Refund guarantee

Refund guarantee (abbreviated to "RG", 선수금 환급보증/先受金還給保證) is provided for shipbuilding contracts. Given that the purchaser will normally be paying for a substantial part of the vessel in advance of delivery actually taking place, the refund guarantee provides a form of security in respect of those instalments.

Key words
Ship financing, shipbuilder, refund guarantee, performance, call-up, cut-off date

Ship financing
In general, a shipbuilder performs its work in the following process, and causes the purchaser to pay 20 percent of the contract price by phase in advance: It means that, prior to the delivery of the vessel, the purchaser has paid 80 percent of its price. By virtue of the refund guarantee, the builder’s bank undertakes that in the event the purchaser ends the contract for the reason of shipbuilder’s insolvency, etc. If the shipbuilder for any reason fails to refund the advance instalments of the contract price, the bank will refund those instalments on the builder’s behalf. Where the purchaser has taken a loan to finance the instalments, the purchaser will usually be required to assign the benefit of the refund guarantee to the financier. In this situation it is important to check that such an assignment is not prohibited in the refund guarantee.
 * 1) Shipbuilding contracts (계약체결);
 * 2) Steel cutting (착공);
 * 3) Keel laying (용골거치);
 * 4) Launching (진수); and
 * 5) Delivery (인도).

Legal issues
In the current economic climate, it is likely that shipbuilders will experience difficulties in financing new orders, making refund guarantees a very important tool in protecting the purchaser and its lender’s interests. More often than not shipbuilders are faced with unexpected cancellation of shipbuilding contracts since newly built vessels are expecting no more needs for charter. It is therefore vital for the purchaser to ensure that the refund guarantee provides as much protection as possible and, importantly, that the refund guarantee is actually enforceable.

The refund guarantee will normally be in place throughout the vessel’s construction and outfitting period and will have a cut-off date, which will usually make allowances for potential delays. It is important for the purchaser to ensure that the cut-off date takes into account any delay which could occur as a result of the arbitration of any disputes.

In this connection, disputes are on the increase in relation to the question of whether the guarantee can be called up on demand from the purchaser, or whether it should only be called up when an arbitrator or court has held that the builder should be liable. The purchaser and its lender will prefer the former, due to the fact that legal or arbitration proceedings can be lengthy and they will want reimbursed as quickly as possible.

Often the purchaser’s financing arrangements will state the loan is repayable when the purchaser rescinds the contract, therefore it will be in the particular interests of the purchaser for the refund guarantee to be called up on demand. The builder on the other hand, will wish to avoid the situation where the guarantee is cancellable even though the purchaser’s rescission is being contested.

In most cases the calling up provisions will be in the builder’s favour. The builder’s bank will make the guarantee expressly conditional on either the builder’s admission in writing that it is liable to make the refund or an arbitration award or court judgment determining the liability.

On the independence of RG

 * Rainy Sky S.A. and others v. Kookmin Bank

On the prohibition of abuse of rights

 * Supreme Court Decision 93Da43873 decided on December 9, 1994