Ali Shipping Corporation v Jugobanka D.D. Beograd

A guarantee securing repayment of advance payments is ordinarily a risk contract. Frustration is not established merely because war, political change or loss of contact with the principal debtor prevents the guarantor pursuing reimbursement, where the contingent obligation to pay remains possible. Payment made to the builder at its request remains an advance payment for the guarantee, even if made to a different account, particularly where contractual variations are permitted. A late appeal should not proceed where its grounds are clearly hopeless, speculative or seek to reopen an issue deliberately abandoned at trial. Appellate courts should also respect trial findings based on witness credibility unless there is a very strong case for interference.

Jugobanka appealed from judgment given by Tuckey J in the Commercial Court on 25 July 1996, under which it was ordered to pay Ali Shipping Corporation approximately US$24.25 million under a guarantee securing advance payments under a shipbuilding contract. The bank failed to serve a valid notice of appeal in time and later applied for an extension, permission to amend the notice, further discovery and permission to raise additional grounds concerning the builder’s default and alleged negligence. The proposed grounds included frustration of the guarantee, bad faith concerning a mortgage over the unfinished vessel, and the effect of a payment made to a German account at the builder’s request. The central issue was whether the Court of Appeal should exercise its discretion to allow the appeal to proceed.

1. Applications and discretion. The Court of Appeal unanimously refused all the applications. The discretion to extend time and cure defects in an appeal should ordinarily be exercised in the applicant’s favour unless the proposed appeal has no real merit and allowing it would waste time and cause injustice to the respondent. The threshold is low, but the proposed grounds must be examined. Jugobanka had delayed despite being told that its representation and notice were defective, and it provided no adequate excuse.
2. Frustration. The guarantee was a risk contract protecting Ali against the builder’s failure to perform. Its remaining obligation was a contingent obligation to pay money. The breakup of Yugoslavia, hostilities, loss of the bank’s Croatian branches and inability to pursue reimbursement from the builder did not make performance impossible or frustrate the guarantee. The reasoning was consistent with Re Fitzgeorge [1905] 1 KB 462, where the principal debtor’s insolvency and dissolution did not discharge the guarantor.
3. Bad faith and negligence. The negligence amendment added nothing. The authorities concerning misuse by a creditor of security held for a guarantor’s benefit did not apply to the bank’s own security over the builder’s chattel. Any viable challenge based on the release of that security required fraud or at least bad faith. Tuckey J had rejected that allegation after hearing and observing Mr Sherriff and considering the documents. A very strong case would be required before an appellate court could disturb that finding.
4. Fourth payment. The payment made to Mercur-Mainz’s German account at the builder’s request was still a payment to the builder. The guarantee’s consideration was the making of the advance payment, and the guarantee expressly contemplated variations to the shipbuilding contract. There was therefore no failure of consideration or breach of guarantee.
5. Abandoned issue and discovery. The bank had consciously abandoned its denial that clause 16 applied, and the trial proceeded on that defined basis. The renewed discovery application was speculative and sought to resurrect the abandoned issue after trial and after the earlier discovery application had failed. No sufficient basis existed to displace the finality of the trial.

1. Court of Appeal (Civil Division): On 13 November 1997, Lord Justice Hobhouse, Lord Justice Brooke and Lord Justice Waller unanimously refused the applications for an extension of time, amendment, further discovery and permission for the proposed appeal to proceed.
2. High Court of Justice, Commercial Court: Tuckey J gave judgment for Ali Shipping Corporation on 25 July 1996 in its claim under the guarantee.