Issue 17, 2010 - Refund Guarantees – to pay or not to pay?

Most shipbuilding contracts require a prospective owner of a ship to pay the purchase price in instalments, usually linked to key stages in the construction of the ship. Where a shipyard is in a foreign jurisdiction, a key question for the owner will be his ability to recover these instalments if the ship is ultimately not delivered, for example by reason of excessive delay or the shipyard going out of business. This risk is nearly always addressed through refund guarantees, whereby the guarantor, usually an internationally recognised bank, will agree to refund any advanced instalments if the yard defaults

on its obligations to the owner.

Against this general proposition, the recent decision by the Court of Appeal in England in Rainy Sky v Kookmin Bank ([2010] EWCA 582) has caused a degree of uncomfortableness, as the court concluded that a bank’s obligations under the refund guarantee in question were not triggered by the insolvency of the shipyard.