Sea-Cargo Skips AS v State Bank of India

A demand under a performance bond or refund guarantee must comply with the requirements identified by construing the guarantee. The beneficiary need not use identical wording, unless the contract requires it, but the demand must contain the statements needed to show on its face that the contractual conditions for payment are satisfied. A bank ordinarily decides compliance from the documents presented and is not required to investigate the underlying transaction. An ambiguous demand is insufficient where the guarantee requires a clear statement of a particular contractual event. A valid assignment does not prevent the original beneficiary from enforcing the guarantee where the assignment permits the beneficiary to exercise its rights until the assignee gives notice that it intends to enforce its rights.

The claimant, Sea-Cargo Skips AS, contracted with Bharati Shipyard Ltd for construction of a vessel. The defendant, State Bank of India, issued refund guarantees for instalments paid under the shipbuilding contract. After the vessel was not delivered, the claimant cancelled the contract and made a type 3 demand under the guarantees.

The guarantees required a statement that construction had been delayed by more than 270 days as described in article IV clause 1(e), that the claimant had cancelled the contract, and that it was entitled to repayment of the advance payments. The bank argued that the demand did not comply with those requirements and that the claimant could not enforce the guarantees because its rights had been assigned to DnB Nor Bank ASA. The issues were whether the demand was compliant and whether the assignment prevented enforcement.

1. The claim failed. The demand dated 5 November 2012 did not comply with the refund guarantees and therefore did not trigger the bank’s obligation to pay.
2. Whether a demand is sufficient depends on the true construction of the guarantee: namely, what type of demand the parties intended to trigger the bank’s liability. The beneficiary need not repeat the precise contractual words, but must provide the substance of the required statement.
3. Refund guarantees are a form of performance bond. As with documentary credits, the bank deals with documents and must determine from the presentation alone whether it appears on its face to be compliant. The extent of strict compliance is a matter of construction, but strict compliance was required by these guarantees. An ambiguous demand could not satisfy them.
4. The type 3 demand referred to delay in delivery, whereas the guarantee required a statement that there had been more than 270 days’ delay of the kind described in article IV clause 1(e), concerning specified construction stages. The demand did not make that statement. It also failed expressly to state that the claimant was entitled to receive repayment of the advance payments. That omission was material because the bank was not party to the shipbuilding contract and was not expected to investigate the claimant’s entitlement.
5. The assignment point failed. Under clause 2.1.2 of the deed of assignment, the claimant remained entitled to exercise its rights unless and until DnB gave notice that it intended to enforce its rights. No such notice had been given when the demand was made. The bank could seek DnB’s instructions before paying, but the absence of such instructions did not invalidate the demand.
6. The claimant’s claim based on the first demand was dismissed. Submissions on the claimant’s application to amend the claim to rely on a later demand were to be heard separately.