In re ORCHARD LTD.

HCCW685/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.685 OF 1998

------------

------------

------------------------

J U D G M E N T

------------------------

1. This is a creditor's petition to wind up Orchard Limited ("the Company"). The debt upon which the statutory demand was based arises out of a Guarantee dated 4 July 1998 given by the Company in respect of obligations of Seacon Shipping Limited ("Seacon") under a charterparty. The petition was opposed on the ground that there was no consideration for the Guarantee which is therefore void and unenforceable and alternatively that there was a total failure of consideration in that the Petitioner failed to perform its part of the bargain for the Guarantee.

The facts

2. On 19 May 1998, the Petitioner as disponent owners chartered a vessel to Seacon at the daily rate of US$4,175 payable 15 days in advance. The charterparty contained the following provisions which are relevant for present purposes :

"5. ...failing the punctual and regular payment of the hire, or bank guarantee, or on any breach of this Charter Party, the Owners shall be at liberty to withdraw the vessel from the service of the Charterers, without prejudice to any claim they (the Owners) may otherwise have on the Charterers....

46. ...

Before exercising the option of withdrawing the vessel from the Charter under Clause 5 (five), the Owners will give the Charterers 48 (forty-eight) hours (Saturdays, Sundays and Holidays excluded) official notice in writing, and will not withdraw the vessel if the hire is paid within the 48 (forty-eight) hours allowed for notice from the time the Charterers received such notice.

Should over-payment occurs at any stage and Charterers have valid proof of same, include bunker joint survey report on redelivery, Owners to return excess within 3 banking days of Charterers notice of over-payment. In case of any sum due but not paid by Charterers, Owners/Master have right to suspend fully or partially their service for the Charter and vessel remains on-hire. Charterers to be given proper notice same as [the preceding paragraph] to rectify the situation before Owners exercise the right under this Clause."

3. Seacon and the Company are associated companies. The Company acknowledges that hire charges became payable under the terms of the charterparty on 18 June, 3 July and 18 July 1998 in the sums of US$66,827.56, US$60,276.56 and US$60,276.56 respectively. The Company defaulted in paying the hire charges due on 18 June causing the Petitioner to threaten to withdraw the vessel and to cease discharge which commenced on 20 June 1998. Discussions then ensued between the Petitioner and the Company which was asked to provide a guarantee of the payment of hire charges in order that discharge be continued. On 3 July 1998, the following exchanges took place :

At 1116 hours the Petitioner's agent sent the following fax to the Company :

"Owners are going to stop disch[arge] in case no confirmation is received before 15:00 hrs today for the 2nd hire plus USD 4050. The notice is given without prejudice to the charter party."

At 1519 hours, the following response was sent :

".....if the owners continues (sic) discharging the chtrs assure that c/hire payments will be made next week with the best of intentions. This is the best commercial way to solve the present problem.

Keeping the above in view and for the sake of good order chtrs request owners not to disrupt discharging, while chtrs arrange funds for c/hire payments.

Please advse.

The above being sent without prejudice to the C/P."

This prompted the Petitioner's agent to reply as follows :

"Chartrs msg 030798/1504 of today noted. Firstly it is owners right authorised by the C/P to take actions such as stop discharge against chartrs for the overdue payment. Secondly chartrs had been given sufficient notice/time to rectify the situation. Of course chartrs are responsible for the consequences if any occurred by stoppage of disch.

However asper chartrs request owners would once again render their good co-operation not to stop disch against letter of guarantee provided by 'Orchard'. The request of such a L/G should be in no circumstance whatsoever and howsoever considered as owners waiver of their right under the C/P.

Please find enclosed format of L/G"

At 1820 hours Seacon acknowledged the fax regarding the letter of guarantee but advised that the person in charge at the Company would not be available until 4 July.

4. On 4 July, the Company gave the following guarantee :

" LETTER OF GUARANTEE

---------

MV DELIGHT GLORY

C/P DATED 19.5.98

We hereby irrevocably and unconditionally guarantee the due payment and performance in every respect by Messrs. Seacon shipping limited of the terms and conditions of the above-mentioned C/P including payment of hire (USD66,826.56 due 18/Jun as 2nd hire and USD60,276.56 due 3rd Jul as 3rd hire). However as advsd the first hire has already been remitted to the owners, we undertake to pay and make good all amounts due to you under the C/P immediately when same become due. We agree that our liability under the guarantee shall be a primary liability and shall in no way be conditional upon your first proceeding against Messrs Seacon Shipping Limited. This guarantee shall be governed by English law, and any dispute hereunder shall be determined by the High Court in Hong Kong.

(Sd) For and on behalf of

ORCHARD LIMITED"

5. No payment was made of the hire due on 18 June or that due on 3 July. The Petitioner suspended discharge as of 0429 hours on 8 July until 1847 hours on 9 July. Apart from this interruption lasting some 38 hours, the charterparty ran until the end of July, but the Petitioner received no payment either from Seacon or the Company in respect of unpaid hire due on 18 June, 3 and 18 July.

Was there consideration for the Guarantee?

6. Under the charterparty, the Petitioner had two remedies in the event of any default in the payment of hire charges : it could withdraw the vessel pursuant to clause 5 or suspend discharge pursuant to clause 46. Although counsel for the Company was of the view that the 48-hour prior notice is required only for the withdrawal of the vessel, I agree with counsel for the Petitioner that having regard to the last sentence in the last paragraph of clause 46, such notice is also required for the suspension of discharge.

7. Whether the fax sent on 3 July at 1116 hours amounted to notice for the purposes of clause 46 is a matter of dispute between the parties. The Company submitted that it did not amount to notice within clause 46 because there was no reference to 48 hours' notice. Whilst such a (technical) reading of the clause is possible, there is an alternative way of reading the clause : what it requires is clear notice of intention to exercise the owner's rights, be it withdrawal or suspension of discharge, but that such right may not lawfully be exercised until after the expiration of 48 hours (excluding Saturdays, Sundays and holidays) from the time the notice was received by the charterers. So, if the Owners sought to stop discharge at 1500 hours that day because confirmation was not received, they would be acting in breach of clause 46. If it were necessary to choose between the two ways of construing clause 46, I would prefer the latter.

8. In my judgment, it matters not which is the true construction for the following reason. It is an undisputed fact that Seacon was in default under the charterparty in respect of the hire charges payable. The Owners were exerting pressure and inarguably were in a position to give notice at any time to withdraw the vessel or to suspend discharge. The Company negotiated with the Petitioner and requested the Petitioner not to disrupt the discharge of the cargo which had commenced on 20 June 1998. The further exchanges that took place in the afternoon of 3 July between the Company and the Petitioner's agent constituted an offer by the Company to provide the letter of guarantee requested against the Petitioner's agreement not to stop discharge. The provision that the letter of guarantee should not be considered as any waiver by the Petitioner of its rights under the charterparty does not render the bargain meaningless. In the context, this reservation of rights must be construed in the light of and subject to the Petitioner's promise not to stop discharge against the letter of guarantee. But the provision is not otiose because the charterparty was entered into with Seacon and not the Company. So vis-à-vis Seacon there is no waiver for example of the Petitioner's entitlement to the hire due under the charterparty. Accordingly, there is no merit in the submission that the letter of guarantee was not supported by consideration.

Petitioner's failure of performance

9. The other issue which arises is whether the stoppage of 38 hours between 8 to 9 July constituted a total failure of consideration on the part of the Petitioner. The question is whether the suspension went to the root of the contract or whether it was a breach of a term of the contract which sounded only in damages. The principle is stated in Chitty on Contract at 24-032 as follows :

"....Thus, where one party failed to perform a promise which went to the whole of the consideration, the other party was released from performance as the former had not performed that which was a condition precedent to the latter's liability. ....On the other hand, where the failure of performance went to part only of the consideration or, as it was later expressed, did not go to the 'root' or substantial consideration, the breach did not entitle the innocent party to be discharged from further liability, but to claim damages only..."

Applying that principle to the facts of this case, the Petitioner's breach cannot be considered one that went to the root of the contract : the period of suspension has to be seen in the context of events as from the date of the Guarantee. The charterparty was in fact allowed to run its course until the end of July apart from the 38-hour stoppage. In a sense, it is not dissimilar to Bowmaker (Commercial) Ltd. v Smith [1965] 1 WLR 855. There, the obligation of the finance company under an indemnity agreement was to transfer the vehicle to the dealer. It was held that breach of that term ordinarily did not entitle the dealer to repudiate the contract but sounded only in damages equal to the value of the vehicle. As stated by Russell LJ (at 858H-859A) :

"Some breaches of contract operate to let the other party off his part of the contract. The sale of the car by the finance company in this case was clearly not such a breach. The dealer remained liable to the finance company for 'the loss' as defined in the indemnity agreement, subject to a deduction of what he had lost by reason of the fact that the car was not forthcoming...."

In my judgment, the temporary stoppage is not such a breach as would release the Company from its obligations under the Guarantee.

Miscellaneous points

10. Counsel for the Company raised other objections to the validity of the Guarantee. It was submitted that the Company was acting ultra vires in offering the Guarantee since it had no interest in the continuance of the charter and the use of the Company's powers for the conferment of a gratuitous benefit is ultra vires. This submission is not borne out by the Company's own evidence. In the affirmation filed by Shaikh Abdul Rauf in opposition to the petition, it was expressly stated that Seacon is an associated company of the Company. That being so, there would have been every reason for the Company to provide the Guarantee. There is nothing in the ultra vires point.

11. Counsel for the Company also submitted that looking at the wording of the Guarantee, although the obligations it guaranteed was expressed as future obligations, in fact, the Guarantee was limited in terms to hire that had already fallen due so that the Guarantee was void for impossibility. I confess I have some difficulty in following this submission. I do not read the Guarantee as being limited to hire that had already fallen due. The words appearing in parenthesis in the Guarantee was part of what was covered by the Guarantee and not the sole subject matter of the Guarantee.

12. Finally, the Company also relied on In Re A Company (No.0012209 of 1991) [1992] 1 WLR 351. However, that was a case about a solvent company and a defence that had a prospect of success. It was in those circumstances that the Judge made the observation at 354G that :

"The court should give the company the benefit of the doubt and not do anything which would encourage the use of the companies court as an alternative to the RSC Order 14 procedure."

Here, there is no evidence that the Company is solvent. Moreover, the Company has not discharged the burden of proof in showing that the argument that the Guarantee is unenforceable has any rational prospect of success. In other words, there is not in the present case a bona fide dispute as to the debt.

Order

13. The Company is to be compulsorily wound up pursuant to Cap.32. In the circumstances, it is unnecessary to hear Charterer's Mutual Assurance Association Limited who attended the hearing in its capacity as the Intended Substituted Petitioner.

14. There is also to be an order nisi for costs in favour of the Petitioner, to be taxed if not agreed and paid out of the assets of the Company.