Enviroco Limited v Farstad Supply A/S

The court determined a preliminary issue about the construction of the word "Affiliate" in a charterparty which cross-referred to section 736 of the Companies Act 1985 (as supplemented by section 736A). The key question was whether Enviroco Ltd (the Contractor) remained an "Affiliate" of the Charterer despite the Parent company having given the Parent's shares in the Contractor as security to a bank, with registration of those shares in the bank's nominee. The court held that the statutory cross-reference must be read in the context of the contract and commercial reality: section 736A(7) should be read so as to treat rights attached to shares held by way of security as being held by the provider of the security where necessary to avoid commercial absurdity, and this produces the result that the Contractor remained an Affiliate. The court rejected a literal approach that would treat registration in the nominee's name as dispositive of membership for the purpose of the charterparty definition.

Background and parties:

• The vessel was chartered under an English-law charterparty. Enviroco Ltd (the Contractor/Claimant) cleaned the vessel's oil tanks in July 2002 and an engine-room fire occurred causing substantial damage. The Owner (Defendant) sued the Contractor in Scotland for damages. The Contractor relies on an indemnity/exemption clause in the charterparty which, if applicable, would prevent the Owner's claim because the clause allocated insurable risk to the Owner and its insurers and protected the Charterer and its "Affiliates".

Nature of the application: A reserved judgment on a preliminary issue: whether the Contractor fell within the charterparty definition of "Affiliate" where that definition cross-referred to section 736 of the Companies Act 1985, given that the Parent's shares in the Contractor had been "pledged" (a charge) to the Bank and registered in the bank's nominee.

Issues framed:

1. Whether, after the pledge and registration in the bank's nominee, the Parent nonetheless remained a "member" or otherwise satisfied the statutory tests in s.736(1) so that the Contractor was a subsidiary of the Parent for the purposes of the charterparty definition of "Affiliate".
2. Whether the statutory cross-reference must be construed in the context of the charterparty, with regard to commercial common sense and the anti-evasion purpose of s.736A, rather than by literal application of registration as determinant of membership.

Reasoning:

• The court treated the cross-reference to s.736 as incorporated into the contract and to be construed in that contractual context. Brett v The Brett Essex Golf Club Ltd was cited to support the proposition that words lifted from statute can bear a different meaning when incorporated into a contract.
• The statutory wording of s.736 and, in particular, s.736A(7) was analysed. The court accepted that s.736A(7) was designed to prevent evasion and to treat rights attached to shares held as security as held by the provider of the security in certain situations, and that the provision should be read broadly enough to cover both equitable charges and security manifested by registration in a nominee's name.
• The court emphasised commercial common sense and rejected a literal rule that would permit simple evasion by re-registering shares in a bank nominee so as to defeat a contractual allocation of risk. Authorities on avoiding commercial absurdity in construction were applied.

Conclusion: On the assumed facts the Contractor was an "Affiliate" of the Charterer for the purposes of the charterparty despite the pledge and registration in the bank's nominee; the indemnity/exemption therefore extended to the Contractor. The court gave a determination of the preliminary issue in favour of the Contractor.

The court determined the preliminary issue in favour of the Claimant (Enviroco Ltd). The judge held that the cross-reference to section 736 of the Companies Act 1985, read in context and in light of section 736A(7) and commercial common sense, meant that the Contractor remained an "Affiliate" of the Charterer despite the Parent's shares being registered in the bank's nominee pursuant to a security arrangement. Literal application of registration to defeat the contractual allocation of risk was rejected as commercially absurd.