Wuhan Ocean Economic & Technical Cooperation Company Ltd & Ors v Schiffahrts-Gesellschaft "Hansa Murcia" MBH & Co KG [2012] EWHC 3104 (Comm)

Case No 2012 FOLIO 283

[2012] EWHC 3104 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 06/11/2012

Before

MR JUSTICE COOKE

Between

WUHAN OCEAN ECONOMIC & TECHNICAL COOPERATION COMPANY LIMITEDClaimants

NANTONG HUIGANG SHIPBUILDING CO. LTDClaimant

SCHIFFAHRTS-GESELLSCHAFT “HANSA MURCIA” MBH & CO. KGDefendant

Simon Bryan QC (instructed by MFB) for Claimants

Timothy Young QC (instructed by Holman Fenwick Willan) for Defendant

Hearing Hearing date: 19 TH OCTOBER 2012

Judgment

Introduction

[1]This is an appeal from an interim final arbitration award on a preliminary issue made on 27th January 2012 (the Award), with reasons attached and forming part of it (the Reasons). The arbitration arose under a ship building contract dated 8th January 2004 for the building, sale and purchase of a 900 TEU container vessel. The claimants are the Sellers and the defendants are the Buyers. Under the Contract, instalments of the price were to be paid by the Buyers and their repayment was to be secured by a Refund Guarantee. Such a guarantee was provided on the 7th June 2007 (the Refund Guarantee) which provided as follows: - “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.”

[2]On 22nd December 2009, the parties agreed to a delayed delivery of the Vessel. By Addendum No. 4 to the contract the following was agreed:- “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.”

[3]On 28th June 2010, prior to the expiry date of the Refund Guarantee of 30th June 2010, the Buyers, in a letter from their solicitors to the Sellers, sent a termination notice by hand and by fax:- “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.”

[4]On the following day, 29th June 2010, the Buyers served a Notice of Demand for Arbitration, thereby commencing such an 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 Tribunal found that the Sellers had submitted a request to the Bank for an extension on the 23rd April 2010 (paragraph 21 of the Reasons) and expressed themselves as “satisfied on the evidence that genuine attempts were being made to obtain the extension, even though knowledge of such attempts did not cross the line” to the Buyers. The Sellers’ evidence was that they had given the counter security required by the Bank by the 22nd June 2010 and that a representative visited the Bank on 26th, 27th and 28th June with a view to executing any further documents necessary to secure the extension.

The Questions of Law

[5]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?”

The Tribunal’s Decision

[6]The Tribunals conclusions on the implied term can be stately shortly:- 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.

[7]The Arbitrators went on to find that the Sellers were in breach of the obligation to obtain the extension of the Refund Guarantee within a reasonable time. Addendum No. 4 was signed on the 22nd December 2009 and there was a period of over 6 months available before the expiry of the instrument. The Arbitrators concluded that a reasonable time for obtaining the extension was no later than the 16th June 2010, because what mattered was whether an extension was granted a reasonable time before the expiry date in order that the Buyers should not be “forced into making decisions as to what to do against unreasonable time pressure” and thereby prejudiced. The date of the 16th June 2010 gave the Sellers many months to obtain the extension and gave the Buyers a reasonable period to consider what to do if the extension had not been granted without the risk of making a mistake as a result of pressures of time. The Sellers were thus in breach of contract from 16th June onwards on the Arbitrators reasoning.

[8]The Tribunal found in paragraph 80 of the Reasons that the Sellers had not evinced a clear and unequivocal intention that they were unwilling or unable to procure the extension of the Refund Guarantee before it expired or, by the 28th June when, in accordance with paragraph 76 of their reasons, they held that they must “stop the clock” at the point where the Buyers terminated the Contract. There was therefore no renunciatory breach by the Sellers. The Tribunal went on to find however that the Sellers were in repudiatory breach in not obtaining the Refund Guarantee by 23rd June 2010 because, at that stage, the breach was so serious as to go to the root of the Contract. That Refund Guarantee represented the financial cornerstone of the Contract since no instalment payments were due without it and the Buyers were entitled to be certain that the security was in place. Once the breach of contract had occurred on the 16th June, a time came when the provision of the Refund Guarantee was no longer certain or where the time before expiry was so limited that the security given to the Buyers was imperilled, because there was such an unreasonably short time to consider what steps to take, whether to terminate the contract or commence arbitration and to give notice of either, whilst the Refund Guarantee remained in place.

[9]At that point the Buyers were, the Tribunal found, at risk of being unable to call on the Refund Guarantee. The Arbitrators concluded that the Contract did not mean that the Buyers should have to wait until the very last minute for the Sellers to extend the Refund Guarantee with the risk that the Buyers could lose its benefit completely if they made a mistake or waited too long. The Buyers were entitled to be absolutely certain that the extended Refund Guarantee was in place 7 days before expiry, namely by the 23rd June 2010 and, if the extension was not obtained by then, that breach was so serious as to go to the root of the contract, because there was not sufficient reasonable time to be certain that the breach could be remedied before the expiry of the Refund Guarantee.

[10]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.

Issues of Law and Fact

[11]If the Arbitrators were correct in holding that there was an implied term that the Sellers should procure the extension of the Refund Guarantee within a reasonable time, their conclusion as to what was a reasonable time would not be susceptible of appeal under the Arbitration Act. This is a pure finding of fact. Likewise, there can be no challenge to the Arbitrators finding of fact that the provision of an extension to the Refund Guarantee was uncertain and the time before expiry of the existing Refund Guarantee so limited, as at the 23rd June, that the security given to the Buyers could be said to be imperilled, unless there is an underlying mistake of law as to whether there was such an imperilment.

[12]The Arbitrators themselves found at paragraph 51 that the wording of the Refund Guarantee was wide enough to trigger an automatic extension of it, whenever arbitration was commenced, even after the expiry of the current Refund Guarantee. The Refund Guarantee provided for an automatic extension until 60 days after the issue of the final arbitration award if an arbitration was initiated by either the Sellers or the Buyers before the delivery of the vessel. On the face of it, therefore an arbitration instituted following a failure by the Sellers to extend the Refund Guarantee, on the ground that there had been a breach in failing to extend it, would result in an extension until 60 days after the award of the Arbitrators determining that dispute. There is therefore, according to the Sellers, a fallacy in paragraph 89-96 of the Reasons, inasmuch as the security is said to be imperilled by reason of the short period of time before the 30th June for decisions to be taken about termination/arbitration and actual termination or commencement of arbitration “while the Refund Guarantee remains in place”. Contrary to the earlier finding of the Arbitrators, on the proper construction of the Refund Guarantee, the Buyers would still be able to call on the Refund Guarantee after that date, by instituting arbitration, since arbitration remained available with the consequent automatic extension of the guarantee. That argument was employed in relation to each of the questions of law raised on this Appeal.

[13]The questions of law require the Court to decide: 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

[1983] 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

[14]The Sellers submit, through Mr Simon Bryan QC, that paragraph 3 of Addendum No. 4 only required them to procure an extension of the Refund Guarantee by the time that the existing Refund Guarantee expired. The Addendum provided for the Sellers to “extend the validity” of the guarantee and all that meant was the maintenance of the continuity of the security provided. There was thus no obligation to ensure that it was in place at any time before the last minute of 30th June 2010 in whichever time zone was effective for the guarantee. The ordinary and natural construction of the words used in the Addendum, it was said, when regard is had to the expiry date in the Refund Guaranteed, is that the extension should be procured before that expiry. The Sellers submit that there is no room for the implied term found by the Tribunal and that the test for any such implied term is not met, because of the wording by which the obligation was imposed and the terms of the existing guarantee with its specified expiry date. Alternatively, if there is any implication to be made as the Addendum does not expressly set out the date by which the extension is to be given, the obvious answer, by reference to the terms of the Refund Guarantee, is the expiry date.

[15]The relevant principles of law governing the implication of terms were not in issue between the parties, but, although they are to be found in Lord Hoffman’s dicta in AG of Belize v Belize Telecom Ltd [2009]1 WLR 1988, the application of those principles often gives rise to major issues, as it did here.

[16]The Buyers summarised the effect of paragraphs 16, 19 and 21 of that speech in this way:

“The law on implication of terms is found in AG of Belize v Belize Telecom [2009] 1 W.L.R. 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.”

[17]Later decisions, commenting on Belize have stressed the need for a court not to imply a term merely because it is reasonable to do so but only where it is necessary to do so to give the contract its intended meaning. At paragraph 15 of his judgment in The Reborn [2009] 2 LLR 639, Lord Clarke MR said this:

“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 [1977] 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.

[18]Moreover, the Sellers submitted, the implied term had to be certain and if there was room for the implication of a number of terms, then it could not be said that any one of them was the term necessarily to be implied. In this respect they relied on the passage cited by Lord Clarke in The Reborn of paragraph 17, taken from the judgment of Sir Thomas Bingham in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472:- “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

[1918] 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.”

[19]In Trollope & Colls v N.W. Metropolitan Hospital Board [1973 1WLR 601, 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. ”

[20]The Sellers said that the implied term had been formulated by the Buyers in a number of different ways and it was not at all clear what the parties would have agreed, if anything, had the officious bystander asked them about the position at the time of signing the Addendum. Indeed the contract might well be silent on the point precisely because the parties knew that they would not be able to reach agreement on it

[21]The Arbitrators cited paragraph 21-020 of Chitty on Contracts (30th Edition), which supports its statement of the law with multiple authorities, at paragraph 34 of the Reasons; “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.”

[22]They then referred (albeit inaccurately) to an example of this in a shipbuilding context, namely the decision of Langley J in Covington Marine v Xiamen Shipbuilding Industry [2006]1 Lloyd’s Rep 745 at paragraph 58, where he held that when an express time limit for the provision of a Refund Guarantee was waived, the continuing obligation to provide it meant that it had to be provided within a reasonable time.

[23]The Tribunal held that Addendum No. 4 was silent as to the date by which the extension had to be procured, but it is contended by the Sellers that the Refund Guarantee expressly demarked the date of expiry and the date by which the Extended Refund Guarantee had to be in place. The obligation in Addendum No. 4 is not framed in terms of any time before that expiry date. But the obligation is not framed in terms of that date either. The Addendum provides for the Sellers to extend the validity of the Refund Guarantee but this tells one nothing about the time by which that extension falls to be arranged.

[24]It is clear to me that there is no express term in the Addendum as to the time by which the existing Refund Guarantee fell to be extended. Nor is there any express incorporation of any terms from the Refund Guarantee itself. It must be accepted that the obligation to provide the extension has a temporal content, with the result that any time limit must fall to be implied. Where parties impose a unilateral obligation, without specifying the time in which it is to be done, there must be some implication as to the time in which it is to be done, because the parties cannot have intended the obligation to be of perpetual or indefinite duration. There must be a limit to the time in which the obligation is to be fulfilled. In reality, the Sellers’ argument is that the natural and most obvious implication arising from the obligation to extend the Refund Guarantee is that continuity should be maintained and that nothing else is needed other than an extension which is procured before the expiry of the existing guarantee. The Sellers therefore argue for the minimum implied obligation on the Sellers – the one that gives them most time for procuring the extension. There is force in that argument, but the Arbitrators held that there were good commercial reasons for an earlier date and no commercial logic or business rationale was put forward to justify the contrary.

[25]The implied term found by the Arbitrators was a term spelt out in many authorities as the passage in Chitty reveals. The Sellers implicitly contended for a different implied term, one founded on the terms of the Refund Guarantee itself, relying on the lack of any necessity for an earlier time limit than the expiry of the existing instrument. Once however, it is recognised that there has to be an implied term as to the time for fulfilment of the obligation, other commercial elements fall to be taken into account in considering the test of necessity for business efficacy to give effect to the intentions of the parties. Lord Hoffman put it this way at paragraph 23 in Belize. “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”.”

[26]The Tribunal regarded the instant case as a paradigm case for implication of the reasonable time test, for essentially two reasons. First, the silence in the Addendum as to the time by which the extension should be procured. Second, the need for the Buyers’ security to be protected, which would mean that the expiry date of the existing Refund Guarantee would be too late. The Arbitrators, in my judgment, were right to rely on both reasons, if there was a need for the Buyers to be protected in this way, though the second reason is also directed to the question of what that reasonable time might be. The parties would want to know where they stood before the expiry date, because of any need to call on the security in the event of any breach by the Sellers and the concern about doing so, if there was no obligation to produce an extension of the guarantee until the last moment. In the event of failure to produce a further bank guarantee, there would be no existing guarantee on which to call in respect of breaches by the Sellers, including the breach of Addendum No. 4 of failing to extend the guarantee.

[27]It is true to say that the Buyers could, following the expiry of the existing guarantee, institute arbitration in respect of any breach, including the failure to procure the extension of that guarantee, which would have the effect in law of automatically extending it until 60 days after any award, but this does not answer the point, because there was a duty on the Sellers to provide that extension, without the need for any action on the part of the Buyers, whether by commencing arbitration or otherwise. They were entitled to an instrument from the Bank which set out the extension of their guarantee rights, without any further risk on their part. The whole purpose of the agreement to extend was to give the Buyers certainty about the existence of the security in the same form as that already given. The receipt of an extended Refund Guarantee from the Bank is different from the prospect of being able to take steps which have the effect in law of extending that guarantee, without the Bank’s express consent. The Buyers’ risk is increased because arguments might be taken by the Bank about the scope of the instrument, on an extension under the arbitration mechanism which would not have been available had there been continuity of the Refund Guarantee, by extension. The certainty to which the Buyers were entitled under the Addendum would be jeopardised and the risks increased if the extended guarantee was not put in place in good time before the expiry of the existing guarantee. The Tribunal, the finders of fact, said this at paragraph 46 of the Reasons “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.”

[28]The Buyers were, according to the Tribunal, entitled to a degree of certainty about the continuity of the Refund Guarantee, and that could only be the case if the extension was agreed within a reasonable time, which in the circumstances, meant a reasonable time before its expiry, so that decisions could be taken and implemented if it was not forthcoming.

[29]It mattered not whether the Buyers had put forward arguments that the extension should be obtained within “a reasonable time from the conclusion of the Addendum” or “a reasonable time before expiry of the Refund Guarantee” or indeed any other formulation. The term itself, “within a reasonable time” was certain in its formulation, though all the circumstances fell to be taken into account when determining what a reasonable time actually would be, and when a breach would occur, when seeking to apply the term. A reasonable time in all the circumstances was found by the Tribunal to expire 14 days before the expiry of the Refund Guarantee, allowing time for a decision to make a claim and to actually claim on the existing guarantee, without any room for additional arguments about its expiry or ambit.

[30]There can in my judgement be no basis for upsetting the Tribunal’s finding of an implied term that the extension had to be procured within a reasonable time. In the absence of any agreed time for the extension to be procured, it is the obvious and natural implication. Whilst there was room for argument that the expiry of a reasonable time occurred at the expiry of the Refund Guarantee, that point was not, it seems, run by the Sellers, because, no doubt they considered it uncommercial. That reasoning would also give the lie to the term for which they contended, whether purely as a matter of construction or as an implied term.

[31]The Tribunal’s finding as to what actually constituted a reasonable time is, as is recognised, once the Arbitrators’ implied term is held to exist, unchallengeable as a fact found by the Tribunal.

The nature of the Term

[32]The Sellers argued that any such implied term must be a warranty. The Tribunal held it was an innominate term. The more usual argument encountered in the courts is that a given term is a condition of a sale contract as opposed to an innominate term. Although at one time the Buyers were arguing for a condition precedent, that argument was abandoned at the Arbitration hearing. The issue was whether, as the Buyers said, it was an innominate term, or, as the Sellers said, only a warranty which could only ever sound in damages, regardless of the consequences of any breach. The Sellers relied on Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962]2 QB26 and Woodar v Wimpey [1980]1 WLR 277 for the proposition that, where a breach of a term could never deprive the other party of substantially the whole benefit of the contract or strike at its root, that term could only be a warranty.

[33]In Chitty on Contract (30th Edition) at paragraph 12-131, Professor Guest says that a warranty, as a term which gives rise to damages only if breached, can be considered a less important term of the contract or one which is collateral to its main purpose. He states that the emergence of the category of innominate or intermediate terms seems likely to have reduced the number of occasions when a term will be classified as a warranty, in that sense, “almost to vanishing point”.

[34]The Arbitrators held that the provision of the Refund Guarantee was a financial cornerstone of the Contract, because it was security given by a bank in respect of the return of instalments paid, should the Sellers default. The first four instalments payable before the delivery instalment were only payable if there was in existence a Refund Guarantee in respect of them. The existence of that guarantee was therefore critical- of fundamental importance. If there was no Refund Guarantee, damages would prove an inadequate remedy to the Buyers if the Sellers became insolvent. That was the whole point of the guarantee. Damages for failure to extend the guarantee would be illusory in such circumstances. Such a breach could go to the root of the contract.

[35]In my view, as suggested in argument, notwithstanding the Sellers’ submission to the contrary, if the Sellers failed to procure the extension of the Refund Guarantee for a period of a year or more after the expiry of the existing guarantee, it would be impossible to say that such a breach did not go to the root of the contract, whether or not it might also constitute a renunciation of the contract. That possibility is enough in itself to show that the agreement to extend within a reasonable time is an innominate term.

[36]The Arbitrators did not consider that every breach of the obligation would strike at the root of the contract and constitute a repudiatory breach. Whilst they found a breach at 16 June 2010, they found such breach only became repudiatory when the security of the Refund Guarantee was imperilled, because of the shortness of time and the risk that any claim or notice might prove ineffective or be considered ineffective by the Bank.

[37]The Tribunal also relied on its inability to make an order for specific performance against the Bank, as a third party both to the Contract and to the arbitration and the inability to cure the lack of an extension by that route. Additionally it relied on the fact that any automatic extension of the Refund Guarantee by commencing arbitration, was not indefinite but only for a period expiring 60 days after their award. In circumstances where the only breach was the failure to procure the extension but the contract otherwise continued, that automatic extension would not be the same as an Addendum No. 4 extension. It would be inadequate as it would not run until the agreed date for that extension, namely 31 May 2012.

[38]The Sellers rightly say that at any time, as a matter of English law, the Buyers could have instituted arbitration, even after the expiry of the Refund Guarantee with the automatic triggering of the extension, according to the terms of the instrument itself. They also rightly submit that the Tribunal could have been asked to make an order under s 48 (5)(b) of the Arbitration Act that the Sellers procure the extension to 31 May 2012 within a specified time, say 30 days, following which they could have been found to be in repudiatory breach for failing to do so, thus enabling the Buyers, within 60 days of an Award to call on the refund Guarantee, as extended by the Arbitration itself. In this way, the Buyers would have an adequate remedy in damages.

[39]That does not however meet the point which the Buyers make and the Arbitrators accepted. Employing the devices suggested is not the same as having a continuing Refund Guarantee, about which fewer arguments can be made and having it in place before the expiry of the existing guarantee, so that no hiatus can occur, as I have already found. Given the importance of the Refund Guarantee, as found by the Tribunal, it is hard to see how it could have ruled out the possibility that some breach might go to the root of the contract. The contractual risk profile is significantly altered, if there is no Refund Guarantee in place upon which the Buyers can rely. With the implied term as found by the Arbitrators, the Buyers should not be at risk of that from 16 June onwards. The Buyers would be at risk of having no security, even if there were means of making it good, by instituting arbitration against the Sellers and separate proceedings against the Bank itself, should it resist any claim upon it. It cannot be said that in all circumstances, because the Buyers could take such steps, damages would always be an adequate remedy and that no breach of this term could go to the root of the contract. The term must be an innominate term because a breach could deprive the Buyers of substantially the whole benefit of the Contract, if they did not institute arbitration and thus extend the guarantee.

Repudiatory Breach

[40]The Tribunal set out the correct test for ascertaining if there was a repudiation, referring to Hong Kong Fir (ibid) and Woodar v Wimpey (ibid). On the Tribunal’s findings, the Buyers had not made time of the essence and had been keeping quiet since April when they had been told that the Sellers were trying to put the extension in place. The Buyers were looking to get out of an unprofitable contract, following the collapse of the market in 2008. The Refund Guarantee was still in place on 28 June 2010 and the breach was remediable to ensure continuity of the guarantee (as in fact occurred on 29 June, after the notice of termination had been sent by fax).

[41]The Arbitrators noted at paragraph 88 of the Reasons that there was very little time left before the expiry of the Refund Guarantee. They found that by this time the Buyers did not have a reasonably sufficient period of time left in order to be certain that the breach would be remedied. They went on to say at paragraph 89 “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. ”

[42]In paragraphs 90 and 91 they stated that the expiry or loss of the security in the form of the Refund Guarantee would go to the root of the contract, because it was the financial cornerstone of the Contract. The Arbitrators were however wrong to say that, once the Refund Guarantee had been allowed to expire, it was too late to secure the Buyers’ claim for a refund from the third party Bank, because the institution of arbitration against the Sellers would, on the terms of the Refund Guarantee revive it, as the Arbitrators themselves had previously stated. At this stage in their reasoning they appear to have lost sight of that fundamental point.

[43]They held at paragraphs 92-93 of the Reasons that the essential feature of Article II of the Contract was that the Buyers were entitled to be certain that any instalments paid were secured by a third party Refund Guarantee before paying them over, and those payments were, of course, the sine qua non for construction of the vessel. They held that the Buyers had a reasonable expectation that the security obligation would stay in place until delivery (or expiry at an agreed time) so that throughout the Contract they were entitled to remain certain that the Refund Guarantee was in place. Hence their conclusion that there was a breach as at 16 June 2010.

[44]They then held that once a breach had occurred, a time would come when the provision of the renewed Refund Guarantee was so uncertain or the time before expiry so limited that the security would be imperilled, because there was such an unreasonably short time to consider what steps to take, whether to terminate the contract or commence arbitration, and, if so, to do either by notice, whilst the Refund Guarantee remained in place. The Buyers were at risk of being unable to call on the Refund Guarantee and any reasonable person, in the Tribunal’s view, would conclude that the Contract did not intend that the Buyers should have to wait to the very last minute in the hope of an extension of the guarantee, with the risk that the Buyers could lose the benefit of it, if they made a mistake or waited too long.

[45]It is here that, in my judgement, the Arbitrators erred in law, in failing to give effect to the legal finding they had made as to the effect of instituting arbitration in extending the Refund Guarantee. Earlier in their Reasons at paragraph 51, they had found that, whenever arbitration was commenced, the Refund Guarantee would be extended automatically as a matter of construction. It was governed by English law and provided for arbitration of differences under it in a LMAA arbitration. There was therefore no real pressure of time operating on the Buyers. They could have waited until the expiry date of the Refund Guarantee and then instituted arbitration against the Sellers for their failure to procure the extended guarantee within a reasonable time, with the automatic triggering of the extension and the resurrection of the security.

[46]In what sense can it be said that their security was truly imperilled in those circumstances? The Buyers were under no risk of losing the Refund Guarantee, provided that they commenced arbitration and they could do that even after the expiry date, thus allowing time for the taking of advice, the taking of decisions and the implementation of any course of action in relation to arbitration, termination or calling on the guarantee, all of which could be done by instant communication under Article XVII, which provided for such communication by telefax.

[47]It cannot avail the Buyers at this stage of the argument to say that the Bank was a third party which might resist any claim that there had been an automatic extension or say that the guarantee would not respond where the immediate arbitration dispute was over the failure to provide the Addendum No. 4 extension, rather than the immediate reclaim of the instalments paid on a cancellation or termination of the Contract by the Buyers. Any dispute referred to arbitration between Buyers and Sellers would trigger the extension and if there was a continued failure to provide the Addendum No. 4 extension thereafter, following the inevitable award of an order against the Sellers requiring them to provide it, claims for repudiation, termination and a refund would follow, either in that arbitration or, if necessary, another arbitration, with its triggering effect on the Refund Guarantee. It matters not that there would be a different Arbitral Tribunal. The fact that the Bank might think of additional arguments to run in relation to an extended Refund Guarantee, as compared with the original Refund Guarantee does not seem to me to constitute any true imperilling of the security, if those arguments would be without substance. I have accepted in a different context in paragraph 27 above that the receipt of an extended guarantee from the Bank is different from the prospect of taking steps to commence arbitration which has the effect in law of triggering the extension without the Bank’s consent, but in the context of a breach, how significant is that difference?

[48]Mr Timothy Young QC said that there were additional risks for the Buyers in having only the triggered “temporary” Refund Guarantee and not the piece of paper promised under Addendum No. 4. Additional arguments could be run by the Bank, but I could see no merits and no substance in any of those additional arguments, if it was shown that the Sellers had failed to produce an extended guarantee or had repudiated the contract leading to termination by the Buyers. Nor could it be said that a triggered Guarantee was any less effective than one under Addendum No. 4 because it did not run to 31.5.12, since it would run until 60 days following the determination of any arbitration dispute between the parties to the Contract and any assessment of sums due by way of refund of the purchase instalments.

[49]What extra risk therefore did the Buyers run that they did not always run in the context of making a call under the guarantee? It is true that instead of simply being provided with an Addendum No. 4 guarantee, they would have to take steps to arbitrate in order to operate the triggering mechanism, but in order to secure any sums payable under the guarantee at any time, they would have had to terminate the Contract and take steps to call on it, with the establishment of their claims in arbitration if necessary. The factors raised by the Buyers, through Counsel, as I have already accepted, demonstrate that there was a breach of an innominate term, but do not support a claim for repudiatory breach.

[50]Instantaneous communication was possible under the provisions of Article XVII by telefax, provided it was acknowledged by answerback. Notices could be given speedily. 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.

[51]I am conscious, especially when concerned with an area such as this, that the parties have chosen their forum. Decisions as to what constitutes a repudiatory breach are often not decisions on pure issues of law but are fact driven, especially where the commercial consequences of a breach fall to be evaluated, as here. The decision could be considered to be of the type referred to by Lord Diplock in The Nema [1982]AC 724 at p 743 where he referred to disputes as to whether contractual obligations had been put to an end by frustration “and somewhat analogous questions as to whether one party to a commercial contract is entitled to refuse to perform his own obligations under the contract in consequence of a [fundamental] breach or breach of condition by the other party.” The Tribunal has to take a legal test, derived from the authorities and apply it to the facts as it finds them in order to reach a conclusion of law, based on its view of the facts and the seriousness of the breach in the context of them.

[52]The Tribunal here, though not consisting of “commercial men” in the strict sense of the term, as formerly used, consisted of experienced lawyers with considerable commercial experience. They concluded that the Sellers were in repudiatory breach on 23 June:

“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.”

[53]The conclusion of repudiation was based on the concept that the Refund Guarantee might be lost, as clearly set out in paragraphs 89-91 of the Reasons and on the need for certainty and assurance on the part of the Buyers in the period before expiry that it would continue, combined with the difficulty in communicating and taking steps at the last moment. Once the arbitration mechanism for its continuance is brought into account however, that conclusion is unsustainable. There is no real prospect of losing the security. It is not significantly imperilled and, even if communication by telefax proved impossible, time pressures in the period shortly before expiry are unreal and do not impact on the position, because there is no time limit on commencement of arbitration with the triggering effect.

[54]The arbitrators erred in law. They set out the right test for repudiatory breach but they cannot have applied it if their earlier conclusion about the triggering effect of an arbitration, whenever commenced, as set out in paragraph 51 of their Reasons, is taken into account. A correct application of the test for repudiatory breach in these circumstance would lead inevitably to one answer only and this is part of the second stage of reasoning to which Mustill J (as he then was) referred in The Chrysalis [1983]1 Lloyd’s Rep503 at p507. furthermore, even if they did apply the right test, once they had decided as they did, correctly, in paragraph 51, their conclusion is one that no reasonable arbitrators could reach. Their conclusion that the failure to extend the Refund Guarantee by 28th June 2010, 2 days before the expiry date of the existing guarantee, was a repudiatory breach, cannot be right as a matter of law.

Conclusion

[55]In these circumstance, there is no need for remission, because the conclusion on repudiatory breach is inevitable.

[56]The answers to the questions posed in the questions of law can only be answered by reference to this contract and the facts found by these arbitrators, though framed in general terms in order to obtain permission to appeal. This Addendum No. 4 and these facts may or may not be repeated elsewhere, but permission to appeal was given.

(a) -Yes Question 2(b) - No

[57]For these reasons the appeal must succeed.