TMF Trustee Ltd & Ors v Fire Navigation Inc & Ors

A contractual no set-off clause ordinarily prevents reliance on a set-off or cross-claim, but it does not prevent the debtor from contesting whether the claimed sum is due. The common-law prevention principle may excuse non-performance where the other party’s breach prevented performance. That principle is distinct from a set-off and is not excluded by a standard no set-off clause unless the contract uses sufficiently clear language. On an assumed repudiatory breach which caused the borrowers’ inability to repay, the borrowers had an arguable defence and summary judgment was refused. Where default-interest provisions contain a drafting lacuna, the court may construe them in accordance with the evident commercial purpose and common sense.

The claimants sought summary judgment and declarations concerning repayment of a vessel-financing loan. They accepted, for the application, that an invalid acceleration and subsequent arrest of one vessel constituted a repudiatory breach which caused the borrowers’ inability to repay at maturity, and that the borrowers had a valuable cross-claim.

The defendants argued that the loan had been terminated or that the prevention principle excused repayment. The claimants relied on a no set-off clause. A separate issue concerned the default-interest margin after maturity. The court had to determine whether the assumed prevention defence had a real prospect of success and how the default-interest provisions should be construed.

1. The application for summary judgment was dismissed. The defendants’ prevention-principle defence had at least a real prospect of success on the assumed facts, so the claim had to proceed to trial.

2. The prevention principle is a common-law rule that a party cannot rely on its own breach where that breach prevented the other party’s performance. The assumed acceptance that the claimants’ breach caused the borrowers’ inability to repay was capable of amounting, for present purposes, to an acceptance that performance had been prevented. The court did not decide whether the loan had separately been terminated or accepted as terminated, because that issue was highly fact-sensitive.

3. The No Set-Off Clause prevented the borrowers from resisting liability by reason of a set-off or cross-claim. It did not prevent them from contending that the sums claimed were not due in the first place. The prevention principle excused the repayment breach itself and was not merely a mechanism for setting off damages. The clause therefore did not exclude the principle. The wider clause considered in Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd [2018] EWHC 2977 (Comm) was materially different because it expressly preserved payment obligations despite the claimant’s default.

4. If the prevention principle applied, the borrowers were excused performance and were not in default on the maturity date.

5. The default-interest provisions contained a drafting lacuna concerning the margin after maturity. Construed in light of their commercial purpose, the applicable margin remained 8 per cent until payment. The claimants would therefore be entitled to that margin if they ultimately established that repayment was due at or before maturity.