The applicability of the refund guarantees when the shipyard goes bankrupt

When major shipbuilding contracts are entered into, a so-called ‘refund guarantee’ issued to the buyer by a bank nominated by the shipyard, by virtue of which the instalments paid in advance are returned, provided that the buyer terminates the shipbuilding contract before delivery of the vessel has taken place. Despite the clear wording of the refund guarantees and the shipbuilding contracts, the applicability of the refund guarantees is in doubt in situations where the contract is terminated due to the shipyard entering into bankruptcy proceedings. This is because the bankrupt estate cannot be expected to agree to the termination of the shipbuilding contract as a matter of course. In this event, the buyer may have to waive the agreed security and accept the bankrupt estate as the contracting party, unless the fulfilment of the shipbuilding contract is specifically identified with the performance of the shipyard in question. With this in mind, it will be assessed in this article whether the work required in order to complete the construction of a vessel may be of an interchangeable nature.