Rainy Sky SA & Ors v Kookmin Bank

An advance payment bond must be construed as a whole and in a commercially sensible manner. Where its operative wording covers sums due under the underlying contract, a recital identifying particular repayment events will not ordinarily confine the substantive undertaking unless the language clearly does so. A demand guarantee is generally concerned with compliance with the demand, not with determining disputes under the underlying contract. Where the demand satisfies the bond’s express requirements, the bank must pay, absent fraud. A requirement to specify the respects in which the underlying party failed to perform does not, without clear wording, authorise the bank to investigate the underlying merits.

The claimants sought payment of approximately US$46.62 million under six identical advance payment bonds issued by the defendant bank in connection with shipbuilding contracts. The builder entered a Korean debt work-out procedure and declined to refund instalments demanded under the contracts. The bank also refused payment.

The parties made cross-applications for summary judgment under CPR Part 24. The claimants accepted that, for present purposes, their contractual rights arose under the insolvency-default provision rather than the provisions concerning rejection, termination, cancellation or rescission. The issues were whether the bonds covered those sums and whether payment was due regardless of a dispute under the shipbuilding contracts.

1. Issue 1. The claimants were entitled to summary judgment. The bond’s paragraphs [2]–[4] formed a coherent structure. Paragraph [2] was a preamble describing some rights against the builder. Paragraph [3] contained the bank’s substantive undertaking to pay all such sums due under the contract. Paragraph [4] addressed the nature of the obligation and the form and timing of a demand. The unqualified wording of paragraph [3] covered sums due under the insolvency-default provision as well as the repayment events mentioned in paragraph [2].
2. The bank’s construction would produce the surprising and uncommercial result that the bond could not be called when the first-class security was most likely to be needed. The obligation to procure a refund guarantee did not justify that restricted construction.
3. Issue 2. The bonds were demand guarantees. The court applied the principles in Esal (Commodities) Ltd and Reltor Ltd v Oriental Credit Bank and others [1985] 2 Lloyd’s Rep 546, I.E. Contractors Ltd v Lloyds Bank Plc and Rafidain Bank [1990] 2 Lloyd’s Rep 496 and Gold Coast v Caja de Ahorros [2002] EWCA (Civ) 1806. The nature of the instrument had to be determined from its terms, without preconceptions. A bank was not entitled to investigate whether the builder was in default or whether the underlying sum was legally due.
4. The claimants’ demand specified the respects in which the builder had failed to fulfil the contract, as required by paragraph [4]. The reference to evidence did not entitle the bank to form its own view on the underlying merits. Absent fraud, the bank was obliged to pay against a conforming demand. The defendant’s application was dismissed.

First-instance decision. No prior appellate decision is stated in the judgment.