Shanghai Shipyard Co. Ltd. v Reignwood International Investment (Group) Company Ltd

Factual and Procedural Background

This appeal arises from a decision of Judge Knowles on two preliminary issues concerning the construction of a guarantee supporting the payment obligation of a buyer under a shipbuilding contract. The Appellant ("the Builder") is a Chinese shipbuilding company, part of a large state-owned conglomerate, while the Respondent ("the Guarantor") is a Hong Kong company within an international conglomerate.

The Builder and the Guarantor initially entered a shipbuilding contract dated 21 September 2011 for the construction of an offshore drillship for US$200 million. The Guarantor was originally the buyer but intended to substitute a special purpose vehicle ("the Buyer") incorporated in Singapore, which eventually occurred by novation in November 2012. The contract required payment in three instalments, with the final instalment of US$170 million due on delivery. The contract provided for a Letter of Guarantee from the Guarantor to secure payment of the final instalment.

The Guarantor issued an Irrevocable Payment Guarantee in November 2011, described as a primary obligation guaranteeing punctual payment of the final instalment and interest. The Buyer was substituted after the Guarantee was given. Delivery dates were extended multiple times, and title passed to the Buyer before physical delivery, with the vessel mortgaged to the Builder.

Completion was notified in December 2016, and the Builder demanded payment of the final instalment and other sums in early 2017. The Builder subsequently demanded payment under the Guarantee. A dispute arose regarding whether the vessel was in deliverable condition, with the Buyer alleging defects. The Guarantor defended the claim on the basis that the Guarantee was a "see to it" guarantee, limiting liability to the Buyer's obligation, and that payment was conditional on arbitration outcomes.

The court ordered determination of two preliminary issues: (a) whether the Guarantee was a demand guarantee payable upon demand or a surety ("see to it") guarantee contingent on the Buyer's liability; and (b) whether the Guarantor could withhold payment pending arbitration if arbitration was not commenced before the demand.

The judge ruled in favor of the Guarantor on both issues, and the Builder appealed.

Legal Issues Presented

1. Whether the Guarantee is a demand guarantee, obliging the Guarantor to pay immediately upon demand regardless of the Buyer's liability, or a surety ("see to it") guarantee, making the Guarantor's liability contingent on the Buyer's liability to pay the final instalment under the contract.
2. Whether the Guarantor is entitled to withhold payment under the Guarantee pending arbitration only if the arbitration has been commenced before the demand, or whether this right exists regardless of when arbitration is commenced.

Arguments of the Parties

Appellant's Arguments

• The Guarantee should be construed as a demand guarantee payable immediately upon valid demand, irrespective of the Buyer's liability.
• The proviso allowing withholding payment pending arbitration requires arbitration to have been commenced before the demand; otherwise, the Builder has an accrued right to immediate payment.
• The Guarantor's status as a parent company performing a financing function does not alter the nature of the Guarantee.
• The language of the Guarantee, including terms such as "absolutely and unconditionally" and "primary obligor," supports the demand guarantee characterization.
• The short window for commencing arbitration after demand is commercially reasonable and consistent with protecting cashflow.

Respondent's Arguments

• The Guarantee is a "see to it" or surety guarantee, meaning the Guarantor's liability depends on the Buyer's liability to pay.
• The proviso in clause 4 permits withholding payment pending arbitration even if arbitration is commenced after the demand.
• The Guarantor is not a bank or financial institution, so presumptions favoring demand guarantees do not apply.
• The existence of a dispute alone prevents the Guarantee being payable on demand.
• The short 15-day window to commence arbitration is uncommercial and unrealistic given the arbitration clause's requirements.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by outlining the commercial context of shipbuilding contracts, highlighting the dual purposes of guarantees: to secure payment and to reduce counterparty risk. It rejected the Respondent's submission that the nature of the guarantor (bank or trading company) should determine the character of the Guarantee, emphasizing that the wording of the instrument and commercial context are paramount.

The court distinguished between two types of guarantees: surety ("see to it") guarantees, where the guarantor's liability depends on the principal obligor's liability, and demand guarantees, where payment is made upon demand without reference to the obligor's liability.

Examining the Guarantee's language, the court found key features indicative of a demand guarantee: use of terms like "ABSOLUTELY and UNCONDITIONALLY," the Guarantor described as a "primary obligor and not merely as surety," obligation to pay immediately upon receipt of the first written demand, and provisions stating the Guarantor's obligations are unaffected by disputes under the contract.

The proviso allowing withholding payment pending arbitration was interpreted as a conditional bond provision that modifies the demand guarantee only if arbitration has been commenced before demand. The court rejected the Respondent's argument that the existence of a dispute alone suspends payment, finding that the proviso requires arbitration to have been submitted prior to demand to be triggered.

The court considered relevant authorities, particularly Wuhan and Spliethoff's, which involved materially similar guarantees held to be demand guarantees. It rejected reliance on Marubeni and Vossloh as distinguishable on context and language.

The judge below had found no presumption applied and construed the Guarantee as a surety guarantee; the appellate court disagreed, holding that the language alone suffices to characterize the Guarantee as a demand guarantee.

On the second issue, the court held that the proviso requires arbitration to have been commenced before the demand to suspend the Guarantor's obligation to pay immediately. The court found the short window for commencing arbitration commercially reasonable and consistent with protecting cashflow.

Holding and Implications

The court allowed the appeal on both preliminary issues, determining that:

• The Guarantee is a demand guarantee, obliging the Guarantor to pay immediately upon valid demand, independent of the Buyer's liability under the shipbuilding contract.
• The proviso permitting withholding payment pending arbitration applies only if arbitration has been commenced before the demand; if not, the Guarantor's obligation to pay on demand arises and is not suspended.

The direct effect is that the Guarantor is liable to pay the demanded sums immediately unless an arbitration had been commenced prior to the demand. The decision clarifies the construction of similar guarantees in shipbuilding contracts and emphasizes the primacy of contractual language and commercial context over presumptions based on the guarantor's identity. No new broader legal principles or precedents were established beyond the application of existing principles to the facts.