Lessons from Chugga Chugg v Privinvest: Renunciation and guarantee classification

Renunciation

1. In the absence of a clear and unequivocal intention not to be contractually bound, there will be no renunciation.
2. Words or conduct by the contract breaker, evincing an intention to perform following its (unaccepted) renunciation, will amount to withdrawal of the renunciation.
3. An innocent party’s conduct, including its silence and failure to reserve its rights where it has rendered insignificant performance, can amount to affirmation. 

On Demand or Surety

1. The question is one of construction.
2. The mere fact that the guarantee required a demand did not make it inimical to a surety guarantee of the “see to it” variety.
3. The Court found that the conditions triggering the Guarantee required a breach of the contract to be established, and as such the Guarantee was a “see to it” guarantee.

Background

Chugga Chugg Pty Ltd (Chugga Chugg) entered into a contract with German shipyard Nobiskrug GmbH (Nobiskrug) for the design, build and delivery to Chugga Chugg of a luxury yacht (the Contract). Under the Contract, Nobiskrug’s parent, Privinvest Holding SAL (Privinvest) provided a parent guarantee for €9,955,000 securing Privinvest’s performance under the Contract (the Guarantee). 

Both Chugga Chugg and Nobiskrug served rival termination notices in 2020, before Nobiskrug commenced arbitration proceedings against Chugga Chugg in June 2020. Part way through these arbitration proceedings Nobiskrug entered into preliminary insolvency.  

Two awards were given in Chugga Chugg’s favour, following which Chugga Chugg sent a letter of demand to Privinvest under the Guarantee, following Nobiskrug’s failure to pay. 

Renunciation

The Court found that Nobiskrug had no legitimate basis for its purported termination, and addressed several key issues:

1. A clear and unequivocal intention to renounce: Chugga Chugg did give Nobiskrug reason to understand that Chugga Chugg wanted to cancel the Contract, provided it could be done at an acceptable price. However, this was not a clear, absolute and unequivocal intention to renounce the Contract; it always depended on whether an agreement could be reached. Nobiskrug could not have reasonably understood this to be an unqualified expression of an actual decision or determination to cancel.  As such, there was no renunciation. 
2. Withdrawing or retracting a renunciation: On the hypothesis that Chugga Chugg had renounced the Contract, the Court also considered whether this hypothetical renunciation continued until Nobiskrug’s purported termination. Despite Nobiskrug’s reasonable concerns regarding Chugga Chugg’s willingness to continue with the contract, all of Chugga Chugg’s conduct, including repeated assurances from its beneficial owner and evidence of financial capability, was seen as consistent with it having an intention to perform. As a result, any renunciation (had it occurred) was withdrawn prior to Nobiskrug’s purported termination. 
3. Affirmation following a renunciation: The Court also considered whether Nobiskrug’s conduct would have amounted to an affirmation, had the Contract been renounced. The Court commented that when assessing if conduct is affirmatory, it is correct to bear in mind that the conduct may be occurring at a time when the innocent party cannot reasonably be expected to have reached a decision. However, although Nobiskrug’s conduct did not amount to significant performance under the Contract, when combined with other factors such as Nobiskrug’s silence at management level and a failure by Nobiskrug to reserve their rights, Nobiskrug’s conduct did amount to a sufficiently clear and unequivocal affirmation of the contract. 

Guarantee

The Court then turned to the matter of the Guarantee. Clause 2 of the Guarantee outlined conditions under which the Guarantee was triggered, providing:

“If an alleged breach or termination is uncontested by the Builder, we shall procure performance or pay as required, on first demand being made by the Owner. If the alleged breach or termination is contested by the Builder, we shall procure performance or pay as required against presentation of both (a) a final unappealable award in favour of the Owner … and (b) a written demand by the Owner…”

The Court found that the conditions triggering the Guarantee required a breach by Nobiskrug to be established, and as such the Guarantee was a “see to it” guarantee. In addition, the Court found that where there was no positive admission of liability by Nobiskrug in the arbitration, the breach was “contested”. Barring such an admission, or a settlement, with or without admission, a breach would be “contested” especially in circumstances where arbitration proceedings have commenced.