Swallowfalls Ltd v. Monaco Yachting & Technologies S.A.M. & Anor [2014] EWCA Civ 186

In our Summer 2014 E-Brief, we commented on the case of Swallowfalls v. Monaco Yachting, in which the Court of Appeal construed a loan agreement relating to a yacht construction contract as being “on demand”. The Court also considered whether there was an implied term requiring the buyer to cooperate with the builder to agree, propose an alternative solution or abandon any proposed variation to the contract.

It is common to provide expressly in a construction contract for the ways in which the parties will cooperate with one another. Where this is not addressed by the express terms of the contract, a duty of cooperation may nevertheless be implied in particular circumstances. The scope of such a duty will depend on what is reasonable and necessary in the circumstances of each case and by reference to the terms of the contract. But how far does this go in a shipbuilding contract?

The background facts

The case of Swallowfalls concerned the construction of a yacht that was to be paid for by instalments upon the achievement of particular construction milestones. The Builder had difficulties performing its obligations and required interim finance from the Buyer in order to do so, which was provided by the Buyer as advances on the instalments that would become due under the contract. Upon completion of each milestone, and the Buyer’s counter-signature of the corresponding stage certificate, the outstanding loan amount would be reduced by the amount of the corresponding instalment.

Disputes subsequently arose and the Buyer claimed the balance of the loan. The Builder contended that the balance of the loan that was payable was significantly less than that claimed by the Buyer because:

1.    The Buyer failed to countersign a stage certificate upon the Builder’s achievement of a milestone, which delayed the instalment being credited against the loan amount, resulting in the accrual of additional interest; and

2.    The Buyer failed to follow the contractual mechanism for Buyer-requested variations, which delayed the completion of milestones and the repayment of the loan.

The Builder argued that it should be implied into the loan agreements between the Builder and the Buyer that:

1.    The Buyer would not prevent the Builder from repaying the loan, or delay the Builder in repaying the loan by completing the milestones under the shipbuilding contract; and/or

2.    The Buyer would cooperate with the Builder in the confirmation of the achievement of milestones under the shipbuilding contract and, in particular, the counter-signature of stage certificates.

The Court of Appeal decision

The Court of Appeal did not accept that the first term should be implied but found that the second term was implied and that “will do all that is required to make the contract work”. The Court 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 should have a duty to cooperate by countersigning stage certificates upon the achievement of milestones. If such an obligation was not imposed, the buyer could suspend payment by refusing to certify milestones, which is unlikely to have been the intention. 

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.

In many cases, the builder will be able to continue construction despite the buyer not having responded to a variation proposal. 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 in the absence of such provisions, the builder may be obliged 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 expressly agreeing, proposing an alternative solution or abandoning the proposed variation would not appear to be necessary in order to make the contract workable.

Comment

It appears doubtful that the Court of Appeal was intending to lay down a general principle that a general duty to cooperate will be implied in all shipbuilding contracts where the buyer proposes a variation and the builder notifies the buyer of the impact on the price, performance and delivery, such that the buyer must cooperate to agree, propose an alternative solution or abandon the proposed variation. However, this case could introduce some uncertainty as to the circumstances in which a duty of cooperation will be implied and time will tell how it will be treated by the Court in subsequent cases.