Covington Marine Corp & Ors v Xiamen Shipbuilding Industry Co Ltd

On an arbitration appeal under section 69 of the Arbitration Act 1996, the construction of contractual correspondence is a question of law or mixed fact and law. Offers and acceptances are assessed objectively, in their commercial context, and not merely by literal analysis. A contract which is effective on execution but subject to automatic rescission remains operative until the relevant conditions are unmet and the rescission mechanism takes effect. A party entitled to performance of a condition may waive the contractual time for performance. Where conditions must be performed sequentially, a party cannot rely on the other party’s subsequent non-performance before performing its own anterior obligation. The awards were varied because the arbitrators had erred in law.

The claimants were buyers under four shipbuilding contracts. The contracts contained conditions concerning agreement on the supplier of the main engine, provision of refund and performance guarantees, and payment of the first instalment. Failure to satisfy the conditions within specified periods was said to result in automatic rescission.

The arbitrators concluded that the parties’ letters of 18 and 19 March 2003 did not constitute agreement on the main engine supplier and that the contracts had consequently been automatically rescinded. The buyers appealed under section 69 of the Arbitration Act 1996 on questions concerning agreement, waiver, repudiation and the proper construction of the contractual sequence.

1. The appeal was allowed in substance. The question whether the letters created a binding agreement was a question of law or mixed fact and law. The court should respect the commercial judgment of an arbitral tribunal, but may intervene where the tribunal has erred in the legal construction of the documents.

2. Both offer and acceptance were to be assessed objectively, subject to actual knowledge that no offer was intended. The correspondence had to be read in its commercial context. The letter of 18 March was properly understood as containing alternative offers concerning the source and cost of the main engine. The letter of 19 March accepted the relevant alternative in clear terms. The parties therefore reached agreement on the main engine supplier within Article 21(b)(i).

3. Article 21 created contracts effective from execution, subject to conditions subsequent and automatic rescission. The phrase permitting the party to whom performance was owed to agree otherwise preserved that party’s right to waive the relevant time for performance or the performance itself. It did not require bilateral agreement.

4. Although the court’s conclusion on question (ii) was not necessary to the result, Article 21(b)(i) required mutual agreement on the engine supplier. It did not impose a duty to agree or prevent either party from declining to reach agreement.

5. The buyers could waive the time for provision of the refund guarantees. The builders nevertheless remained subject to the independent obligation under Article 10(h) to provide the guarantees within a reasonable time. The builders’ refusal to take steps towards providing them was repudiatory.

6. The conditions were required to operate in sequence. A party could not rely on the other party’s failure to perform a subsequent condition, or invoke automatic rescission, before performing its own anterior obligation. The builders therefore could not rely on the buyers’ failure to provide performance guarantees by 21 March 2003.

7. The awards were varied to provide that the contracts had not been automatically rescinded and had been repudiated by the builders, who were liable in damages. The precise form of order and ancillary matters were reserved.

The claimants appealed from four arbitration awards dated 11 January 2005. Permission to appeal under section 69 of the Arbitration Act 1996 was granted by Morison J on 26 May 2005. The High Court varied the awards.