Meritz Fire & Marine Insurance Co Ltd v Jan De Nul NV & Anor

An advance payment guarantee subject to the ICC Uniform Rules for Demand Guarantees is construed primarily from its own wording. Where payment is required against specified documents, the guarantor is concerned with documentary compliance, not the underlying parties’ substantive liability, unless the guarantee expressly makes payment conditional on resolving that liability. A transfer or novation of the underlying contract does not automatically make the guarantee a dead letter where the guarantee covers advance payments and the beneficiary has supplied the stipulated statement of entitlement and non-refund. The guarantor must pay against conforming documents, even if the original builder’s liability under the underlying contract has changed or ceased.

Buyers paid advances under three Korean shipbuilding contracts with Huen Woo Steel Co Ltd (HWS). Meritz issued advance payment guarantees governed by English law and incorporating the ICC Uniform Rules for Demand Guarantees. Without the Buyers’ or Meritz’s consent, the shipbuilding contracts and HWS’s obligations passed first to Buyoung Heavy Industries Co Ltd and then to Asia Heavy Industries Co Ltd; HWS was dissolved.

After terminating the contracts for specified defaults, the Buyers demanded repayment under the guarantees. Beatson J rejected Meritz’s contention that the guarantees were traditional see-to-it guarantees and decided in favour of the Buyers: [2010] EWHC 3362 (Comm). The appeal concerned whether the transfers discharged the guarantees and whether the Buyers’ documentary demands complied with them.

1. Appeal dismissed. Longmore LJ, with Laws LJ and Etherton LJ agreeing, held that the advance payment guarantees were to be construed primarily by their terms. Their incorporation of the ICC Uniform Rules showed that payment was to be made against documents, without reference to the underlying contract, subject only to any express contractual requirement for an arbitration award or other specified document.
2. Paragraph 2 of the guarantees operated on the basis that the Buyers had become entitled to a refund and had not received it, rather than requiring proof that the Builder was substantively liable to make the refund. The Buyers had made the advance payments, stated that they had terminated in accordance with clause 17, and had received no refund. Since no arbitration notice had been served under paragraph 6, they were entitled to payment.
3. Paragraph 4 required a signed statement certifying that the demand for refund was made in conformity with clause 17 and that the Builder had failed to make the refund. It required documentary certification, not proof that the certification was legally or factually correct. Meritz therefore could not resist payment by arguing that HWS was no longer the Builder, that another entity was liable, or that HWS could no longer pay.
4. Commercial Bank of Tasmania v Jones [1893] AC 313 did not determine the appeal. It concerned a traditional see-to-it guarantee, where the guarantor could rely on the principal debtor’s lack of liability. That reasoning did not apply to a guarantee payable against conforming documents. The court left open whether the novation in that case depended on a voluntary agreement.
5. The court considered it unnecessary to decide whether “Builder” meant only HWS or the builder to whom the contractual rights and obligations were transferred. HWS had failed to make the refunds, and paragraph 4 was operative. The court also deprecated attempts to raise fresh points by correspondence after the oral hearing.

• Court of Appeal (Civil Division) dismissed Meritz’s appeal, unanimously agreeing with the judgment below: [2011] EWCA Civ 827.
• High Court of Justice, Queen’s Bench Division, Commercial Court (Beatson J) rejected Meritz’s arguments concerning the character and effect of the guarantees: [2010] EWHC 3362 (Comm).