Wuhan Ocean v Hansa Murcia

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DMC/SandT/13/02

England

Wuhan Ocean Economic & Technical Cooperation Co Ltd v Schiffahrts-Gesellschaft “Hansa Murcia” MBH & Co KG

English Queen’s Bench (Commercial Court): Cooke J: [2012] EWHC 3104 (Comm): 6 November 2012

Mr Simon Bryan QC, instructed by MFB for the Claimants

Mr Timothy Young QC, instructed by Holman Fenwick Willan for the Defendant

CONTRACT FOR CONSTRUCTION OF VESSEL: ADDENDUM FOR SELLERS TO OBTAIN EXTENSION OF REFUND GUARANTEE: IMPLIED TERM TO OBTAIN EXTENSION WITHIN REASONABLE TIME BEFORE EXPIRY OF ORIGINAL GUARANTEE: INNOMINATE TERM: BUT BREACH OF IMPLIED TERM NOT A REPUDIATORY BREACH AS, UNDER THE TERMS OF THE GUARANTEE, BUYERS COULD MAINTAIN THE SECURITY BY COMMENCING ARBITRATION

Summary

The present case arose out of a contract for the construction and sale of vessel. After the parties agreed to a delayed delivery of the vessel, the Sellers undertook to extend the validity of the refund guarantee. The Court held that, given the importance of the guarantee and the lack of provision in the contract for the time in which the extension should be obtained, a term was to be implied that the Sellers would obtain the extension within a reasonable time before the expiry of the original guarantee. The term was an innominate term, and the Sellers were in breach, as an extension was not obtained two weeks before the expiry of the guarantee. However, the breach was not repudiatory as the Buyers were not at risk of losing the guarantee which, by its terms, would be revived when arbitration commenced.

This note has been contributed by Ken T.C. Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong.

Background

The present case arose out of a ship building contract dated 8 January 2004 (“the Contract”) between Wuhan Ocean Economic & Technical Cooperation Co Ltd, the Sellers, and Schiffahrts-Gesellschaft “Hansa Murcia” MBH & Co KG, the Buyers, for the building, sale and purchase of a 900 TEU container vessel. Under the Contract, the Buyers were required to pay the price in instalments and their repayment was to be secured by a refund guarantee.

A Refund Guarantee provided by the Sellers dated 7 June 2007 stated that it would “remain in force until the Vessel has been delivered to and accepted by [the Buyers] or refund has been made by the Sellers or ourselves… or until June 30th, 2010, whichever occurs earliest… In case arbitration initiated by either Sellers or Buyer before delivery of the Vessel, the validity of this guarantee shall be extended to 60 calendar days after the final arbitration award is issued.”

On 22 December 2009, the parties signed Addendum No.4 to the Contract whereby it was agreed that the delivery of the Vessel would be delayed to 31 October 2011. The Sellers also undertook “to extend the validity of the Refund Guarantee dated 7th June 2007… until 31 May 2012.”

On 23 April 2010, the Sellers submitted a request to the bank for an extension of the Refund Guarantee. However, the Buyers did not know this.

Shortly before the expiry of the Refund Guarantee on 30 June 2010, the Buyers through their solicitors sent a letter to the Sellers, stating that they accepted the Sellers’ repudiatory breach of the Contract in failing to obtain an extension of the Refund Guarantee, thereby terminating the Contract.

On 29 June 2010, the Buyers commenced arbitration by serving a Notice of Demand for Arbitration. On the same day, the bank extended the Refund Guarantee shortly before its expiry.

The arbitral tribunal held that, given the importance of the provision of the Refund Guarantee and the absence of provision in the Contract as to when the Sellers should procure the Refund Guarantee, a term would be implied into the Contract that the Sellers should fulfil its obligation to obtain an extension of the Refund Guarantee within a reasonable time. This was an innominate term; and on the facts, the Sellers were in breach as a reasonable time for obtaining the extension was no later than 16 June 2010. Further, the Buyers were entitled to be certain that the Refund Guarantee was in place seven days before the expiry, that is, on 23 June 2010; otherwise, there was not sufficient time to ensure that the breach could be remedied before the expiry of the Refund Guarantee. Thus, when the Sellers had not obtained the extension by 23 June 2010, the breach became repudiatory and the Buyers were entitled to terminate the Contract.

The Sellers appealed against the decision of the arbitral tribunal, and leave was given under s.69 of the Arbitration Act 1996 for the determination of the following questions of law:

1. Whether the Sellers had an obligation to extend the Refund Guarantee before the date of expiry of the existing Refund Guarantee on 30 June 2010), or

2. Whether a term was to be implied (amounting to an innominate term and not a warranty) that the Sellers should extend the validity of the Refund Guarantee within a reasonable time having regard to all the circumstances; and if so

2(a). Whether there was a breach as a result of the Refund Guarantee not having been extended by 28 June 2010, and if so

2(b). Whether the breach amounted to a repudiatory breach.

Judgment

Cooke J allowed the appeal.

Cooke J firstly noted that courts would not imply a term merely because it was reasonable to do so but only where it was necessary to do so to give the contract its intended meaning: AG of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, The Reborn [2009] 2 Lloyd’s Rep 639. Where parties imposed a unilateral obligation without specifying the time in which it was to be done, the parties could not have intended the obligation to be of perpetual or indefinite duration. There must be a limit to the time in which the obligation was to be fulfilled.

In the present case, there was no express term in the Addendum as to the time by which the existing Refund Guarantee fell to be extended. The Sellers contended that they were only required to procure an extension by the time the Refund Guarantee expired. However, this was rejected by the Court because parties would want to know where they stood before the expiry date in case there was a breach by the Sellers and thus a need to call on the security. Concern would arise if the obligation was to produce an extension of the guarantee at the last minute. The term “within a reasonable time” was certain in its formulation and all circumstances fell to be taken into account to determine what a reasonable time actually would be and whether a breach occurred. Thus, the tribunal was right to imply the existence of a reasonable time test. Its finding as to what constituted a reasonable time was unchallengeable as a finding of fact, and the Sellers were in breach of the implied term.

It was true that the Buyers could, following the expiry of the existing guarantee, institute arbitration in respect of any breach, including the failure to procure the extension of guarantee, and this had the effect of automatically extending the guarantee until 60 days after any award. However, this did not negate the implication of term. The duty was on the Sellers to provide the extension without the need for any action on the part of the Buyers, whether by commencing arbitration or otherwise. Further, the risks on the Buyers would be increased if resort had to be made to extension under the arbitration mechanism. The bank might have arguments on the scope of the instrument that would not have been available to it, had the Refund Guarantee simply been extended. The Buyers were entitled to a degree of certainty about the continuity of the Refund Guarantee which would only have been possible if the extension was agreed within a reasonable time before its expiry.

As to the nature of the term, the Court noted Chitty on Contract, 30th edition, paragraph 12-131, where it was stated that the emergency of the category of innominate term seemed to have reduced the number of occasions when a term would be classified as a mere warranty “almost to vanishing point”. In the present case, if the Sellers failed to procure the extension of the Refund Guarantee for a year or more after the expiry of the existing guarantee, the breach clearly went to the root of the contract. Such possibility was enough by itself to show that the implied term was an innominate term. Further, the extension by the arbitration mechanism would be inadequate as it would expire 60 days after the award and would not run until the agreed date for the extension, i.e. 31 May 2012. The tribunal could not order specific performance against the bank which was not a party to arbitration. It was still possible that certain breaches could go to the root of the contract, even though the guarantee would be extended upon the commencement of arbitration.

However, the tribunal was wrong to ignore the extension by the arbitration mechanism in concluding that the breach was repudiatory. The Buyers could have waited until the expiry date of the Refund Guarantee and then instituted arbitration against the Sellers for failure to procure the extended guarantee within a reasonable time, with the automatic triggering of the extension and the resurrection of the security. In such circumstances, the Buyers were under no risk of losing the guarantee. They were entitled to damages for the Sellers’ breach of the implied term, but not to repudiate the contract as a whole – which it had been their commercial purpose to achieve.