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16 Feb 2023

When can you terminate a contract for failing to obtain 'confirmed financing'? (Havila v Abarca)

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The High Court judgment in Havila Kystruten AS v Abarca Companhia De Seguros, SA [2022] EWHC 3196 (Comm) shows how complex contractual termination claims can be, particularly when the meaning of the contract is unclear. While the claims concerned the termination of two shipbuilding contracts, the judgment is of interest to banks and other financial institutions because of the court's analysis of a requirement in one of the contracts to provide a 'written, committed statement' of financing and the consequences of an invalid attempt to terminate for breach.

Background

Havila Kystruten AS (Havila) entered into two shipbuilding contracts in April 2018 (SBCs) with Hijos de J. Barreras SA (the Shipyard) for the design and build of two passenger ships. The SBCs provided for payment by Havila in instalments (although the majority of the purchase price was payable on delivery). Following difficulties in finalising the intended lease structure for the purchase, the parties entered into various addenda to the SBCs. In the first addendum, the parties agreed that Havila's obligation to pay the instalments would be subject to a refund guarantee, a form of security frequently provided in relation to shipbuilding contracts. Portuguese insurer Abarca Companhia de Seguros SA (Abarca) was ultimately appointed as refund guarantor. In the seventh addendum, Havila agreed to provide a 'written, committed statement from [a] bank/financing institution' by an agreed deadline, failing which, the Shipyard would be entitled to terminate and/or cancel the SBCs, subject to a requirement that the parties meet to 'consider and negotiate in good faith' alternative arrangements to avoid termination.

In November 2019 (two days before petitioning the Spanish courts for its dissolution), the Shipyard purported to terminate the SBCs because of what it alleged was Havila's failure to comply with the obligation to provide the written, committed statement of financing. Havila contended that it had provided an appropriate written financing commitment and that the Shipyard had not been entitled to terminate. It then terminated the SBCs pursuant to a contractual entitlement (for, amongst other things, the Shipyard's insolvency) and also for repudiatory breach at common law.

As its remedy, the Shipyard sought payment of two instalments it alleged had fallen due prior to termination, together with damages for breach of the SBCs. Havila, by contrast, sought repayment of three instalments it had already paid to the Shipyard pursuant to a contractual entitlement and as damages for repudiatory breach at common law. Havila also sought the same sums from the refund guarantor, Abarca.

Meaning of 'confirmed financing'

The relevant clause read as follows:

'Pursuant hereto the Parties have agreed that the Buyer's alternative pre and post-delivery financing of the Vessel shall be confirmed to the Builder no later than on the 30 April 2019. The confirmation shall be provided by a written, committed statement from the bank/financing institution financing the Buyer (pre and post-delivery financing), to be submitted to the Builder.'

Abarca (defending Havila's claim for payment pursuant to the refund guarantee) argued that this meant: i) financing must exist; and ii) evidence of its existence must be provided in a written, confirmed statement from the lender providing that financing.

The court rejected the partitioning of the clause in that way. It held there was a single obligation to confirm the financing through a written, committed statement from the intended financing entity. It also held that that the parties had not intended to require evidence of a binding legal obligation to lend – if they had wanted to do that they could have required facility documents to be executed. The natural meaning of the words used was more apt to refer to an 'in principle' decision to lend, or a commercial commitment, without a legal, binding agreement. The court also held the word 'financing' was not synonymous with 'financing documents' and that its meaning had to be taken from the commercial context. The language of the clause was clear and there was no need for the 'gloss or reinterpretation' as proposed by Abarca.

The court therefore held that the commitment letter provided by Havila satisfied the contractual requirement and that the Shipyard had wrongfully purported to terminate the SBCs.

Waiver and good faith negotiations

While the court concluded that the Shipyard's right to terminate had not arisen, it considered whether any right to terminate would have been waived. In particular, the court considered what constitutes a 'reasonable period of time' for an innocent party to elect to terminate a contract. Havila argued that the Shipyard had waived any right to terminate by failing to terminate within a reasonable time and/or by agreeing a further contractual addendum. Abarca contended that no waiver had taken place because the Shipyard had:

  • agreed to negotiate with Havila until 22 July 2019;
  • stopped work on the ships on 12 July 2019 and not recommenced;
  • reserved its rights by letters/emails between June and October 2019 (and in the subsequent addendum);
  • pressed for performance between July and November 2019; and
  • terminated in November 2019 for failure to perform.

However, the court disagreed. It held that, had it been entitled to terminate, the Shipyard had waived that right because of its failure to act within a reasonable period of time. Of particular relevance was the Shipyard's negotiation and agreement of a subsequent addendum to the contract. The court held that in the context of those negotiations, any termination right needed to have been exercised promptly. It was not reasonable, in circumstances where negotiations aimed at 'fundamentally altering the commercial terms' of the SBCs were taking place, to delay exercising any termination right. The Shipyard's failure to exercise its right to terminate on or soon after it had arisen had resulted in it losing that right.

Further, the court found that the Shipyard would not in any event have been entitled to terminate the SBCs, given the requirement that the parties meet to 'consider and negotiate in good faith' alternative arrangements to avoid termination. The parties had not in fact concluded, in good faith, that there was no such alternative.

Common law and contractual termination rights

The Shipyard claimed that it had terminated the SBCs both pursuant to the contract and at common law. In the alternative to Havila's primary case that the right to terminate had not arisen, Havila argued that the Shipyard was prevented from claiming termination under the common law because it had elected to pursue, instead, its contractual termination rights. Although the court found it had not validly terminated pursuant to the contract, it considered the extent to which a party can rely on both a contractual and common law right to terminate. It held that this area of contract law 'may still be developing' and that the precise circumstances in which a party can validly rely simultaneously on both common law and express contractual termination rights is unresolved. The court held that an 'unduly restrictive' approach should be avoided when considering the meaning and effect of a termination notice. However, it noted that where a termination notice expressly makes it clear that the claimant is not relying on its common law termination rights, damages cannot be claimed at common law.

Comment

This complex and lengthy judgment addresses various aspects of contract law (not all of which have been explored above, given the number of issues). The court's analysis of both the meaning of the contractual clauses and the application of the doctrine of waiver were heavily driven by reference to the commercial context in which the parties found themselves. This echoes the approach of the Supreme Court in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2], in which the majority found that the correct contractual interpretation of a clause was not that of its 'natural and ordinary' meaning but rather a more commercially attractive construction. The judgment shows that care is needed, when terminating a contract, to make sure there are good grounds to do so – in this case, because the Shipyard was not entitled to terminate, its purported termination amounted to a repudiatory breach, entitling Havila to damages.

The judgment also highlights the dangers of relying on reservation of rights letters when a right to terminate has arisen, given the risk of a finding, after a reasonable period of time, that the right to terminate has been waived. For more information on reservation of rights and termination in the context of finance agreements, see our article here.

Finally, the finding that Havila's non-binding commitment letter from its bank was sufficient to amount to a "confirmed financing" and a "written, committed statement" from a bank, and that this wording did not require a legally binding obligation to lend, will be of interest to banks and other parties involved in transactions that depend on commitments to lend.

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