Obligation to obtain extension of Refund Guarantee within a reasonable time

Under a shipbuilding contract, repayment of the contract price paid by the Buyers was secured by a Refund Guarantee issued by the Seller’s Bank. The Refund Guarantee was to remain in force until the delivery and acceptance of the Vessel… or until June 30th 2010, whichever occurs earliest.

In the event that either Party initiated Arbitration proceedings before delivery of the Vessel, the validity of the guarantee was extended to 60 calendar days after issuance of the final arbitration award. Pursuant to an Addendum, the Parties agreed to extend the delivery date and the Sellers undertook to extend the validity of the Refund Guarantee until 31 May 2012.

On 28 June 2010, two days before the expiry date of the Refund Guarantee, the Buyers terminated the shipbuilding contract on the grounds that the Sellers have failed to obtain the extension of the Refund Guarantee and are therefore in repudiatory breach of the Shipbuilding Contract.

On 29th June 2010, the Buyers served a Notice of Demand for Arbitration, thereby commencing such arbitration. On the same day, the Refund Guarantee was extended by the Bank. The notification from the Bank was timed at 17.30.25 (Chinese time), with the result that it was issued prior to the expiry of the Refund Guarantee.

The Arbitrators concluded that the Sellers were in breach of the obligation to obtain the extension of the Refund Guarantee within a reasonable time. In such circumstances, as the Sellers were in repudiatory breach of contract on the 23rd June, the Buyers were entitled to terminate the Contract, which they did on the 28th June.

On appeal the Court had to decide the following:

The questions of law which fall to be determined under section 69 of the Arbitration Act, in respect of which permission was given are as follows:-

“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?”

Cooke J allowed the appeal and agreed that there was a breach of an innominate term. However, he ruled that the Buyers were not entitled to terminate the Contract on the basis of repudiatory breach.  

End Note:

The Judge noted at paragraph 50 that:

…Moreover the Buyers did not enquire of the Sellers at any time after 23 April 2010 as to when the extension would be forthcoming, which would have been a natural and sensible course of action, from which it might be inferred that they were looking to catch the Sellers on the hop and escape their unprofitable bargain. Had they so enquired they would have been told, doubtless, that the extension was about to be given, as it duly was on 29 June. As it turned out there was continuity of security and an extension was given, which demonstrates that the breach was remediable because it was remedied without any prejudice to the Buyers save for the interim uncertainty.

Reference:

[2012] EWHC 3104 (Comm)


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