Bitumen Invest AS v Richmond Mercantile Ltd FZC

This is the Claimant’s (the Owners) application for Summary Judgment against the Defendant (Richmond) in respect of sums alleged to be due under a Deed of Guarantee dated 16 May 2008. The issue is whether or not the Deed constitutes an “on-demand guarantee”, payable on the certification of sums due by the Owners, or whether, before liability arises under the Deed, the Owners must establish the liability of the party guaranteed, namely Windrush Intercontinental SA (Windrush), the Bareboat Charterers under a Barecon 2001 Charter with the Owners dated 7^th May 2008. The wording of the Deed of Guarantee ran to 8 pages, was headed “Deed of Guarantee” with an execution clause which referred to the Parties executing and delivering “this Guarantee and Indemnity as a Deed”. It referred to itself throughout its clauses as “this Guarantee”.

The Owners contend that, on a true construction, the Guarantee is an “on demand” guarantee, where certified written demands for payment have been made, which set out the sums claimed by the Owners as a consequence of Windrush not having fulfilled their obligations under the Charter. No payments have been made in response to those demands whether within five business days of receipt of the demand or at all and because the clause prevents any set-off, defence or counterclaim operating to reduce the claim, the sums set out in those demands should be the subject of summary judgment. The demands include demands for the various costs either awarded in arbitration against Windrush, awarded in this Court in relation to an unsuccessful appeal against an arbitration award and costs incurred in relation to matters arising out of the seizure of the vessel and crew by pirates and an arrest in respect of the wages of the crew which were not paid by Windrush during the course of the charter. For the purposes of the summary judgment application, the details are of no real importance, save insofar as there may be additional arguments available to the Owners in relation to costs which are the subject of specific provision in the relevant clause.

Richmond admits that the Owners have made the certified demands and that these demands have not been paid but denies that the Guarantee is an “on demand” guarantee; and that Windrush is in breach of charter. In relation to costs, Richmond denies that any of the costs are costs consequent upon any default by the charterers under the charter and, as regards the costs of some of the claims, denies liability pending adjudication or assessment. It further contends that it is entitled to set-off sums claimed from the Owners by Windrush under the CCA amounting to US$385,000 and various costs it says that it incurred in relation to the arrest of the vessel and reimbursement of hire because of delay in receipt of the Insurance proceeds when the vessel became a total loss.

Under CPR Part 24 Rule 24.2:

“The court may give summary judgment against a … defendant on the whole of a claim or on a particular issue if—

(a)

it considers that—

…

(ii)

the defendant has no real prospect of successfully defending the claim or issue; and

(b)

there is no other compelling reason why the case or issue should be disposed of at a trial.”

An “issue” will include a point of law, such as the meaning and effect of a document (such as the Deed of Guarantee in this case). As Moore-Bick LJ said in ICI Chemicals v TTE Training [2007] EWCA Civ 725 at paragraph 11:

“…if the respondent’s case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant’s case is bad in law, the sooner that is determined the better”

The agreed Case Memorandum set out in paragraphs 1-3 the general structure of the arrangements between the Owners, Windrush and Richmond. Those paragraphs read:

“1.

The Owners concluded a demise charter-party for the vessel ASPHALT VENTURE (subsequently renamed BITU GULF – “the Vessel”) with Windrush … dated 7 May 2008 on the terms of an amended BARECON 2001 form with additional rider clauses (“the Demise Charter”).

2.

The Demise Charter was a form of sale and lease-back of the Vessel which, by a series of contracts each dated 7 May 2008, was sold by Concord Worldwide Inc. (“the Concord”) to the Owners; demise chartered by the Owners to [Windrush] on the terms of the Demise Charter; and sub-demise chartered by [Windrush] to the Concord. If the Demise Charter had been fully performed, [Windrush] would have been obliged to purchase the Vessel from the Claimant at the end of the charter period.

3.

It was a condition of the Owners’ agreement to enter into the Demise Charter that [Richmond], the parent company of both Concord and Windrush, would execute and deliver a guarantee in favour of the Claimant.”

There are further features of the transactions which are worthy of recitation. The Owners referred to the Deed as forming “part of a financing package under which Richmond was able to raise finance on a vessel owned by one of its subsidiaries”. The Owners were established as a special purpose vehicle by a group of Norwegian investors and purchased the vessel from Richmond’s subsidiary, Concord for US$8.25m. The Owners raised the majority of the purchase price by way of a bank loan from Nordea Bank, which was secured by a mortgage over the vessel and 10% was loaned from Windrush (under what was called the CCA) which was repayable at fixed intervals over the course of the charter, and stood as additional security for Windrush’s obligations prior to repayment.

The Owners’demise charter to Windrush, another of Richmond’s subsidiaries, was on what was referred to as “hell or high water terms”, involving absolute and unconditional liability to pay hire without set off or counterclaim and regardless of any unavailability of the vessel. Windrush was also required to purchase the vessel at the end of the charter period. Windrush sub-demise chartered the vessel to Concord, which in turn traded the vessel, initially under a pre-existing time charter.

The sale, the Demise Charter and the Guarantee were all bound up together as part and parcel of the overall transaction, which was essentially a financing arrangement of a kind which is now regularly seen in connection with Demise Charters. Clause 32 of the Demise Charter provided that delivery under the sale agreement (the MOA) and under the Demise Charter would be simultaneous and that the latter would be automatically cancelled if the vessel was not delivered under the MOA. Furthermore, the parties envisaged that the Guarantee could or would be assigned to Nordea Bank as security for the bank loan to the Owners.

There was an issue as to admissibility of some evidence in the form of a witness statement adduced by Richmond (to which the Owners replied in kind, whilst taking objection) relating to what was said to be the aim and object of the Deed of Guarantee. Reference was made to the terms of a Term Sheet of 7^th December 2007 which referred to the Sellers/ Charterers being guaranteed by one of a number of companies in the Richmond group, to the Demise Charter which referred to the Guarantee to be issued as “security” for Windrush’s obligations and liabilities to the Owners under the Charter and to discussions where the term “guarantee” was used, not “on demand guarantee” or some synonym for the latter. Not only was that evidence of negotiation inadmissible in my judgement, but it was not an accurate reflection of the course of negotiation and did not help Richmond. The transactions were all interlinked, and negotiated together – with a closing on 16 May 2008. Whilst reliance on the terms of the Demise Charter as context for the Deed of Guarantee is permissible, the attempt to rely on discussions in the course of negotiation of any of the documents is not. In fact, as appears from an email of December 7th 2007, proforma documentation was put forward by lawyers for the Owners which included what was described as a Performance Guarantee, with a clause in similar terms to clause 2 of the Deed which was finally executed.

The Demise Charter was for 7½ years and was on a Barecon 2001 form with amendments. At Box 26 it referred to the Nordea Bank as the location to which payment of hire was to be made and at Box 28 the Owners’ ship mortgage to that Bank was set out with a cross reference to clause 12(b) which again referred expressly to the mortgage to that Bank. Clause 40 set out the right of the Owners to assign to the Bank (inter alia) all rights under the Charter and the Guarantee, whilst Clause 49 referred to the obligations and liabilities of the Charterers to the Owners as secured by them. Clause 1 of the Charter defined the Guarantee by referring to it with that label and stating that it stood as security for Windrush’s obligations and liabilities to the Owners.

The Demise Charter included Clauses 35, 36(a) and 37(a) in the following terms:

“35 Payment of Hire

This Charter is construed to be on “hell and high water” terms. Thus, save as provided in Clause 37 below, the Charterers’ obligation to pay hire and perform any obligations under this Charter shall be absolute and unconditional and shall not be affected by and shall be irrespective of any contingency whatsoever including:

(a)

any right of set-off, counter-claim, withholding or deduction;

(b)

any unavailability of the Vessel for any reason including but not limited to requisition, provided that hire is paid directly to the Owners by the requisitioning party, or by any restriction against or interference with the use of the Vessel or any defect in the seaworthiness or satisfactory quality, fitness for any purpose, condition, design or operation of any kind of the Vessel or the eligibility of the Vessel for any particular use or trade or the absence of any permit or other documentation required under the applicable law of any relevant jurisdiction for the chartering, use, operation or location of the Vessel or any damage to the Vessel or any party thereof; and

(c)

any other clause which would have the effect of terminating or in any way affecting any obligation of the Charterers hereunder.”

36 Off-hire, set off, indemnities and payments

(a)

Notwithstanding any provision to the contrary in this Charter, the Vessel shall not at any time be placed off-hire and hire shall continue to be paid by the Charterers in full for the whole and uninterrupted period from delivery until redelivery of the Vessel, or the Charterers’ obligation to pay hire ceases in accordance with Clauses 11, 28 or 37, without any kind of set-off, deduction or counterclaim.

...

37 Total loss

(a)

In the event that the Vessel becomes a Total Loss, the Charterers shall continue to pay hire also after the date of such Total Loss until payment of all insurance proceeds in respect of the Total Loss is made in full and received by the Owners. Provided that the Vessel is insured in accordance with the provisions of this Charter and all insurance proceeds are received in full by the Owners within ninety (90) days of the date of the occurrence of that Total Loss, the Owners shall upon receipt of such insurance proceeds reimburse the Charterers for all hire received by the Owners from the Charterers from the date of the Total Loss until receipt of the insurance proceeds, except that the Owners shall be entitled to withdraw an amount equal to the amount paid in interest by the Owners for the same period on the loan secured by the mortgage over the Vessel.”

The meaning of “hell and high water terms” or “hell or high water terms”, as they are apparently sometimes referred to, is plain from these clauses. Hire was payable under the Demise Charter in all circumstances, without any offset or provision for off-hire, until expiry or termination or until the insurance proceeds were received in the event of a total loss. The clear rationale underlying this was the fact that this was a financing arrangement and the hire payments represented effective repayments of the loan made by the Owners to Windrush. It is in this context that the Deed falls to be construed.

It was said that there were two competing lines of authority with opposite presumptions to be applied. Richmond relied on a line of authority referred to in Marubeni Hong Kong Ltd v Mongolian Government [2005]1 WLR 2497, which at paragraphs 23 and 30-31 in particular of the judgment of Carnwath LJ stated that no assumption could be made that the cases relating to banking instruments (meaning what are commonly referred to as performance bonds) provided any useful guide when construing guarantees given outside the banking context. He held that the absence of description of the document with which he was concerned as a “performance bond” or “on demand bond” in a transaction outside the banking context created a strong presumption against it being such and the question arose as to whether the wording of the instrument was sufficient to displace that presumption.

The other line of authority is reflected in Gold Coast Ltd v Caja de Ahorros Del Mediterraneo [2002] 1 Lloyd’s Rep. 717 at 620 and Wuhan Guoyo Logistics Group Co Ltd v Emporiki Bank of Greece [ 2014] 1 Lloyd’s Rep 266 at paragraph 26, where a passage from Paget’s Law of Banking is cited:

“In Paget's Law of Banking (11th ed.) under the heading “Contract of suretyship v. demand guarantee” the authors say:

Where an instrument (i) relates to an underlying transaction between parties in different jurisdictions, (ii) is issued by a bank, (iii) contains an undertaking to pay “on demand” (with or without the words “first” and/or “written”) and (iv) does not contain clauses excluding or limiting the defences available to a guarantor, it will almost always be construed as a demand guarantee.”

This is repeated more recently by Carr J in Spliethoff’s Bevrachtingskantoor BV v Bank of China Ltd [2015] 2 Lloyd’s Rep 123 at paragraph 71-78, with qualification as to the fourth element (which is present in the present case).

It will be seen that these presumptions are, to some extent, based on particular labels or features of banking or non-banking transactions and any presumption can be displaced by the wording used. As this transaction is in the nature of a financing transaction, though taking the form of a Sale and Demise Charter arrangement, with a Deed of Guarantee as part of it, any presumption applicable to non- banking transactions that might be thought to apply will more readily give way to language which indicates the contrary.

I turn then to the language used in the Deed of Guarantee on which the issue really turns.

In argument, Mr Whitehead for the Owners, whilst stressing the need to read Clause 2 as a whole, broke down its first paragraph into 4 constituent parts for the purposes of argument. It reads as follows:

“[A] In consideration of the Owners entering into the Charter with the Charterers and delivering the vessel thereunder, and for other good and valuable consideration ( the receipt and adequacy of which the Guarantor hereby acknowledges) the Guarantor hereby unconditionally and irrevocably guarantees as primary obligor and not merely as surety the due and proper performance of all obligations, including payment obligations, which the Charterers incur or may incur towards the Owners under the Charter (the “Guaranteed Obligations”) and to pay to the Owners on demand all monies as may fall due from the Charterers to the Owners and to discharge all Guaranteed Obligations or any part thereof when the same become due for payment or discharge.

[B] The Guarantor agrees that it shall, notwithstanding any notification, be liable for (i) interests accrued according to the Charter, (ii) costs (including but not limited to recovery costs) in the event of the Charterers’ default under the Charter and (iii) costs (including but not limited to recovery costs) in connection with the enforcement of this Guarantee

[C] The Guarantor expressly undertakes to make payment on demand of any amount certified by Owners by written notice to be due to the Owners as a consequence of the Charterers not having fulfilled their obligations under the Charter, within five (5) Business Days after receipt of written notice for payment from the Owners.

[D] Any payments under this Guarantee shall be made in full, free and clear of any deductions, withholdings, set-offs or counterclaims of any nature whatsoever.…”

The authorities refer to different features or forms of words as pointers to the nature of the instrument in question. I bear in mind all those that were cited to me and the particular features of the Deed which are the subject of comment in them. The particular label that the parties apply to the document is not determinative, nor very significant if the wording points in the opposite direction.

In my judgment there are a number of features of this Deed of Guarantee which make it plain that it is an “on demand guarantee” and not a “see to it guarantee”, to use the expressions which are frequently used to describe the difference. Some of those features are not conclusive in themselves but point in that direction but others are not capable of sitting with the notion that this is a “see to it”guarantee – in particular what can appropriately be described as the trigger for payment under the Deed.

The key feature of the Deed of Guarantee appears in paragraph C of the Owners’ classification of clause 2. The trigger for payment is the issue of a demand by the Owners for an amount certified by them, by written notice, as due as a consequence of Windrush failing to fulfil its obligations under the Charter. This is referred to as an “express” undertaking, no doubt to emphasise the absolute and unconditional nature of it. Although Windrush sought to argue that this certification applied to quantum alone, relying on a dictum of Sir Andrew Morritt C at paragraph [48] in North Shore Ventures Ltd v Anstead Holdings Inc, not only did Tomlinson LJ not follow that route, but the wording of the “conclusive evidence” clause there was different. Furthermore, as Tomlinson LJ pointed out by reference to a decision of the High Court of Australia in Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643, at page 651:

“It is not easy to see how the amount can be certified unless the certifier forms some conclusion as to what items ought to be taken into account and such a conclusion goes to the existence of the indebtedness. Perhaps such a clause should not be interpreted as covering all grounds which go to the validity of a debt; for instance illegality … but the manifest object of the clause was to provide a ready means of establishing the existence and amount of the guaranteed debt and avoiding an inquiry upon legal evidence into the debits going to make up the indebtedness.”

That reasoning is compelling where Richmond “expressly undertakes to make payment on demand of any amount certified by Owners by written notice to be due as a consequence of [Windrush] not having fulfilled their obligations under the Charter, within five business days after receipt of written notice for payment”. How can it be said that there is any room for disputing liability as opposed to quantum? The certification of any amount as due as a consequence of non-fulfilment of Windrush’s obligations must go, inevitably, to liability since, otherwise, the certification of sums as due is meaningless.

This point is reinforced by the terms of paragraph D (in the Owners’ classification) of clause 2. When the clause provides that any payments under the guarantee shall be made “in full, free and clear of any deductions, withholdings, set-offs or counterclaims of any nature whatsoever”, it means what it says. Payments which are certified by the Owners as due as a consequence of non-fulfilment of obligations by Windrush under the Charter fall to be paid, with no defence available of any kind.

The nature of these obligations is wholly explicable by reference to the character of the overall arrangement, namely a financing transaction, and the terms of the Demise Charter which fully accord with it. Since the Demise Charter provided for payments without any set-off, counterclaim, withholding or deduction and without the possibility of any off-hire, the Deed of Guarantee takes a similar form, thus ensuring the cash flow for repayment of what was, effectively a loan. Moreover, whereas as on a straightforward loan, there is the possibility of a “conclusive evidence” clause (absent manifest error) with certification which relates solely to the amount owing, as opposed to liability to repay and any potential defences to repayment, the particular form of words used in paragraphs C and D relate specifically to a certification of non-fulfilment of obligations under the Charter, which include both obligations of payment and other obligations which arise.

In my judgment the clear objective intention of the instrument is that payment should be triggered upon certification in accordance with paragraph C and that there should be no room for defence to such a certification by reason of the terms of paragraph D, absent fraud. Once the demand is made in accordance with paragraph C, Richmond is liable to pay the sums certified without any deduction of any kind.

Although Richmond point out that paragraph C nowhere uses the term “conclusive evidence” this is of no assistance to it in its arguments. The “conclusive evidence” clauses which apply on certification of the amount due under a loan in a loan agreement (absent manifest error) are, arguably, designed for a different purpose (see the North Shore case (ibid.)). The reality is that none of the submissions made by Richmond could detract from the force of the wording used in paragraph C as the trigger for payment within five business days of receipt of the written notice of certification. Payment against certification is wholly inconsistent with the need for the Owners to establish the liability of Windrush in order to enforce the Deed of Guarantee. When combined with the anti-set-off provision in paragraph D, there can only be one conclusion as to the true nature of this instrument and of the obligations undertaken by Richmond.

There are other features of the wording which support this but in themselves do not conclude the matter. It is true that the provision that the guarantor is to be a primary obligor and not merely a surety can be used with a view to avoiding the effect of the principle in Holme v Brunskill that a guarantor is discharged where the beneficiary of the guarantee agrees with the primary debtor to vary the debtor’s obligations. There is however doubt as to whether this is necessarily effective – see CIM Raffles Offshore (Singapore) Ltd v Schahim Holding SA [2013] EWCA Civ 644 at paragraph [57]. Whilst the decision of Fisher J in Heald v O’Connor [1971] 1 WLR 497 at 503D relates that the inclusion of the “primary obligor” provision is a common form of provision to avoid the consequences of giving time or indulgence to the principal debtor and cannot convert a guarantee into an indemnity, it is nonetheless a pointer to the nature of the obligations undertaken by Richmond. The guarantor is not merely to stand as surety for the “due and proper and proper performance of all obligations, including payment obligations” but is to be primarily liable therefor.

Richmond however relies upon the balance of the wording in paragraph A which talks of payment on demand of all monies “as may fall due” from Windrush to the Owners and the discharge of all guaranteed obligations “when the same become due for payment or discharge”. It is fair to say that, if these words stood on their own, they would have the effect for which Richmond contends but they can in no way negate the effect of paragraphs C and D which give rise to an express undertaking to make payment in the circumstances there set out. If the wording of paragraph A was construed to render the guarantee a “see to it” form of guarantee, the wording of paragraphs C and D would be given no meaning.

I agree with Richmond that the unconditional and irrevocable wording in the first line of paragraph A do not really take the matter any further save to emphasise the nature of the obligation undertaken. But, looking at the clause as a whole, there can, in my judgment, be no doubt as to the objective intention of the parties which was that, absent fraud which is not alleged here, payment should become due in the circumstances set out in paragraphs C and D upon the certification made in accordance with their terms.

Richmond placed reliance upon other clauses in the Deed of Guarantee. Particular reliance was placed upon clause 5 which provided that the liability of the Guarantor should not be affected by (inter alia) “anything which would have released or reduced the ability of the Guarantor to the Owners had the liability of the Guarantor under clause 2 been as principal debtor of the Owners and not as a guarantor.” Such a provision was, it was said, inconsistent with the notion that this was an “on-demand” ordinary type guarantee and not a “see to it” ordinary type guarantee. Whilst that may be so, this provision, as with many forms of guarantee, was one of a number of ancillary provisions which cannot affect the primary obligations in clause 2. That would be a case of the tail wagging the dog. As was pointed out by Tuckey LJ in Gold Coast (ibid.) there are, in any event, possible reasons for including such a clause in an instrument which is intended to be autonomous. Such provisions may be included to avoid any argument that variation of the underlying contract could imperil recovery under the Guarantee, regardless of whether or not as a matter of law it would do so. It could have been inserted simply to ensure that the rule applicable to true guarantees did not apply to the on-demand guarantee. Carr J in Spliethoff’s Bevrachtingskantoor BV v Bank of China Ltd [ibid] at paragraph [80] has more recently made the same point.

Furthermore, reliance on clause 5(h) which referred to both “guarantee” and “indemnity” cannot take the matter any further when considering the main obligations undertaken in clause 2, particularly bearing in mind the terms of the wording of execution at the end of the Deed, to which I have drawn attention in paragraph 1 of this judgment.

There is a small additional reinforcing point to the Owners’ arguments by reference to the dispute resolution provisions. The Demise Charter provided for English law and London arbitration whereas the Deed of Guarantee provides for English law and High Court jurisdiction. Whilst parties may choose different jurisdictions for any number of reasons, in the ordinary way one would expect to see the same provisions applying to a primary obligation and a guarantee which amounted to a secondary obligation to ensure that the primary obligation was met by a different party. This, though not a strong point, was a factor taken into account by Tuckey LJ in Gold Coast (ibid.) at paragraph [21].

In these circumstances, the Owners are entitled to summary judgment in accordance with the demand letters of 1st April 2016, 26th April 2016 and the Particulars of Claim of 29th July 2016, where at paragraph 10 the Owners certified that the sums thereafter set out were due to them under the Demise Charter as a consequence of Windrush not having fulfilled its obligations under the Charter and then made demands under clause 2 of the Guarantee. The sums in question are set out in a claim schedule attached to the Owners’ skeleton argument and amounted, as at 10th November 2016 to £319,798.64, US$2,912,335.78 and NOK1,156,774.33. Up to date figures can be supplied and agreed when this judgment is handed down. Furthermore, the Owners are entitled to the declarations set out in paragraph 1 of the draft order.

If the parties can agree the form of order to be made, I would be pleased if they would do so. If not, I will determine the remaining application relating to financial information to be supplied under clause 8 of the Deed of Guarantee on handing down this judgment, once the parties have discussed what material is readily available and what information it is reasonable to supply in relation to the financial condition and operations of Richmond, in the light of whatever has previously been supplied. Costs must follow the event but if there is to be an application for costs on anything other than the standard basis, and this is opposed, I will determine that question too.