Chugga Chugg v Privinvest

Chugga Chugg (an SPV) claimed €9.955m under a parent company guarantee. The guarantee secured performance of Privinvest’s subsidiary, Nobiskrug GmbH, under a contract with Chugga Chugg for the design and build of a luxury superyacht. Central to the dispute were:

1. Discussions by telephone in which the Buyer and their broker were found to have communicated to the Builder that they wished to terminate the build contract; and
2. The interpretation of the Parent Company Guarantee issued by Privinvest for the yacht build contract.

The issue on the facts was whether during telephone discussions between Chugga Chugg’s and Nobiskrug’s representatives on 6 & 8 April 2020, Chugga Chugg communicated to Nobiskrug a settled intention to terminate the shipbuilding contract. Nobiskrug had concluded that the Buyer could no longer be relied on, and had terminated the contract. Chugga Chugg disputed any repudiation, and claimed that Nobiskrug’s conduct was in turn repudiatory.

Nobiskrug commenced an LMAA arbitration concerning Chugga Chugg’s and Nobiskrug’s rival terminations of the shipbuilding contract in 2020 but entered insolvency in Germany in 2021, part-way through the proceedings. Chugga Chugg obtained two awards in its favour, the first dismissing Nobiskrug’s claim in default of payment of security for costs by Nobiskrug and the second awarding Chugga Chugg its counterclaim.

The judgment of Dias J addresses with great clarity a number of important issues for commercial practitioners, including: 

1. First, the Builder in this case had leapt too early in terms of acting on what it considered to be the Buyer’s renunciation. Although the Judge found that (contrary to their witness evidence) both the Buyer and their broker had said that the Buyer wished to terminate the contract, that wish was expressed as being conditional on getting a good deal (ie some money back) for the exit. The renunciation was not, therefore, unequivocal and did not, therefore entitle Nobiskrug to terminate the contract as they did.
    
2. Second, the issue of affirmation was not a key one, given the decision on renunciation, but the Judge found that if the Buyer had repudiated the contract, then Nobiskrug had affirmed. That affirmation was established by Nobiskrug taking no action to terminate for a month after it was made clear that no further guarantee would be available from the Buyer, despite ongoing discussions about the Buyer’s ability to perform and a later reservation of rights. The Judge found that even though the conduct by Nobiskrug relied upon by Chugga Chugg did not amount to significant performance under the contract (agreeing with Privinvest), when coupled with (i) Nobiskrug’s silence at management level; and (ii) the absence of any reservation of rights by Nobiskrug, meant that (if it had been necessary to reach a decision on the point) this conduct would have amounted to a sufficiently clear and unequivocal affirmation [144]-[146].
   
   This is perhaps the most (and indeed only) questionable part of the judgment, when considering the context of a four year build project for 100 million, in circumstances where the Buyer had expressed a wish to terminate, and discussions were ongoing as to whether the Buyer could satisfy Nobiskrug as to future performance. It is well established that a delay or performance of a contract can amount to affirmation, and that what will count will be a matter of fact in each case. However in many shipbuilding cases that time is often relatively long, given the sums at stake (and therefore the importance of the decision) and the length of the projects.
    
3. Third, and in a welcome approach, the Judge took an objective view of the actual wording and nature of the Parent Company Guarantee. This is an area in which there have been numerous, mostly consistent authorities, but which has then perhaps led some to take such guarantees as automatically “on demand” in nature. In this case the parties disputed whether the parent company guarantee was an instrument of primary liability (an “on demand” guarantee) or secondary liability (a “performance” guarantee).
   
   Dias J concluded that the guarantee was a performance guarantee (agreeing with Privinvest), with clause 2 setting out the agreement as to how Nobiskrug’s liability under the shipbuilding contract is to be established for the purposes of a claim under the guarantee (in line with Hill v Mercantile & General Reinsurance Co plc, [1996] 1 WLR 1239) [152]-[156]. That separated the guarantee from an “on demand” bond, under which no liability need be established beyond a simple demand for payment. 

Comment

In many ways, this is an exemplary judgement, which sets out a very clear consideration of the requirements for renunciation, withdrawal of renunciation, affirmation, and the interpretation of a refund guarantee.

On the central argument as to renunciation, the Judge essentially accepted the evidence of fact presented by witnesses from Nobiskrug and Privinvest, but held that the conduct and wording of the Buyer and his brokers was below the threshold for renunciation. This is a trap that shipyards in all spheres (commercial as well as yachting) need to be wary of. The Buyer in this case was held to have wanted to get out of the contract, and had told the yard as much, but critically did not say so in unequivocal terms because he wanted to terminate by way of a deal. In practice, for a shipyard committing to expensive sub-contracts, a Buyer indicating a wish (in any way) to end the contract is very clearly a serious concern. However, it does not, without more, entitle the yard to terminate, especially when the Buyer then confirms that in the absence of a deal, he will continue the project. This judgment is a good reminder that any repudiation must be very clear, and not conditional in any way.

In terms of affirmation, the key here is reservation of rights. To some extent, any shipyard (or indeed Owner) must perform the contract while it is considering whether or not to accept a repudiation and terminate, because otherwise they run the risk of themselves accidentally repudiating the contract. However, any performance must, in order to preserve the right to terminate, be accompanied by clear, and preferably regular, reservations of rights from the very start in order to make clear that any conduct does not affirm the contract or waive the right to terminate.

Finally on the guarantee, the most common form of guarantee in newbuild projects will be an “on demand” guarantee, which confers primary liability payable on demand, without reference to the underlying shipbuilding contract. However, that does mean that in some cases, the Court or Tribunals can be too quick to assume that a guarantee is “on demand”, when in fact it does not contain the provisions that have been found to confer primary liability. In this case, the guarantee was referrable to performance of the underlying contract, and the Court’s examination of the words used, rather than assumptions made, highlights the need to adopt clear wording if the parties genuinely intend a guarantee to be “on demand”.

Tom Kelly, Jasmine Clark, Freya Sydney-Smith, and Deborah Cooper of Preston Turnbull LLP acted for Privinvest, with Rani Noakes and Jacob Haddad of 4 Pump Court as counsel.

You can read the full judgment here.