Yachtbuilding: Court of Appeal considers implied duty of cooperation in shipbuilding contract

In a decision relevant to both buyers and builders of yachts, the English Court of Appeal considered whether a loan for the construction of a luxury yacht was repayable “on demand” and decided it was. This was significant for the buyer, who had made the loan to the builder to help it complete the construction work, because it meant that when the builder defaulted on the loan, the buyer was entitled to demand full and immediate repayment of the total amount due.

One interesting point that arose out of this case was that the court agreed with the builder that it was appropriate to imply a provision into the loan agreement and shipbuilding contract that the buyer would cooperate with the builder in confirming the completion of milestones in the construction process. The English Court will only imply terms into a contract in very limited circumstances and the fact that it did so here is noteworthy.

Background and issues

The construction of the 71.5m superyacht Project NATO was commissioned by a company connected to Nathaniel Rothschild. The contract price was to be paid in 11 instalments when the builder had achieved certain milestones in the yacht’s construction. The builder’s subcontractors had difficulties performing their obligations and the builder obtained interim finance from the buyer in order to ensure completion of the yacht.

The buyer provided the interim finance as advances on the milestone instalments before they became due. Upon completion of each milestone, and the buyer’s countersignature of the corresponding stage certificate, the outstanding loan would be reduced by the amount of the relevant instalment.

Disputes subsequently arose and the buyer claimed the balance of the loan and exercised its right to complete the yacht elsewhere. The builder argued that the balance of the loan was significantly less than that claimed by the buyer because:

(a)  the buyer failed to countersign a stage certificate upon the achievement of a milestone; and

(b)  the buyer failed to follow the contractual mechanism for buyer-requested variations.

It was alleged that repayment of the loan was delayed as a result of these failures by the buyer, so that additional interest became payable.

The builder argued that it should be implied into the loan agreements between the parties that:

(i)  the buyer would not prevent or delay the builder from completing the milestones under the shipbuilding contract and thereby repaying the loan; and/or

(ii)  the buyer would cooperate with the builder to confirm the meeting of milestones under the shipbuilding contract and, in particular, to counter-sign stage certificates.

The judge at first instance gave summary judgment in favour of the buyer. The matter went to appeal.

The Court of Appeal decision

The Court of Appeal held that the first term should not be implied but that the second term should because it “will do all that is required to make the contract work”. The Court of Appeal commented that:

“The second proposed implied term is an ordinary implication in any contract for the performance of which co-operation is required. A shipbuilding contract is such a contract since … the builder only earns a stage payment when the buyer’s representative signs a certificate that the relevant stage or milestone has been achieved. 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.”

It is not controversial that the buyer has a duty to cooperate by countersigning stage certificates upon the achievement of milestones. Otherwise, the buyer could suspend payment by refusing to certify those milestones.

What is more controversial is the comment that if the buyer proposes a variation and the builder notifies the buyer of the impact on the price, performance and delivery, the buyer must cooperate to agree, propose an alternative solution or abandon the proposed variation and that, if this is not spelled out in the contract expressly, it will be implied.

Some contracts provide that the builder is required to follow the buyer’s variation instructions while awaiting a response (with the time, cost or other consequences being determined later) or that, if the buyer fails to respond within a particular period, the proposed variation will be withdrawn. Even without such provisions, the builder may be required to continue construction in accordance with the original specification unless and until any variation is agreed. In all these cases, an implied duty on the buyer to cooperate by agreeing, proposing an alternative solution or abandoning the proposed variation, may not be necessary in order to make the contract workable.

Comment

It is unlikely that the court will imply such a duty to cooperate in all shipbuilding contracts as a matter of general principle. So where the buyer proposes a variation and the builder notifies the buyer of the impact on the price, performance and delivery, it will depend on the particular facts of the case as to whether the buyer must cooperate to agree, propose an alternative solution or abandon the proposed variation. However, this case could introduce some uncertainty as to when a duty of cooperation will be implied and time will tell how it will be treated by the courts in subsequent cases.

Robin Acworth
Solicitor, Ince & Co
E: [email protected]
T: +44 (0) 20 7481 0010
W:  http://incelaw.com/en/sectors/shipping/yachts-superyachts