Refund guarantees in shipbuilding contracts

Why refund guarantees matter

Under most shipbuilding contracts, the buyer pays a significant share of the price in instalments while the ship is being built, with the balance due on delivery. If the contract is cancelled before delivery, typically because the yard is late or in financial difficulty, the yard keeps the partly built ship. The buyer's protection is a right to a refund of its instalments.

That right is only as good as the party paying it. Because cancellations often happen when a yard is struggling, buyers ask for a refund guarantee from a creditworthy bank. In some contracts, the instalments only fall due once the buyer has received the guarantee.

Demand guarantees and conditional guarantees

A refund guarantee is a separate contract between the bank and the buyer. Its wording decides how it works.

Under a demand (or on-demand) guarantee, the bank must pay when it receives a demand that complies with the guarantee, without looking into the dispute between buyer and yard. Under a conditional, or 'see to it', guarantee, the bank only pays once the yard's liability has been established.

Many refund guarantees combine the two. A common pattern is a guarantee payable on demand unless the yard disputes the cancellation in arbitration within a set period, in which case payment waits for the outcome. In one English case the court treated guarantees of this kind as demand bonds because the yard had not started the dispute in time.

The wording also decides what the guarantee covers. In that same case, the guarantees were held to respond to a termination under the general law as well as a cancellation under the contract's own termination clause, because their wording was wide enough.

How Singapore courts treat on-demand bonds

Singapore courts treat an unconditional on-demand bond as independent of the underlying contract. The court will only stop the beneficiary calling on it, or stop the bank paying, if there is enough evidence of fraud or unconscionability.

The parties can agree to exclude the unconscionability ground, but the party relying on that exclusion has to prove it. Beneficiaries should also be careful how they respond if the yard goes to court to stop a call, because some steps can be argued to make payment depend on proving the underlying claim.

When the guarantee does not arrive on time

Some contracts give the buyer a right to cancel if the refund guarantee is not delivered within a set period. In a 2026 English decision, the court held that an obligation of this kind was not a condition of the contract. The buyers could cancel under the express clause, but could not claim damages for their lost bargain, partly because their money was never at risk: no instalments were due until the guarantee was given.

That decision turned on English law and the contract's particular wording, but it shows that buyers who want wider remedies need to say so clearly in the contract.

Points to check in a refund guarantee

• Who the guarantor is, and whether it is acceptable to the buyer and its financiers.
• Whether payment is on demand, conditional, or a mix, and what a valid demand must contain.
• Which cancellation and termination events the guarantee covers.
• How later amendments to the shipbuilding contract are dealt with under the guarantee.
• Expiry dates, governing law and where disputes will be decided.

Getting advice on your guarantee

This guide is general information. Refund guarantees differ widely in wording and governing law. Ask a lawyer to review the guarantee alongside the shipbuilding contract before the first instalment is paid, and again before any amendment or call.