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England and Wales Court of Appeal (Civil Division) Decisions

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Cite as: [2014] 2 Lloyd's Rep 50, [2014] EWCA Civ 186

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Neutral Citation Number: [2014] EWCA Civ 186
Case No: A3/2013/0708


Royal Courts of Justice
Strand, London, WC2A 2LL
27th February 2014

B e f o r e :



- and -



(Transcript of the Handed Down Judgment of
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Mr Stephen Hofmeyr QC & Mr Michael Holmes (instructed by MFB Solicitors) for the Appellant
Mr Michael Fealy (instructed by Gibson, Dunn & Crutcher LLP) for the Respondent



Crown Copyright ©

    Lord Justice Longmore:


  1. This is the unfortunate story of the partial construction of a 71.50 metre long luxury motor yacht known as "Project NATO". The claimant ("Swallowfalls") commissioned the yacht from Monaco Yachting & Technologies S.A.M. ("MYT") as General Contractor but it was always understood that the actual construction work was to be carried out at La Spezia in Italy by Cantiere San Marco SRL ("the Yard"). Swallowfalls is a single-purpose company, incorporated under the laws of the Isle of Man, administered by a Guernsey-based company called Artemis Trustees Ltd and connected to Mr Nathaniel Rothschild.
  2. Under the Construction Agreement of 3rd January 2006 the price of the yacht was 35,231,600 to be paid by 11 instalments due when MYT had achieved what were known as "milestones" on the way to final delivery, with a final 10% due on delivery, which constituted the 11th milestone. Title to the yacht was to be transferred to Swallowfalls on payment of the 5th milestone. The construction agreement contained a London arbitration clause, incorporating the LMAA Rules.
  3. The only clause of the Construction Agreement which needs to be singled out at this early stage of the story is Article 19:-
  4. "19.1 The General Contractor [MYT] shall be deemed to be in default if:
    19.1.1 subject always to the provision in this Agreement covering delays to the Production Schedule the General Contractor shall be in material breach of a term or terms of the Agreement and that breach continues for forty-five (45) days following receipt by the General Contractor of a notice from the Buyer requesting that the breach be remedied; or
    [Various provisions relating to insolvency, which do not include grace periods]
    19.1.6 anything analogous to the preceding Articles of 19.1.2 to 19.1.5 occur in respect of the Builder, which, if capable of being remedied, are not remedied to the reasonable satisfaction of the Buyer within forty-five (45) days, or where alternative suitable arrangements to have the Vessel constructed or completed elsewhere have not been made within forty-five (45) days and fully implemented within a further sixty (60) days thereafter;"
  5. We do not know the terms of the sub-contract between MYT and the Italian Yard but MYT had difficulty in meeting their obligations under it and it became clear to Swallowfalls that, if they were going to get their yacht, they would have to provide interim finance to MYT in advance of payment becoming due under the 3rd and 4th milestones. So a First Amendment came into existence dated 26th October 2007 by which Swallowfalls agreed to pay 3,372,000 and MYT agreed to repay that sum from the payments due to it on the achievement of milestone 4 or, if the milestone had not been reached by 30th April 2008, by some other means on that date. It was also agreed that Swallowfalls would pay the sums, available under this facility, directly to MYT's suppliers and sub-contractors. A further agreement was that title to the yacht would be transferred to Swallowfalls within 30 days. The second defendant, Mr Peter Landers, the Chairman and Managing Director of MYT, provided a personal guarantee for sums outstanding under this First Amendment.
  6. MYT did not repay the loan by 30th April or at all. Nor did it transfer title to the vessel within 30 days or at all.
  7. By a Second Amendment of June 2008, Swallowfalls agreed to provide a more substantial loan facility of 33,803,980 (to include the previous facility) in advance of certain milestones being achieved and such funds were likewise to be provided directly to MYT's suppliers and sub-contractors. By Article 3.4 as and when the relevant milestone had been achieved and the Stage Certificate for that milestone had been counter-signed by Swallowfalls' Technical Advisor, the loan amount would be reduced by the amount of the relevant instalment. A formal loan agreement ("the 2008 Loan Agreement") was attached to the Second Amendment and Mr Landers provided a second guarantee. Article 2.5(a) of the 2008 Loan Agreement provided:-
  8. "The Loan and Interest shall be repaid by the Borrower; (1) within thirty (30) days from receipt of a demand letter by the Lender, (2) upon termination of the Agreement or the Loan Agreement or (3) the earlier of the expiration of the Term hereunder or the date of the Stage Certificate for instalment 11 under the Agreement."

    Article 2.6 further provided that the term of the loan facility was to be "up to and including 01 September 2009". All sums lent were therefore (on the face of it) repayable on or within 30 days of a demand and, in any event, on 1st September 2009. In the event of any claim or dispute the English court was to have exclusive jurisdiction.

  9. By a Third Amendment of 1st May 2009 Swallowfalls agreed to release monies held by way of Refund Guarantee. MYT for their part agreed (again) to transfer title to the vessel within (this time) 60 days and agreed to pay liquidated damage of 50,000 per month if they did not do so.
  10. It is, however, the Fourth Amendment of 3rd November 2010 which is the most pertinent agreement for the present case. Not only had the loan not been paid by 1st September 2009 or title to the yacht transferred but by this time a serious dispute had arisen between MYT and the Yard relating to late payment of sums due from MYT and sums charged by the Yard to MYT because construction was taking too long and "late stay charges" were supposedly accruing. This dispute was settled by a Tripartite Agreement between Swallowfalls, MYT and the Yard. Swallowfalls agreed to provide yet more additional funds to MYT partly for the late stay charges and partly as "Working Capital". By the Fourth Amendment it was also agreed that this sum would be rolled into the loan facility and that a new loan agreement ("the 2010 Loan Agreement") would be made in the form attached to the Fourth Amendment, which also provided (by Article 3.9) that then 2010 Loan Agreement was to replace the 2008 Loan Agreement. Mr Landers signed a Third Guarantee.
  11. MYT further agreed (again) to transfer title in the yacht to the Buyer of the yacht and abandon their right to a lien in respect of the purchase price which had been granted by Article 6.1 of the original Construction Agreement. The price was moreover increased to 41,687,210.
  12. Matters still proceeded unhappily and on 9th July 2011 Mr David Larkin of Swallowfalls gave MYT a contractual notice that MYT were in material breach of the Construction Agreement, the Fourth Amendment and the Tri-Partite Agreement. Mr Landers responded on behalf of MYT on 2nd September 2011 by refuting the allegations and on 5th September by giving notice of arbitration under the Construction Agreement and the Tri-Partite Agreement and appointing Mr Ian Gaunt as MYT's arbitrator. MYT identified four particular disputes:-
  13. i) Swallowfalls' delays in respect of buyers' variation requests;

    ii) Swallowfalls' failure to have a buyers' representative at the Yard;

    iii) Swallowfalls' failure to countersign stage certificates so as to enable the loan to be repaid by MYT; and

    iv) Swallowfalls' failure to provide some or all of the agreed Working Capital.

    Swallowfalls riposted by appointing Mr Christopher Hancock QC as their arbitrator for the disputes in respect of MYT's claims and their own cross-claims. We have been told that MYT's claim in the arbitration has now been dismissed as MYT have not given security for costs. The arbitration is, however, still alive for the purpose of Swallowfalls' cross-claims.

  14. Swallowfalls then on 19th December 2011 precipitated these proceedings by giving notice under clause 2.5(a) of the 2010 Loan Agreement (which I set out below) that the loan was immediately due and payable in the sum of 15,699,864.21. They also exercised their right under Article 19.2.2 of the Construction Agreement to replace MYT as General Contractor and complete the construction by their own nominee. It seems that, in the event, construction has halted and the yacht is still at La Spezia in an uncompleted condition.
  15. Swallowfalls then issued an application for summary judgment for repayment of the loan. On 4th July 2012 Walker J gave judgment in favour of Swallowfalls against the appellants on the issue of the construction of clause 2.5(a) of the 2010 Loan Agreement and adjourned the balance of the summary judgment application to a hearing to be fixed. MYT now appeal paragraphs 1 and 2 of the order of 4th July 2012 under appeal notice 2013/0708.
  16. At the re-fixed hearing on 15th February 2013, save as regards the summary judgment granted to Swallowfalls on the issue of construction by the order of 4th July 2012, Walker J dismissed Swallowfalls' application for summary judgment. He also dismissed Swallowfalls' application for an interim payment and stayed the proceedings pending resolution of MYT's cross-claim for breach of implied terms of the 2010 Loan Agreement (which he found to exist) as to Swallowfalls' obligation to co-operate with MYT particularly in relation to contractual variations and certification of compliance with relevant milestones. In addition, Walker J ordered that there be no order as to costs in respect of the parties' various applications. MYT now appeal against this costs order under appeal notice 2013/0716.
  17. Swallowfalls in their turn cross-appeal against the judge's order finding that the 2010 Loan Agreement contained any implied terms and say they are now entitled to judgment in the monetary sum claimed.
  18. The terms on which Swallowfalls rely

  19. It has been necessary to set out the history of the matter at a little length in order to provide the relevant context for the arguments about construction of the Fourth Amendment and the 2010 Loan Agreement. Under the heading of Further Finance Facility, Article 3.11 of the Fourth Amendment provided:-
  20. "From the signing of this Fourth Amendment until the Delivery or until the termination of the Agreement, or upon demand for repayment by [Swallowfalls], whichever is the earliest, [Swallowfalls] agrees to provide the Loan Facility of up to Euros 38,327,600."

    Clause 2.5(a) of the 2010 Loan Agreement provided:-

    "Unless previously repaid or prepaid pursuant to this Loan Agreement the Borrower shall repay the Loan, accrued Interest and all other sums payable under the Loan Agreement on the first to occur of:
    (i) the date on which the Lender gives the Borrower notice that the Loan is immediately due and repayable;
    (ii) the date on which the Agreement terminates;
    (iii) an Event of Default;
    (iv) the Completion Date; or
    (v) upon Delivery."

    Clause 2.6 of the Agreement provided that the term of the Loan Facility was to be from 3rd November 2010 to the Completion Date which was stated to be 30th April 2012.

  21. In the light of these clauses Swallowfalls claims it was entitled to serve notice of demand when it did and that the sum outstanding under the Facility became due. MYT claim that the loan is not repayable on demand but only in the event of default on MYT's part or termination/completion/delivery. That MYT say is the only way to make sense of the interlocking provisions for the Facility which provided for the reduction of the loan to occur on the achievement of the relevant milestones.
  22. The Judgment of July 2012

  23. The judge set out the history of the matter and recorded the rival submissions of the parties; Swallowfalls' submission was that clause 2.5(a) gave it the right to call in the loan at any time without more; MYT's submission was that Swallowfalls could only give notice if some other provision of the 2010 Loan Agreement entitled it to give notice or in other words when an Event of Default had occurred or the Agreement had terminated. The judge also recorded the submission of Mr Hofmeyr QC for MYT that if the true construction of clause 2.5(a) was that the loan was repayable on demand, the rest of the clause was otiose and Mr Fealy's converse contention that if Mr Hofmeyr's construction was correct clause 2.5(a) was otiose. The judge observed that the rest of the clause was not otiose if Swallowfalls' construction was correct. He pointed out that if an event of default had occurred such as a breach which was not remedied within 45 days or an event of insolvency, it might take time for the lender to be aware that such an event had occurred. (The judge might have added that it could be a matter of dispute whether the event of default had occurred or not). In those circumstances clause 2.5(a) operated to enable such uncertainty (or dispute) to be side-stepped. He then concluded that Swallowfalls' construction was the natural meaning of the words and was indeed the commercial good sense of the matter and that Rainy Sky v Kookmin [2011] 1 WLR 2900 assisted Swallowfalls rather than MYT. He then rejected various other arguments of MYT and gave summary judgment accordingly.
  24. The submissions on the appeal

  25. Mr Hofmeyr opened the appeal by accepting that MYT's construction of the clause might appear to be difficult but that in those circumstances a construction should not be adopted which effectively deprived MYT of the benefit of the Loan Agreement. He developed his argument under 5 headings. He first relied on the purpose of the 2010 Loan Agreement which echoed the purpose of the 2008 Loan Agreement and indeed the First Amendment which was that the loan facility was provided
  26. "in advance of the Milestone having been reached and the relevant stage certificates therefore having been signed under the [construction] Agreement, in order to assist with the Borrower's cashflow during the construction of the Vessel under the Agreement."
  27. Secondly he said that clause 2.5(a)(i) of the Loan Agreement had to be construed in its own contractual content which included Article 6.2 of the Fourth Amendment:-
  28. "For the avoidance of doubt repayment of the Loan under the Loan Agreement when expressed to have been made on demand, will not be subject to the grace periods for payment/repayment provided for under Article 19 of the Original Agreement."

    This was itself mirrored in clause 2.5(d) of the 2010 Loan Agreement:-

    "For the avoidance of doubt any call for repayment of the Loan under the Loan Agreement, when expressed to have been made on demand, will not be subject to the grace periods for payment/repayment provided for under the Original Loan Agreement or under Article 19 of the Original Agreement."

    He submitted that this provision for disapplying the grace periods was only necessary on the supposition that payment on demand could only be made if an entitlement to make such demand had arisen from some provision of the contract.

  29. Thirdly Mr Hofmeyr relied on the existence of the other provisions of clause 2.5(a) in repetition of his submission to the judge that they are otiose if Swallowfalls is correct. Questions of uncertainty relied on by the judge at paragraph 11 of his judgment (or dispute) need never arise. The judge's further remark that a provision enabling the loan to be called in after default might have a relevance "for other purposes" made no sense.
  30. Fourth he relied on clause 2.8.2 of the 2010 Loan Agreement:-
  31. "In the Event of Default by the Borrower, the Lender may exercise any and all of its rights against the Borrower under this Loan Agreement, including but not limited to termination of the Loan Agreement and the Agreement, whereupon all monies shall become immediately due and repayable by the Borrower to the Lender."

    This provision was also otiose if Swallowfalls were correct.

  32. Fifthly and lastly he relied on what he called "the utterly uncommercial" consequences of Swallowfalls' construction. The sums borrowed were (and were contractually required to be) paid to suppliers or sub-contractors. If the loan could be called in at any time, MYT would find that they could not achieve milestones under the Construction Agreement because suppliers/sub-contractors would stop work and the sub-contract would then be taken over by Swallowfalls, freezing MYT out of the supposedly profitable arrangements they had made with the Italian Yard.
  33. Mr Fealy submitted that the judge was right for the reasons he gave.
  34. Conclusion

  35. This is a short question of construction of clause 2.5(a)(i) and, despite Mr Hofmeyr's powerful submissions, I have no doubt that the judge was correct. If a clause provides that a loan is to be repaid
  36. "on the first to occur of"

    a number of events (i) to (v) and one of those events is

    "the date on which the Lender gives the Borrower notice that the Loan is immediately due and payable,"

    the natural construction of the words is that, once such notice is given, the loan is to be repaid. When one sees that, under clause 3.11 of the contemporaneous Fourth Amendment, Swallowfalls agrees to provide the loan facility from the signing of the Amendment

    "until the Delivery or until termination of the Agreement or upon demand for repayment by the Buyer,"

    that natural construction is confirmed.

  37. Both parties appealed to the contractual history which I have set out at the beginning of this judgment. That history seems to me also to support Swallowfalls' argument. Swallowfalls self-evidently wanted the boat built. It came to realise that this could only be done if it lent MYT money for that purpose. A comparatively small amount of money was lent in October 2007 against a promise that MYT would transfer title to the yacht within 30 days and promise to repay by 30th April 2008. Neither event occurred and more money was needed. A very large sum was provided in June 2008 against a promise to repay on the happening of various events one of which was 30 days from receipt of a demand and in any event on or before 1st September 2009. No repayment was made and more money was needed to continue construction. So the Fourth Amendment and the 2010 Loan Agreement came into existence on 3rd November 2010, not surprisingly on more stringent terms as to repayment than existed before. No doubt Swallowfalls hoped that this Fourth Amendment and the 2010 Loan Agreement would actually get the vessel built. But it must have had serious doubts about the matter at that stage and a provision for repayment on demand (as opposed to the earlier provision for repayment within 30 days of demand) was only to be expected.
  38. In these circumstances it seems to me that Mr Hofmeyr's appeals to the contractual context of clause 2.5(a)(i) and to the purpose for which the loan agreements came into existence are misplaced. Reliance on clause 6.2 of the Fourth Amendment and 2.5(d) of the 2010 Loan Agreement takes the matter no further. Article 19 of the original Construction Agreement provided for periods of grace during which MYT had the opportunity to correct or remedy any breach of contract which might otherwise constitute Events of Default or give rise to a right to terminate the contract. It was only sensible to provide, once it had been agreed that the loan was repayable on demand, that no grace period was applicable. The clauses relied on are thus supportive of what I see as the true construction of clause 2.5(a)(i) and certainly do not support the idea that demand could only be made, if the loan was only repayable pursuant to some entitlement to be found elsewhere in the contract.
  39. Arguments of surplusage are not particularly compelling in commercial contracts. No doubt both parties hoped that a demand for repayment would be unnecessary and construction would proceed. No demand was in fact made shortly after the Fourth Amendment of November 2010. It was not until December 2011, after MYT had themselves initiated arbitration proceedings, that any demand was made. It is true that the judge did not in paragraph 27 of his judgment indicate the circumstances in which the Borrower might prefer to rely on an Event of Default rather than a mere demand. But a possibility he might have had in mind is that the interest rate is defined, in the interpretation clause of both the 2008 and the 2010 Loan Agreement, as being 3% per annum above thee month EURIBOR
  40. "or, if there has been an Event of Default, the rate of 5% p.a. above three month EURIBOR."

    Mr Hofmeyr's third and fourth points cannot, to my mind, carry the day.

  41. As to the supposed uncommercial consequences, one has to stand back a little. If the provision for repayment on demand had been in the First Amendment, one could legitimately say that the contract was somewhat one sided. Even that would not be conclusive if the words were clear enough. But as loan after loan had to be made to keep the Construction Agreement operative, it is not surprising that a provision first for a demand for repayment within 30 days and finally for a demand for immediate repayment on notice came to be incorporated in the contractual arrangements. Such uncommerciality as there is has only come about as a result of MYT's inability to meet the commitments which they had originally assumed.
  42. So for all these reasons I would agree with the judge and dismiss this appeal. There was also a notionally separate appeal as to costs in respect of the construction issue but this turned out to be merely because the order for costs was part of the judge's second order rather than his first. It is entirely parasitic on success of the construction issue and falls to be dismissed as well.
  43. The Cross-Appeal

  44. The judge accepted Mr Hofmeyr's contention that the following terms should be implied into the 2010 Loan Agreement:-
  45. "(1) Swallowfalls would not, by its own acts or defaults and/or the acts of defaults of its agents, in breach of the Construction Agreement and/or otherwise, prevent MYT from repaying the Loan, or delay MYT in repaying the Loan by the means identified in clause 2.5(b) and (c); and/or
    (2) Swallowfalls would cooperate with MYT in the confirmation of the achievement of Milestones and, in particular, the counter-signature of stage certificates."
  46. Mr Fealy submitted that it was not necessary to imply either term and that such implication would, in any event, only be duplicative of the position under the Construction Agreement any breach of which sounded in damages which could, if necessary, include damages for preventing MYT earning the price due for the vessel. He also objected to the phrase "and/or otherwise" in the first implied term.
  47. The second proposed implied term is an ordinary implication in any contract for the performance of which co-operation is required. A shipbuilding contract is such a contract since, as Mr Hofmeyr points out, the builder only earns a stage payment when the buyer's representative signs a certificate that the relevant stage or milestone has been achieved. If the relevant milestone has in fact been reached, the buyer must so certify as part of his implied obligation to co-operate in the performance of the contract. Similarly if the buyer proposes a variation and the builder notifies the buyer of the impact in price, performance and delivery, the buyer must co-operate to agree, propose an alternative solution or abandon the proposed variation. If this is not spelled out in the contract expressly, a duty to co-operate in the project will be implied. There is a number of authorities to that effect of which Mackay v Dick (1881) 6 App Cas 251, 263 and Mona Oil Equipment Ltd v Rhodesia Railways Ltd (1949) 83 LL. L Rep 178, 187 are well-known examples.
  48. If such a term is to be implied in the contract and its amendments, so also must it be implied into the loan agreements because the primary method of repayment of the loan is that the loan is to be reduced by the corresponding amount of the instalment due on the achievement of the relevant milestone, which has to be certified by a certificate countersigned by Swallowfalls' representative, see 2.5(c) of the 2010 Loan Agreement. The fact that it is also implied into the Construction Agreement does not make it duplicative when implied into the 2010 Loan Agreement since the agreements set out their own separate obligations and those obligations have separate procedures for enforcement namely arbitration under the Construction Agreement and litigation under the Loan Agreement.
  49. The first of Mr Hofmeyr's implied terms is more problematic. In his skeleton argument Mr Hofmeyr says:-
  50. "where there are conditions precedent to performance of an obligation under a binding contract, a term may be implied that a party will not do an act which, if done, would prevent fulfilment of the condition."

    For this proposition he cites Stirling v Maitland in which Cockburn CJ says:-

    " if a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own notion to put an end to that state of circumstances under which alone that arrangement can become operative."

    This proposition has no reference to conditions precedent to performance, it refers to "an existing state of circumstances" which has to continue if the contract is to be effective. It is therefore not an authority which supports Mr Hofmeyr's proposition. There is, moreover, no existing state of circumstances which has to continue if the 2010 Loan Agreement is to be effective. If anything, circumstances have to change for the contract to be effective e.g. a new milestone has to be achieved before an instalment is due and the loan can be reduced.

  51. It is, of course, true that a certificate has to be signed before payment is due but it is unnecessary to dress that up as a condition precedent. The implied term as to co-operation will do all that is required to make the contract work. Indeed Mr Hofmeyr asserts that each of his implied terms is really only the obverse of the other. In these circumstances I would not imply the first of Mr Hofmeyr's proposed terms but only the second.
  52. But Mr Hofmeyr only needs one implied term for the purpose of asserting a breach which can sound in damages. As the judge recorded in paragraph 109 of his judgment, Swallowfalls acknowledges that there must be a stay of the current proceedings as regards arguable breaches of such an implied term. I would therefore, dismiss the cross-appeal as well as the appeal.
  53. Lord Justice McFarlane:

  54. I agree.
  55. Mrs Justice Proudman:

  56. I also agree.

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