Sea Emerald SA v Prominvestbank- Joint Stockpoint Commercial Industrial & Anor

A bank is not bound by a guarantee issued by an employee unless actual authority, ratification or ostensible authority is established. Ostensible authority must be assessed by reference to the specific transaction, including its type and amount; general authority to provide banking services is insufficient. Ratification requires knowledge of the material circumstances and an unequivocal decision to adopt the unauthorised act. A guarantee ordinarily covers only the secondary liability identified by its terms. Where it guarantees contractual instalments, it does not necessarily cover advance payments, payments allocated between different contracts, or sums paid to suppliers. Contractual variation provisions do not extend the guarantee beyond its commercial scope.

The claimant shipowner sought payment under a refund guarantee issued in 1994 by the head of the defendant bank’s Nikolaev Regional Department. The guarantee related to payments made under a shipbuilding contract for hull no 1148. The shipyard later encountered financial difficulties, payments were made ahead of contractual milestones and were allocated between several vessels, and the claimant rescinded the contract.

The bank denied liability, principally contending that the signatory lacked authority. Alternatively, it argued that the guarantee had been discharged by variations to the underlying contractual arrangements and did not cover the sums claimed. The central issues were authority, ratification, ostensible authority, construction of the guarantee and discharge.

1. Authority. The signatory had no actual authority under the bank’s Articles of Association or its Regulations on Regional Departments and Divisions. The provisions concerning foreign economic agreements and international banking formats did not authorise a regional head to issue a refund guarantee, which was a collateral commitment rather than a method of payment. There was insufficient evidence of a special authorisation or power of attorney.
2. Ratification. Ratification required adoption by the Chairman or Management Board, knowledge of the material terms, and, where reliance was placed on silence, an unequivocal manifestation of an intention to adopt the guarantee. Knowledge of the bank’s lending and of the shipbuilding contracts did not establish knowledge of, or adoption of, the guarantee. The claim of ratification therefore failed.
3. Ostensible authority. The relevant question was whether the bank held out the employee as authorised to issue a refund guarantee of this kind and amount. General authority to provide banking services or guarantees was insufficient. The claimant also failed to prove reliance on any representation by the bank.
4. Construction. If binding, the guarantee would cover no more than US$1.3 million plus interest. Its maximum sum of US$9.9 million included contractual interest. It covered contractual instalments, including an instalment whose timing had been advanced, but not payments made in excess of the contractual instalment scheme, sums reallocated between vessel contracts, or payments to equipment suppliers. A guarantee was a secondary obligation and could not be construed as imposing a primary liability for sums which the shipyard itself was not obliged to refund.
5. Discharge and order. The contractual changes did not discharge the guarantee on the court’s construction because they could not prejudice the bank. On the alternative wider construction, the changes would have fallen outside the guarantee’s general purview and commercial scope. The claim was dismissed because the signatory lacked actual and ostensible authority and the bank had not ratified the guarantee.