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03 Apr 2014

Duty of cooperation of the buyer in the construction of a yacht an implied term?

Ship finance law watch email

The Court of Appeal has just rendered its judgement in a protracted legal battle between the buyer (S) of a 71 metres yachts owner and a Monaco based general contractor (M).

The case, which began in mid-2012, revolves around a €38 million loan facility advanced by the S to M and that the buyer claimed to be returned back, whereas M claimed against S for breach of contract and preventing the contractor from completing the yacht.

M had agreed to build a yacht for S and the general contractor subcontracted the construction of the hull to an Italian yard (the Yard) and other suppliers. S was to pay the price by instalments when each of 11 milestones on the way to final delivery were achieved. It results that M had difficulty in meeting its obligations and so on four occasions S lent M money and made amendments to the construction contract. Further, title to the yacht was to be transferred to S on payment of the 5th milestone.

However, by the time of the fourth amendment and loan the costs of the project dramatically increased and a serious dispute arose between M and the Italian Yard relating to late payment of sums due from M and sums charged by the Yard to M because the construction was taking too long and "late stay charges" were supposedly accruing. This dispute was settled by a Tripartite Agreement between S, M and the Yard and a loan agreement was made which provided that the loan would become payable on the first to occur of several events, one of which was the date on which S gave M notice that the loan was immediately due. Disputes arose under the construction contract which were referred to arbitration. S gave notice under the loan agreement that the loan was immediately due. It applied for summary judgment for repayment of the loan.

The first instance judge gave judgment in S's favour on the construction of the repayment clause of the loan agreement but he refused to give summary judgment pending resolution of M's cross-claim for breach of implied terms of the loan agreement, namely that S would co-operate in the confirmation of the achievement of milestones, and that S would not prevent M from repaying the loan. Both parties appealed against the decision.

The Court of Appeal held that the judge had been correct regarding the construction of the clause. If a clause provided that a loan was to be repaid on the first to occur of a number of events and one of those events was the date on which the lender gave the borrower notice that the loan was immediately due and payable, the natural construction of the words was that, once such notice was given, the loan was to be repaid.

On the other hand the court accepted M's defence that in a shipbuilding contract there is an implied term that the buyer will cooperate in the performance by the builder, since the builder earned a stage payment only when the buyer's representative signed a certificate that the relevant milestone had been achieved. The court held that:

"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".

If such a term was to be applied in the contract, so also it had to be implied into the loan agreements, because the primary method of repayment of the loan was that the loan was to be reduced by the corresponding amount of the instalment due on the achievement of the relevant milestone. The fact that it was implied into the contract did not make it duplicative when implied into the loan agreement, since the agreements set out their own separate obligations with separate procedures for enforcement.

As a result, however, to money has yet been awarded to either side and proceedings have been stayed proceedings pending arbitration.

The above judgement is of great importance for the buyers of yachts and their representatives as the English courts have affirmed that a buyer must cooperate with the builder throughout the construction and the failure to have a buyers' representative at the yard or to countersign stage certificates might result in liability.


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