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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Wuhan Ocean Economic & Technical Cooperation Company Ltd & Ors v Schiffahrts-Gesellschaft "Hansa Murcia" MBH & Co KG  EWHC 3104 (Comm) (06 November 2012)
Cite as:  EWHC 3104 (Comm)
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| WUHAN OCEAN ECONOMIC & TECHNICAL COOPERATION COMPANY LIMITED
NANTONG HUIGANG SHIPBUILDING CO. LTD
|- and -
|SCHIFFAHRTS-GESELLSCHAFT "HANSA MURCIA" MBH & CO. KG
Timothy Young QC (instructed by Holman Fenwick Willan) for the Defendant
Hearing date: 19TH OCTOBER 2012
Crown Copyright ©
MR JUSTICE COOKE:
"This Letter of Guarantee shall remain in force until the Vessel has been delivered to and accepted by [the Buyers] or refund has been made by the Seller or ourselves (the Export Import Bank of China) or until June 30th 2010, whichever occurs earliest, after which you are to return it to us by airmail for cancellation. In case arbitration initiated by either Seller 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."
"1. The Buyer and Seller agree that the Vessel shall be delivered to the Buyer on 31st October 2011, which shall be the Delivery Date….
3. The Seller does undertake to extend the validity of the Refund Guarantee dated 7th June 2007 of Export Import Bank of China…until 31 May 2012."
"You have failed to obtain the extension of the Refund Guarantee and evinced an intention of not so doing and are therefore in repudiatory breach of the Shipbuilding Contract (as amended). We, on behalf of the Buyers, hereby accept your repudiatory breach as terminating the…Contract and give you formal notice of the Buyers final and irrevocable cancellation of the above mentioned Shipbuilding Contract."
The Questions of Law
"Where the Sellers in a shipbuilding contract agree to extend a refund guarantee:
1. Is the obligation of the Sellers to extend the refund guarantee before the date of expiry of the existing refund guarantee (here 30 June 2010), or
2. Is a term to be implied (amounting to an innominate term and not a warranty) that the Sellers undertake to extend the validity of the refund guarantee within a reasonable time having regard to all the circumstances, and if so
2(a). Did the fact that the Refund Guarantee had not been extended by 28 June 2010 in the present case amount to a breach of any such term, and if so
2(b). Were the consequences of such breach so serious as to deprive the Buyers of substantially the whole benefit of the contract, thereby entitling the Buyers to terminate the Contract on the basis of repudiatory breach or a sufficiently serious breach of an innominate term?"
The Tribunal's Decision
i) The Refund Guarantee was an extremely important provision for the Buyers since it provided third party security from a bank in respect of a breach of contract by the Sellers and the latter's inability to meet their financial obligations. The four instalments of the purchase price payable prior to delivery all fell to be paid if and only if the Buyers had received the Refund Guarantee covering the relevant instalment.
ii) The contract itself was silent as to the date by which the Sellers should procure the Refund Guarantee.
iii) It would be unreasonable and uncommercial to expect the Buyers to bear the risk of losing the security of the Refund Guarantee by having to wait for an extension of the guarantee until shortly before its expiry, particularly because the Contract provided that the Refund Guarantee had to be in place before the payment of instalments which were advances under the contract repayable in the event of defined rights of cancellation.
iv) It was necessary to imply a term into the Contract as a matter of business necessity, because the Contract was silent and in order to protect the Buyers' security, that the Seller should fulfil its obligation to obtain the extension of the Refund Guarantee within a reasonable time, having regard to all the circumstances of the case. Such a term was "precise and obvious".
v) The Sellers' obligation to obtain the extension was an innominate term, not a mere warranty. If the Sellers failed to provide the Refund Guarantee within a reasonable time, but not so late as to imperil the security given by it, the Buyers' loss would be capable of compensation in damages but if an extension was not provided at all, damages would not be an adequate remedy because the Refund Guarantee was a third party security, given by a Bank, to cover the position where the Sellers were unable to meet an award of damages. An order for specific performance was not available as against the Bank and the commencement of arbitration only resulted in an automatic extension of the Refund Guarantee for a period of 60 days after the award. A failure to commence arbitration could result in the loss of the Refund Guarantee when the burden rested on the Sellers to procure it.
Issues of Law and Fact
i) On the existence or non existence of the implied term found by the Arbitrators, its content and nature.
ii) Whether the Arbitrators erred in law in saying that the security of the Bank Refund Guarantee was imperilled so as to constitute a breach of any such term.
iii) Whether, if there was a breach of such a term, the Arbitrators erred in law in saying that the security was so imperilled as to constitute a repudiatory breach of contract.
My attention was drawn to the decision of Mustill J in The Chrysalis  1 Lloyds Rep 503 and the analysis of the different stages of reasoning employed by arbitrators in coming to a decision. Questions ii) and iii) above are mixed issue of law and fact, but a failure to set out the right test in law or a failure to apply it in the light of their own findings would constitute a point of law upon which the Court could rule, deciding whether or not a remission to the arbitrators was required to direct themselves aright (the default position under the Arbitration Act), or whether the conclusion is so obvious in the light of these principles that remission is unnecessary.
The Implied Term
"The law on implication of terms is found in AG of Belize v Belize Telecom  1 WLR 1988. As Lord Hoffman said at paragraphs 16,19 and 21, the law is concerned to discover what the instrument means, what meaning the instrument would convey to a reasonable person having all the background knowledge which would be reasonably available to the audience to whom the instrument is addressed. The implication of a term is an exercise in the construction of the instrument as a whole; the question is whether a proposed [implied] provision would spell out in express terms what the instrument, read against the relevant background, would reasonably be understood to mean. The test of "it goes without saying" and "necessary to give business efficacy to the contract" are not different tests, but merely different means for reaching a conclusion as to what the contract should be reasonably understood to mean. There are, as he pointed out, dangers in taking those tests as if they had a life of their own."
"Moreover, as I read Lord Hoffman's analysis, although he is emphasising that the process of implication is part of the process of construction of the contract, he is not in any way resiling from the often stated proposition that it must be necessary to imply the proposed term. It is never sufficient that it should be reasonable. This point is clear, for example, from the well-known speech of Lord Wilberforce in Liverpool City Council v Irwin  AC 239, where he rejected at page 253H to 254A the approach of Lord Denning, which was to permit the implication of reasonable terms. He identified two classes of implied term in the case (as here) of a complete bilateral contract. He said that in a case of established usage the courts are spelling out what both parties know and would, if asked, unhesitatingly agree to be part of the bargain. That is not, in my opinion, this case. Lord Wilberforce added at page 253G:
In other cases, where there is an apparently complete bargain, the courts are willing to add a term on the ground that without it, the contract will not work – this is the case, if not of The Moorcock…itself on its facts, at least of the doctrine of The Moorcock as usually applied."
The Sellers said that lip-service only had been paid to the touchstone of necessity by the Tribunal when referring to it at paragraph 36 of the Reasons.
"The courts' usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is potentially so intrusive that the law imposes strict constraints on the exercise of this extraordinary power.
18. Reference was then made to cases in which terms are routinely and unquestionably implied, as in the case of a term that a surgeon will exercise all reasonable care and skill. He added:
But the difficulties increase the further one moves away from these paradigm examples. …It is much more difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully-drafted contract but have omitted to make provision for the matter in issue. Given the rules which restrict evidence of the parties' intention when negotiating a contract, it may well be doubtful whether the omission was the result of the parties' oversight or of their deliberate decision; if the parties appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur.
The question of whether a term is to be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong. For, as Scrutton LJ said in Reigate v Union Manufacturing Co (Ramsbottom) Limited  1 KB 592 at 605:
"A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that I can confidently be said that if at the time the contract was being negotiated some one had said to the parties, 'What will happen in such a case', they would both have replied, 'Of course, so and so will happen; we did not trouble to say that; it is too clear'. Unless the court comes to some such conclusion as that, it ought not to imply a term which the parties have not themselves expressed…"
And it is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown that one of several possible solutions would without doubt have been preferred: Trollope & Colls… at 609-610, 613-14."
i) Lord Pearson referred to the basic principle that the court does not make a contract for the parties:"The court will not even improve the contract which the parties have made for themselves, however desirable the improvement might be. The court's function is to interpret and apply the contract which the parties have made for themselves. If the express terms are perfectly clear and free from ambiguity, there is no choice to be made between different possible meanings: the clear terms must be applied even if the court thinks some other terms would have been more suitable. An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves."
Lord Cross commented on the different options available for an implied term in that case:"In this case, by contrast, there is, as I see it, no ambiguity whatever in the wording of clause 21(1) of conditions "C" and what the respondents are asking the court to do is, in effect, to rectify the clause by the addition of some words which will make it accord not indeed with the actual intention of the parties but with the intention which the respondents say must be imputed to them. In such a case, as I have always understood the law, it is not enough for the party seeking to have the words varied to say to the court, "We obviously did not mean what we have said, so please amend the clause so as to make it read in what you think is the most reasonable way." He must establish not only that the parties obviously did not mean what they said but also that if they had directed their minds to the question they would obviously have framed the clause in the way for which he contends. In this case, as my noble and learned friend Lord Pearson points out, there are a number of different ways in which the clause might be varied so as to provide for the event of the completion of phase I being delayed. He instances four.""There is something to be said for and against each of these possible ways of dealing with the problem and one cannot say that the parties had they directed their minds to the question would, as reasonable people, at once have agreed that one of the ways was obviously the right way. If they had reached agreement on this point at all it would probably only have been after a process of negotiation in which the pros and cons of the various possibilities were canvassed in detail. Moreover if, contrary to my opinion, it is for the court in a case such as this to select what it considers to be on balance the fairest way of re-writing this clause, I would not in fact select that put forward by the respondents. "
"Where a party to a contract undertakes to do an act, the performance of which depends entirely on himself, and the contract is silent as to the time of performance (or merely uses indefinite words such as "with all dispatch") the law implies an obligation to perform the act within a reasonable time having regard to all the circumstances of the case."
"The danger lies, however, in detaching the phrase "necessary to give business efficacy" from the basic process of construction of the instrument. It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. Lord Steyn made this point in the Equitable Life case, at p 459, when he said that in that case an implication was necessary "to give effect to the reasonable expectations of the parties"."
"However in considering "all the circumstances" in this case, it is appropriate to have regard to the commercial importance of ensuring that the extension has been obtained a reasonable time before its expiry in order to protect the Buyers' third party security."
The nature of the Term
"Where matters are left to the very last minute, there is always a risk that mistakes will be made, decisions will be ill-considered; and that notices will be incorrectly drawn up or served. By this time it would be too late to serve any effective notices by registered airmail or express courier under Article XVII of the Contract before expiry of the Refund Guarantee. We consider that the consequences for the Buyers of losing the security of the Refund Guarantee are so serious that the Buyers are entitled to be absolutely certain that it will remain in place. It follows, in our view, that if it is not extended a sufficient period before its expiry, then there is a breach going to the root of the contract. "
"Given the importance of communicating both internally and with any external advisors, reaching a properly informed decision, determining whether to terminate and /or commence arbitration and ensuring that notices are validly delivered, each member of the tribunal independently considered that the correct period was 7 days before expiry. The Sellers were given over 6 months to secure the extension and the Buyers were, in our view, entitled to be absolutely certain that the extended Refund Guarantee was in place 7 days before expiry. If the extension was not obtained by 23rd June 2010, the breach was in our view so serious as to go to the root of the Contract.
We do not therefore consider that there was sufficient reasonable time to be certain that the breach would be remedied as to prevent the breach from going to the root of the contract. We have explained why specific performance cannot be granted by the Tribunal. In those circumstances, we do not consider that the temporary extension of the Refund Guarantee during the arbitration is sufficient to prevent the breach going to the root of the contract. There is no relief which the Tribunal can grant, which ensures that the Refund Guarantee is permanently extended to the agreed date.
Therefore as from 23rd June the Sellers were in repudiatory breach of contract and the Buyers were entitled to terminate the Contract when they did so on 28th June 2010."
Question 1- No
Question 2 – Yes
Question 2(a) -Yes
Question 2(b) - No