Do refund guarantees under a shipbuilding contract cover restitution and reliance loss claims?
Introduction
In Havila Kystruten AS v Abarca
Companhia De Seguros, SA [2022] EWHC 3196, the Commercial Court of the
High Court of England and Wales (the “Court”)
has ruled that the buyer under shipbuilding contract is entitled to terminate
on various grounds and that the buyer can recover pre-paid instalmants as
reliance loss from the refund guarantees. In addition, a
provision in the shipbuilding contract requiring the buyer to provide “a
written committed statement of its financing” for the vessels was held not to
require full loan documentation to have been executed.
Background
This case concern the termination of two
shipbuilding contracts dated 10 April 2018 (the “Shipbuilding Contracts”), entered into between Havila Kystruten AS
(“Havila”), as the buyer and Hijos
de J. Barreras SA (the “Yard”), as
the shipbuilder, for the design and build of two coastal passenger vessels for
a price of €108 million per vessel. The Yard wished to terminate the
Shipbuilding Contracts on 24 November 2019 on the grounds that Havila had
failed to comply with an obligation arising under addenda to the Shipbuilding
Contracts (the “Addenda”) to provide
a written committed statement of its
financing for the vessels and no other financial arrangement shall be provided
by Havila in order to avoid termination of the Shipbuilding Contracts. The Yard
seeks (i) the payment of two instalments which it claimed to have fallen due
from Havila prior to termination; and (ii) damages.
Havila asserted that the Yard was not
entitled to terminate under the abovementioned provisions. Instead, Havila gave
notice to terminate the Shipbuilding Contracts on 11 February 2020 and claimed (i)
the recovery of three instalments (in the aggregate sum of €18.4 million per
vessel); and (ii) the same sums from Abarca Companhia de Seguros SA (“Abarca”) under a series of six
insurance bonds dated 1 March, 30 April and 27 May 2019 (the “Bonds”). The Bonds provided security to Havila in the event of termination of the Shipbuilding
Contracts and a claim by Havila to recover instalments it had paid to the Yard.
The issues
The Court has considered the following
issues when deciding which party can terminate the Shipbuilding Contracts:
1.
whether the Yard was entitled to terminate the Shipbuilding Contracts
for the breach of Havila’s obligations under the Addenda to the Shipbuilding
Contracts;
2.
whether the Yard waived any such right;
3.
if the Yard did not validly terminate the Shipbuilding Contracts,
whether Havila was entitled to terminate the same on the basis that (i) the
Yard’s purported termination was a repudiatory act that Havila accepted; (ii) the
vessels would not be completed within a certain days of the delivery dates pursuant
to Article IV.1(d) of the Shipbuilding Contracts; and (iii) pursuant to Article
XII.3 of the Shipbuilding Contracts, the Yard’s application for judicial
dissolution on 26 November 2019 had rendered Havila the right to terminate;
4.
whether the Bonds issued by Abarca are in the nature of ‘on
demand’ bonds, and whether they correspond to a damages claim following
termination by Havila of the Shipbuilding Contracts at common law; and
5.
if the Yard was entitled to terminate the Shipbuilding Contracts,
whether it is entitled to claim damages from Havila for wasted expenditure.
Whether the Yard
was entitled to terminate the Shipbuilding Contracts
The Court held that the Yard was not
entitled to terminate the Shipbuilding Contracts and claimed damages from
Havila for wasted expenditure. The Court explained that the ordinary meaning of
a written committed statement is a
written statement of the bank’s commitment to lend, whereby the bank has given
an “in principle” indication that it will lend on specified terms but without
entering into any legally binding agreement. As such, the Court accepted that
the issue of a term sheet by a bank in general represents an important degree
of commercial commitment to the proposed transaction. The Court further held
that the Yard was entitled to terminate the Shipbuilding Contracts under the
terms of the Addenda if committed financing was unavailable, provided that the
Yard had negotiated with Havila in good faith and concluded after 14 days that
there was no alternative financial arrangement could be provided by Havila.
Yet, no conclusion was reached by the parties and therefore the right to
terminate did not arise.
Whether the Yard
has waived any right to terminate
The Court held that even if the right to
terminate had arisen, the Yard would have waived the same by failing to
terminate the Shipbuilding Contracts within a reasonable time given that the
Yard had engaged in ongoing discussions which indicated a continuation of the
Shipbuilding Contracts with Havila.
Whether Havila
was entitled to terminate the Shipbuilding Contracts
The Court held that Havila was entitled to
terminate the Shipbuilding Contracts. Havila submitted that the instalments
could be recovered as expenditure wasted in reliance on the
Shipbuilding Contracts. On the other hand, the Yard argued that the price
paid to a contractual counterparty was not regarded as reliance loss but a
claim for restitution and could be recovered only in the event of total failure
of consideration. The Court concluded that it would be wrong in
principle for the innocent party to be left without a remedy and for the
wrongdoer to be able to retain the price merely on the basis that they had
provided some degree of contractual performance.
Article IV.1(d) of the Shipbuilding
Contracts provided that if it can be established beyond any reasonable doubt
that the vessels will be delayed for more than 180 days or for a force majeure
delay of 270 days, Havila shall have a right to terminate the Shipbuilding
Contracts. As the Yard had sent the termination notice on 24 November 2019 to
Havila, it was clear beyond any reasonable doubt that the Yard was not going to
complete the vessels at all.
The Court also upheld Havila’s right to
terminate the Shipbuilding Contracts pursuant to Article XII.3 of the
Shipbuilding Contracts as the Yard had commenced judicial dissolution
proceedings, even though the petition for judicial dissolution was rejected
afterwards.
Havila’s claims under the
Bonds
The Court construed that the Bonds are
demand bonds given that payment by Abarca was due against production of
stipulated documents without the need for Havila to separately prove an
underlying unsatisfied liability of the Yard. The Court rejected Abarca’s
submission that the Bonds did not cover termination at common law for repudiatory
breach. The key provisions of the Bonds cover cases where
Havila is entitled to recover an amount equal to those instalments by way of
damages. Therefore, it is broad enough to cover an obligation to pay damages in
the amount of the instalments and the Bonds cover a liability on the Yard to
refund the instalments to Havila including by way of a liability for damages.
Key takeaways
This case puts beyond doubt that refund guarantees expressed to secure
repayment of the buyer’s instalments can secure a claim in restitution or for
reliance loss for such sums following a termination for repudiatory breach at
common law and not just for express contractual termination. As such, the decision
has provided a more complete protection to buyers in shipbuilding contracts.
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Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
cannot be relied upon as legal advice in any individual case. If any advice
or assistance is needed, please contact our solicitors. |
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Published by ONC Lawyers © 2023 |
