Establishing a contract by conduct and “see to it” versus “on demand” guarantee obligations – UK Commercial Court provides guidance

Background

The dispute arose from two long-term bareboat charterparties (the Charterparties). The vessels m.v. Ben Nevis (Ben Nevis) and m.v. Kailash (Kailash and together with Ben Nevis, the Vessels) were initially owned by Global Offshore Services BV (GOSBV) and GOSBV’s parent company Global Offshore Services Ltd (GOSL and together with GOSBV, the Defendants). In 2014, GOSBV entered into two sale-and-leaseback arrangements with Ocean Clap Shipping Ltd (OCSL) in respect of Ben Nevis and with MT Kailash Sàrl (MT Kailash, together with OCSL, the Owners) in respect of Kailash, under which the Vessels were purchased by the Owners and demise-chartered back to GOSBV. Both Vessels were due to be returned to the original owners, the Defendants, approximately 72 months after delivery. GOSBV’s obligations under the Charterparties were guaranteed by its parent company, GOSL as guarantor (the Guarantor).

The sharp fall in oil prices in late 2014 significantly hampered the Vessels’ earnings by way of hire, and hire payments from GOSBV to the Owners were stopped on 28 December 2015 in respect of Kailash and 11 January 2016 in respect of Ben Nevis.

The Owners subsequently brought two claims. Firstly, against GOSBV under the respective Charterparties for outstanding sums of hire and ancillary expenses due and, secondly, claims under the guarantees provided by the Guarantor for the maximum agreed amounts.

Issues

The Defendants provided the following defences.

A “general agreement”

The Defendants argued that the Charterparties, the guarantees and any associated debts had been cancelled by way of “general agreement” entered into with the Owners by conduct around early 2016 or subsequently (the General Agreement). It was asserted that the General Agreement had the following effects:

• GOSBV’s role in the Charterparties would transition to one of technical and commercial management of the Vessels;
• the Owners would retake possession of the Vessels;
• the earnings of the Vessels would be used to meet operational expenditure and other overheads in respect of the Vessels;
• the Charterparties would be cancelled and the guarantees no longer called upon; and
• the account between the parties under the Charterparties would be 'zeroed' such that no monies were due from GOSBV to the Owners in respect of any historic debt that had built up under the Charterparties.

The Owners denied the existence of the General Agreement and maintained that the Charterparties remained in force until their respective expiries at the end of the charter periods.

An “on demand” obligation

The Guarantor argued that clause 2.1.1(b) of each guarantee was an “on demand” as opposed to a “see to it” obligation. It was therefore argued that the obligation need only be fulfilled by the Guarantor at the demand of the beneficiary, which was not served before the expiry of the guarantees. Clause 2.1.1(b) stated: “The Guarantor irrevocably and unconditionally: … undertakes with the Owner that whenever the Charterer does not pay any amount of the Guaranteed Obligations when due, the Guarantor shall immediately on demand pay that amount as if it were the principal obligor…”.

As important context in respect of the Court’s judgment, clause 2.1.1(a) of each guarantee was, in contrast, a “see to it” obligation, stating: “The Guarantor irrevocably and unconditionally: … guarantees to the Owner the due and punctual observance and performance of all the obligations of the Charter under the Bareboat Charterparty and the Security Documents and the due and punctual payment of all the Guaranteed Liabilities”.

Judgment

Conduct required to form a binding contract

In respect of the first defence, the Court held that no General Agreement existed. The Court cited the case of Blue v Ashley [2017] EWHC 1928 (Comm), which concerned an alleged oral contract, to summarise the essential elements that must apply to any informal oral contract: (i) the parties must have reached an agreement, (ii) which they intend to be legally binding, (iii) is supported by consideration and (iv) is sufficiently certain and complete. Specific to the case in hand, the Court went on to confirm there was no General Agreement due to the following principles:

• there were inconsistencies within the Defendants’ witness evidence in respect of the terms, timing and mode of formation of the alleged agreement;
• the parties had exchanged term sheets, made subject to contract, which did not align with the alleged terms of the General Agreement; and
• the conduct relied upon in relation to non-payment by GOSBV was consistent with the fact that GOSBV did not have the funds to pay the Owners and was not unequivocally consistent with the formation of a new agreement which cancelled the Charterparties.

The distinction between “see to it” and “on demand” obligations

The Guarantor’s argument was rejected. The Court held that clause 2.1.1(a) provided for a stand-alone “see to it” obligation which was separate to any obligation to pay sums on demand under clause 2.1.1(b). Therefore, the Guarantor’s liability was due upon GOSBV’s default to pay the hire amounts under the Charterparties and no demand was necessary. It is worth noting that the Court referred to the use of “and” between clauses 2.1.1(a) and (b) as an indicator of separate obligations.

The Owners’ counter-argument that, should a demand be required in order to effect the Guarantor’s obligation, this demand could be made after expiry of the guarantee period so long as the demand related to liabilities incurred during the guarantee period, was also accepted by the Court.

The full judgment can be found here.