The Legal 500

It has been a tempestuous few years in world markets and whilst the Scandinavian model economies have survived the worst of the downturn, bankruptcies have been prevalent and the international nature of trading patterns has exposed Norwegian companies and local authorities to disputes in courts around the globe. The banking crisis has been compounded by the financial implosion of countries such as Iceland and Greece, leaving recession-hit economies already affected by increased regulatory constraints, environmental protection measures  and enhanced solvency requirements, still struggling to sustain growth.

Norwegian companies have found themselves embroiled in disputes in the US, UK, Sweden and the Far East, frequently as a result of overly optimistic projections proving too expansive in the altered new world order. Derivatives and futures trading positions have dissolved overnight leading to large scale insolvencies, not least for corporations but also certain local authorities tempted to indulge in financial transactions outside both their scope of powers and expertise.

Cross Border Insolvency measures primarily proposed as simple harmonisation measures have led to liquidators and administrators of Korean and Singapore companies applying to the courts in the US, UK and Australia to recognise such foreign insolvency proceedings. This has resulted in court orders staying of  the commencement and future progress of arbitration  litigation, and attachment and enforcement measures. 

The Norwegian maritime cluster has been similarly affected. Shipping and energy companies had, prior to the downturn at a time of an overheated freight market, placed orders for newbuilding programmes with yards with greenfield sites or a limited track record for specialist construction. Environmental restrictions on scrapping programmes, projected market overcapacity with new tonnage coming on stream combined with reduced trade led to freefall. As a result plummeting asset values breached minimum value covenants. Debt rescheduling was limited to those judged capable of surviving. Those owners who were previously willing to pay a premium for delivery over and above the contract price in an attempt to avoid major losses from delayed deliveries suddenly scrambled to locate exit routes, cancelling contracts and calling for repayments under refund guarantees. Banks previously willing to support both yards and potential owners expressed liquidity concerns over counterparty banks. Standard document wordings underwent microscopic forensic evaluation. Unpredictability of judgements caused concern to numerous owners, their financiers and advisors in the Scandinavian market, especially when certainty and consistency in such area is desirable.

GUARANTEES - THE APPROACH OF THE ENGLISH COURTS

The English Court of Appeal in Kookmin Bank v Rainy Sky SA (1) gave judgement recently on a buyer's claim for repayment under a refund guarantee. Repayment from the guarantor was demanded in circumstances where the Builder under a shipbuilding contract became insolvent. The Court concluded, on the particular wording of the refund guarantee, the refund guarantor was not obliged to pay. The decision concluded whilst the Builder might be  obliged to repay all advance instalment payments, nevertheless the guarantee wording did not oblige the Guarantor to repay.  The fact the repayment obligation of the Builder to repay in the event of insolvency fell under a separate term of the shipbuilding contract meant the guarantee responded only to certain listed events permitting rescission or cancellation. The judgment may yet be overturned by the Supreme Court on appeal, but in the short term when negotiating shipbuilding contracts or refund guarantees, or approving their cancellation, it remains prudent to bear in mind some of the following factors:

• 1. Most shipbuilding contracts permit the return of advance instalments in circumstances where the buyer has lawfully "cancelled or rescinded" the shipbuilding contract.
• 2. The refund guarantee often mirrors that narrow expression and can be of restricted benefit.
• 3. It is rare (and the Gearbulk/Stocznia Gdynia shipbuilding contract is perhaps an exception) for a shipbuilding contract expressly to state it can be terminated by reason of the builder's "material breach". Repayment obligations of the Builder for such a cause may not be secured by some refund guarantee wordings in use.
• 4. Insolvency of the builder may give rise to an entitlement to call for repayments; however, if it is contained in a separate clause which does not also permit rescission or cancellation, the insolvency of the builder may not trigger a repayment under the refund guarantee.
• 5. Buyers' Supplies, whilst their value is repayable by the builder, are not secured by the refund guarantee unless particular wording is utilized.
• 6. In the case of a default on the part of the Buyer, the builder may complete and sell the vessel to a third party; such sale proceeds may be sufficient to enable repayment by the builder to the buyer of part of the instalment payments. However again, based upon the logic of the Kookmin Bank judgement, such refund may not be covered by the terms of a narrow refund guarantee.

The Commercial approach of the Courts?

The Norwegian approach in the courts is to identify the underlying intent of the parties and for that purpose are willing to detect the parties true agreement from pre contractual negotiations. Despite statements that they were moving towards a more "purposive" approach to interpreting agreement wording, the English decisions show a reluctance to fully adopt this approach.  The last word on the Kookmin decision deservedly goes to the succinct summary produced by Lloyds Law Reports when publicising the judgement:

A natural and obvious construction of the bond provided that the shipbuilder's insolvency was excluded from the scope of the bond. Merely to say that no credible commercial reason had been put forward for the limited scope of the bond was to substitute one's own judgment of the commerciality of the transaction for that of those who were actually party to it.

Strangely, in a different guarantee case that same month a differently constituted Court of Appeal were prepared to impose a "commercially rational objective reading" to assist interpretation on guarantee wording (2).

The Court of Appeal upheld the judgment of the trial judge. The phrase "any claim" and "in competition with or in priority to the Bank" were wide. Further, a narrow interpretation of the clause would not be helpful to the bank, and the context of the clause was the insolvency of any one of the debtors, so that it was not appropriate to limit the words "any claim" to mean "any claim in the particular company's capacity as guarantor".

Clearly there is some way to go before predictions about the outcome of English decisions on guarantees can be made with any degree of certainty.

 www.vogtwiig.no

Adrian Moylan Solicitor, Bergen

Erik Solheim, Partner, Bergen

Anders Monrad, Partner, Oslo

Vogt & Wiig AS

1 KOOKMIN BANK V RAINY SKY SA - [2010] EWCA Civ 582, Court of Appeal (Civil Division), Lord Justice Thorpe, Lord Justice Patten and Sir Simon Tuckey

2 Cattles Plc v Welcome Financial Services Ltd [2010] EWCA Civ 599