BACKGROUND
Burlington Loan Management DAC and Bank of America N.A, the third and fourth claimants in the matter (collectively the “Lenders”), entered into a loan agreement (the “Loan Agreement”) with Fire Navigation Inc and Hurricane Navigation Inc, the first and second defendants in the matter (“collectively the Borrowers”). In terms of the Loan Agreement, the Lenders would provide the Borrowers with a loan facility in the amount of US$69,020,047.00 (the “Facility Amount”) which would be utilized to finance the acquisition of two vessels, namely the Megacore Honami (the “Honami”) and the Megacore Philomena (the “Philomena”) (“collectively the “Vessels”). TMF Trustee Limited (the “First Claimant”) and TMF Global Services (UK) Limited (the “Second Claimant”) were also party to the Loan Agreement as security trustee and agent, respectively. The Borrowers purchased the Vessels with the funds they received under the Loan Agreement. As security for the Borrowers’ obligations arising from the Loan Agreement, the Borrowers executed a mortgage (a mortgage creates a fixed security over a ship and must be registered with the Registry of Shipping and Seamen in Cardiff, Wales) over the Vessels in favour of the Lenders. In terms of the Loan Agreement, the Borrowers were required to repay the Facility Amount in 11 equal quarterly instalments with a final ‘balloon’ payment on the maturity date, being 29 December 2017 (the “Maturity Date”). Failure to pay or “non-payment when due or demanded” would thus constitute an event of default. The Loan Agreement contained a no set-off clause (the “No Set-Off Clause”) which provided that “all amounts due from the Borrowers … shall be paid (a) without any form of set-off, cross-claim or condition…”
Subsequent to the conclusion of the Loan Agreement, the Lenders issued a loan to value notice (the “LTV Notice”) demanding that the Borrowers provide additional security to eliminate an alleged shortfall in the security required under the Loan Agreement. The Borrowers did not comply with the LTV Notice and so the Second Claimant served an acceleration notice on the Borrowers in terms of the Loan Agreement (the “Acceleration Notice”). The Acceleration Notice stated that the Facility Amount and all accrued interest thereon was immediately due and payable. The Borrowers did not make any form of payment following the service of the Acceleration Notice. Thus, the Lenders, the First Claimant and the Second Claimant (collectively the “Claimants”) commenced with proceedings on 28 June 2018 against the Borrowers, seeking repayment of the Facility Amount as well as any interest due based on the fact that the Loan Agreement had been validly accelerated and, in the alternative, that the loan was in any event repayable on the Maturity Date. As a result of the Borrowers’ failure to comply with the Acceleration Notice, and further to the abovementioned proceedings, the First Claimant acquired an interim order in October 2017, taking possession of the Honami and causing the vessel to be arrested in order to be sold at auction. On the 18th December 2017, the First Claimant also caused the Philomena to be arrested and sold at auction, without an interim order being granted by the courts.
In this matter, the Claimants sought summary judgment against the Borrowers for firstly, a money judgment (which is a judgment for a monetary sum and which would afford the Borrowers a certain time period in which they would be required to repay the money owing before making a final order against the Borrowers’ property). Secondly, the Claimants sought the following declarations: (i) that the Facility Amount became repayable no later than the Maturity Date; and (ii) that there would be an event of default under the Loan Agreement in the event that the Borrowers did not affect payment by the Maturity Date. For the purposes of this matter, the Claimants accepted the invalidity of the LTV Notice as the information contained therein was found to be deficient and incomplete. As a result, the Claimants further accepted the invalidity of the Acceleration Notice as it attempted to accelerate the repayment of the loan based on the invalid LTV Notice. The invalidity of the Acceleration Notice meant that the arrest of the Philomena, was unlawful and thus resulted in a breach of the Loan Agreement by the First Claimant.
The Borrowers relied on two alternative defences. Firstly, that the Loan Agreement had been terminated before the Maturity Date because either “(i) the Claimant’s repudiatory breach was such that the Loan Agreement terminated automatically; or (ii) the Borrowers accepted the Claimants’ repudiation by their conduct in failing or refusing to perform their own obligations thereafter.” Alternatively, the Borrowers relied on a defence based on the prevention principle (“the Prevention Principle”) which provides that “a party in breach of contract is excused where he has been prevented from performing the relevant obligation by the breach of the other party.” Essentially, the Borrowers held that they were unable to repay the Facility Amount at the Maturity Date as a result of the breach on the part of the Claimants and thus, the Prevention Principle meant that all debts owing under the Loan Agreement had not become due and payable.
The Claimants stated that they were entitled to summary judgment as “(a) the assumed repudiation of the Loan Agreement was never accepted by the Borrower” and as such, the Loan Agreement was in force at the Maturity Date and became repayable and “(b) the No Set-Off Clause prevented the defendants from resisting summary judgment.” The Claimants, in advancing their case, made reference to the case of Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd [2018] EWHC 2977 (Comm) (the “Cargill case”) wherein it was decided that “a defence based on alleged breaches of contract by the claimant and the ‘prevention principle’ had no real prospect of success because of no set-off clauses in the relevant contract.”
HELD
The main issues before the High Court of England and Wales (Commercial Court) (the “Court”) were to determine whether firstly, the Claimants’ repudiatory breach had rendered the Borrowers unable to repay the Facility Amount and as such, to excuse the breach on the part of the Borrowers. Secondly, the Court had to determine whether the Borrowers were prohibited from relying on the Prevention Principle due to the No Set-Off Clause in the Loan Agreement. The Prevention Principle would in essence allow the Borrowers to defend themselves from the claims that they had breached the Loan Agreement, if the breach were to be proven to have been caused by the actions of the Claimants.
The Court noted, in response to the case advanced by the Claimants, that the No Set-Off Clause referred to in the Cargill case was “rather wider in effect than simple no set off clauses,” as it included the express provision that no default of the claimant of its obligations under the agreement shall suspend or terminate or extinguish the defendant’s payment obligations. The Loan Agreement between the parties in the matter at hand, contained no such express provision and as such, the Cargill case provided no support for the Claimants’ case.
The Court, in its decision, referred to the case of Roberts v The Bury Improvement Commissioner [1870] L.R. 5 C. P. 310, where it was stated that “… it is a principle very well established at common law, that no person can take advantage of the non-fulfillment of a condition, the performance of which has been hindered by himself … and also that he cannot sue for a breach of contract occasioned by his own breach of contract…” The Court further referred to Budgett & Co. v Binnington [1891] 1 QB 35 where it was held that “… a breach is excused where the party committing the breach has been prevented by the other side from carrying out his contract.”
The Court thus concluded that due to the invalidity of the LTV Notice and the subsequent Acceleration Notice, the First Claimant was indeed in breach of the Loan Agreement when it arrested and sold the Philomena. As such, the Borrowers were prevented from performing their obligations in terms of the Loan Agreement. The Court found further that the No Set-Off Clause in the Loan Agreement does not exclude the application of the Prevention Principle and the Claimants’ application for summary judgment was therefore dismissed.
VALUE
This case is a prime indication that a No Set-Off Clause does not prevent a party to a contract from relying on the Prevention Principle. Such reliance would allow a party to defend themselves from the claims that it has breached the contract by the opposing party, when the alleged breach is in fact caused by the actions of the opposing party.
Written by Michal Asoulin and Angela Paschalides
