Wednesday, March 28, 2012

RELIEF FROM FORFEITURE: Knotty issues for Oil Industry Contracting

By Nkaepe Lisk-Carew

The courts of equity have the right to relieve against the forfeiture of property. This gives the defaulter more time to perform its contractual obligations. Relief is available because forfeiture is a draconian remedy which results in substantial and disproportionate loss to the defaulter. How does the doctrine of relief from forfeiture impact on the forfeiture provision in a JOA? 

Applicable Case Law 
The classical position on relief from forfeiture can be found in the House of Lords decision in Shiloh Spinners Ltd v Harding (“Shiloh”). The case involved a right of re-entry over assigned premises. The claimants claimed possession of the assigned premises while the defendants disputed the right of re-entry and sought relief from forfeiture. Lord Wilberforce in his judgement said: 
“we should reaffirm the right of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result.” 

 The House of Lords held that the court had jurisdiction to grant relief against forfeiture of proprietary rights in circumstances outside the ordinary landlord and tenant relationship. From this case, we see that three conditions must be satisfied for there to be jurisdiction to grant relief, namely, (a) the primary object of the bargain must be to secure a stated result; (b) that result must be one which can effectively be attained when the matter comes before the court; (c) it must be possible to say of the forfeiture provision that it was added by way of security for the production of that result. 

While Lord Wilberforce proposes a cautious approach to relief from forfeiture, an alternative view was taken by Lord Simon of Glaisdale in Shiloh. He states: 

“I would therefore myself hold that equity has an unlimited and unfettered jurisdiction to relieve against contractual forfeitures and penalties. What have sometimes been regarded as fetters to the jurisdiction are, in my view, more properly to be seen as considerations which the court will weigh in deciding how to exercise an unfettered jurisdiction.” 

Lord Simon’s conclusion was initially adopted by Lloyd J at first instance in the case of Scandinavian Trading Tanker Co. AB v. Flota Petrolerra Ecuateriana (“Scaptrade”). However, this was overturned by the Court of Appeal and also unanimously rejected by the House of Lords. The case involved a time charter. Payments of hire under the charter were to be made monthly in advance. The charter also provided that if the charterers defaulted in paying the monthly hire installment by the due date the owners could withdraw the vessel from hire. The charterers failed to pay the installment due. The owners gave notice to the charterers withdrawing the vessel. The owners of the vessel sought and obtained a declaration that they were entitled to withdraw the vessel. The charterers appealed seeking relief from forfeiture. Their appeal was dismissed by the Court of Appeal which held that it had no jurisdiction to grant the equitable remedy of relief against forfeiture in such circumstances. On appeal to the House of Lords, it was held that: 
“time charter, unless it is a charter by demise, with which your Lordships are not here concerned, transfers to the charterer no interest in or right to possession of the vessel: it is a contract for services to be rendered to the charterer by the shipowner through the use of the vessel by the shipowner's own servants, … Being a contract for services it is thus the very prototype of a contract of which before the fusion of law and equity a court would never grant specific performance” (per Lord Diplock, Scaptrade) 
Willoughby explains that the Scaptrade was in actual fact, “quite narrow”. It only recognized that since a time charter is a contract for services, the only relief available would be an injunction to restrain withdrawal of the vessel.[1] From this case we learn that relief cannot be granted in the case of contracts for services. The limited application of Lord Diplock’s reasoning is seen when he states: 

“I do so with the reminder that the reasoning in my speech has been directed exclusively to time charters that are not by demise. Identical considerations would not be applicable to bareboat charters and it would in my view be unwise for your Lordships to express any views about them” 

The decision in Scaptrade was applied by the House of Lords in Sports International Bussum BV v Inter-Footwear (“Sports International”). This case involved licenses to use certain names and trademarks for which the defendant agreed to pay the plaintiffs £105,000 in three installments. It was further agreed that the defendant would provide guarantees for the second and third installments 'immediately upon payment' of each previous installment and that if the defendant failed to pay either instalment on its due date or failed to furnish either guarantee the whole sum outstanding would become due and the licenses would terminate. The defendant failed to provide the second guarantee until a fortnight after the payment of the second installment. The defendants failed to provide one of the guarantees on time and the plaintiffs sought judgment for the outstanding amount and a declaration that the license had been validly terminated. The defendants sought relief from forfeiture. The House of Lords denied the defendants relief on the basis that: 

“The recognized boundaries (of equitable relief from forfeiture) do not include mere contractual licenses and I can see no reason for the intervention of equity.” (Per Lord Templeman) 

Therefore, mere contractual rights were also ineligible for relief from forfeiture. This principle was re-affirmed by Scott J in Crittal Windows Ltd v Stormseal (UPVC) Window Systems (“Crittall”) another trademark infringement case. It was held that the defendant’s rights under various user agreements were purely contractual and did not amount to any proprietary or possessory interest..[2]

 The above cases are thought to restrict relief to cases involving some interest in land and exclude mere contractual licenses or contracts for services. However Lord Diplock’s reservations on bareboat charters in Scaptrade may indicate willingness to extend jurisdiction in some commercial cases. It has been suggested that B.I.C.C. PLC v Burndy Corporation (“BICC”) introduced uncertainty into this area of law. In BICC the plaintiff invoked forfeiture of patent rights following the defendant’s default. The Court of Appeal rejected the plaintiff’s claim because the defendant was entitled to set-off the amount in default against debts owed to it by the plaintiff. However Dillon J in obiter stated that: 

“There is no clear authority, but for my part I find it difficult to see why the jurisdiction of equity to grant relief against forfeiture should only be available where what is liable to forfeiture is an interest in land and not an interest in personal property. Relief is only available where what is in question is forfeiture of proprietary or possessory rights, but I see no reason in principle for drawing a distinction as to the type of property in which the rights subsist. The fact that the right to forfeiture arises under a commercial agreement is highly relevant to the question whether relief against forfeiture should be granted, but I do not see that it can preclude the existence of the jurisdiction to grant relief, if forfeiture of proprietary or possessory rights, as opposed to merely contractual rights, is in question” 

 It was formerly commonly accepted that relief can only be given where the forfeited interest is proprietary or possessory, usually an interest in land. Willoughby comments that Dillon J’s view is in sharp contrast to that of the decision in Scaptrade which precluded the extension of relief to purely commercial rights/transactions. Lord Templeman in Sport International, exhibited a reluctance to discuss the applicability of relief in a wider context. He merely commented that the Sport International was not suitable for defining the boundaries of the doctrine of relief from forfeiture but note Lord Diplock’s reservations in Scaptrade. Pawlowski comments that the BICC case extended relief from forfeiture to interests in personal property making the distinction more difficult.[3]

It is submitted that BICC is not a complete departure from what was previously established. Following BICC, relief is still only available where there is a possessory or proprietary interest. However, that interest may be in personal property or arising from a commercial agreement, as opposed to just being an interest in land. Dillon J still excludes relief in relation to merely contractual rights. 

In keeping with the ruling in BICC, the court in On Demand Information plc (IAR) v Michael Gerson (Finance) plc (“On Demand”) found that a lessee under a finance lease agreement of video and editing equipment had sufficient possessory interest which qualified for relief from forfeiture. The lessor was entitled to receive rent for a period of 36months at a rate which amounted to the cost of the equipment with interest, costs and profit. At the end of the term, the lessee was entitled to indefinite possession for a nominal annual rent. Further, the lessee could sell the equipment to a third party and retain 95 percent of the sale proceeds. Pawlowski argues that the lessee in On Demand was given a contractual right to keep possession of the chattel indefinitely which brought this case within the boundaries of relief from forfeiture.[4] Surely this was not just a contractual right but possessory or else relief would not have been granted. 

 The 2010 decision in Celestial Aviation Trading 71 Ltd v Paramount Airways Private Ltd (“Celestial Aviation”) may help to address the conflict in reasoning resulting from the BICC decision. This case involved the lease of three aircrafts which were leased by the claimant to the defendant under three lease agreements for a period of eight years. Rent was payable monthly in advance and a deposit was also paid under the agreements. Time was stated to be of the essence on all payment obligations. When the defendants failed to make payments due under the leases, the claimant gave notice of default, terminated the agreements and requested delivery up of the aircrafts. The defendants sought relief from forfeiture. 

In deciding whether the court had jurisdiction, Hamblen J, applying the reasoning in Scaptrade and Shiloh considered the following: 

(1) “Whether the contract involves the transfer of proprietary or possessory rights 

(2) Is it possible to state that the object of the transaction and of the insertion of the right to forfeit is essentially to secure the payment of money; and/or is the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result." 

(3) If so, whether reasons of legal policy support the existence of such a jurisdiction” 

In answering the first question, Hamblen J re-affirms Scaptrade which makes it clear that relief against forfeiture is generally limited to contracts which involve the transfer of proprietary or possessory rights. The present case did not involve a transfer of such rights because the defendant only has a right to possess the Aircraft for a proportion of its economic life. As such Celestial retained proprietary interest in the aircraft themselves. He distinguished this from the situation in On Demand where the lessee acquires ultimate ownership. Further, unlike in On Demand, rent was not calculated such as to recoup the cost of the aircraft, costs and interest. Therefore Hamblen J held that relief of forfeiture does not apply to contracts transferring merely a bare possessory right for only a proportion of the economic life of the chattel in question. 
With regard to the second question, Hamblen J view is evident in his statement: 

“In such circumstances I do not consider that it can be said that the essential purpose of the termination provisions in the ASLAs was as "security" for the payment of rent. An essential purpose of the termination provisions was to secure Celestial's ability to be released from the ASLAs and to have the Aircraft returned in circumstances where Paramount was in default. Moreover, security under the ASLAs was provided by the requirement that a deposit be provided.” 

As to the third consideration, Hamblen J refers to previous decisions which reiterate the need for certainty in commercial transactions. The consequence of extending jurisdiction to such cases would cause significant uncertainty which is undesirable as a matter of policy. Hamblen J refers to Lord Hoffman's judgment in Union Eagle Ltd v Golden Achievement Ltd: 

“…it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be 'unconscionable' is sufficient to create uncertainty. Even if it is most unlikely that discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic. The realities of commercial life are that this may cause injustice which cannot be fully compensated by the ultimate decision in the case. 

Hamblen J goes further and states that if he was wrong in relation to the court’s jurisdiction, the question would then be a matter of discretion. He found that the defendant had a prior history of persistent defaults which evidenced a “cavalier disregard” of their contractual obligations. Hamblen J was therefore of the firm view that relief should be denied. 

This is the second instalment in the analysis of Default and Relief from Forfeiture. In this article, Nkaepe outlines the various areas where there are different interpretations of the doctrine of relief from forfeiture; the nature of contracts which qualify for relief and those which do not qualify. The analysis reveals that the doctrine is one which is subject interpretation based on varying business cases. This makes for an interesting debate. What then are the right positions for energy lawyers to adopt when contracting and anticipating the best outcomes for their businesses on both sides (defaulters and claimants)? For more information on this article and to view Nkaepe's professional profile, Click here -->

[1] WILLOUGHBY, G. D. M. 1985. Forfeiture of Interests in Joint Operating Agreements. Jounal of Energy and Natural Resource Law, 3. 

[2] PAWLOWSKI, M. 2010. Chattel leases: relief against forfeiture? Landlord and Tenant Review, 14, 59-62. 

[3] Ibid. 

[4] Ibid.

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