UK: Shipyard Liable For Failing To Obtain Extension Of Refund Guarantee Within A Reasonable Time

(1) Wuhan Ocean Economic & Technical Cooperation Company Ltd and (2) Nantong Huigang Shipbuilding Co Ltd v. Schiffahrts-Gesellschaft "Hansa Murcia" MBH & Co KG (Hansa Murcia) [2012] EWHC 3104 (Comm)

A shipyard's failure to procure a renewal of a refund guarantee (two days before its expiry), was held to be a breach of an implied term of the shipbuilding contract that the shipyard must procure an extension within a reasonable time. However, this breach was not of itself repudiatory in nature. It was merely breach of an innominate term of the contract which did not deprive the innocent party (the buyers in this case) of "substantially the whole benefit of the contract". As a result, Mr Justice Cooke, on appeal from an arbitration award, held that the buyers were wrong to terminate the shipbuilding contract when they did, two days before the actual expiry date of the refund guarantee.

The background facts

The buyers had entered into the shipbuilding contract with the shipyard on 8 January 2004, before the financial crisis. By an addendum to the shipbuilding contract dated 22 December 2009 ("Addendum No. 4"), the parties agreed to a delayed delivery of the vessel. Addendum No. 4 extended the delivery date until 31 October 2011 and required the shipyard to procure an extension of the refund guarantee until 31 May 2012 (the refund guarantee had been due to expire on 30 June 2010). Crucially, Addendum No. 4 omitted to set a deadline for extension of the refund guarantee.

In the interim, the shipbuilding contract had become unprofitable and the buyers were looking to get out of it. On 23 April 2010, the buyers made their final enquiry of the shipyard as to when the extended refund guarantee would be provided. Two months later, on 28 June 2010, two days before the original refund guarantee was due to expire, the buyers alleged that the shipyard's failure to obtain an extension of the refund guarantee was a repudiatory breach of the shipbuilding contract, which they purported to accept as a ground for terminating the contract. On 29 June 2010, the buyers commenced arbitration against the shipyard. Pursuant to the terms of the original refund guarantee, the commencement of arbitration by either party would automatically extend the validity of the guarantee to 60 days after the final arbitration award was issued.

Had the buyers made further enquiries of the shipyard, they would have discovered that efforts were being made to obtain the extension. On 29 June 2010, the day before the refund guarantee was due to expire and the same day the buyers commenced arbitration, the refund guarantee was extended by the bank.

The tribunal's decision

The arbitration tribunal held that it was necessary to imply a term into the shipbuilding contract that the shipyard should procure the refund guarantee within a reasonable time because the contract was silent on this point and such a term was necessary to protect the buyers' security. The tribunal further found, as a matter of fact, that the "reasonable time" for the shipyard's performance ended on 16 June 2010, 14 days before the refund guarantee was due to expire. After 16 June 2010, the shipyard was, in its view, in breach of the shipbuilding contract. The tribunal concluded that this was a continuing breach and, by 23 June 2010 (seven days before expiry of the refund guarantee), it had become so serious as to go to the root of the shipbuilding contract and constitute a repudiatory breach that entitled the buyers to accept that repudiation and terminate the contract when they did on 28 June 2010. The shipyard appealed.

The Commercial Court decision

The judge agreed with the tribunal that a term should be implied into the contract that the shipyard must procure the extension of the refund guarantee within a reasonable time. He further stated that he could not disturb the tribunal's finding of fact that 16 June 2010, 14 days before the expiry of the guarantee, constituted a "reasonable time" and that the shipyard was in breach of the contract on that date.

The judge disagreed with the tribunal, however, that this continuing breach became repudiatory when the shipyard failed to procure the extension by 23 June 2010. In his view, the breach was not sufficiently serious so as to deprive the buyers of substantially the whole benefit of the shipbuilding contract. This was because, as the tribunal had found, the refund guarantee would automatically be extended if the buyers commenced arbitration against the shipyard (as they had done). The buyers could even have waited until the expiry of the refund guarantee before commencing arbitration against the shipyard for its breach of the implied term, thereby automatically extending the buyers' security. On that basis, Mr Justice Cooke held that the buyers' security was not "imperilled".

The judge concluded that there was a breach of contract, for which the buyers could be adequately compensated in damages, but not a repudiatory breach that entitled the buyers to terminate the shipbuilding contract when they purported to do so.

Comment

This decision highlights the need for buyers to exercise extreme caution when agreeing extensions to delivery dates by addenda to shipbuilding contracts. Buyers should consider making an extension of the refund guarantee a condition precedent to the continued existence of the shipbuilding contract or making time of the essence and, in each case, stipulating the exact consequence of failing to obtain an extension. In this case, the Commercial Court was persuaded that, on the particular wording of the refund guarantee in question, commencement of arbitration would extend the refund guarantee automatically. This will not, however, be the effect of every refund guarantee and buyers should be cautious not to assume that they will always have this protection.

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