BIMCO to publish standard refund guarantee to eliminate legal uncertainty

BIMCO to publish standard refund guarantee to eliminate legal uncertainty

Overview

BIMCO is developing a standard refund guarantee for shipbuilding contracts, including the SAJ and Chinese forms. The current issue is that English law and jurisprudence on guarantees is contradictory, complex and often very difficult to understand from a commercial perspective, and as a result small changes made by negotiators can have wide reaching commercial consequences.

“The aim of the BIMCO refund guarantee is to provide an instrument which removes uncertainties as to what is guaranteed and when the guarantee can be called on, as far as practicable,” says Ian Gaunt, Chairman of the refund guarantee subcommittee and Arbitrator and Past President of The London Maritime Arbitrators Association.

Refund guarantees play a vital role in shipbuilding projects by securing the large advance payments made by the buyer during the construction of the ship.

The BIMCO refund guarantee will be a primary security instrument where the bank pays on demand of the buyer but with appropriate provisions for disputes to be decided by arbitration before payment is made. It will provide the industry with a balanced instrument intended to protect the interests of all parties involved in the project - the builder, the buyer and the bank.

“The focus of our work is to draft a guarantee which will be accepted by the issuing banks, builders and buyers and thus be used as a standard for the industry,” Gaunt says.

To achieve this goal, the subcommittee consists of senior representatives of banks, builders and buyers from ICBC, Hyundai Heavy Industries (HHI) and shipowner Norden.

In practice, refund guarantees are often negotiated by commercial departments who might not be aware of the many legal traps and pitfalls in such a deal. Even small “compromise” changes in the wording of a refund guarantee agreed during commercial negotiations can have significant legal consequences and change the bank’s obligations. The subcommittee has identified this as a major point which the refund guarantee has to address. To help users, the guarantee will be published with explanatory notes which will be comparable to a users’ manual for the form.

Legal expertise on this project is provided by Professor Min Han, Ewha Womans University, South Korea, Richard Lord, QC Brick Court, Chris Kidd, Ince & Co and Sean Gibbons, Stephenson Harwood. The refund guarantee is expected to be available in 2021.

Nina Stuhrmann
in Copenhagen, DK

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