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26 November 2019
According to the High Court in TMF Trustee Ltd v Fire Navigation Inc, the prevention principle can excuse a breach of contract when a party has been prevented from performing the relevant obligation by a breach of the other party.(1)
This case centred on a loan agreement entered into in 2009 (and subsequently restated in 2016) by the third and fourth claimants as lenders and the first and second defendants as borrowers. The relevant loan facility of $69 million was for the purchase of two vessels, the Honami and the Philomena. Both vessels were purchased by the borrowers using the loan sums and served as security for the loan.
On 8 September 2017 the second claimant (the security agent for the loan) served a loan-to-value (LTV) notice stating that the fair value of the vessels was insufficient to comply with the terms of the LTV ratio specified in the loan agreement. On 20 October 2017 an acceleration notice was served requiring that the loan sum and accrued interest be repaid immediately. No repayment was forthcoming and following the issue of proceedings in the United States and Singapore, both vessels were arrested and the Philomena was sold at auction.
On the basis of the defendants' failure to repay the sums due under the loan agreement, the claimants applied for summary judgment. One of the bases on which the defendants resisted the application was the prevention principle.
The 'prevention principle' was described in Roberts v The Bury Improvement Commissioner ( LR 5 C P 310) as follows:
it is a principle very well established at common law, that no person can take advantage of the non-fulfilment 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, so that any damages he would otherwise have been entitled to for the breach of the contract to him would immediately be recoverable back as damages arising from his own breach of contract.
In this case, the defendants argued that the claimants had committed various wrongful actions, including materially and recklessly overstating the shortfall in the LTV notice, which amounted to a repudiatory breach of the loan agreement and had caused the defendants' inability to repay the loan on maturity. The defendants argued that this fact pattern engaged the prevention principle.
For the purposes of determining the summary judgment application, the claimants agreed the fact pattern put forward by the defendants. Accordingly, the court had to determine whether the prevention principle defence had a real prospect of success, so as to clear the summary judgment hurdle.
The claimants argued that the prevention principle was not applicable; the true basis of the principle is that it is a term implied into contracts and therefore capable of exclusion if inconsistent with another express term of the relevant contract. The principle was inconsistent with the wording of a no set-off clause in the loan agreement, which stated that "all amounts due from the Borrowers… shall be paid (a) without any form of set-off, cross-claim or condition".
The judge accepted that the authorities(2) recognised that the language of a contract could in principle constrain the court to hold that the prevention principle was not applicable.
Looking at the wording of the clause, the judge held that while it would prevent the defendants from resisting liability for amounts due by reason of any alleged set-off or cross-claim, it did not stop the defendants from arguing that the amounts claimed were not due in the first place. Therefore, the judge found that the defendants had an arguable defence and refused the claimants' application.
This case provides an interesting illustration of the application of the prevention principle, although it is disappointing that the judge did not take the opportunity to clarify the precise legal basis from which it arises.
This case is of further interest as it distinguishes the judgment of Mr Justice Teare in Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd ( EWHC 2977 (Comm)), which also concerned the interaction of the prevention principle with a no set-off clause. In that case, it was held that the relevant clause had excluded the prevention principle. The distinction between the two cases was due to the relevant clause in Cargill being "rather wider in effect than simple no set-off clauses" as it contained an express provision that no default by the claimant of its obligations under the relevant agreement should suspend, terminate or extinguish the defendant's payment obligations.
Contracting parties may wish to consider whether to insert express wording into contracts containing no set-off clauses that would exclude this principle.
For further information on this topic please contact Chris Whitehouse or Andy McGregor at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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