Shanghai Shipyard Co. Ltd v Reignwood Worldwide Funding (Group) Firm Ltd – UKSCBlog

On this submit Aleksandra Gajewska, an Affiliate, and David McKie, a Accomplice at CMS, preview the choice awaited from the UK Supreme Court docket within the matter of Shanghai Shipyard Co. Ltd v Reignwood Worldwide Funding (Group) Firm Ltd.

On 8 December 2022, the Supreme Court docket will hear the enchantment in Shanghai Shipyard Co. Ltd v Reignwood Worldwide Funding (Group) Firm Ltd. This might be a big resolution for these concerned in building tasks and their financing and may make clear the authorized ideas relevant to the interpretation and impact of ensures of funds or refunds because of below shipbuilding, onshore and offshore building contracts.

Factual background

Shanghai Shipyard Co. Ltd (the “Shanghai Shipyard”) is an organization working a shipyard in Shanghai, offering shipbuilding and repairing companies. Reignwood Worldwide Funding (Group) Firm Ltd (“Reignwood”) is a world multi-industrial firm providing funding companies and investing in a variety of industries.

By a shipbuilding contract (the “contract”) Shanghai Shipyard agreed to construct an offshore drillship, “Tiger 1” (the “vessels”) for Reignwood for US$200 million.

Sooner or later, Reignwood was changed as the customer by a single goal automobile, Opus Tiger 1 Pte. Ltd (“OT1”). The value was to be paid in three installments, with the ultimate installment of US$170 million due upon supply (the “Closing Set up”). Reignwood entered into an “Irrevocable Cost Assure” to help OT1’s obligation to pay the Closing Set up in favor of Shanghai Shipyard (the “assure”).

The important thing provisions of the Assure had been as follows:

  1. Clause 1 of the Assure offered that:

In consideration of your getting into into the Shipbuilding Contract…[Reignwood] hereby IRREVOCABLY, ABSOLUTELY and UNCONDITIONALLY assure in accordance with the phrases hereof, as the first obligor and never merely because the suretythe due and punctual cost by the OWNER of the Closing Set up of the Contract Value amounting to a complete sum of United States Greenback US$170,000,000 as laid out in (2) under…”. (Emphasis added.)

  1. Clause 4 of the Assure offered that within the occasion that OT1 fails to punctually pay the Closing Set up and:

any such default continues for a interval of fifteen (15) days, then, upon receipt by us of your first written request, we will instantly pay to you or your assignee all unpaid Closing installment, along with the curiosity as laid out in paragraph. (3) hereof, with out requesting you to take any or additional motion, process or step towards the Proprietor or with respect to another safety which you will maintain”.

  1. Clause 4 offered that within the occasion of any dispute between OT1 and Shanghai Shipyard and if such dispute is submitted to arbitration (in accordance with Clause 17 of the Contract), Reignwood:

shall be entitled to withhold and defer cost till the arbitration award is printed

and

shall not be obligated to make any funds to [Shanghai Shipyard] until the arbitration award orders [OT1] to pay the Closing Installment”.

  1. Clause 7 additional offered that:

Reignwood’s “obligations below this assure shall not be affected or prejudiced by: (a) any dispute between [Shanghai Shipyard and OT1] below the Contract…”.

On 12 December 2016, Shanghai Shipyard gave discover of completion of the vessel to OT1, and on 11 January 2017, Shanghai Shipyard made a requirement to OT1 for the Closing Set up and different sums allegedly due below the Contract. On condition that the sums due had not been paid, on 23 Might 2017 Shanghai Shipyard made a requirement of Reignwood below the Assure for cost of the Closing Set up.

At some stage OT1 contended that the vessel contained a variety of main and significant defects and a dispute arose between Shanghai Shipyard and OT1 as as to whether the vessel was in a deliverable situation. On 10 December 2018, Reignwood commenced proceedings within the Singapore court docket, searching for go away to begin an arbitration towards Shanghai Shipyard, within the title of OT1. The arbitration proceedings had been ultimately commenced on 3 June 2019.

In the meantime, the Shanghai Shipyard commenced the proceedings within the Business Court docket towards Reignwood below the Assure.

Resolution of the Business Court docket

The Business Court docket needed to resolve the next points (as preliminary points).

Firstly, was the Assure:

  • a requirement assure, such that, topic to concern 2 under, Reignwood’s legal responsibility arose upon (and by cause of) a requirement, no matter OT1’s legal responsibility below the phrases of the Contract; or
  • a “see to it” assure such that Reignwood’s legal responsibility arose provided that OT1 was liable to pay the Closing Set up below the phrases of the Contract?

Each, whether or not Reignwood, as a guarantor, might refuse cost below Clause 4 of the Assure pending the result of an arbitration between Shanghai Shipyard and OT1 regarding OT1’s legal responsibility to pay, and Shanghai Shipyard’s entitlement to assert, the Closing Set up below the phrases of the contract.

The Business Court docket (Knowles J) decided each points in favor of Reignwood. It was held that: (1) the Assure was a “see to it” assure; and (2) in any occasion, Clause 4 was engaged by the graduation of the arbitration, however that it had commenced after the date of demand, such that Reignwood was entitled to refuse cost pending the result of the arbitration.

Shanghai Shipyard appealed the Business Court docket resolution.

Resolution of the Court docket of Enchantment

The Court docket of Enchantment thought-about the identical two points and was discovered for the Shanghai Shipyard.

The Court docket of Enchantment disagreed with the Business Court docket on the development of the Assure and located that: (1) the Assure was a requirement assure; and (2) Shanghai Shipyard was entitled to cost below the Assure, on condition that it made a requirement previous to the arbitration being commenced.

With regard to the primary concern, in reaching its resolution, the Court docket of Enchantment commented extensively on the variations between a requirement assure and a “see to it” assure (or a surety assure). particularly:

  • The Court docket of Enchantment restated {that a} “see to it” assure creates an unbiased, major legal responsibility of the guarantor upon the obligor’s default. A requirement assure, in flip, is contingent upon and arises by cause of the demand (with out the beneficiary having to ascertain a legal responsibility of the obligor). In case of any dispute as to the obligee’s entitlement, a requirement assure offers that the guarantor should “pay now and argue later”.
  • The Court docket of Enchantment additional emphasised that ensures needs to be interpreted in accordance with regular ideas of building and no specific regard needs to be given to the id of the guarantor, such that equally worded ensures shall be interpreted in the identical method, no matter whether or not they’re issued by a financial institution, or a father or mother firm. The court docket highlighted the danger in over-reliance on preconceptions or presumptions. Specifically, the court docket thought-about that “Paget’s Presumption” (derived from Paget’s Legislation of Banking (fifteenth version)), authorised by the Court docket of Enchantment in Wuhan Guoyo Logistics Group Co Ltd v. Emporiki Financial institution of Greece SA [2012] EWCA Civ 1629, was not any actual help. The authors of Paget had been trying to offer a succinct assertion of steering primarily based on earlier case legislation, and wrote that an instrument will nearly at all times be constructed as a requirement assure if it: (a) pertains to an underlying transaction between the events in several jurisdictions ; (b) is issued by a financial institution; (c) accommodates an enterprise to pay “on demand”; and (d) doesn’t comprise clauses excluding or limiting the defenses out there to a guarantor.
  • The court docket additionally cautioned towards overreliance on beforehand determined instances concerning devices that seem like equally worded. The court docket famous that such precedents might solely be utilized if each (a) the phrases used therein “taken as a complete”; and (b) the contractual context, are materially an identical.
  • The court docket thought-about {that a} mixture of the next languages ​​was essential in making this a requirement assure:
  1. The capitalized phrases “ABSOLUTELY and UNCONDITIONALLY” which within the court docket’s view would convey to a businessman that the obligations weren’t conditional on the legal responsibility of OT1.
  2. the phrases”as the first obligor and never merely because the surety”, which expressly states that the instrument shouldn’t be merely a surety assure.
  3. The language contained in Clause 4, together with that “upon receipt by us of your first written request, we will instantly pay to you”, which signifies that: (a) a cost is to be made towards a requirement (which is a attribute of a requirement assure); and (b) it’s to be made instantly with out a want for a previous evaluation of entitlement.

Making an allowance for the components set out above, primarily based on the development of the Assure as a complete, the Court docket of Enchantment determined in favor of the Shanghai Shipyard that this was a requirement assure.

With regard to the second concern, the Court docket of Enchantment famous that Clause 4 of the Assure outlined the circumstances by which the demand assure ceases to be payable on demand, and as a substitute, turns into payable towards an arbitration award. Based mostly on the pure which means of the phrases in Clause 4, the guarantor is “entitled to withhold or defer cost” when a dispute is submitted to arbitration. Nevertheless, this was solely the case if the arbitration was commenced previous to a legitimate demand being made. That is implied by Clause 4 (which offers that if a “default continues for a interval of fifteen (15) days, then, upon receipt…of…first written demand”) {that a} proper to cost below the Assure is “instantlytriggered. The court docket concluded that to divest a celebration of an accrued proper would require clear language and such language was not contained within the proviso in Clause 4.

The 15-day timeframe to begin an arbitration was not uncommercially brief and was meant to guard money circulation.

Reignwood appealed to the Supreme Court docket.

Remark

The Supreme Court docket’s judgment is eagerly anticipated. In easy phrases, the Supreme Court docket has to resolve whether or not on its language the Assure was a “demand” assure or a “see to it” (or surety) assure and if it’s a demand assure, whether or not the duty is a pay now, sue later one. These two problems with legislation usually come up in follow and are basic to the efficacy of efficiency and refund ensures that are utilized in many building tasks, not simply shipbuilding. There may be now some distinction of opinion on the Court docket of Enchantment degree between the judgments in Shanghai Shipyard Co. Ltd v Reignwood Worldwide Funding (Group) Firm Ltd and Wuhan Guoyo Logistics Group Co Ltd v. Emporiki Financial institution of Greece SA so it’s hoped that the Supreme Court docket’s resolution will present additional steering as to the ideas to be utilized with regard to the development of ensures and the suitable use (if any) of presumptions on this course of.


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