Backdating contracts a risky business
It might seem tempting in the current climate, but backdating shipbuilding contracts could prove to be a costly mistake.
As shipyards face financial difficulty, it is increasingly likely that buyers will be looking to bring shipbuilding contracts to an end and make claims under the refund guarantees. However, a recent decision indicates the importance of checking the terms of any security assignment of the contract to ensure the buyer’s claims are pursued in the right names. It also highlights the risks of backdating shipbuilding contracts.
In Alpha Bank A.E v Bank of Communications Company Limited and Bank of Communications Company Limited Quingdao Branch, Chinese Shipyard Nantong Mingde Heavy Industry Stock Co, agreed to construct and sell a vessel to Crescendo Maritime Co, pursuant to the terms of a shipbuilding contract. The buyer obtained funding from Alpha Bank AE and the Bank of Communications Company Limited Qingdao Branch provided refund guarantees to the buyer as security for instalments paid under the shipbuilding contract.
The construction was delayed, and the buyer claimed that it was entitled to cancel the shipbuilding contract and claim repayment of the instalments. Arbitration commenced in London, whereby the shipbuilder disputed the buyer’s right to cancel the shipbuilding contract, did not repay the instalments and, instead, claimed that it was entitled to damages.
The buyer claimed under the refund guarantees, but these claims were declined by the bank pending the outcome of the dispute between the builder and the buyer. Therefore, the buyer commenced arbitration against the bank.
“Backdated contracts are very often a feature of transactions structured to deceive and, whether or not fraud is involved, backdating is likely to be offensive to English public policy.”
The bank alleged, in the arbitration proceedings, that the shipbuilding contract had been fraudulently backdated; that it had been “cheated to agree to issue the refund guarantees”, and that the refund guarantees should be null and void and/or unenforceable. The bank also claimed that the buyer had assigned its rights under the shipbuilding contract to the lender and, as such, it was the lender, not the buyer, who was entitled to commence arbitration proceedings. The lender then joined the arbitrations.
Arbitration awards were issued in the favour of the buyer and the Court dismissed the bank’s challenge to the arbitration awards. Meanwhile, the bank had commenced court proceedings in China as to whether the backdating of the shipbuilding contract constituted fraud, and so whether the refund guarantees had any binding force. The proceedings in China continued, despite the bank having been ordered by the English Court, on an interim basis, not to pursue proceedings in China.
Holding court
In the two actions before the Court, the buyer and the lender sought to obtain anti-suit injunctions restraining the Chinese proceedings. Not surprisingly, the Court granted the anti-suit injunction sought by the buyer. However, because the lender was not a party to the arbitration agreement, under the shipbuilding contract, the court was not persuaded that it was appropriate to grant the anti-suit injunction sought, restraining the bank from pursuing the Chinese proceedings against the lender.
Interestingly, the lender sought the following declarations:
- A declaration that the lender was not an assignee of the refund guarantees.
Although the Court concluded that the buyer probably had defaulted under the deed of assignment, the lender did not give notice that it intended to enforce its rights under the deed of assignment. Until such notice had been given, the buyer was entitled to exercise its rights as if the assignment had not been made, in accordance with the terms of the deed of assignment.
- A declaration that the lender had no liability to the bank for fraud.
It was common ground that the shipbuilding contract had been backdated to December 2, 2006, in order to circumvent the application of certain amendments to the SOLAS Convention regarding tank coatings, which applied to shipbuilding contracts signed after December 8, 2006. The true date of execution, as stated in the second addendum, was August 15, 2007. The Court concluded, on the factual evidence, that the bank was aware that the shipbuilding contract had been backdated and, as such, there could not have been any concealment or non-disclosure of the date of the shipbuilding contract by the lender. Without any intention to deceive, there could be no finding of fraud in either English or Chinese law. Accordingly, the Court granted the declaration.
No absolutes
In circumstances where a deed of assignment is not an absolute assignment, but rather an assignment by way of security under which the assignee must give notice to the assignor that it intends to enforce its right, following the occurrence of a default event, until such notice has been given, the assignor is entitled to enforce its rights as if the assignment had not been made. This is reassuring for buyers, but it highlights the importance of checking the exact nature and form of the assignment to ensure the claims under the contract and guarantee are being made by those who have title to sue.
The Court was not asked to consider the enforceability or illegality of the shipbuilding contract, or the refund guarantees as a result of the shipbuilding contract being backdated. As the arbitrators had already found that the bank was aware that the shipbuilding contract had been backdated, there was no concealment or non-disclosure of the true date and, as such, the lender could not be said to have deceived the bank issuing the refund guarantees.
If the bank had not been aware of the backdating, however, the buyers may well have been in some difficulty claiming the refund under the contract and refund guarantee. English law will regard as void and unenforceable a contract to commit a legal wrong or one that is contrary to morals or public policy. Backdated contracts are very often a feature of transactions structured to deceive and, whether or not fraud is involved, backdating is likely to be offensive to English public policy. While deception under foreign law or international treaty obligations may also lead to a contract being unenforceable if it is subject to English law.
There are, therefore, serious risks for the buyer in backdating shipbuilding contracts, and in fact for anyone in backdating any contract. Not least in shipbuilding transactions, the contract and the refund guarantee may be tainted and unenforceable.
Chris Kidd is head of Shipbuilding, Offshore Construction and Renewables at Ince & Co and can be contacted at chris.kidd@incelaw.com or +44 (0) 20 7481 0010. David Choy is a solicitor specialising in energy, insurance and reinsurance at the same company. He can be contacted at david.choy@incelaw.com or +44 (0) 20 7481 0010.