Ince&Co International Law Firm

Sea Emerald Ruling Warns Over Refund Guarantees

Monday 20 October, 2008

The danger of going on holiday in August is that this is the time that judges quietly catch up on writing and handing down judgments which risk slipping by unnoticed. This year is no exception and the recent decision in Sea Emerald S.A. v. Prominvestbank [2008] EWHC 1979 highlights the importance of ensuring that refund guarantees issued in connection with shipbuilding contracts are signed by employees with full and proper authority.

Unfortunately for the Laskaridis Group it was unable to claim under a refund guarantee signed by an employee of the Ukrainian bank, Prominvestbank, and issued in connection with a newbuilding contract entered into with the Nakolaev Shipyard. The bank had not given the head of the department assigned to the region in which the yard was located actual or apparent authority to issue the refund guarantee, and had not ratified it.

Neither the English or the Russian version of the guarantee was dated, and neither was on headed paper. No expiry date for the guarantee was specified, and the English version had a number of typing errors. Although it did not form part of the reasoning that led Mr Justice Andrew Smith to his conclusion, he was apparently comforted in his decision because of the nature of the guarantee. It was not usual for departments of the bank to issue guarantees of any kind at the relevant time, and the judge found it difficult to believe that the bank’s Articles should be interpreted as authorising the head of the department to commit the bank to a refund guarantee to pay a large amount of scarce foreign currency, and one governed by a foreign law about which advice was not taken.

In the circumstances, the court concluded that the expression in the bank’s Articles empowering it “to effect settlements connected with clients’ export and import operations in foreign currencies in the form of a documentary letter of credit, collection of payments or bank transfer, and in other formats used in international banking practice” was not broad enough to expressly or impliedly empower the head of department to issue a refund guarantee. Mr Justice Smith interpreted the provision as being restricted to letters of credit, collection of payments or bank transfers. A refund guarantee was not a method of making payment but a collateral contractual commitment. It was not therefore within the terms of the expression. Further, it was not within the scope of the usual authority for a head of department to enter into a contingent commitment as large as that given by the refund guarantee, and the bank had not held out their head of department as having authority to do so. Furthermore, the buyer failed to establish that the bank had ratified the guarantee by showing that it was adopted by the Chairman of the bank, or by its management board – there was insufficient evidence to show that either had knowledge of the terms of the guarantee or that they were content to adopt it.

The decision highlights the importance of ensuring that refund guarantees are signed by employees with proper authority. It may well be unsafe to assume that it is necessarily usual for senior officials of regional offices of banks to have authority to issue refund guarantees for shipbuilding contracts as opposed to more general commercial guarantees.

This is particularly so where guarantees are issued by banks in parts of the world where written procedures might be non-existent or at best opaque, and where employees might be unfamiliar with guarantees of this kind. The result may be that, understandably, those involved in issuing the guarantee may do so in circumstances where they are, in all good faith, wishing to support the shipyard customer who is earning important foreign currency at a time when the banks are developing new services required by their customers. The bank may therefore be reluctant to turn the customer away and go too far in accommodating the request, without necessarily consulting head office as to how it might do so.

It is therefore necessary to undertake a careful review of the bank’s Memorandum and Articles of Association and consider obtaining an opinion from a corporate lawyer in the relevant country before accepting a refund guarantee.

Although not essential to the decision the judgment also highlights some further traps for the unwary, in holding that the wording of the guarantee was such that it only covered the instalments due under the contract, in respect of the vessel made by reference to the progress in its construction. It did not extend to advance payments of such instalments when they were not contractually due, payments for equipment, or payments the parties agreed to bring into account although not made under the contract. If a buyer makes such payments they risk being unsecured in the event of termination, unless the buyer negotiates for the refund guarantee to be amended to cover such payments.

For further information on this subject please contact Chris Kidd at chris.kidd@incelaw.com or your usual Ince & Co contact

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