WS Tankship II BV v The Kwangju Bank Ltd & Anor

A guarantee issued by a financial institution is a demand guarantee where, on construction of the instrument as a whole, liability arises from a conforming demand rather than from the underlying contract. The court should not apply strict-construction or contra proferentem principles applicable to traditional suretyship. Rules concerning discharge by material variation, forbearance and non-disclosure do not apply to an autonomous demand guarantee. Clear automatic-increase wording operates according to its terms. Rectification requires convincing proof of a continuing objectively manifested common intention, an outward expression of accord, and execution of a document that failed to reflect that intention. An estoppel requires a relevant shared or acquiesced assumption and unconscionability in departing from it.

Three Dutch shipping companies claimed unpaid balances under refund guarantees issued by The Kwangju Bank Ltd and Seoul Guarantee Insurance Company. The guarantees secured advance payments made under shipbuilding contracts with GEO Marine Engineering & Shipbuilding Co Ltd. The contracts were cancelled after GEO failed to complete the vessels, and the defendants made only partial payments.

The principal issues were whether the guarantees imposed primary or secondary liability, whether their automatic-increase provisions covered later instalments, and whether the defendants were discharged by alleged contractual variation, non-disclosure, the Statute of Frauds, rectification or estoppel. The defendants also counterclaimed for sums already paid.

1. Demand guarantees. The instruments were to be construed as a whole. Their wording required payment upon written demand accompanied by a signed statement that the buyer’s demand complied with the shipbuilding contract and that the builder had failed to refund. That documentary condition, rather than the buyer’s underlying entitlement, conditioned payment. The instruments therefore imposed primary autonomous liability and were demand guarantees, notwithstanding their headings and repeated use of the word guarantee.
2. Automatic increase. The third paragraph plainly provided that the guaranteed amount increased automatically when the builder received subsequent instalments. The maximum figure in that paragraph was not a cap at the first instalment. The guarantees covered the later instalments claimed.
3. Underlying-contract defences. The alleged variation to a system of discrete guarantees was not proved. At most, there had been short forbearance concerning the timing of one instalment. In any event, the equitable rule discharging a surety for material variation or binding forbearance had no application to autonomous demand guarantees. The non-disclosure obligation applicable to traditional suretyship likewise did not apply to the beneficiaries of these guarantees.
4. Rectification and estoppel. The defendants failed to establish the required continuing objectively manifested common intention. The evidence showed misunderstanding, not agreement or a shared assumption communicated to the beneficiaries. Vroon’s October 2007 review of the instruments and authorisation of payment on the basis of automatic increase ended any possible common assumption. Reliance on the guarantee terms was neither unjust nor unconscionable.
5. Other defences and orders. The premature-termination defence depended on secondary liability and therefore did not arise. The Statute of Frauds defence likewise had no application to a demand guarantee; in any event, the bank’s name in the SWIFT header was a sufficient signature. The counterclaims did not arise because the substantive defences failed. The claimants succeeded and the counterclaims were dismissed.