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The Court of Appeal in Swallowfalls v Monaco Yachting & Technologies SAM confirmed that a provision in a loan agreement which allowed the lender to give the borrower notice that the loan was immediately due and repayable should be construed as meaning that the loan was repayable on demand
Swallowfalls v Monaco Yachting & Technologies SAM  EWCA Civ 186
The case related to loans which were made in connection with the planned construction of a luxury motor yacht for Nat Rothschild.
Swallowfalls (the Claimant) commissioned the yacht from Monaco Yachting & Technologies (the Defendant) in 2006 pursuant to a construction agreement containing a London arbitration clause. It was understood that the actual construction work would be carried out by a sub-contractor of the Defendant.
The price of the yacht was just over €35m which was to be paid by 11 instalments, each due when the Defendant had achieved certain milestones in respect of the yacht's construction. The final 10% of the purchase price was due on delivery of the yacht (the 11th milestone). Title to the yacht was to be transferred to the Claimant on payment of the 5th milestone.
Progress with construction of the yacht was slow. It became clear to the Claimant that they would have to provide interim finance to the Defendant in advance of payment becoming due under the 3rd and 4th milestones. In a series of amendments to the original construction contract, the Claimants agreed to provide funds to the Defendant. The amendments were as follows:
The Defendant did not repay the loan by 30 April or at all.
The Defendant did not repay the loan by 1 September 2009 or at all.
In July 2011, the Claimant issued a notice to the Defendant that the Defendant was in breach of its contractual obligations. The Defendant refuted the allegations and commenced arbitration proceedings under the construction agreement.
In December 2011, the Claimant gave notice to the Defendant under the 2010 Loan Agreement that the loan was immediately due and payable in the sum of €15,699,864.21.
The Claimant then issued an application for summary judgment for repayment of the loan.
In Swallowfalls v Monaco Yachting & Technologies SAM 2012 [EWHC] 2057 (Comm), Walker J gave judgment in favour of the Claimant (now the respondent in this case) on the issue of the proper construction of clause 2.5(a) of the 2010 Loan Agreement (which provided that the loan was repayable on demand). The Defendant (now the appellant in this case) appealed that decision.
Walker J also found that the 2010 Loan Agreement contained certain implied terms imposing obligations on the Claimant (see what were the Defendant's arguments about the repayment terms section below?). The Claimant cross-appealed against that order.
Clause 2.5(a) of the 2010 Loan Agreement provided that:
'Unless previously repaid or prepaid pursuant to this Loan Agreement the Borrower shall repay the Loan, accrued Interest and all other sums payable under the Loan Agreement on the first to occur of:(i) the date on which the Lender gives the Borrower notice that the Loan is immediately due and repayable;(ii) the date on which the Agreement terminates;(iii) an Event of Default;(iv) the Completion Date; or(v) upon Delivery'
'Unless previously repaid or prepaid pursuant to this Loan Agreement the Borrower shall repay the Loan, accrued Interest and all other sums payable under the Loan Agreement on the first to occur of:
(i) the date on which the Lender gives the Borrower notice that the Loan is immediately due and repayable;
(ii) the date on which the Agreement terminates;
(iii) an Event of Default;
(iv) the Completion Date; or
(v) upon Delivery'
Clause 2.6 of the 2010 Loan Agreement provided that the term of the loan was to be from 3 November 2010 to the Completion Date which was stated to be 30 April 2012.
The Claimant argued that it was entitled to serve notice of demand when it did and that the sum outstanding under the 2010 Facility Agreement became due.
It argued that clause 2.5(a) of the agreement entitled it to call in the loan at any time without the need for any event or circumstance to have occurred.
The Defendant argued that the loan was not repayable on demand but only on the occurrence of an event of default or upon termination, completion or delivery.
The bases for the Defendant's argument included that:
The Defendant also argued that certain terms ought to be implied in the 2010 Loan Agreement. The terms were that:
'[The Claimant] would not, by its own acts or defaults and/or the acts or defaults of its agents, in breach of the Construction Agreement and/or otherwise, prevent [the Defendant] from repaying the Loan, or delay [the Defendant] in repayment of the Loan by the means identified in clause 2.5(b) and (c); and/or...[the Claimant] would cooperate with [the Defendant] in the confirmation of the achievement of Milestones and, in particular, the counter-signature of stage certificates.'
'[The Claimant] would not, by its own acts or defaults and/or the acts or defaults of its agents, in breach of the Construction Agreement and/or otherwise, prevent [the Defendant] from repaying the Loan, or delay [the Defendant] in repayment of the Loan by the means identified in clause 2.5(b) and (c); and/or
...[the Claimant] would cooperate with [the Defendant] in the confirmation of the achievement of Milestones and, in particular, the counter-signature of stage certificates.'
The Court of Appeal noted that the Claimant's construction of clause 2.5(a) did not render the rest of that clause pointless. The court referred back to an observation of the original trial judge that an event of default may not come to the attention of the lender for some time or that there may be some dispute as to whether an event of default had occurred at all. In those circumstances, clause 2.5(a) operated to enable any uncertainty or dispute to be side-stepped.
The Court of Appeal therefore agreed with the trial judge. It noted that:
'If a clause is to be repaid "on the first to occur of" a number of events (i) to (v) and one of those events is "the date on which the Lender gives the Borrower notice that the Loan is immediately due and payable", the natural construction of the words is that, once such notice is given, the loan is to be repaid.'
The Court of Appeal noted that the second implied term is an ordinary implication in any contract which requires co-operation in order for it to be performed. A ship-building contract would be such a contract. If a construction milestone has been achieved then the ship buyer must certify that milestone as part of his implied obligation to co-operate in the performance of the contract. If this is not spelled out in the contract explicitly, then a duty to co-operate will be implied.
The court found that this term could also be implied in the 2010 Loan Agreement on the basis that the primary method of repaying the loan was that the loan was to be reduced by the amount of the instalment due on the achievement of each milestone.
In respect of the first implied term, the court found this more problematic. It could find no basis for that term to be implied in the 2010 Loan Agreement. That said, the court noted that the Defendant only needed one implied term for the purpose of asserting a breach which could give rise to damages.
The court therefore dismissed both the cross-appeal and the appeal.
The court has stayed proceedings under the loan agreement while the arbitral proceedings under the construction contract are progressed.
Borrowers should be aware that an on demand loan is exactly that—it is repayable on demand. It is interesting to note the court's comments about the on-going relevance of the other circumstances in which repayment could be required. For example, the court noted that the Claimant in this case might have chosen not to demand repayment of the loan under clause 2.5(a) of the 2010 Loan Agreement but instead call an event of default because calling an event of default allowed it to charge an additional 2% interest per annum on the loan.
Kate Gaskell, solicitor in the Lexis®PSL Banking & Finance team.
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