Sea-Cargo Skips AS v State Bank of India

This is the trial of an action for a claim under a Refund Guarantee issued by the Defendant, the State Bank of India (“the Bank”) to the Claimant, Sea-Cargo Skips AS (“the Buyer”).

The Refund Guarantee was issued in connection with a Shipbuilding Contract entered into between the Buyer and Bharati Shipyard Ltd. (“the Builder”). The Shipbuilding Contract was dated 12 June 2007 and provided for the construction and sale of a roro/container vessel. Article VIII clause 1 defined the “Contract Delivery Date” as 15 December 2009. The “Delivery Date” was defined by Article 1 as the Contract Delivery Date, as adjusted for Permissible Delay. “Permissible Delay” was defined by Article 1 as all delay, including Force Majeure Delay, which permitted postponement of the Delivery Date.

Article IV provided for an adjustment of the contract price and for cancellation by the Buyer in the event of late delivery. In particular Article IV clause 1(b) –(f) provided as follows:

“(b)

If the delay in delivery of the Vessel shall continue for a period in excess of 180 days (but excluding Permissible Delay) after Delivery Date, the Buyer may at its option cancel the Contract.

Provided the Buyer has not sent notice of cancellation as provided for in Article XII hereof within 185 days of delay having elapsed after the Delivery Date, the Builder may demand in writing that the Buyer shall make an election either to cancel the Contract, or to consent to the acceptance of the delivery at a specific future date reasonably estimated by the Builder to be the date when the Vessel will be ready for delivery; in which case the Buyer shall, within 15 days after such demand is received by the Buyer, notify the Builder of its choice it being understood that, if the Buyer elects not to cancel and the Vessel is not delivered by such future date, the Buyer shall have the right to cancel the Contract.

(c)

If the total accumulated delay of non Permissible Delay and of Force Majeure Delay, but excluding other Permissible Delay, amounts to 270 days or more, then in such event the Buyer may cancel the Contract. The Builder may, at any time thereafter, demand in writing that the Buyer shall make an election either to cancel the Contract or to consent to the acceptance of the delivery at a specific future date reasonably estimated by the Builder to be the date when the Vessel will be ready for delivery, in which case the Buyer shall, within 15 days after such demand is received by the Buyer, notify the Builder of its choice; it being understood that, if the Buyer elects not to cancel and the Vessel is not delivered by such future date, the Buyer shall have the right to cancel the Contract.

(d)

If it can be established beyond any reasonable doubt that the Vessel will be delayed for more than 180 days as per paragraph (b) above, or be delayed for more than 270 days as per paragraph (c) above, the Buyer shall have a right forthwith to cancel the Contract.

(e)

In addition to the above, the Buyer shall also have the right to cancel the Contract if the Builder is delayed for more than 180 days as per paragraph (b) above, or be delayed for more than 270 days as per paragraph (c) above in reaching the Second, Third or Fourth stage set out in Exhibit D hereto. The Builder may, at any time thereafter, demand in writing that the Buyer shall make an election either to cancel the Contract or to consent to a revised Progress and Milestone Schedule, reasonably estimated by the Builder after discussing with and obtaining the views of the Buyer, in which case the Buyer shall, within 15 days after such demand is received by the Buyer, notify the Builder of its choice, it being understood that, if the Buyer elects not to cancel the Contract, and any of the revised Milestones regarding preparations of the Builder and/or progress in construction of the Vessel is thereafter delayed with more than 30 days, then the Buyer shall have the right again to cancel the Contract.

(f)

If the Vessel is delayed for more than 180 days as per paragraph (b) above, or be delayed for more than 270 days as per paragraph (c) above beyond the Contract Delivery Date, the Buyer shall also have the right to require the Vessel to be delivered to the Buyer (together with all technical and legal documentation for transfer of title to the Vessel) for completion of the Vessel at another yard chosen by the Buyer (in India or elsewhere). In such case the Contract shall be deemed to be amended correspondingly to relieve the Builder of the remaining obligation to complete the Vessel in consideration for the reduction of the Contract Price, and the Contract Price for the Vessel shall be reduced to reflect the level of completion of the Vessel at such time. Any balance of such reduced Contract Price shall be paid to the Builder or returned to the Buyer, as the case may be. If the Builder and the Buyer can not agree on such reduced Contract Price, the matter shall be referred to arbitration in accordance with the Contract. The provisions of Article III, clause 3 regarding the Builder’s and the Buyer’s right to demand guarantees shall apply mutatis mutandis.”

Article IV clause 1(c) does not identify the event in respect of which there must be 270 days delay. By contrast, article IV clause 1 (e) does; it refers to delay “in reaching the Second, Third or Fourth stage set out in Exhibit D”. However, it is clear from the terms of Article IV clause 1(f) that the delay referred to in clause 1(c) is with regard to the Contract Delivery Date. The stages in Exhibit D refer to stages in the construction of the vessel and to the making of stage payments or instalments of the price. Thus the second stage, commencement of steel cutting, is to be no earlier than 2 months after stage 1; the third, fabrication of 750 tons of steel and the confirmation of orders for pieces of machinery (eg the main engine), is to be no earlier than 4 months after stage 1; and the fourth, launch of the hull and the receipt of machinery as ordered (eg the main engine) is to be no earlier than 13 months after stage 1. The fifth stage (not mentioned in article IV 1 (e)) is the signing of the protocol and delivery of acceptance and is projected to be 29 months from stage 1.

Article IV clause 1(c) gives a right to cancel in the event of 270 days delay in the Contract Delivery Date resulting from non-permissible delay and force majeure delay. Article IV clause 1 (e) gives a right to cancel in the event of 180 days’ delay as per paragraph (b) or 270 days’ delay as per paragraph (c) in reaching the second, third or fourth stage. These are separate and distinct rights of cancellation.

Article XII provides for the refund by the Builder of sums paid by the Buyer in the event of cancellation. Article III makes provision for a refund guarantee in respect of each instalment of the price.

The refund guarantees (of which there was one in respect of each instalment of the price) were provided by the Bank. The Bank’s “irrevocable and unconditional” obligation to pay the Buyer was expressed to arise in three different ways. It is convenient to label them 1, 2 and 3 although they were not so labelled in the refund guarantees themselves. Thus, with the addition of that labelling, the guarantees provided as follows:

“1.

We shall pay you the aforesaid amounts within 5-Five-banking days upon receipt by us of your first demand in writing accompanied by a written statement signed by a person that is entitled to bind the buyer by signature, stating (A) the causes that entitle the buyer to cancel the contract and to receive repayment of the advance payments, (B) that such cause/s has or have occurred, (C) that you the buyer have pursuant to such right of cancellation duly cancelled the contract, (D) that the builder has not disputed the cancellation of the contract, (E) that no arbitration proceedings have been initiated with reference to the cancellation and (F) that a demand for refund of the said amount of advance payment has been duly made upon the builder and the builder has failed to refund the amount of the said instalments claimed by you, the buyer, or any part thereof at the date of the demand made by the buyer under this guarantee.

2.

Where the dispute, if any, has been referred to arbitration in accordance with the contract, the request for payment by the buyer under this guarantee shall be accompanied by arbitral judgement award in an arbitration procedure evidencing the amount due to the buyer by the builder together with a statement that the amount claimed under this guarantee forms part of the arbitral award and that no part of the claim made under this guarantee exceeds the amount awarded under the arbitral award and that no part of the amount of the arbitral award has been received from the builder.

3.

Notwithstanding anything to the contrary contained hereinabove, should builder be delayed in the construction of the vessel for more than 270 days including force majeure but excluding other permissible delay as per terms of the contract, then the buyer shall have the right to demand immediate payment from us under this guarantee, and we shall pay you the aforesaid amounts within 5-five-banking days upon receipt by us of your first demand in writing accompanied by a written statement signed by a person that is entitled to bind the buyer by signature, stating (A) that the vessel or the construction thereof is delayed with more than 270 days as set out in the contract article IV 1 (E) which entitles the buyer to cancel the contract and to receive repayment of the advance payments, (B) that you the buyer have pursuant to such right of cancellation duly cancelled the contract, we shall pay to the buyer the guaranteed amount within 5 banking days after the receipt of such written statement.

This guarantee shall not be affected but shall remain valid notwithstanding the contract being altered, amended, varied or supplemented from time to time.”

The form of demand made in the present case was of type 3. The cancellation was in dispute and there was no arbitration award in favour of the Buyer.

By a Deed of Assignment dated 2 July 2007 between the Buyer and DnB Nor Bank ASA (which bank financed the Buyer’s purchase of the vessel) the Buyer assigned to DnB its rights under the refund guarantees. However, clause 2.1.2 of the Deed of Assignment provided as follows:

“unless and until a Default shall occur and the Agent [DnB] shall have given notice to the Builder, the Refund Guarantor and the Borrower that the Agent intends to enforce its rights under this Deed the Borrower shall be entitled to exercise all its rights under the Assigned Documents (subject as provided in this Deed) in all respects as if the foregoing assignment had not been made.”

Notice of the assignment of “all our beneficial interest” in the Refund Guarantees was given by the Buyer to the Bank on 2 July 2007 and the Bank was instructed to hold the Refund Guarantee to the order and at the disposal of DnB and

“following receipt by you of notice from the Agent [DnB] that the Agent is entitled to enforce its rights under the Assignment, to pay to the Agent all sums which you may become due to pay to us under the Refund Guarantees.”

The notice of assignment was acknowledged by the Bank on 5 July 2007 in these terms:

“We hereby acknowledge receipt of the notice above and agree to act in accordance with the authority and instructions given to us in that notice.”

There were four addenda to the Shipbuilding Contract. Addendum no.2 dated 15 January 2010 provided for the amendment of the “contractual delivery date” in Article VIII to 30 June 2011. Addendum no.3 dated 30 June 2011 recited that the Builder acknowledged that the delivery of the vessel would be substantially delayed beyond the contractual cancellation dates and provided as follows:

“1.

The Buyer hereby agrees not to exercise any right of cancellation by reason of delay in the delivery of the Vessel provided that the Vessel is properly tendered for delivery, in accordance with the terms of the Contract, by no later than 30 October 2012.

……….

3

(i) If the Vessel is not tendered for delivery in accordance with the terms of the Contract by 30 October 2012 then the Buyer may, at its option, cancel the Contract.

….

(iv)

The provisions of Article IV.1(b),(c),(d) and (e) shall be deleted.”

In due course the Buyer cancelled the Shipbuilding Contract when the vessel was not delivered by 30 October 2012. On 5 November 2012 the Buyer made the following demand on refund guarantees:

“By a Shipbuilding Contract, as amended from time to time by addenda 1-4 (“the Shipbuilding Contract”) dated 12 June 2007 between Sea-cargo Skips AS (“the Buyer”) and Bharati Shipyard Limited (“the Builder”), the Builder agreed to deliver and sell a Vessel to the Buyer. By way of a Notice of Cancellation dated 31 October 2012 the Shipbuilding Contract was terminated due to delay in delivery of the Vessel in excess of 270 days. The Buyer demanded repayment from the Builder of, amongst other things, the full amount of all sums paid on account of the vessel plus interest at the contractually agreed rate of 5%. The Builder has not repaid such sums to the Buyer.

In accordance with the terms of the above referenced Refund Guarantees, in circumstances where the Builder, as here, has been delayed in the construction of the vessel for more than 270 days then the Buyer is entitled to demand immediate repayment from you of the pre-delivery instalments. We accordingly hereby demand payment by you of the pre-delivery instalments paid with respect to the Vessel/Hull 357 in the amount of:

First instalment: US$4,340,000

Increased amount first instalment: US$ 100,000

Second instalment: US$4,440,000

Third instalment: US$4,440,000

Plus interest of: US$2,225,761

We confirm that the vessel has not been delivered by the delivery date of 30 June 2011 or within 270 days of the same, that is by 26 March 2012 and that the Buyer has accordingly exercised their right to cancel the Contract.

We look forward to receiving payment within 5 banking days to the following account: …………”

Following the exchange of Skeleton Arguments it became apparent that the Bank did not suggest that its liability was conditional upon anything in fact being due from the Builder to the Buyer or upon any particular delay having in fact occurred. Instead, the Bank took two points. The first was that the Buyer’s demand on the Bank pursuant to the Refund Guarantees was not in the required form so that the Bank was not liable to honour it. The second was that the Buyer was not entitled to enforce the Refund Guarantees in the light of the assignment to DnB.

It is first necessary to set out the respects in which it is said that the demand made by the Buyer is said not to comply with the demand required by the refund guarantee. The guarantee required a statement from the Buyer

“(A)

that the vessel or the construction thereof is delayed with more than 270 days as set out in the contract article IV 1 (E) which entitles the buyer to cancel the contract and to receive repayment of the advance payments, (B) that you the buyer have pursuant to such right of cancellation duly cancelled the contract…….”

The Bank says that the demand failed to make reference to a delay within article IV 1 (e) of the Shipbuilding Contract and also failed to state that the Buyer was entitled to receive repayment of the advance payments.

The demand has three sections. The first relates to the position between the Buyer and the Builder and provided as follows:

“By way of a Notice of Cancellation dated 31 October 2012 the Shipbuilding Contract was terminated due to delay in delivery of the Vessel in excess of 270 days. The Buyer demanded repayment from the Builder of, amongst other things, the full amount of all sums paid on account of the vessel plus interest at the contractually agreed rate of 5%. The Builder has not repaid such sums to the Buyer.”

Thus the Buyer has referred to the Notice of Cancellation and the cause of it; “delay in delivery of the Vessel in excess of 270 days”. Strictly speaking the cause of the cancellation, in the light of addendum no.3, was the Builder’s failure to deliver the vessel by 30 October 2012. The terms of the notice therefore refer, by implication, to article IV 1 (c) which entitles the Buyer to cancel in the event of 270 days delay in the contract delivery date. The terms of this section of the demand do not refer, either expressly or by implication, to article IV 1 (e) which entitles the Buyer to cancel in the event of 270 days delay in stages 2-4 of construction of the vessel.

The second section relates to the position between the Buyer and the Bank and provides:

“In accordance with the terms of the above referenced Refund Guarantees, in circumstances where the Builder, as here, has been delayed in the construction of the vessel for more than 270 days then the Buyer is entitled to demand immediate repayment from you of the pre-delivery instalments.”

This section states that the Buyer is entitled to demand repayment by the Bank of the pre-delivery instalments. It identifies the circumstances in which that right has arisen, namely, “where the Builder, as here, has been delayed in the construction of the vessel for more than 270 days.” If the reference to “construction” is to be understood as a reference to delivery then this description of the circumstances in which the right has arisen is consistent with the first section of the demand. If, however, it is to be understood as a reference to the second, third and fourth stages of construction in article IV 1 (e) then it would not be consistent with the first section of the demand. Since the first section deals with the position as between the Buyer and the Builder to which the second section refers back I consider that the second section is reasonably to be understood as referring to the delay identified in the first section, that is, to 270 days delay in the delivery of the vessel. Further, the second section refers to delay in “construction” and not to delay in the second, third or fourth stage of construction. It would therefore appear to refer to the completion of construction, in reality delivery, rather than to the second, third or fourth stage of construction.

The third section reverts to the position as between the Buyer and the Builder. It provides:

“We confirm that the vessel has not been delivered by the delivery date of 30 June 2011 or within 270 days of the same, that is by 26 March 2012 and that the Buyer has accordingly exercised their right to cancel the Contract.”

This refers to delivery not having taken place by 30 June 2011 (which is the amended Contract Delivery Date in addendum no.2) or within 270 days of that date. This confirms that the delay relied upon is delay in the delivery of the vessel. The statement does not refer to the Builder’s failure to make delivery by 30 October 2012 (which, strictly speaking, was the event which, in the light of addendum no.3, gave rise to the right to cancel) or to delay in stages 2-4 as referred to in article IV 1 (e).

I do not know whether the reason why the demand did not slavishly follow the wording of the refund guarantee and, in particular, refer to article IV 1 (e), was that article IV 1 (e) had been deleted by addendum no.3 and so was not the cause of the cancellation. That is irrelevant. The relevant question is whether the demand complied with the refund guarantee and therefore bound the Bank to pay.

Mr. Kenny submitted on behalf of the Buyer that the demand was compliant and so bound the Bank to pay. He said that unless the parties have contracted for a stricter degree of compliance it is sufficient if the demand is in substance what is required. It is not necessary that the beneficiary uses the very words mandated.

Mr. Coleman QC submitted that the demand was not compliant. He said that an on-demand guarantee was a transaction in documents and that the Bank was not obliged, when a demand was made, to investigate any facts but merely to determine whether the documents as presented were compliant. He said that that the degree of strictness depended upon the terms of the guarantee. He accepted that no particular form of words was required but submitted that the facts required to be stated had to be expressly stated.

Neither party referred me to any decision specifically concerning refund guarantees but cases on performance bonds, of which refund guarantees are an example, were cited. In particular I was referred to a decision of the Court of Appeal which bears upon the question of the extent to which compliance with the terms of a performance bond is required; I.E Contractors v Lloyds [1990] 2 Lloyd’s Reports 496. The lead judgment was given by Staughton LJ. He referred at p.500, col.1, to the need for strict compliance which is well-established in the field of letters of credit: “the documents presented must be precisely those which the letter of credit calls for.” However, he said that “there is less need for a doctrine of strict compliance in the case of performance bonds, since I imagine that they are used less frequently than letters of credit, and attract attention at a higher level in banks. They are not so much part of the day-to-day mechanism of ordinary trade. And…….the kind of documents which they require is usually different from the kind required under a letter of credit.”

The distinction suggested by Staughton LJ between letters of credit and performance bonds has not met with universal approval; see Jack on Documentary Credits 4^th.ed. paragraph 12.17. But such a distinction was also drawn by Hirst J. in Siporex Trade v Banque Indosuez [1986] 2 Lloyds Rep. 146 at p.159. For my part I would respectfully doubt that there is less need for a doctrine of strict compliance in the field of performance bonds than in letters of credit. In the field of performance bonds, as in the field of letters of credit, the banks who provide the bonds deal with documents. Banks must honour their obligation to pay if documents which conform with the requirements of the bond are tendered. Thus the banks must determine, on the basis of the presentation alone, whether it appears on its face to be a complying presentation; see articles 6 and 19(a) of the ICC’s Uniform Rules for Demand Guarantees 2010 Revision which are good evidence of banking practice.

However, Staughton LJ’s statement of the governing principle is in terms which cannot be doubted.

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

Buckley LJ expressed the same principle:

“I am in entire agreement with the proposition that to discover what the parties intended should trigger the indemnity under the bond involves a straightforward exercise of construction, or interpretation, of the bond to discover the intention of the parties in that respect. ”

I therefore consider that the question whether the demand in the present case was sufficient to trigger the Bank’s liability to pay involves a question of construction, namely, what type of demand did the parties intend would trigger the Bank’s liability to pay.

The refund guarantee required a statement

“that the vessel or the construction thereof is delayed with more than 270 days as set out in the contract article IV 1 (E) which entitles the buyer to cancel the contract and to receive repayment of the advance payments……………”

The words “as set out in the contract article IV 1 (e)” refer the reader to the type of delay referred to in article IV 1 (e) of the shipbuilding contract. That raises the question whether it was sufficient for the Buyer to state that the delay was of more than 270 days in reaching the second, third or fourth stage (that is, the type of delay referred to in article IV 1(e) of the shipbuilding contract) or whether the Buyer was required to state in terms that the delay was of the type referred to in article IV 1 (e) of the shipbuilding contract.

The Bank is not party to the shipbuilding contract. Its liability to pay does not depend on the actual position between the Builder and the Buyer but on whether a demand for payment has been made containing the requisite statement by the Buyer. In that context it seems to me unlikely that the meaning of the refund guarantee which the parties reasonably expected it to bear was that it was sufficient for the Buyer to state that the delay was of more than 270 days in reaching the second, third or fourth stage. For in circumstances where the Bank was not party to the shipbuilding contract the Bank could not reasonably be expected to know that such delay was of the type set out in article IV 1 (e) of the shipbuilding contract or to investigate whether it was of the required type. On the contrary in circumstances where the Bank was not party to the shipbuilding contract it is likely that the parties reasonably expected that the demand should contain a statement that the delay which had occurred was as set out in article IV 1 (e) of the shipbuilding contract. The parties would not expect the Bank, having been told that the delay was in reaching the second, third or fourth stage, then to examine the shipbuilding contract to which it was not party to see if delay of that nature was as set out in article IV 1 (e) of the shipbuilding contract. The parties would expect the Bank simply to read the demand to see whether on its face it complied with the refund guarantee.

The demand in the present case did not contain a statement that there had been 270 days delay as set out in article IV 1(e). Even if it had been sufficient for the demand to contain a statement that there had been 270 days delay in reaching the second, third or fourth stage the demand in the present case would not have been complaint because, for the reasons I have given, it stated that there had been 270 days delay in the delivery of the vessel. If, contrary to my view, the second section (which refers to “construction”) is to be taken as a reference to delay in the second, third or fourth stage of construction the demand as a whole cannot be said to free from ambiguity, because the first and third stages clearly refer to delay in delivery. An ambiguous demand cannot be compliant; see Siporex v Banque Indosuez [1986] 2 Lloyds Rep. 146 at p.159 lhc. It therefore appears to me that the demand did not comply with the terms of the refund guarantee.

Mr. Kenny made a number of submissions in support of the Buyer’s case that the demand was compliant. First, he submitted that it was sufficient that the demand was “in substance” what was required. It may well be sufficient, depending upon the words of the performance bond, that the statement is in substance what is required. Thus in I.E.Contractors v Lloyds, where the bond was “issued by one Iraqi concern to another, written in both English and Arabic, in language which is both prolix and vague”, Staughton LJ could not “attribute to the parties an intention that there had to be a strict degree of compliance.” In the present case it was indeed common ground that the demand did not have to repeat precisely the words of the refund guarantee. However, it was necessary, in my judgment, for it to refer to article IV 1(e) so that the Bank could see on its face that it was a compliant demand.

Mr. Kenny then submitted that “in the context of a [type 3] demand” it was obvious that the demand made by the Buyer referred to delay as set out in the contract article IV 1 (e). “Any reasonable reader of the demand would understand that that was what was meant. In the circumstances, the demand is in substance what a [type 3] demand requires.” I am unable to accept that the reasonable reader would so read the demand. I have already analysed the three sections of the demand and concluded that they refer to delay in delivery, not to delay in reaching the second, third or fourth stage of construction. The best that can be said is that the second section refers to delay in “construction” which could refer to article IV 1(e) delays. However, if the demand is read as a whole, as it must be, it refers, in my judgment and for the reasons I have given, to delay in delivery, as is stated clearly in the first and third sections. Alternatively, and as explained above, it contains only an ambiguous reference to delay of the type referred to in article IV 1(e). I do not understand why it is said to be “obvious” that it referred to delay of the type mentioned in article IV 1(e), that is, to delay in reaching the second, third or fourth stage of construction.

Mr. Kenny submitted that it was obvious that the statement in the demand was to the effect that there had been 270 days of delay “of that character which entitles the Buyer to cancel”. The difficulty with that submission is that the refund guarantee required, not a statement that there had been 270 days delay of any character which entitled the Buyer to cancel, but a statement that there had been 270 days delay of a particular character which entitled the Buyer to cancel, namely, that set out in article IV 1 (e).

Mr. Kenny submitted that reference to the opening four lines of the type 3 demand indicated that there was no need for there to be any reference to article IV 1 (e) because those four lines did not contain such words. I do not accept this suggestion. The latter part of the type 3 demand states that which must be stated by the Buyer in order to trigger the Bank’s liability to pay. I do not consider that one can ignore the reference there to article IV 1 (e) merely because that article is not mentioned in the introductory words to the type 3 demand.

Mr. Kenny submitted that it was “obvious” that the reference in the refund guarantee to 270 days delay “as set out in the contract Article IV 1 (e)” was a mistake and that the “parties” must have intended to refer to article IV 1 (c) or (e). There was no claim for rectification of the refund guarantee. This point was put forward as a matter of construction. Very cogent evidence of a mistake would be required before one could construe “(e)” as meaning “(c) or (e)”. There was none. Mr. Kenny said that “the parties must have intended that the Buyer should have the right to make a [type 3] demand in a case where there had been delay in delivery [article IV 1 (c)] as well as in a case where that been delay in reaching an intermediate stage of construction [article iv 1 (e)].” I do not consider that this was at all obvious. I accept that it is unfortunate from the Buyer’s point of view that the type 3 demand did not extend to delay in delivery and that it is not immediately apparent why a type 3 demand was limited to 270 days delay in reaching the second, third or fourth stage of construction. But the parties must be assumed to have had their reasons for so limiting it. It is to be noted that the type 3 demand was particularly limited because it did not refer to the 180 days delay mentioned in article IV 1 (e) but only to the 270 days delay mentioned in article IV 1 (e).

So, for the reasons which I have endeavoured to express, I have concluded that the demand was not one which, on the true construction of the demand, triggered the Bank’s liability to pay.

It was submitted that there was a further respect in which the demand was deficient, namely, that it failed to state that the delay was such that “entitles the buyer ……to receive repayment of the advance payments”.

The demand did not state in terms that the buyer was entitled to receive repayment of the advance payments from the Builder. But Mr. Kenny submitted that in the context of a type 3 demand any reasonable reader of the demand would understand that the statement that the Buyer demanded repayment from the Builder meant that that the Buyer had lawfully demanded repayment from the Builder, that is, that the Buyer was entitled to repayment from the Builder. He asked: if the Bank had paid pursuant to the demand, later found that the Buyer was not entitled to repayment and sued the Buyer on the grounds that it had misrepresented that Buyer was entitled to repayment, could the Buyer possibly deny liability on the basis that he had made no representation that the Buyer was entitled to repayment? He answered his own rhetorical question: plainly not.

This was, I think, a powerful and attractive argument. However, I do not consider that it provides the right answer when one is considering whether the demand which has been made is one which the parties have agreed will trigger the Bank’s obligation to pay. The Bank, it must be remembered, is not party to the shipbuilding contract and is not expected to investigate the position as between the Builder and the Buyer. Whether or not it is obliged to pay depends upon whether the demand made contains the required statement by the Builder. In Esal (Commodities) v OCL [1985] 2 Lloyds Rep. 546 Ackner LJ, when considering what the demand in that case required, observed at p. 550 lhc that the requirement in that case that the beneficiary state that the contract had not been complied with “may prevent some of the many abuses of the performance bond procedure that undoubtedly occur.” Similarly, he said that the need to inform the bank of the true basis upon which he is making his demand “may be very salutary”. The contrary argument advanced by Mr. Sumption that a bare demand was sufficient because “whenever a demand is made under the performance bond then there is an irresistible implication that it is being made on the basis that the supplier has failed to execute the contract” was not accepted. The submission of Mr. Kenny in the present case that a statement that the Buyer is entitled to repayment is to be implied has echoes of Mr. Sumption’s submission. Also, the requirement that the Buyer must state in terms that he is entitled to repayment can be said to be “salutary” because it serves to prevent abuse of the refund guarantee. It requires the Buyer to state on its face that which the Bank cannot be expected to investigate, namely, that the Buyer is entitled to repayment.

I therefore consider that in this respect also the demand was deficient.

It follows that the Buyer’s claim for payment pursuant to the refund Guarantee must fail.

Mr. Coleman submitted on behalf of the Bank that, as against the Bank, the Buyer was not entitled to seek payment under the refund guarantee in the absence of any instructions from DnB Bank that the Bank should pay the proceeds of the refund guarantees to the Buyer. There were no such instructions until 5 months after the demand dated 5 November 2012 but that was too late.

I do not accept this submission. Clause 2.1.2 of the assignment provided that

“unless and until a Default shall occur and the Agent [DnB] shall have given notice to the Builder, the Refund Guarantor and the Borrower that the Agent intends to enforce its rights under this Deed the Borrower shall be entitled to exercise all its rights under the Assigned Documents (subject as provided in this Deed) in all respects as if the foregoing assignment had not been made.”

No such notice had been given by DnB and accordingly the Buyer was entitled to exercise its rights under the refund guarantee.

I accept, as suggested by Mr. Kenny, that the Bank, in the light of the notice of assignment, may well have wished to seek instructions from DnB before paying the demand; indeed, it was probably bound to do so since it had undertaken to hold the refund guarantee to the order of DnB. But that does not invalidate the demand made by the Buyer. The terms of the notice of assignment contemplated that the Bank would only pay the proceeds of the refund guarantee to DnB following receipt of notice from DnB that it was entitled to enforce the demand guarantee. No such notice had been given or received.

Had DnB’s instructions been sought by the Bank DnB would have consented to payment to the Buyer; for DnB did so by letter dated 22 March 2013 when informed by the Buyer of the stance being taken by the Bank in this action. Mr. Coleman complains that this confirmation was given too late but if it was too late that was because the Bank did not seek instructions from the Bank after receiving the Buyer’s demand.

The Buyer’s claim against the Bank pursuant to the demand made on 5 November 2012 fails on the grounds that the demand did not comply with the terms of the refund guarantee.

The Buyer made a further demand on 3 June 2013 (two days before the trial) and has sought permission to amend its claim to add a claim under this second demand. It was agreed that I should hear submissions on that application after giving judgment on the claim based upon the first demand.