Most Read Contributor in Hong Kong, September 2016
Keywords: bank guarantees, shipbuilding
For a shipowner the process of buying a new vessel from a
shipyard can be a hazardous venture, much riskier than buying an
existing, second-hand vessel. This is because the shipowner has to
part with millions of dollars "up front" to a
shipyard/builder, by way of payment instalments to fund the
construction. The shipowner as buyer generally has no mortgage or
other security in the ship under construction; all the shipowner
has is the refund guarantee issued by the shipyard's bank,
which therefore forms the cornerstone of the entire project. If the
shipyard defaults and is obliged to return the shipowner's
instalments, the bank refund guarantee provides the shipowner with
the necessary security.
Shipowners buying from mainland Chinese shipyards will often
receive refund guarantees issued by PRC banks, and may therefore
stipulate that the bank guarantee should be subject to Hong Kong
law and court jurisdiction. If the mainland bank maintains a Hong
Kong branch, any judgment obtained through the Hong Kong court will
be enforceable in Hong Kong.
The refund guarantee can be one of two types. A
"traditional" guarantee creates a co-extensive or
secondary liability on the part of the bank, meaning in practice
that the shipowner must succeed in the underlying shipbuilding
contract arbitration. Such traditional guarantees can only be
called once the shipowner has obtained an arbitration award
upholding his right to cancel the shipbuilding contract and obtain
the return of the instalments.
The second type of guarantee is the "on-demand"
guarantee or bond which, as the name suggests, can be triggered by
simply a written demand from the shipowner. A shipowner with an
on-demand guarantee thus has the strongest form of security, giving
the right to payment of the funds irrespective of any ongoing
arbitration under the shipbuilding contract.
In Otto Offshore Ltd v. Bank of Communications  HKEC 1073
the shipowner brought an action in Hong Kong under the bank's
refund guarantee. Separately, the shipyard obtained from the
Tianjin Court a restraining order/injunction to prevent the bank
from making payment under the refund guarantee. The bank applied to
the Hong Kong court to stay the Hong Kong court action, pending the
outcome of the Tianjin Court proceedings and the underlying
shipbuilding contract arbitration. The bank contended that it
should not be exposed to the risk that it would either be in breach
of (a) the Tianjin restraining order or (b) a Hong Kong court order
for payment under the guarantee. Significantly, the Hong Kong court
rejected this argument and refused to stay the Hong Kong
proceedings. The shipowner had not agreed, or submitted, to the
jurisdiction of the Tianjin Court. In addition, the Tianjin Court
restraining order, not being a money judgment, was not recognisable
either under the relevant Hong Kong statute or at common law. The
Tianjin Court therefore did not have jurisdiction over the
shipowner to give a judgment capable of being recognised in Hong
The Hong Kong court's decision upheld both the vital role of
the refund guarantee in the shipbuilding process, as well as the
parties' agreement in the guarantee to the jurisdiction of the
Hong Kong court.
For inquiries related to this Legal Update, please contact Bill
Amos, who appeared for the shipowner, or your usual contacts with
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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