The judgment in Chugga Chugg Pty Ltd v Privinvest Holding SAL [2025] EWHC 585 (Comm) eloquently sets out the requirements for renunciation and affirmation of commercial contracts, and the interpretation of different types of guarantees in the shipbuilding industry. Richard Murray, Managing Associate, provides a summary.
Background
Chugga Chugg Pty Ltd ("Chugga Chugg"), was an SPV owned by Australian billionaire Brett Blundy, who engaged Nobiskrug GmbH, a German shipyard within the Privinvest Group, to design and build a luxury superyacht for €99.5 million. The contract required that Privinvest Holding SAL ("Privinvest") provided a parent company guarantee up to an aggregate maximum of €9.955 million, which was equivalent to the first instalment payable under the contract.
In early 2020, amidst the pressures of the Covid-19 pandemic, Chugga Chugg considered options to terminate the build. Chugga Chugg's case was that it sought to explore the possibility of a consensual termination owing to substantial delays in the construction schedule, the recent closure of Nobiskrug's yards and its financial difficulties. Privinvest's case was that the buyer "wanted out" of the contract, and that this amounted to its renunciation.
Nobiskrug issued a termination notice first, alleging Chugga Chugg's renunciation. Chugga Chugg responded by serving a notice pursuant to the contract - asserting that Nobiskrug was in material breach and demanding that it cure such breach within a certain period. Without any steps having been taken by Nobiskrug, Chugga Chugg served its own notice contending Nobiskrug's termination was wrongful.
The fact that the build contract had come to an end was not in issue, but a dispute arose as to when and on what basis it had terminated. LMAA arbitration proceedings followed, during which Nobiskrug entered insolvency in Germany. The Tribunal subsequently issued two awards in favour of Chugga Chugg, the first dismissing Nobiskrug's claim for non-payment of security for costs, and the other upholding its counterclaim for recovery of sums paid to Nobiskrug under the contract and directing the yard to pay.
The Issues
On 21 December 2021, Chugga Chugg sent a letter to Privinvest under the terms of the guarantee, enclosing the arbitration awards, and demanding that - since Nobiskrug was obliged to pay the first instalment to Chugga Chugg but had failed to do so - Privinvest was obligated to pay the guarantee amount.
The dispute before the High Court centred around the interpretation of the parent company guarantee, and in particular its 'Clause 2, which stated:
2. 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 issued by the Arbitral Tribunal as per Clause 20.2(c) of the Contract[2], and (b) a written demand by the Owner stating that the Builder is obliged to pay the amount(s) or perform the obligations referring to the relevant clause of the Contract and which the Builder did not pay or perform.
Amongst the lengthy list of issues agreed by the parties prior to trial, they fell broadly into two headings of "guarantee issues" and "renunciation issues". The Court was required to consider both:
- the alleged renunciation of the Contract – i.e. did the Claimant unequivocally renounce the contract in April 2020, thereby entitling the shipyard to terminate on 8 June 2020?
- the nature of the guarantee - i.e. was it a demand guarantee, payable upon a compliant demand, or an instrument of secondary liability, requiring proof of the shipyard’s default?
Decision
The Court ruled in favour of Chugga Chugg and determined that Privinvest was liable under the parent company guarantee.
Renunciation
The first question was whether Nobiskrug reasonably understood Chugga Chugg to have evinced a clear and unequivocal intention to renounce the contract on 6 - 8 April 2020. The Judge found this did not occur. Chugga Chugg wanted to cancel the contract if an agreement could be reached on price, but this was never an unqualified intention.
Further, the Judge held that even if she were wrong on the above, a repudiatory breach has no effect until accepted. It can be overtaken by events. Nobiskrug purported to accept the termination on 9 June. By this point, Chugga Chugg had stated several times that they wanted to continue the contract and provided evidence of their ability to meet at least their immediate contractual obligations. In such circumstances, it could not be said there was a 'clear and unequivocal' intention not to perform.
Chugga Chugg also argued that even if there was a repudiation of the contract by Chugga Chugg from 6 - 8 April, the contract was affirmed by Nobiskrug before termination on 9 June. Given that the Judge had found there was no repudiation, there was no need for the Judge to decide this. Nevertheless, Ms Justice Dias stated that if necessary, she would have been "inclined on balance to conclude" that there had been an affirmation of the contract.
This was because, although there had been no significant performance of the contract by Nobiskrug during the period in question:
1. There was "complete silence at management level" from Nobiskrug from 1 May onwards; and
2. The first reservation of Nobiskrug's rights was made only on 25 May. The Judge held by this point, the contract had been affirmed.
Accordingly, there was no legitimate basis for Nobiskrug to terminate the contract. In light of this finding, the Court did not need to determine the nature of the guarantee, but did so anyway.
Nature of the guarantee
Mrs. Justice Dias concluded that the guarantee was not a demand guarantee but rather imposed secondary liability, contingent upon establishing the shipyard's breach. There was no wording under the guarantee making Privinvest's liability "absolute and unconditional". Therefore, proof of Nobiskrug's default was necessary.
However, the Court also found that clause 2 of the guarantee represented a contractual agreement on how to establish the shipyard's underlying liability such that the guarantee could be called upon. Therefore whilst "technically an instrument of secondary liability", the guarantee was practically akin to a conditional demand bond, where payment should be made when the conditions were fulfilled.
The next question was whether clause 2 was in fact applicable to the current situation. Privinvest argued that because the shipyard withdrew from the arbitration proceedings, its liability was neither "contested" nor "uncontested," preventing the guarantee from being triggered. In such circumstances, the liability of Nobiskrug would have to be again proved by Chugga Chugg.
The Court rejected this, holding that once arbitration had commenced, the breach remained contested unless positively admitted by the yard in a manner binding on the Tribunal.
Conclusion
This important judgment eloquently sets out the requirements for renunciation and affirmation of commercial contracts, and the interpretation of different types of guarantees, which are a vital and common instrument used in the shipbuilding industry.
In relation to questions of repudiation and renunciation, the judgment serves as a useful application of well-known principles. It was not denied that Chugga Chug did want to get out of the contract in April, but wanted to negotiate a deal to terminate it. There lies a crucial distinction that shipyards should be aware of when gauging the conduct/intentions of buyers.
Further, the findings of the Judge in relation to the changing position after 6 - 8 April and the likely affirmation of the contract by Nobiskrug are a useful reminder that accepting an alleged repudiation of a contract can become more dangerous the longer the 'innocent' part waits. It is also a helpful reminder of the importance of reserving rights.
As to the guarantee issues, so called “on demand” guarantees are popular and make guarantors liable for payment of the guaranteed amount on demand, without reference to the underlying shipbuilding contract. However, parties need to read such wordings very carefully. Conditions on triggering payment may be lurking, giving rise to potential disputes.