The application of shipbuilding contract and refund guarantee

What is it about?

The purpose of this paper is to highlight the importance of independence principle of refund guarantees(RGs) and how to make the best of an arbitration clause in the guarantees so that a Korean shipbuilder, a guarantor and an export credit agency (ECA) may possibly protect themselves from buyers’ unlawful demand. To this end, this paper firstly introduces a brief elucidation about RG and the concept of independence principle. By way of presenting factual backgrounds, legaland policy evaluation and analyses, this paper covered all issues and disputes arising out of one shipbuilding contract and the independent RG drawn from the shipbuilding contract, through in-depth cases studies of a judicial case on the matter of independence principle of RG between the beneficiary (the buyer or its assignee) and the guarantor reviewed by an English court, an arbitration case regarding whether the beneficiary (the buyer or its assignee) has any right of refund in the event of the acceptance of a repudiatory breach by the applicant (thebuilder)in the London Maritime Arbitrators Association, and the beneficiary (thebuyeror itsassignee)’s appeal to an English court against the award and ajudicial case reviewing whether the guarantor has right of reimbursement in accordance with the terms of the export bond insurance with the Korean ECA.

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Why is it important?

While most RGs, in practice, are drawn as an independent guarantee which is payable on call without any evidence of default, there is another payment scheme in RGs, such as payment upon the submission of an arbitral award which may enhance the application of RGs in shipbuilding contracts. The paper suggested that under these circumstances, Korean builders may opt to make their shipbuilding contract be governed by Korean laws, with the Korean Commercial Arbitration Board as a competent arbitral jurisdiction and forum as far as possible. In addition, this paper proposes prudent approaches and considerations in the issuance and application of RGs which are independent from shipbuilding contracts. The hope is to increase awareness in the utility of arbitration system as well as for fiduciary Korean banks and ECAs to play a more pivotal role in guiding shipbuilding industry stakeholders.