Meritz Fire and Marine Insurance Co Ltd v Jan De Nul NV (Rev 1)

An advance payment guarantee is construed as a whole and according to its commercial substance. Its label is not decisive. An undertaking to pay on demand against specified documents, issued for a fee by a commercial insurer and subject to the Uniform Rules for Demand Guarantees, may be a performance bond even if it refers to the underlying contract and contains conditional language.

A guarantor is discharged by a material variation only where the creditor agreed to vary the guaranteed contract. Unilateral corporate reorganisations by the principal debtor do not suffice. A demand remains effective where the contract expressly permits termination and repayment following dissolution, and the successor has assumed the principal debtor’s rights and obligations.

Meritz issued three advance payment guarantees in favour of Jan de Nul NV and Codralux SA concerning payments made under shipbuilding contracts with Huen Woo Steel Co Ltd. Huen Woo subsequently merged with another company, became Buyoung Heavy Industries Co Ltd, and its shipbuilding business was transferred to Asia Heavy Industries Co Ltd.

After delays and financial difficulties, the defendants terminated the shipbuilding contracts and demanded repayment from Asia Heavy and then from Meritz. Meritz sought declarations that it was not liable, arguing that the guarantees were contracts of suretyship, that it had been discharged by corporate changes and alleged extensions of delivery dates, and that the defendants could not make valid contractual demands after Huen Woo ceased to exist.

1. Nature of the guarantees. The APGs were performance bonds or demand guarantees. They were construed as whole commercial documents. Relevant indicators included the obligation to pay within 30 days after demand, the absence of limitations or exclusions of surety defences, the description as irrevocable and unconditional, and incorporation of the Uniform Rules for Demand Guarantees.

2. The obligation was triggered by demand accompanied by the specified certification, not by an independent determination of the shipbuilder’s default. References to the shipbuilding contracts and clause 17 did not convert the instruments into classic guarantees. The arbitration provision supplied an alternative means of establishing the sum payable and did not make payment dependent upon proof of default.

3. Even if the APGs had been contracts of suretyship, Meritz would not have been discharged. The corporate changes resulted from unilateral acts and the operation of Korean law, rather than an agreement between creditor and principal debtor to vary the guaranteed contracts. The defendants’ forbearance did not discharge the guarantor. Meritz also affirmed the APGs after learning of the corporate changes and proposed delivery arrangements.

4. The defendants could make effective demands. Clause 17.1(d) expressly contemplated termination following dissolution or liquidation of the Builder. The reorganisation placed successor companies in the Builder’s position, and Asia Heavy assumed the relevant rights and obligations. The defendants therefore validly certified that their demands complied with clause 17. In the absence of fraud, that certification triggered liability under the performance bonds.

5. Judgment was given for the defendants on their counterclaims: US$6,300,000 under each of the HS1005 and HS1006 APGs, and €15,050,000 under the HS1007 APG, together with interest at 6 per cent as stipulated.

First-instance decision. No appellate history was stated in the judgment.