Given the current financial climate, some yards may face difficulties financing the building of new orders. With approximately 1,000 ships on order at a value of around $350 billion, refund guarantees could potentially be very relevant in the near future for purchasers of new build vessels.
The judgment handed down in the Sea Emerald v Prominvestbank case in August serves as a timely reminder to purchasers to ensure that refund guarantees issued alongside shipbuilding contracts have been signed by persons acting with full and proper authority to do so.
In this case, the Laskiridis Group contracted to purchase 19 ships from a yard in Ukraine for over US$200 million. The purchase contracts were governed by English law and stipulated that the yard must provide the buyer with a refund guarantee, guaranteeing repayment to the buyer of any sum owed by the builder under the contract.
The guarantees were issued and were signed by Mr Skock, the head of the Nikolaev Regional Department of the seller's bank.
In January 1994, the yard could not obtain the funds necessary to build the vessels or pay for equipment and materials. In July 1997, the yard was put into administrative bankruptcy.
The ship relating to this particular contract was not completed or delivered and, in 2006, the buyer held the yard in default and made a demand on the bank under the refund guarantee. The bank argued that the guarantee was invalid. This action was brought by the buyer against the bank for enforcement of the guarantee.
The bank argued that Mr Skock was not authorised to give the guarantee on its behalf, that even if the guarantee was binding when given, it was discharged because the contract was varied and not carried out according to its original terms and that, largely, and the buyer's claim fell outside the guarantee.
The court considered whether Mr Skock had authority to enter into the guarantee on behalf of the bank and reviewed in detail the types of authority Mr Skock may have had to sign the guarantee. The court also considered whether the bank ratified Mr Skock's actions.
The court held that Mr Skock did not have actual authority to sign the guarantee, was not held out as having such authority and that the bank did not ratify Mr Skock's actions. Accordingly, the buyer's claim failed and it was not entitled to repayment under the guarantee.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
