Master Marine AS v Labroy Offshore Ltd and others

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 18 April 2012
• Neutral Citation: [2012] SGCA 27
• Date: 18 April 2012
• Docket Number: Civil Appeal No 79 of 2011
• Published date: 31 May 2012
• Plaintiff Counsel: Chan Leng Sun SC, Sheik Umar and Joanne Chia (Wong & Leow LLC)
• Hearing Date: 06 February 2012
• Defendant Counsel: Steven Lim, instructed by Prakash Mulani and Bhaskaran Sivasamy (M&A Law Corporation),Lee Eng Beng SC, Sim Kwan Kiat and Chong Kah Kheng (Rajah & Tann LLP)
• Court: Court of Appeal (Singapore)
• Subject Matter: Performance bonds,Credit and Security

V K Rajah JA (delivering the judgment of the court): Introduction

This is an appeal against the decision of the High Court judge (“the Judge”) in Labroy Offshore Ltd v Master Marine AS and others [2011] SGHC 234 (“GD”), granting an injunction restraining the second to fourth respondents (together, “the Banks”) from paying the appellant, Master Marine AS (“MM”), monies it demanded under several “Refund Guarantees” issued by the Banks in its favour. We should add that the underlying transaction here is an international shipbuilding contract and that “Refund Guarantees”, otherwise known as performance bonds, commonly feature as security in such matters for a buyer’s advances of the purchase price.

In the course of construing the subject instruments, many interesting issues were raised, namely: (a) consideration of the nature of a first demand performance bond; (b) how this type of instrument should be construed; (c) how much attention should be given to the instrument’s contextual setting; and (d) when a demand would be effective.

The facts

On 28 March 2007, the first respondent, Labroy Offshore Ltd (“Labroy”), and MM entered into an agreement (the “Underlying Contract”) for the former to construct and the latter to purchase an offshore elevating rig (“the Rig”). Under Article 3.8 read with Article 3.2 of the Underlying Contract, MM was to pay part of the purchase price of the Rig in five precalculated instalments before delivery, according to certain milestones. MM’s liability to pay, however, was subject to Labroy procuring “Refund Guarantee(s)” from first class international banks to “secure the repayment to [MM] of all instalments of the [purchase price] paid by [MM] to [Labroy]”.

As required, Labroy approached the Banks on or before 16 May 2007 with their request and each bank issued its own “Refund Guarantee” in MM’s favour, purporting to guarantee approximately a third of each instalment. All of the letters bore the heading “Refund Guarantee” with a designated serial number, made reference to the Underlying Contract in the subject title, and carried an expiry date of 31 August 2010. There were altogether 12 Refund Guarantees issued: four from the second respondent, four from the third respondent and four from the fourth respondent. The Refund Guarantees also provided for three types of demands that MM could serve on the Banks for repayment of their advances. These were the “Initial Demand”, the “Deferred Demand” and the “New Demand”. The circumstances in which each of these demands could be made were set out in the Refund Guarantees as follows: ¹ 3. At the request of [LABROY] ... we, [OCBC/UOB/DBS] ... hereby:- a. absolutely, irrevocably and unconditionally guarantee to pay to you an amount up to but not exceeding a total amount of … (the “Guaranteed Amount”) representing one-third of the [First/Second/Third/Fourth] Installment plus interest at the rate of six percent (6%) per annum, if and when the same or any part thereof becomes repayable to the Owner [ie, MM] from the Builder [ie, Labroy] in accordance with the terms of the Contract [ie, the Underlying Contract]; subject to clause 3 (b) below and provided always that our maximum liability under this Refund Guarantee shall not at any time exceed the Guaranteed Amount. b. Irrevocably undertake that payment under this Refund Guarantee will be effected by us within fourteen (14) Singapore banking days following our receipt of a written demand from the Owner for payment, stating that the Contract is cancelled or rescinded by the Owner in accordance with the terms of the Contract, which statement shall be final and conclusive, together with the original of this Refund Guarantee. We shall inform Builder by way of registered mail and electronic mail (for which acknowledgement is not required from Builder) by 6pm of the next Singapore banking day from the date of receipt of such written demand from the Owner.

PROVIDED THAT, in the event we receive notification (“Notification”) from the Builder within (5) Singapore banking days from the date of our receipt of your written demand referred to in paragraph 3 (b) above (which demand shall be referred to hereinafter as the “Initial Demand”) that your claim for refundment is disputed by the Builder and has been referred to arbitration in accordance with the Contract, we shall be entitled to defer payment of the entire sum claimed under the Initial Demand and only be liable to pay to the Owner the sum adjudged to be due to the Owner by the Builder pursuant to an award (hereinafter the “Award”) made under such arbitration or as agreed pursuant to a settlement agreement between the Builder and the Owner such deferred payment to be payable by us to the Owner immediately upon receipt by us from the Owner of a further written demand (which demand shall be referred to hereinafter as the “Deferred Demand”) for the sum(s) so adjudged together with a certified true copy of the Award or the settlement agreement (as the case may be) and PROVIDED ALWAYS that our maximum liability hereunder shall not at any time exceed the Guaranteed Amount.

For the avoidance of doubt, we shall not be obliged to make any payment under the Initial Demand till five (5) Singapore banking days have elapsed from the date of our receipt of the Initial Demand. …

In the event of (i) any possible delay in the delivery of the Rig or (ii) if an Initial Demand has been made and your claim for refundment is disputed and referred to arbitration and the said arbitration cannot reasonably be expected to be concluded thirty (30) Singapore banking days before the Expiry Date [ie, of the Refund Guarantee], ... the Owner shall be entitled to request from the Builder for a replacement guarantee to be issued by us in similar terms as this Refund Guarantee with expiry date 30 calendar days from the new anticipated date of the delivery of the Rig to the Owner or conclusion of the arbitration (as the case may be) ... which replacement guarantee must be furnished by the Builder to the Owner not later than fourteen (14) Singapore banking days before the Expiry Date ... In the event such replacement guarantee is not furnished no less than fourteen (14) Singapore banking days before the Expiry Date ... as provided in Article 3.8 of the [Underlying] Contract, the Owner shall be entitled to make a written demand (which demand shall be referred to hereinafter as the “New Demand”) for the sum claimed under the Initial Demand (if made) and stating that the Builder has failed to furnish a replacement guarantee (such statement to be final and conclusive) and we shall pay the Owner the said sum claimed under the New Demand immediately upon our receipt of the New Demand irrespective of whether or not the claim under the New Demand is disputed by the Builder or has been referred to arbitration or there is an arbitration claim pending; subject always to the New Demand being received by us on or before the Expiry Date ... .

For the avoidance of doubt, the Owner may make only one Initial Demand and one Deferred Demand and/or one New Demand under this Refund Guarantee and we will make payment in the manner described above for each such demand upon our receipt of the Initial Demand or the Deferred Demand or the New Demand, provided always that any such demand is received by us on or before the Expiry Date ... For the purpose herein, “banking days” shall be the days (other than a Saturday or Sunday) on which banks are open for business in Singapore.

...

5. Our liability under this Refund Guarantee shall not be affected by any alteration to or variation of the terms of the Contract which the Owner may hereafter agree with the Builder, or by any other matter or circumstances, including bankruptcy or insolvency of the Builder, which might otherwise discharge our liabilities as guarantor of the Builder’s obligations as aforesaid.

...

7. After the Expiry Date, this Refund Guarantee shall be null and void whether or not it is returned to us for cancellation.

[emphasis added in italics and bold italics]

It was with the concrete assurance of these Refund Guarantees in place that MM proceeded to make four instalments of the purchase price to Labroy amounting to approximately €85,080,000.²

As it turned out, the Rig was not ready by 28 June 2010 which was the original delivery date the parties had agreed to. This had certain ramifications for Labroy: under limb (i) of the third paragraph to the proviso of clause 3 of the Refund Guarantee (“the First Limb”), it was obliged to procure a “replacement guarantee” for MM by a stipulated deadline, viz, 14 Singapore banking days before the expiry date of the subsisting Refund Guarantees (see [4] above). However, this was not done. Instead, Labroy prevailed upon the Banks to issue letters extending the expiry date of the subsisting Refund Guarantees. (That being said, this particular discrepancy in form - that is to say an extension in lieu of replacement - is not an issue before us, as MM’s position in the hearing was that these extensions were valid.)³

Even while this difficulty was being resolved, MM and Labroy were intensely wrangling on several other fronts. The first was the question of who was to blame for the delay in the delivery of the Rig. MM pointed to what parties termed the “Graha Incident” on 22 April 2010, where construction of the Rig had come to a standstill because Labroy allegedly had not paid its subcontractors and suppliers.⁴ In contrast, Labroy claimed the delay was the result of various last minute variations MM had made to the specifications of the Rig and MM’s late delivery of “Owner Furnished Equipment” necessary for the Rig’s construction.⁵ The second was the issue of a reasonable new delivery date: MM alleged Labroy revised its building schedule multiple times without consulting them. MM also objected to the unilateral revisions made by...