 million would be unrealistically high unless the Guarantee is to be interpreted as covering the US$10 million that the Contract contemplates is to be paid for imported equipment. This is because the Contract provides that the third instalment paid to the Yard is to be paid “within 7 working days after signing the Acceptance Act and the Vessel is ready in all respects for delivery”; and that title to the vessel will pass to the Buyer upon delivery of the Acceptance Act. Therefore, it is said, as far as payments to the Yard are concerned the Buyer is exposed only in respect of, and only required a guarantee for, the first two instalments, which were only US$2.88 million in total, and it is argued that the limit on the Guarantee was required because of potential liability arising from payments to the suppliers of equipment.

The Buyer seeks to reinforce this argument by referring to the contract for hull no. 1143 and the guarantee relating to it. That contract contemplates that payments totalling US$3 million will be paid before delivery of the vessel and that the buyer of the vessel will pay US$3.5 million for equipment: US$6.5 million in all. The limit on the guarantee is also US$6.5 million, and this, it is said, is because it is intended to cover the sums payable for equipment under the contract. I am not persuaded by this argument. It would (as I interpret the maximum amount provision) mean that the maximum total sum was calculated without recognising that interest would be payable by the Yard on what was to be refunded and there is no reason that I can discern that the parties should disregard this. Further, this argument, as it appears to me, overlooks the wording of the guarantee in respect of the contract for hull no. 1143: it provides for a guarantee for the payment of US$6.5 million or “any amount to be paid to the Builder as the first, second and third instalments under the Contract…”. Under the contract for hull no. 1143, as I have said, three instalments were payable to the Yard before the vessel’s completion and the signing of the Acceptance Act: instalments payable by reference to the signing of the contract, by reference to when the keel was laid, and by reference to when the vessel was launched. It seems to me that those are the three instalments to which the guarantee refers, and payments to suppliers were not covered.

I do not find convincing the Buyer’s argument based upon the maximum amount payable under the Guarantee. After all, the purpose of this provision is naturally understood to be to protect the Bank with a maximum exposure whatever the circumstances. Given that the Guarantee contemplated that it should apply when “any supplement, amendment, change or modification” was made to the Contract, I do not find it surprising that it exceeded the potential exposure in the absence of such changes. In particular it is not unnatural for the Guarantee to contemplate that payment of the final instalment to the Yard might be advanced. As I have explained, I consider that the Guarantee would cover such an advanced instalment payment.

In my judgment, therefore, the Guarantee is not to be interpreted as covering the amount paid by the Buyer to suppliers of equipment.

If I am right that the Guarantee does not cover any payments to suppliers of equipment, it follows a fortiori that it does not cover payments for equipment supplied to vessels other than hull no 1148. However, I should briefly express the view that I would have reached about this issue if I had decided that in principle payments to suppliers are covered by the Guarantee. The Contract contemplated that the parties might stipulate that the suppliers of equipment other than that listed in enclosure no 1 might be paid by the Buyer under the Contact, but it did not, as I interpret it, contemplate that the Contract should be varied so that the Buyer should pay under the Contract for equipment for other vessels. Similarly, I cannot accept that if the Contract were varied so as to provide that under it the Buyer should buy equipment for other vessels bought by other companies in the Group (or, I suppose, outside the Group), the Guarantee was intended to payments under such varied obligations in the Contract.

For reasons that I have already expressed, in my judgment, even if in principle payments to suppliers are covered by the Guarantee, I am unable to accept that it covered payments for equipment brought into account under the Contract in the protocols.

In my judgment, upon the true construction of the Guarantee the Bank would (if bound by it) have been liable only for US$1.3 million (plus interest).

The principle of English law that govern whether a guarantee is discharged, because the contracts or obligations that are guaranteed are varied or changed was considered and explained by the Court of Appeal in Triodosbank NV v Dobbs,[2005] 2 Lloyd’s Reports 588. Thus, where the performance of a contractual obligation is guaranteed, any material variation to the underlying contract will discharge the guarantee unless the guarantor assents to it or the guarantee provides for it. A variation is regarded as material for these purposes if it could prejudice the guarantor, regardless of whether it has not in fact done so and regardless of whether the likelihood of it doing so is remote. As Chadwick LJ put it (at para 34), “It is important to keep in mind … that the guarantor is not to be taken to have agreed that his liability under the guarantee would be increased or made more onerous by a subsequent agreement made between the lender and the borrower [or, I would interpolate, any other obligor whose obligation is guaranteed and obligee] unless there are clear words in the guarantee which show that he did agree to be bound”. However, even where the subsequent agreement is one to which the guarantor has assented (under the terms of the guarantee itself or separately), it must be within the “general purview” of the original guarantee if the guarantor is to remain liable. As I understand the judgment of Longmore LJ (esp. at para 18), that is a distinct requirement of law, not simply a matter of interpretation of the provision in the guarantee providing for a variation, but on the facts of this case, it does not matter whether the principle that the amended agreement must remain within the general purview of the original guarantee is a rule of substantial law or a principle of construction. In the end, Longmore LJ allowed the defendant guarantor’s appeal, observing (at para 20) that he “had effectively been held liable as if his guarantee were an “all monies” guarantee of all sums due from the Company (albeit with a limit), but that is not what he agreed”. So too in this case, in essence, the Bank objects that it should not be held to have guaranteed all monies that the Group, or the Group and the Yard, decided to treat as part of the price paid for hull no 1148 when it had given a guarantee (subject to a limit) that certain payments would be refunded.

The thrust of the Bank’s argument that the Guarantee was discharged because the contractual arrangements between the Buyer and the Yard were varied is that the Buyer and the Yard agreed to bring into account under the Contract payments that the Buyer did not originally agree to make under the Contract. Thus, the Buyer paid advances to the Yard that were not by way of instalments of the price referable to the progress of the vessel; the Buyer paid for equipment for other vessels; and the Buyer agreed that the account of what was paid under the Contract would be settled without any intention to agree upon the amount that had in fact been paid under the Contract. However, if I am right in my interpretation of the Guarantee, these arrangements did not prejudice the Bank, and could not have done so. In so far as the Buyer advanced sums to the Yard, paid for equipment for other vessels or agreed to bring into a settled account sums not paid under the Contract, the recovery of those sums from the Yard (even assuming that the Yard was liable to refund them upon rescission of the Contract) was not guaranteed. For these reasons, the variations upon which the Bank relies as having discharged the Guarantee were not material, or potentially adverse to the Bank. For this reason, I reject the Bank’s defence of discharge.

If the Guarantee is to be given a wider interpretation than I have given it and it covers the Buyer’s claim, then different questions would arise. The Bank might then have been prejudiced by the changes in the contractual arrangements between the Buyer and the Yard, and they would be material for the purpose of applying the principle governing whether the Guarantee was discharged. Moreover, they would, I must suppose for the purpose of this argument, be covered by the Guarantee because they fell within the expression “any supplement, amendment, change or modification made” to the Contract and so the Bank is to be taken to have assented to them. This leads to the question whether the Yard’s obligation to refund the Buyer in respect of these sums falls within the general purview of the Guarantee, or, as Cresswell J expressed the concept in Melvin International SA v Poseidon Schiffahrt GmbH (The “Kalma”), [1999] 2 Lloyd’s Rep 374 at p.378, the “commercial scope or range” of the Guarantee.

In my judgment it would not. The nature of the Guarantee, as I see it, is that it is in respect of instalments to be paid to the Yard under a contractual structure of payments for hull no 1148 made by reference to the progress in its construction. It might be that, contrary to the conclusion that I have reached, it is also directed to payments for equipment for hull no 1148. The Buyer makes its claim on the basis that the Guarantee covers payments that were not paid by way of an instalment of the price, still less an instalment reflecting the progress in constructing the vessel, and payments that the parties agreed to bring into account although not made under the Contract. It seems to me that this falls beyond the general purview and commercial scope of the Guarantee when it was originally given. Had I given the Guarantee the construction for which the Buyer contends, I would have concluded that it has been discharged.

I should mention two other arguments that the Bank advanced in support of its contention that the Guarantee has been discharged, which I reject. Indeed, I do not think that either was pressed by Mr. Malek in the Bank’s final submissions. The first is that the Guarantee is discharged because the parties agreed to defer the delivery date of the vessel. In my judgment, this is covered by the expression “any supplement, amendment, change or modification made” to the Contract and I cannot accept that it discharged the Guarantee.

Secondly, it was submitted that the Joint Venture Agreement discharged the Guarantee. However, neither the Yard nor the Buyer was party to the Joint Venture Agreement and it did not affect the contract between them. It is irrelevant whether it did or might have been to the prejudice of the Bank. As it is put in Chitty on Contracts 29^th Ed (2004) at para 44-107, “… the Court of Appeal has affirmed that there is no general principle that “irregular” conduct on the part of the creditor, even if prejudicial to the surety, will discharge him. Short of bad faith, misrepresentation or concealment amounting to misrepresentation, connivance with the default of the principal creditor, or variation of the terms of the contract to the possible prejudice of the surety, the creditor can act as he chooses”.

Accordingly: