In a recent decision in the Admiralty Court before Mr Admiralty Registrar Davison, the Court considered the application of the recently enacted section 233B of the Insolvency Act 1986. Whilst the conclusions reached on that provision are perhaps less surprising given its wide remit, the decision raises some interesting points for contract lawyers on the formation of contracts and the reasonableness of their terms.
Introduction – Section 233B of the Insolvency Act 1986 (Act)
Section 233B of the Act, as incorporated by section 14 of the Corporate Insolvency and Governance Act 2020 (CIGA 2020), prevents certain contracts of supply of goods and services from being terminated (or their terms being amended unfavourably) simply because a contract counterparty has entered into a relevant insolvency process (being either a Part A1 moratorium, administration, administrative receivership, a CVA, a liquidation or a Part 26A restructuring plan).
The provisions of section 233B of the Act have built upon the provisions of sections 233 and 233A of the Act (which more narrowly relate to contracts for essential supplies, e.g. the supply of gas, electricity, water, communications and IT goods and services) and have extended an insolvent company's armoury when faced with supplier termination (or unfavourably amended terms) by reason of the company's insolvency.
These ipso facto provisions (which came into force during the COVID-19 pandemic), are designed to protect insolvent companies that are reliant on a continuing supply of goods and services from having their supply contracts terminated (or amended unfavourably) in order to assist with the rescue of the insolvent company as a going concern or to achieve a better return for the insolvent company's creditors than would be the case if such contracts were terminated (or amended unfavourably).
In the matter of the claim for port dues by Port of Tilbury London ltd  EWHC 113 (Admlty)
This is a shipping case concerning charges owed to the Port of Tilbury (Port) in relation to two cruise ships, "Colombus” and “Vasco Da Gama” (Vessels), that were impacted by the COVID-19 pandemic.
The Vessels were owned by Carnival Plc (Carnival) and formed part of the Cruise & Maritime Voyages (CMV) fleet, which was managed by Global Cruise Lines Ltd (GCL), part of the CMV Group. Both of the Vessels were demise chartered to a single-purpose company within the group. The demise charterer of the "Colombus" was Lyric Cruise Ltd (Lyric) and that of the "Vasco da Gama" was Mythic Cruise Ltd (Mythic). The Port had had previous dealings with the CMV fleet. The invoices for berthing and associated fees had been issued to Lyric and Mythic.
By mid-March 2020, the COVID-19 pandemic had forced CMV to suspend its operations. CMV had a pressing need to lay-over the Vessels until they could resume trading. As it was a regular customer of the Port, it was able to negotiate a lay-by agreement at a preferential rate of £3,000 per Vessel per week. Invoices for the lay-over charges (plus charges for water, sewage disposal etc) were issued by the Port to Lyric and Mythic, c/o GCL and were paid up until June 2020.
On 19 June 2020, the Vessels were detained by the Maritime and Coastguard Agency for non-payment of crew wages. A month later, the CMV group of companies collapsed and some of the CMV companies went into administration on 20 July 2020 (Date of Administration). Those companies did not include Lyric and Mythic.
Variation of lay-by rate
On the same day as the Date of Administration, the Port emailed CMV stating that the reduced lay-by rate would end the next morning and the Vessels would then be charged in accordance with the Port's published tariff. CMV responded that it was relinquishing management of the Vessels with immediate effect. On 23 July 2020, the Port wrote to the demise charterers of the Vessels, setting out the charges already owed and the published tariff now being levied.
Section 233B of the Act and the Court's determination
It was argued at Court that the variation of the lay-by rate was prohibited by section 233B of the Act, which had been enacted during the pandemic to protect supplies of goods and services to companies who had entered into administration.
The Court held that section 233B of the Act was probably wide enough to capture a variation provision such as the variation of the lay-by rate. In particular, the Court drew attention to the wording of subsection (3) of section 233B (and the Explanatory Notes to CIGA 2020), which referred not only to termination but also to doing “any other thing”, which would include an upwards variation of the charge for (the same) services. Therefore, prior to the Date of Administration, the Court determined that the Port was providing services to CMV and GCL (as well as to the demise charterers of the Vessels) such that the administration of the CMV Group would, all other things being equal, have triggered section 233B of the Act.
However, the Court concluded that since CMV and GCL had terminated the ship management arrangements on the Date of Administration (and effectively abandoned the Vessels), the Port was not dealing with CMV and GCL in respect of the charges but rather directly with the demise charterers, Lyric and Mythic. Since neither Lyric nor Mythic were in administration (or any other relevant insolvency process), the Court held that section 233B was of no relevance on the facts of this case and, therefore, the Port's upward variation of the lay-by rate was not prohibited by the Act.
Contract law lessons
Although the case does not create new contract law, it offers some interesting points:
How much detail is needed to form a valid contract?
In this case, GCL wrote to the Port stating "Understand you are holding 4 berths for us for a possible lay-up due to the current situation… please let me know your best charges BER BERTH/PER DAY (lump sum all inclusive please…)" The Port replied "…In round figures £3k per ship per week or part thereof. Lock charges per tariff", and a subsequent email added "Rates £3k per week. This is offered to Global-CMV ships only during this difficult period".
Despite the sparse contract terms, the judgment does not raise the question of whether there was sufficient detail to form a legally binding contract or question whether the terms (such as "during this difficult period") were sufficiently clear to be enforceable. Business operatives should be aware of how easy it can be to become bound to significant and burdensome contractual obligations. If the Court had found that the Port was unable to increase the charges, it could have been stuck with those heavily discounted rates for the duration of "this difficult period" (whatever that may have been construed to mean). Bad deals can often be escaped if clear termination rights are included, but in this case, the Port had not reserved a right to terminate the arrangement.
Is a right to increase charges subject to an implied term of reasonableness?
The Port had a right to "vary Charges at any time upon giving reasonable prior notice to the Customer". The Port sought to vary the charges from the discounted rate of £3k per ship per week, to its tariff rate which equated to £99k and £100k respectively per ship per week. This thirty-fold increase was described in the judgment as "eye-watering".
The Court considered an argument that the Port could only vary the rate by a reasonable amount, because a requirement of reasonableness was to be implied to give business efficacy to the provision or because it was so obvious that it goes without saying. The Court dismissed this and found that the Port had complete freedom to increase the charges as it saw fit. This illustrates the power, and the danger, of unilateral variation rights.
What constitutes 'reasonable notice'?
The email from the Port purporting to increase the charges from £3k per ship to the significantly higher tariff rate gave less than 12 hours' notice. The Court found that this did not qualify as the "minimum practicable" let alone "reasonable prior notice". A notice period of 28 days was held to be a reasonable in the circumstances. In coming to this conclusion, reference was made to the 28 day period for the payment of charges, which gave the Court some indication of the scale of a reasonable period of notice. Be aware that other periods in a contract could be used as reference points for construing what constitutes 'reasonable notice'.
What is the effect of failing to give reasonable notice?
Despite the failure to give reasonable notice, the Court found the notices to be effective, albeit after expiry of the 28 day "reasonable notice period". Other decisions have not been so generous – notices can be held to be ineffective if the procedural requirements are not complied with.
Whilst, ultimately, section 233B did not have any application in this case, the Court clearly considered that, if Lyric or Mythic were in administration, section 233B, in particular (3) which prevents a provider or goods or services from doing "any other thing" because its contract counterparty is subject to insolvency proceedings, would have been wide enough to capture an upwards variation to charges for services. This demonstrates the widely intended remit of the provision which will no doubt be tested again in future cases.
In this case the Port succeeded in charging its commercial rates rather than being bound by the heavily discounted rate, but more by luck than judgement. Contract lawyers may well shudder at the thought of an arrangement which had such a significant impact on the Port being concluded with such informality. However, hasty arrangements are understandably common in these unprecedented and fast-moving times. Service providers are often quick to support and accommodate their customers in difficult situations, but to their own detriment when changes are agreed without considering the full legal ramifications.
Lawyers are often pulled in to look at formal, well documented arrangements that are viewed as "contracts". This case is a strong reminder that in a turbulent world, it is often the informal arrangements entered into in haste that give rise to the greatest dangers, and which are subject to the least legal scrutiny.