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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Golden Sunsets Navigation (UK) Ltd v Lloyds Portfolio Leasing Ltd [2010] EWHC 703 (Comm) (31 March 2010) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2010/703.html Cite as: [2010] EWHC 703 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		31/03/2010

Mr Justice Cooke :

Introduction

1. The claimant seeks payment of the sum of £4,038,035.46 or its US$ equivalent at 28^th July 2008 under the terms of a ship finance Lease dated 26^th July 1993 to which it became a party by novation on 20^th April 2007 (the Lease). Under the terms of the Lease, as novated, the defendant (the Lessor) let the vessel Duhallow to the claimant (the Charterer) for a Primary Period of 15 years with the possibility of further periods thereafter. There is no issue as to the make-up of this sum (to which I shall refer as the Tax Benefit) but there are extensive issues between the parties as to the proper construction of the Lease and the Financial Schedule attached to it. The Charterer contends that it is entitled to payment of the Tax Benefit under clause 6.2.4 or alternatively clause 6.2.6 of the Financial Schedule as the result of a Revised Cash Flow Report which should have been provided upon the Lease coming to an end or thereafter. If wrong about that, the Charterer contends that the Lessor is liable in damages for breach of contract because the effect of the Lease was that the Lessor undertook not to make any profit or return under the Lease greater than the After Tax Profit Take-Out – the ATPTO, as defined in the Financial Schedule, plus 0.5% of the sales proceeds resulting from the disposal of the vessel at the end of the Lease. In effect, it is said that the Lease contained a profit cap, which, if not explicit, was implicit in the Revised Cash Flow and ATPTO calculation methodology.
2. The Charterer claims that the Lessor breached the Lease by failing to produce a Revised Cash Flow Report at the end of the Lease which reflected the Tax Benefit, which meant that it earned in excess of the Assumed ATPTO, as that term is defined in the Financial Schedule, thus making a profit in excess of that for which the Lease provided. The loss flowing to the Charterer from that breach amounts to the pre-tax equivalent amount of the profit, namely the sum to which I have already referred.
3. The Lessor maintains that the Lease and Financial Schedule do not preclude it from making additional profits over and above the Assumed ATPTO and that, as owner of the vessel it is not only liable to tax but retains any tax benefits arising out of the transaction, save to the extent that the Lease and Financial Schedule expressly provide otherwise. The Lessor maintains that neither the Lease nor the Financial Schedule provides that the Charterer has any claim to the Tax Benefit.
4. The parties adduced extensive reports from expert witnesses in relation to ship finance Leases which, whilst useful for general background information, do not help with the questions of construction with which I am concerned. As might be expected, the basic structure of ship finance Leases is not in doubt. The Lessor acquired ownership of the vessel for a sum of just over £35 million and let the vessel to the Charterer for a Primary Period of 15 years from the date of delivery, which was 27^th July 1993. Charter hire was payable under clause 9 of the Lease and clause 2 of the Financial Schedule, with a specified sum payable on the delivery date, followed by a further 29 semi-annual instalments of £1,772,783 and a final 31^st payment, 6 months after the 30^th hire payment date, of £10 million. The Financial Schedule provided for adjustments of the rate of hire by reference to the Assumed ATPTO under clause 4.2 of the Financial Schedule and for payment of Termination Rental under clause 6.2 of that schedule, in the circumstances there set out.
5. Clause 3 of the Financial Schedule set out assumptions upon which the charter hire set out in the Lease and Financial Schedule had been calculated, with adjustments under clause 4 to take effect if those assumptions turned out to be incorrect. Clause 5 provided for non variable assumptions which underlay the charter and the payment of sums due under it, so that any changes in those assumptions, whether resulting in changes to the clause 3 assumptions or not, would not give rise to any adjustment of sums to be paid.
6. Clause 6 of the Financial Schedule then set out amounts payable on a Total Loss or other termination, referring to "Termination Rentals" which were set out in clause 6.2.2, as calculated on the basis of the assumptions contained in clause 3 being realised. Subject to any adjustments to be made under the provisions of clause 4, the Termination Rental was then to be determined in accordance with the provisions of clause 6.2.4, the terms of which are critical to the dispute between the parties. In essence the Lessor was to produce a Revised Cash Flow Report which was to reflect "events and facts material to the assumptions then realised" in the circumstances for which the clause provided. Clause 6.2.6 provided that if, following the date of Termination, any of the assumptions upon which the relevant Revised Cash Flow Report was produced (subject to exceptions) proved not to be correct, a further Revised Cash Flow Report was to be produced, taking into account the assumptions as corrected. The Revised Cash Flow Reports were to be used to produce the amount of any further payment or rebate of charter hire, whether under clause 4.2, 6.2.4 or 6.2.6 of the Financial Schedule in order to produce the amount of charter hire which would produce an ATPTO equal to the Assumed ATPTO set out in the Lease.
7. With that introduction to the basic structure of the Lease, I set out the relevant terms of the Lease in the Schedule attached to this judgment. Whilst conscious of the indigestible nature of a citation of terms of this length, it is important to set out the wider context of the phrases, sentences and clauses in issue and the use of a Schedule is, I hope, better than simply attaching a copy of the Lease, with the Example Cash Flow, to the judgment. Issues of construction of individual phrases, sentences and clauses interrelate with each other and the overall structure of the Lease itself and of the Financial Schedule is of considerable importance to the points at issue.
8. The Example Cash Flow Report was attached to the Financial Schedule setting out in columns the position from the Lessor's perspective. This included the Lessor's outlay, the rental income received from the Charterer and the tax relief obtained, essentially in the form of capital allowances, including the first year allowance of 40% and the subsequent 25% allowances on the reducing balance. Other columns reflected the profit take-out, which was intended to reflect 1.246% of the Total Funds Employed, whilst the last column set out the Total Funds Employed, which represented the aggregate of the advances that the Lessor itself had received from its bank and the overdraft which represented its overall position in cash flow terms. In the row of figures for 27^th July 2008, the last date of the Primary Period, there was provision for rental income of £10 million, for the loan from the Lessor's bank to be reduced to zero and Total Funds Employed set at a figure which, allowing for all tax relief and interest charges, would give rise to a near zero figure on the Final Date of 30^th June 2009 of £53.60.

Finance Leases

9. The nature of a Finance Lease was the subject of expert evidence. The Charterer's expert said that it was for all practical purposes a loan, whatever its legal classification. He said that from the lessor's perspective a tax based finance lease was a loan guaranteeing the banker/lessor a fixed after tax rate of return and that it was a transaction of very low risk for the lessor with no speculative element to it so far as the lessor was concerned, whether positive or negative. In that context the parties used a series of Cash Flow Reports to ensure that the bank/lessor received its bargained for rate of return and that the charterer paid the correct amount of rental.
10. His evidence was that the fixed after tax rate of return (after tax profit takeout - ATPTO) was the starting point for the Cash Flow Reports, that which drove the calculation, and the basis upon which the Cash Flow Report disclosed the correct amount of rental to be paid. In his experience, upon termination of a lease the lessor would produce a Cash Flow Report which took into account all the cash movements and tax effects, in order to produce the result that the bank earned its ATPTO. He concluded that, as between a lessor and charterer, the lessor was not entitled to profits over and above the agreed rate of return (ATPTO) and other minor negotiated amounts. On cross examination he accepted, however, as is plain, that notwithstanding his general comments about the nature of Finance Leases, all questions as to what went into the Cash Flow Reports, rent adjustments and Termination Payments were prescribed by the terms of any individual lease and that all such matters were governed by the proper construction of the lease.
11. Both experts agreed that a finance lease was a fiscal and not a legal term of art. The accounting definition of a Finance Lease from the Statement of Standard Accounting Practice 21, which was the standard in force in 1993 when this lease was concluded, states the position thus:-

"A finance lease usually involves payment by a lessee to a lessor of the full cost of the asset together with a return on finance provided by the lessor. The lessee has substantially all the risks and rewards associated with the ownership of an asset other than the legal title."

12. The internal guidance now provided by the current HMRC Finance Leasing Manual states this:-

"Finance leasing is a method of providing finance. In legal form a finance lease is just another lease – the legal ownership of the asset lies with the lessor. However the economic ownership of the asset – the risks and rewards of ownership – lies with the lessee. In substance the finance lessee buys the asset with a loan from the finance lessor. The special character of the finance lease lies in the way the rentals are calculated. In economic substance a finance lease is a loan of money with the asset as security. It is an arrangement under which one person (the lessor) provides the money to buy an asset which is used by another (the lessee) in return for an interest charge. The lessor has security because it owns the asset. The terms of the leasing arrangements aim to give the lessor a banker's interest turn and no more or less – however good or bad the asset proves to be".

13. The Charterer's expert maintained that the "banker's interest turn" in the Lease in question was the ATPTO but accepted, as was inevitable, that the Lessor's entitlement could only be that for which any given lease provided and that this depended upon the proper construction of the Lease.
14. In the joint memorandum of experts, the Charterer's and Lessor's experts agreed:-

"that the actual after tax rate of return of the lessor need not be fixed for the lease to be a finance lease and, in particular, that a lease may generate profits over and above the ATPTO, including amounts that may be significant, if those amounts do not form part of the cash flow model on which the ATPTO is calculated…."

"that the categories, and the items within such categories which are included in the Cash Flow model are based on the terms of the Lease agreement and the parties do not have discretion as to which categories or items to include or exclude."

15. The Lessor's expert accepted that the transfer of substantially all of the risks and rewards of ownership of the assets to the Charterer was fundamental to the classification of a lease as a Finance Lease but the Lessor would not necessarily transfer substantially all of the tax risk or benefit to the Charterer. That depended upon the terms of the Lease.
16. There were advantages to the parties in having a tax based Finance Lease, as opposed to a conventional loan. One of the major advantages was the availability of the first year capital allowance and the writing down allowances of a given percentage on the reducing balance. Many potential borrowers had insufficient taxable profits to make full use of the first year allowance and leasing provided a way for such companies to obtain the benefit of it. Instead of purchasing an asset, the potential borrower would lease the asset from a tax paying entity, such as a bank/lessor, which would then claim the first year allowances and share the benefit with the Charterer through the pricing of the lease rentals. The advantage of tax based leasing was not that lessors could claim allowances or other tax benefits that were not available to other asset purchasers, but that the bank/lessor could make use of those allowances on a timely basis, where the potential asset purchaser could not, due to insufficient taxable profit. In general therefore leasing is always most beneficial where the lessor is paying tax, but the Charterer is not expected to pay tax for some time (due to excess tax losses or reliefs). At the time of entering into the present Lease, there was a 40% first year capital allowance with a writing down allowance of 25% on the reducing balance.

The Tax Benefit

17. On 15^th May 2008 the Lessor provided a Revised Cash Flow which took account of the reduction in the rate of Corporation Tax to 28% with effect from 1^st April 2008 and the change in the capital allowance regime with allowances reduced from 25% to 20% on the reducing balance of the Written Down Value. The only effect, being so close to the end of the Primary Period, was an adjustment in the final Balloon Rental payable on 27^th July 2008.
18. On 27^th June, the Charterer served a notice in the following form:-

"The undersigned, as Charterer, hereby informs you pursuant to clause 7(B) of the Charterparty that it declines the option to extend the chartering of the Duhallow for further 10 year period."

19. This brought the charter of the ship to an end at the expiry of the Primary Period, so that it did not extend into the Secondary Period. The Tax Benefit issue having arisen, the parties entered into interim arrangements in order that their positions with regard to this issue should not be prejudiced. By a Letter Agreement of 30^th July 2008 and a subsequent Termination Agreement of 23^rd September 2008, the parties agreed that the vessel be sold and a rebate paid in accordance with the terms of the Lease, leaving the matters in issue between them to be resolved in this litigation.
20. The vessel was sold in September 2008 for a total of US$90 million, the same price as would have been paid had the sale taken place on the day prescribed by the Lease which was in fact 28^th July 2008, as the last day of the Lease, 27^th July, was a Sunday, a non-business day. At the then Dollar/Sterling rate of exchange, that was the equivalent of £45 million at the time. Because, under the terms of the Lease, the Lessor was obliged to rebate 99.5% of the sales proceeds to the Charterer under Lease clause 17(C), there were a number of cash movements with tax consequences, which gave rise to the Tax Benefit which is the subject of dispute in this action.

20.1 A capital gain of £9,933,333.33 occurred because the sale price exceeded the purchase price paid by the Lessor. This would have given rise to a tax liability on the Lessor but for an indexation allowance available to it which entirely sheltered that capital gain.

20.2 Because the vessel was sold for a sum considerably in excess of the Tax Written Down Value of just under £375,000, a balancing charge in the amount of £34,691,777 arose, upon which tax became due to the Revenue. The balancing charge is a claw back by the Inland Revenue in respect of capital allowances that had previously been given to the Lessor, to the extent that the vessel was sold for more than the tax Written Down Value.

20.3 Under Lease clause 17(C) the Lessor was bound to pay the Charterer 99.5% of the net sale proceeds as a rebate of charter hire. That rebate was tax deductible by the Lessor and could be applied by it against the balancing charge of £34,691,777 and other taxable revenue items and against any capital gain arising from the sale of the vessel.

21. Since the capital gain had already been sheltered by the indexation allowance, the Lessor had no tax to pay on it but, additionally, the payment of the rebate of just under £45 million (99.5% of the net sale proceeds) meant that the Lessor had an unutilised tax loss the value of which was some £2.9 million, which, when grossed up, amounted to a figure in excess of £4 million. It is agreed that with an adjustment for time value of money, this produces a figure of £4,038,053.46, which is the sum in issue. The Charterer's case is that this Tax Benefit arose as a consequence of the sale at a disposal value (of more than the original acquisition cost but less than the indexed value of that acquisition cost) and the tax deductible rebate of charter hire. This, the Charterer contends, should have created a positive entry in the Tax Paid (Relief) column of the Revised Cash Flow Report which should have been produced at the end of the Lease. Had this been done, in order to arrive at the Assumed ATPTO, as the Charterer contends it should, the net sum payable by the Charterer in respect of Rental would have been reduced by that amount.

Construction of the Lease and Financial Schedule

22. The Charterer's arguments to make good its claim have changed over time as appears from the pleadings and its skeleton argument. These arguments were ingenious and complex but there are two basic questions, as formulated by Mr Andrew Onslow QC for the Lessor, which fall to be answered. In doing so I will implicitly, if not expressly, cover both Mr Onslow's contentions and those of Mr Richard Millett QC, who appeared for the Charterer.

The First Question:– following the service of the Charterer of its notice bringing the charter to an end at the expiry of the Primary Period, was a Revised Cash Flow calculation required by the terms of clause 6.2.4 of the Financial Schedule with a consequent Termination Rental?

23. The effect of the Notice served by the Charterer on 27 June 2008 is, in the context of the Lease, to my mind, clear. It was, as it purported to be, a valid notice under clause 7(B) of the Lease. Clause 7(A) provided that the term of the charter was to be, unless extended, the Primary Period ending on 27^th July 2008. Under clause 7(B), unless the Charterer notified the Lessor in writing to the contrary, one month before the expiry of the Primary Period by effluxion of time, the charter of the vessel would continue for a further ten years from the day of the expiration of the Primary Period (the Secondary Period). The effect of the notice given on 27^th June was therefore to cause the Primary Period to expire on 27^th July. This was not therefore a notice of termination, despite the terms of clause 2.2.1 of the Financial Schedule which refers, under the heading of "Payments of Charter hire in respect of the Secondary Period" to the Charterer having "the option to terminate the chartering of the Vessel" at the end of the Primary Period. That is however merely a shorthand way of referring to the governing provisions in clause 7 of the Lease (and an inaccurate way at that). Clause 7 is the governing clause and is clear in its terms, so that the effect of the notice is to bring about the expiry of the Lease by effluxion of time at the end of the Primary Period and not to bring about a termination within the meaning of the Lease.

The Distinction between Expiry and Termination

24. This Lease draws a distinction between expiry and Termination. That is plain from the structure of the Lease and the terms of clause 7, to which I have referred, as compared with the terms of clause 8 which is headed "Voluntary Termination", reinforced by clause 16 headed "Termination". Clause 8 deals with the consequences of Voluntary Termination and the payments due in that eventuality. Clause 16 deals with the results of particular types of breach by the Charterer, which are to be treated as a repudiatory breaches giving the Lessor the right to terminate the Lease, and setting out various remedies upon termination in clause 16(B), including the Termination Rental calculated for the particular Termination Payment Date on which the hiring of the vessel was terminated. The "Termination Rental" is defined as the amount calculated in accordance with clauses 6 and 7 of the Financial Schedule, whilst the Termination Payment Date is defined as the date of termination of the hiring of the vessel pursuant to clause 16(A), and is therefore specifically tied to clause 16. Under clause 16(B)(iv) the Charterer and Lessor are to pay such further amounts determined in accordance with the Financial Schedule by way of adjustments in respect of the hire paid or payable up to the Termination Payment Date.
25. Furthermore, the definition of "Primary Period" as "the period commencing on the Delivery Date and ending 15 years thereafter or, if earlier, on the day of termination of the chartering" of the vessel pursuant to the Lease and the definition of "Secondary Period" as the "period commencing on the day of expiry by effluxion of time of the Primary Period" show that, whether or not a notice of non renewal is given under clause 7(B) by the Charterer, the Primary Period is seen as coming to an end by effluxion of time, whilst "termination" is seen as an earlier event in time, whether termination is voluntary or the consequence of breach.
26. Other clauses in the Lease such as clause 14(C)(i)(g) draw the same distinction between termination and expiry.
27. Clause 17(A) of the Lease sets out provisions for re-delivery and sale of the vessel. Clause 17(A) expressly draws the distinction between "the expiry by effluxion of time of the Charter Period" and "termination of the chartering of the Vessel", though both give rise to the obligation of re-delivery of the vessel by the Charterer. Similarly clause 17(B)(ii) again distinguishes between "termination" and "the expiry by effluxion of time of the Charter Period" though both lead to the requirement for the vessel to be sold.
28. Clause 17(C) then provides that a rebate of 99.5% of the Net Proceeds of sale is to be paid by the Lessor to the Charterer subject to a right of deduction by the Lessor of sums due under clause 8(C) which deals with Voluntary Termination, 16(B), which deals with termination for breach and 18(G) which makes specific provision for adjustments to the rebate of charter hire following sale, in particular circumstances.
29. In the Financial Schedule itself, the definition of Final Accounting Period draws the distinction between expiry of the Primary Period by effluxion of time and by other means, which would include Voluntary Termination under clause 8 of the Lease, termination for breach under clause 16, termination as a result of Total Loss under clause 12 and termination by frustration or other repudiatory breaches not referred to in clause 16. Likewise, the definitions of "Primary Period" and "Termination Rental" tally with those in the Lease. In the Variable Assumptions in clause 3 of the Financial Schedule, clause 3.3.12 assumes a sale "on the last day of the Primary Period or the date of earlier termination of the leasing for whatever reason" whilst clause 4.4 sets out adjustments to be made to hire "after expiry or other termination" in the heading and "after expiry or other determination of the hiring during the Primary Period" in the body of the clause.
30. The structure of the Financial Schedule deals with the basic payments of charter hire in clause 2. The assumptions upon which hire, as set out in that clause and in the Example Cash Flow Report has been calculated (the Variable Assumptions) are set out in clause 3. The Financial Schedule then provides for adjustment of those hire payments by reference to replacement Cash Flow Reports (the Original Cash Flow Report and such Revised Cash Flow Reports as are necessary). Clause 4.2 provides for adjustments during the Primary Period, whilst clause 4.3 deals with adjustments at the end of the Primary Period and clause 4.4 deals with adjustments after expiry or other termination. The further sub-clauses in clause 4 deal with other adjustments for changes in interest rate before the end of the Final Accounting Period, adjustments for changes in the rate of Corporation Tax between the end of the Final Accounting Period and the Final Date when LIBOR differs from the Assumed Rate, and for adjustments for mis-match in the Lessor's funding.
31. Clause 6 then deals with Termination Payments of charter hire which have nothing to do with the ordinary payments to be made during the course of the Primary Period, nor the last payment due in the Primary Period. This is made clear by the terms of the clause itself. Clause 6.1.1 refers to a Total Loss and "any other termination pursuant to clauses 8, 16 or otherwise of the Charterparty". There is specific reference to termination under specific clauses and in my judgment the words "or otherwise" cannot refer to expiry of the Primary Period by effluxion of time but must refer to termination in consequence of frustration or other repudiatory breach not falling within clause 16. This appears from the balance of the clause and the overall framework of the Lease for reasons which appear below. The balance of clause 6.1.1 gives the Lessor the right to cancel or pre-pay its own loans in whole or in part and to change its funding arrangements and for the Charterer to indemnify the Lessor against all termination payments, penalties, costs, interest and other expenses incurred by the Lessor as a result. This plainly envisages changes rendered necessary by premature termination before the natural expiry of the Lease. Clause 6.1.2 provides for the Lessor to notify the Charterer of all such amounts and benefits or offsets available in respect of such matters and for such elements to be taken into account in the context of the preparation of a Revised Cash Flow Report and a calculation of the Termination Rental payable in accordance with clause 6.2.
32. Clause 6.1.1 thus shows that this clause is primarily concerned with premature termination before the end of the Primary Period since that sub-clause and clause 6.1.2 provide for the Lessor to change its own funding arrangements in consequence of the termination. This would of course not arise if the Primary Period had run its full course, since the funding arrangements would have run their course also. The Charterer under the terms of clause 6.1 must indemnify the Lessor against all termination payments, penalties, costs, interest and other expenses incurred in consequence of changes it has to make to its funding arrangements, taking into account any benefits or set offs accruing to the Lessor in that context, as part of the production of a Revised Cash Flow Report and calculation of the Termination Rental payable in accordance with clause 6.2. Although the table of Termination Rentals includes the date of 27^th July 2008 in clause 6.2.2 and 7.2.2, that is to be expected because the table sets out the dates when semi-annual hire is payable.
33. Clause 6.2 of the Financial Schedule then sets out the amounts payable on a Total Loss or other Termination of the Charter hire and in clause 6.2.2 there is a table set out for the Termination Rental where it is payable on the dates shown, which comprise 2 dates in each year, namely 27^th January and 27^th July. Clause 6.2.2 provides "that the Termination Rental at any given time during the Primary Period" is to be determined in accordance with clause 6.2.4. This again suggests that the Termination Rental applies primarily to a termination prior to the expiry of the Primary Period since termination cannot be said to occur during the Primary Period when it actually occurs at the end of it. Moreover, the clause 6.2.4 calculation is to be done to achieve the Assumed ATPTO on the Final Date "as if the termination had not taken place", even though the Revised Cash Flow Report reflects the termination. The meaning of this is that the calculation is to be done to achieve the Assumed ATPTO on the Final Date which has moved forward from the Final Date which would have obtained, had the Lease run to expiry. This results in a payment in accordance with the Termination Rental table (as adjusted) and not simply the payment of the 31^st instalment in accordance with clause 2.1.1 (as adjusted if necessary). What emerges from this is the expectation that any termination will take place on a date earlier than the expiry date and that termination is seen in a different light from expiry. Where the Lease runs to expiry, rent is payable throughout but no Termination Rental. Termination Rental is only payable where there is a Termination.
34. What is critical however in the context of the argument between the parties in this particular area of dispute, are the terms of clauses 6.2.3 and 6.2.4 of the Financial Schedule. Clause 6.2.4 requires the Lessor to provide a Revised Cash Flow Report to reflect the Total Loss or other Termination. "The Termination Rental as applicable and payable in accordance with the relevant Termination Clause" is to be calculated on the basis of the Revised Cash Flow Report. This is to be done on the same basis as used in the calculation of the figures set out in the table in clause 6.2.2 to reflect the events and facts material to the assumptions then realised "to ensure that upon payment of the amounts payable in accordance with the Termination Clause", the ATPTO is the same as the Assumed ATPTO, as set out in this sub-clause. The important point is that the Termination Rental is said to be "payable in accordance with the relevant Termination Clause".
35. Clause 6.2.3 then defines what is meant by a "Termination Clause", by reference to the provision of a further table of Termination Rentals on, or as soon as practicable before, delivery of the vessel into the Lease. That table of Termination Rentals was to be "in accordance with clauses 8 (Voluntary Termination), 12 (Total Loss) or 16 (Termination) (each a "Termination Clause")".
36. Thus clause 7 of the Lease is not treated as a termination clause whereas clauses 8, 12 and 16 are. Although termination can occur "otherwise" than under clauses 8, 12 or 16 in the shape of frustration or other repudiatory breach falling outside clause 16, (as reflected in clause 6.1.1 of the Financial Schedule), Termination Rental is payable under clause 6.2.4 of the Financial Schedule only in accordance with "the relevant Termination Clause". Monetary considerations for other forms of termination (such as frustration or repudiatory breach outside clause 16) are at large and to be dealt with under ordinary contractual principles of law. Clause 7 of the Lease is not however seen as a clause which brings about termination since, in accordance with its own wording, the term of the charter of the vessel is to be the Primary Period, unless extended. Thus clause 7(B) refers to the need for a notice from the Charterer at least one month before "the expiry of the Primary Period by effluxion of time" albeit that such notice is to be a notice of non-extension, to prevent the automatic extension of the charter for a further period of ten years from the day of the expiration of the Primary Period – into the Secondary Period.
37. In my judgment both the Lease and the Financial Schedule clearly draw the distinction between the position where the Primary Period expires by effluxion of time and the situation where the charter is subject to termination, whether by Voluntary Termination under clause 8, Total Loss under clause 12, Termination by breach under clause 16 or termination by matters not expressly dealt with in the Lease ("or otherwise").

The effect of a clause 7(B) Notice

38. A notice given under clause 7(B) is to be distinguished from a notice of Voluntary Termination under clause 8(A). A "Voluntary Termination Notice" is defined as "a notice of voluntary termination served by the Charterer on the Lessor pursuant to clause 8(A)". A notice served under clause 8(A) is not a notice served under clause 7(B) (nor vice-versa), notwithstanding Mr Millett's arguments to the contrary, even though there is no specified form in which either notice has to be given. Under this Lease, there are two distinct regimes which operate on Voluntary Termination and expiry of the Primary Period. Although, by the terms of clause 8(A), termination under that clause can occur "on any date", it is anticipated to take place prior to the end of the Primary Period, whilst under a clause 7(B) notice, the Primary Period expires by effluxion of time by the Charterer notifying the Lessor that the charter is not to continue into the Secondary Period. That clause 7(B) notice is not a Voluntary Termination Notice because it is not served under clause 8(A), as indeed the notice in this very case made plain, when stating it was a notice given under clause 7(B).
39. Although under clause 8 of the Lease a Notice of Voluntary Termination could be served by the Charterer "on any date by giving to the Lessor not less than one month's written notice to terminate" and such notice could therefore be given on 27^th June 2008 to take effect one month later, on the last day of the Primary Period, this is not the same as a notice under clause 7(A). Mr Millett sought to argue that this gave rise to an absurdity because there could be no good commercial reason for drawing a distinction between a clause 7(B) notice served on that date and a clause 8(A) notice served on that date, since both would have the effect that the charter of the vessel came to an end on the same date. Whilst it is true that each type of notice could be given on the same date which would bring the charter to an end on 27^th July 2008, the fact remains that each clause provided for a notice which had different results and clause 8 is plainly primarily aimed at a termination prior to the end of the Primary Period.
40. A notice under clause 7(B) would give rise to expiry of the Primary Period by effluxion of time and for rental to be paid in accordance with clause 9(A) throughout that period in the amount set out in the Financial Schedule, primarily as set out in clause 2.1 of that Schedule but as adjusted by clause 4. There would be thirty instalments of hire followed by a single payment six months after the thirtieth charter hire payment – a balloon payment. Each of the instalments of hire payable during the Primary Period would be adjusted in accordance with clause 4.2.1 on the basis of a Revised Cash Flow Report (where an assumption in clause 3 of the Financial Schedule proved not to be correct), with successive Revised Cash Flow Reports as required by the terms of the clause and in particular clause 4.2.2. That sub-clause however excludes the last payment of hire, the thirty-first balloon payment from any adjustment until the point where it alone is the only remaining payment to be made. When the last Revised Cash Flow Report was produced on 15^th May 2008, there was only the final balloon instalment due on 27^th July 2008 and that was adjusted, as set out in the Lessor's letter. The provisions of clause 4.2 dealing with adjustments during the Primary Period were thus satisfied, whether or not further payments might then be required at the end or after the expiry of the charter under clauses 4.3-4.7 of the Financial Schedule. The notice under clause 7(B) did not impact on this at all but prevented the charter being extended into the Secondary Period with consequent further hire payable under clause 9(B) of the Lease and clause 2.2 of the Financial Schedule. There was thus no need for any adjustments of hire under clause 6.2.4 at all.
41. By contrast, where a Notice of Voluntary Termination is given under clause 8(A), even on 27^th June 2008, other provisions are brought into effect in accordance with clause 8(B) and 8(C). The latter provides for the cessation of the obligation of the Charterers to pay hire falling due on or after the Voluntary Termination Date (defined as the date when the charter terminates pursuant to clause 8(A)). However the Charterer is to pay to the Lessor, as compensation for the Lessor's financial loss consequent upon such termination, an amount calculated in accordance with the terms of the sub-clause. That payment was to be the aggregate of the Termination Rental, calculated as at the Voluntary Termination Date plus all instalments of charter hire already due but unpaid and all other amounts due from the Charterer to the Lessor (but subject always to the application of the provisions of the Financial Schedule).
42. When regard is then had to the Financial Schedule, it is accepted by the Charterer that clause 4 has no application because termination payments are distinct from the 29 ordinary hire instalments and are governed by clause 6. Termination payments of Charterhire or Termination Rental payments are also distinct from the final hire payment – the thirty first instalment, payable under that clause. Any termination payment is governed by the terms of clause 6 of the Financial Schedule.
43. Clause 6 is however only concerned with termination and not with the expiry of the Primary Period by effluxion of time, as occurred here, as a result of service of the Clause 7(B) notice. The clause 6 provisions for calculation of Termination Rental do not arise therefore, as the very terminology suggests. If rental has been calculated and paid in accordance with Clause 2 of the Financial Schedule, as adjusted by Clause 4, there can be no further "rental" to pay. Termination Rental does not arise as there has been no termination.
44. Moreover, it is only if clause 6.2.4 or clause 6.2.6 is construed in accordance with the Charterer's submissions that in practice any difference will arise in the payments to be made in respect of a notice served under clause 8(A) and a notice under clause 7(B) on 27^th June 2008. If the Lessor is correct in its submissions on construction, there will be no difference in the result and it would not matter whether a notice was served under one clause or the other. An anomaly therefore could only arise if the Charterer's submissions on construction of those clauses are right.

The Second Question – If clause 6.2.4 falls to be applied at the expiry of the Primary Period, does the Tax Benefit fall to be taken into account in the calculation of a Termination Rental?

The Approach

45. There was a fundamental difference in approach between the Lessor and the Charterer to the Lease as a whole and therefore to this clause. The Charterer's approach was based on an a priori assumption that this was a fully tax variable finance Lease so that, absent any provision to the contrary, all the cash movements and tax effects relating to the Lease and the vessel should find their way into the Cash Flow Reports with a view to ensuring that the ultimate ATPTO reflected the Assumed ATPTO, as calculated in the Cash Flow Reports by reference to the final column headed "Total Funds Employed", so that on the Final Date (as defined), the entry in that column was zero or as near to zero as possible. The Lessor's approach was that no such assumption could be made and that the cash movements and tax effects were only to be included in the Cash Flow Reports to the extent that the Lease expressly provided for them to be so included. The starting point suggested by the Charterer was therefore wrong because it all depended upon the terms of the Lease in question.
46. I do not start with any assumption about the allocation of risk and reward between the Lessor and the Charterer, but bear in mind that, in the ordinary way, each party to a transaction bears the tax consequences of its receipts and payments. Regard must then be had to the contract in question to determine how such matters are dealt with.
47. Once again the structure of the Lease and Financial Schedule is important. Liability to pay hire is governed by clause 9 of the Lease which cross refers to the Financial Schedule. Clause 2.1 of this sets out the hire payable in the Primary Period and clause 3 provides that such charter hire, set out in that clause and in the Example Cash Flow Report, has been calculated on the assumptions set out in clause 3 itself. The relevant assumptions for the purposes of the current dispute are set out in clause 3.3 which caters for taxation. The terms of clause 4 and clause 6 provide for hire payments and Termination Rental to be adjusted by reference to those assumptions in clause 3, though the wording used in relation to the adjustment, by reference to the assumption, varies from clause to clause. There is, it is recognised on both sides, a certain symmetry between clause 4 and clause 6 but the wording is not identical. What goes into the Cash Flow Reports and therefore into the calculation of sums to be paid can only be that for which the Lease and Financial Schedule provide. If the Lease, by its express terms provides for specified matters to be dealt with outside the terms of the Cash Flow Reports and there is no provision for inclusion of those amounts in the Cash Flow Reports as well, then those matters do not fall to be dealt with in the context of adjustable hire payments or Termination Rental.
48. Moreover, in relation to hire payments and Termination Rental, the starting point for each is represented by the figures provided in clause 2.1 of the Financial Schedule and the table in clause 6.2.2 and 7.2.2 of the Financial Schedule itself. Those figures only fall to be adjusted in the context of the assumptions of clause 3 being falsified or, depending on the proper construction of the words used in the various clauses, to the extent that adjustment is required to reflect events and facts material to the assumptions, as they have turned out to be in reality.
49. The key then as to what goes into the Cash Flow Reports and the calculations of hire and Termination Rentals, is constituted by the provisions of the Lease which deal with items and the variable assumptions in clause 3, as affected by the non-variable assumptions in clause 5, which provide that no adjustment is to be made, should the latter prove not to be correct.

The Lease Provisions about Sale

50. The assumption in clause 3.3.12 of the Financial Schedule is that the vessel will be sold on the last day of the Primary Period or the date of earlier termination of the leasing and that in the Final Accounting Period the "Disposal Value" on sale is not less than the Lessor's qualifying expenditure at the beginning of the Final Accounting Period. The qualifying expenditure is the Written Down Value of the ship after deduction of the first year capital allowance of 40% (assumed in clause 3.3.3) and the writing down allowances of 25% of the reducing balance (as set out in clause 3.3.4). The Final Accounting Period is the accounting period during which the Primary Period expires.
51. Clause 17(B)(ii) provides that upon termination of the charter period or its expiry by effluxion of time, the vessel is to be sold and other provisions require the Charterer to act as the sole and exclusive agent of the Lessor for that purpose and to achieve a cash price not less than the open market value. These provisions do not apply in the situation of a Total Loss, as this situation is governed by clause 12. Where however clause 17 applies, the Net Proceeds of sale are to be calculated and the Lessor is, subject to clause 18(G)(i) of the Lease, to pay the Charterer a rebate of 99.5% of the Net Proceeds less any sums due to the Lessor under clauses 8(C), 16(B) or 18(G) or due under the Financial Schedule.
52. There are other provisions relevant to sale in the Lease itself in clause 18(G). Clause 18(G)(i) provides that where any rebate of charter hire to the Charterer, (which includes a payment under clause 17(C), which is described specifically as a "rebate of charter hire") is not expected to be wholly allowed as a deductible trading expense of the Lessor for tax purposes, then the amount of the rebate is to be adjusted to give rise to the same effect as if it had been. The sub-clause provided for the position where a payment had initially been made on the basis that it was a deductible trading expense but was subsequently found not to be and vice versa. The adjustments were to result in payments by the Charterer or the Lessor as the case may be by way of an additional payment of charter hire or a rebate of charter hire.
53. By clause 18(G)(vi) the Charterer was obliged to indemnify the Lessor on demand against any tax liability suffered by the Lessor as a result of any balancing charge or chargeable gain arising as a result of the sale of the vessel. The clause concluded with the following words upon which the Charterer relied: "For the avoidance of doubt, no amount shall be recovered by the Lessor under this clause 18(G)(vi) to the extent that any tax liability is taken into account in calculating any amount payable in accordance with the Financial Schedule".
54. On the face of the Lease, therefore, there was express provision covering the treatment of a sale and proceeds of sale, including the rebate of charter hire to be paid to the Lessor in the amount of 99.5% of the Net Proceeds whilst there was no express requirement for such matters to be reflected in the Cash Flow Reports or the adjustments of hire under clause 4 of the Financial Schedule or in the Termination Rental provided for by clause 6 of that schedule. The effect of the last sentence of clause 18(G)(vi) is that if any Tax Liability was taken into account in calculating any amount payable in accordance with the Financial Schedule, there was to be no double counting but did not provide for the sale proceeds, the rebate to the Charterer or the tax effects to be reflected in any adjustment whatsoever under the Financial Schedule. The Financial Schedule itself does include one provision expressly dealing with one potential element arising on sale. By clause 4.3 of the Financial Schedule, where the Disposal Value is less than the Written Down Value, the Charterer is immediately to pay the Lessor an additional payment of charter hire, as calculated in accordance with that sub-clause (quite separately from the Cash Flow Reports). There and no where else in the Financial Schedule is the subject of the sale expressly covered. The effect of clause 18(G)(vi) of the Lease is that there should be no double counting of a sum payable under clause 4.3 of the Financial Schedule in the context of the indemnity payable under clause 18.
55. The net effect of the Lease provisions resulted in the Charterer receiving essentially 99.5% of the net proceeds of the sale of the vessel and the Lessor receiving 0.5%, outside the terms of the Financial Schedule. If the rebate of 99.5% to the Charterer was not fully tax deductible, then clause 18(G)(i) of the Lease provided for an adjustment and a further payment by the Charterer accordingly. Furthermore, if it should turn out that the Lessor suffered a tax liability by reason of a balancing charge of chargeable gain, then the Charterer would have to indemnify the Lessor in an appropriate amount under clause 18(G)(vi).
56. The parties are agreed that the 0.5% of the Net Proceeds of sale which is retained by the Lessor does not fall within the scope of the Financial Schedule and the Cash Flow Reports. If it did so, then the Charterer would, by application of the ATPTO mechanism recover the very sum it had agreed that the Lessor should retain. The Charterer's submission that the sale proceeds, the 99.5% rebate and the balancing charge, with all their tax effects, should be brought into the clause 6.2.4 calculation and the Revised Cash Flow Report therefore gives rise to this anomaly. If Net Proceeds are to be included and the rebate is to be included but, by one means or another the retention of 0.5% is to be excluded from the Cash Flow Reports and the calculation, where is there any provision in the Lease or Financial Schedule to this effect?
57. It is against this background that clause 6.2.4 and 6.2.6 fall to be construed, together with the assumptions in clause 3 of the Financial Schedule.
58. Clause 3.3.12 of the Financial Schedule not only sets out the assumption of the date of sale of the vessel but also the assumption that the Disposal Value of the vessel for tax purposes will not be less than the Written Down Value of the vessel. Self-evidently the assumption was that the Disposal Value would be either equal to or would exceed the Written Down Value. Unless it was exactly equivalent, this would inevitably give rise to a balancing charge payable by the Lessor which, under the terms of clause 18(G)(vi) would be the subject of an indemnity payment by the Charterer.
59. The Charterer had an argument based upon clause 3.3.3 and 3.3.4 and the reference to balancing charges therein, which I will cover later in this judgment, but it is plain to my mind that the parties anticipated the possibility of a balancing charge by the very terms of clause 3.3.12 of the Financial Schedule and 18(G)(vi) of the Lease.
60. The assumption in clause 3.3.12 of the Financial Schedule is an exception to the provision in clause 4.2.1 of the Financial Schedule that on each occasion that any of the assumptions prove not to be correct a Revised Cash Flow Report was to be prepared "taking into account the facts material to the assumptions realised at the time of preparation of the Revised Cash Flow Report".
61. All the other assumptions would however come into play in the context of adjustments of hire during the Primary Period and would lead to payments either way under clause 4.2.3 and clause 4.2.4 following Revised Cash Flow Reports.
62. The assumption relating to the disposal value is specifically not to be included in the Cash Flow Reports because of the terms of clause 4.2.1. However clause 4.3 provides for an adjustment at the end of the Primary Period where the disposal value is less than the Written Down Value. In those circumstances the Charterer is immediately to pay to the Lessor an additional payment of charter hire calculated by a formula set out in that sub-clause. This payment operates outside the terms of the Cash Flow Reports in the same way as other adjustments after expiry or termination (in clause 4.4) and other matters covered in clauses 4.5-4.7.
63. Thus, payments which directly relate to the sale, the rebate to the charter of 99.5% of the Net Proceeds, the retention by the Charterer of 0.5% and the payment to the Lessor should the Disposal Value be less than the Written Down Value (contrary to the assumption of clause 3.3.12) all fall outside the Cash Flow Reports and adjustment of hire which follows Revised Cash Flow Reports.
64. The Charterer did not rely upon clause 4 or suggest that there was a need for an adjustment of hire during the Primary Period, except, I think in its very late argument that the assumptions of clauses 3.3.3 and 3.3.4 had proved not to be correct. Instead it relied solely upon clause 6.2.4 and 6.2.6 because it alleged that a Termination Rental was due. I turn then to clause 6.2.4.
65. Clause 6.2.4 cannot be read in isolation from the other provisions of clause 6 and in particular clause 6.2. Clause 6.2.1 provides that the Termination Rental set out has been calculated on the basis of the assumptions contained in clause 3 being realised. Clause 6.2.2 then provides that subject to any adjustments made under the terms of clause 4, Termination Rental should be determined in accordance with the provisions of clause 6.2.4.
66. Whilst clause 6.2.2 sets out a table of Termination Rental payable on the semi annual dates, should termination occur on those dates, clause 6.2.3 of the Financial Schedule requires the Lessor to supply a further table at about the time of delivery of the ship into the Lease to replace that table and to "reflect the events and matters realised prior to the Delivery Date in the manner contemplated by clause 4". Thus clause 6.2.3 refers back to clause 4 and the trigger for any adjustment to take place – namely "on each occasion that any of the assumptions in clause 3, except that in clause 3.3.12….proves not to be correct". Unless therefore an assumption in clause 3 is proved to be incorrect, there is no basis for a change in the Termination Rental figures set out in clause 6.2.2 under the terms of clause 6.2.3.
67. Clause 6.2.4 then goes on to provide that, about the time when the appropriate Termination Rental is payable, the Lessor is to provide a Revised Cash Flow Report to reflect the termination "and all other events and facts material to the assumptions then realised". The exact meaning of these words falls to be construed in the light of the words used in clause 6.2.3 and those used in clause 4.2.1 but, regardless of that, the passage in parenthesis which immediately follows this phraseology is important in the context of the current dispute. Although there is an opening bracket, there is no closing bracket but the parties were agreed that the bracket should be taken as ending after the reference to clause 4.7. The parties also agreed that the reference in the passage in parenthesis to clause 4.2 was a typographical error for clause 4.3.
68. The effect of the passage in parenthesis, notwithstanding Mr Millett's argument to the contrary, is clear. Any Termination Rental is not to include the receipt of sales proceeds nor any of the payments of charter hire which arise under clauses 4.3, 4.4, 4.5, 4.6 or 4.7. Whereas clause 4.2 provided for adjustments of the Cash Flow Reports and the corresponding payment of hire to achieve the Assumed ATPTO, the additional payment of hire due where the Disposal Value is less than the Written Down Value in clause 4.3 falls outside the Cash Flow Reports altogether, as do the other adjustments, whether positive or negative, set out in clauses 4.4-4.7. This is fatal to the Charterer's case. If the receipt of sales proceeds falls outside the Cash Flow Reports as this sub-clause expressly states, what possible basis can there be for taking account of any tax effects consequent upon the receipt of the sales proceeds whether related to capital gains, balancing charges, the rebate of 99.5% or the retention of 0.5%, in the context of a clause 6.2.4 calculation of Termination Rental? Although this sub-clause does not refer to the rebate of 99.5% of the sales proceeds to the Charterer by way of rebate of charter hire, nor to balancing charges nor indexation relief against a capital gain, because the sales proceeds do not fall to be taken into account here and are expressly provided for elsewhere, along with the 99.5% rebate and the 0.5% retention it is, to my mind, clear that none of these matters fall to be taken into account in the context of the Cash Flow Reports or the calculation of Termination Rental even if, contrary to my earlier decision, there can be said to be a termination triggering the operation of clause 6.2.4, rather than simply an expiry of the Primary Period which does not have that effect.
69. Mr Millett appeared to argue that the passage in brackets did not exclude the receipt of sales proceeds generally and that the exclusion applied only where the receipt of proceeds occurred in the context of a Supplemental Payment of Charterhire under clause 4.3, namely where the Disposal Value was less than the Written Down Value. He thus suggested that all that was agreed was that payments due under clause 4.3, as well as clauses 4.4-4.7, were excluded from the Cash Flow Reports and that the sales proceeds received in any other circumstances were to be included. This simply gives no meaning to the words used "save for the receipt of sales proceeds" and, in order to achieve what he submitted the sub-clause meant, those words should have been omitted leaving only a reference to payments under clauses 4.3-4.7.

The nature of Adjustments under clause 6.2.4

70. Whilst it is in my judgment clear both that clause 6.2.4 has no application to a situation where the Primary Period expires by effluxion of time and that the sales proceeds do not in any event fall into a clause 6.2.4 calculation of Termination Rental, I also do not have any difficulty in construing the words of clause 6.2.4 in the same way as the wording in clause 6.2.3, 6.2.4, 6.2.6 and 4.2.1.
71. The provisions of clause 6.2.4 require, in the circumstances where a Revised Cash Flow Report is required, that it should reflect the Termination "and all other events and facts material to the assumptions then realised" and for the Termination Rental to be calculated on the basis of such a Revised Cash Flow Report but, notably, on the same basis used in the calculation of the figures set out in the table in clause 6.2.2 (emphasis added) "to reflect such events and facts material to the assumptions then realised" to ensure that the ATPTO is the same as the Assumed ATPTO "as if the … Termination had not taken place and on the basis that the entry in the Cash Flow Report headed Total Funds Employed on the Final Date is zero or as nearly zero as possible". The contrast is made between the basis of the original table set out in clause 6.2.2 which has expressly been calculated on the basis of the assumptions contained in clause 3 being realised and the situation as it has turned out.
72. Clause 6.2.3 provides for a further table of Termination Rental to be produced on or about the date of delivery of the ship to reflect the events and matters realised prior to delivery in the manner contemplated by clause 4, which itself refers to the need for one of the assumptions of clause 3 to prove to be incorrect before any adjustment is required. Clause 6.2.3 plainly operates in the same manner and on the same trigger as clause 4.1 and 4.2.1. When then clause 6.2.4 refers to the production of a Revised Cash Flow Report at or about the date of termination in order to produce a calculation of the Termination Rental and states that the report is to "reflect the termination and all other events and facts material to the assumptions then realised", it is plain that what it refers to is the effect of those assumptions being falsified. That is plainly the meaning of the phrase as used in clause 4.1.1(ix), in the latter half of clause 4.2.1 and the last sentence of clause 6.2.3. The wording, which appears twice in clause 6.2.4, has no different effect from that which appears in those earlier clauses nor that which appears in clause 6.2.5.
73. Clause 6.2.5 links the production of a Revised Cash Flow Report pursuant to clause 4 and the new table of Termination Rentals "reflecting the events and matters taken into account in producing that Revised Cash Flow Report" under clause 4, so that it too is directly linked to the clause 4 mechanism. Save as expressly provided, each of these sub-clauses is intended to operate in the same way where an assumption proves not to be correct and not simply if something happens which in some way bears upon an Assumption or upon facts relating to an Assumption, as the Charterer suggested. Such a construction is too uncertain and uncommercial and does not fit the pattern of language used in the clauses nor the symmetrical framework in which the Adjustments operate.

Clause 6.2.6

74. The Charterer had a fall back argument, relying on clause 6.2.6, because this does not expressly exclude "the receipt of sale proceeds". The reason for that, is the reason I have already given, namely that this has already been dealt with elsewhere. This sub-clause is of no application not only because there was no termination, but because no assumption has been falsified following the date when the charter ended (the supposed termination). Clause 6.2.6 requires the production of a yet further Revised Cash Flow Report following the date of termination but that is only to be done when any of the assumptions other than those set out in clause 3.2 (funding) or covered by clauses 4.5 (adjustment for interest after the Primary Period), clause 4.6 (adjustment for change in Corporation Tax rate after the end of the Final Accounting Period and changes in LIBOR) or clause 4.7 (adjustment for mis-matches in funding) prove not to be correct.
75. Matters of sale, Net Proceeds, Rebate, capital gain and balancing charge have been provided for in the Lease and Financial Schedule elsewhere, so they never find their way into the Cash Flow Reports and were they to arise at all would fall to be dealt with on Termination, under clause 6.2.4, not following the date of Termination under clause 6.2.6.
76. Not only do clauses 17 and 18(G) of the Lease and 4.3 of the Financial Schedule cater for the position but the Termination Rental payable at termination under clause 6.2.4 has been calculated and the whole question of the sale of the ship and the manner in which in the sale proceeds are to be treated has long since passed. The argument under clause 6.2.6 cannot succeed where the argument under clause 6.2.4 failed.

The clause 3.3.3 and 3.3.4 Assumptions

77. I turn then to the late argument about the assumptions set out in clause 3.3.3 and clause 3.3.4 of the Financial Schedule.
78. The Charterer contends that the assumption set out in clause 3.3.3 and clause 3.3.4 did prove to be incorrect because a balancing charge arose as the sale proceeds exceeded the Written Down Value. The Charterer submits that the words "no balancing charge arises" in clause 3.3.3 and 3.3.4 mean exactly that and if any balancing charge arises in any context whatsoever the assumptions in these sub-clauses are falsified. Consequently clause 6.2.4 and clause 4.2 are triggered.
79. In my judgment it is clear that the context of clause 3.3.3 and clause 3.3.4 governs the construction of the balancing charge referred to. In each case it refers to a balancing charge in respect of the withdrawal of the First Year Allowance or the Writing Down Allowances as the case might be.
80. In the case of clause 3.3.3 the assumption was not falsified because the First Year Allowance was not withdrawn and no balancing charge did arise in respect of it. In the case of clause 3.3.4, the Writing Down Allowances were reduced in April 2008 from 25% to 20% and this was then reflected in the final balloon rental payment but no previous Allowances were withdrawn. The assumption in the second half of clause 3.3.4 is that, by virtue of entitlement to Writing Down Allowances or the effect of the deductibility of the rebate of the sales proceeds under clause 17(C), the Lessor is in no worse an economic position than it would have been if it had the use of the remaining Writing Down Allowances on a 25% reducing basis. This assumption did hold good so that in fact the Lessor obtained the Tax Benefit. The very last phrase refers back to the Writing Down Allowances of at least 25%, the assumption being that they are not withdrawn in whole or in part and that no balancing charge arises in respect of them. Whilst the Writing Down Allowances were reduced for the future in April/May 2008, they were never withdrawn and no balancing charge did ever arise.
81. Mr Millett submitted that the phrase "balancing charge" was inept for the way in which the Revenue recovered monies following the withdrawal of Writing Down Allowances and drew attention to the terms of section 24 and section 75 of the Capital Allowances Act 1990 which talked of withdrawal without reference to a balancing charge, whereas section 25 talked of a balancing charge where the sale price exceeded the Written Down Value. Section 42(4) of that Act provides in relation to assets leased outside the UK:-

"(4) Where a balancing allowance or a writing-down allowance has been made in respect of expenditure incurred in providing machinery or plant and, at any time in the requisite period, an event occurs such that, by virtue of subsection (3) above, there is no right to that allowance, an amount equal to any such allowance which has previously been given (less any excess reliefs previously recovered by the operation of section 46) shall, in relation to the person to whom the machinery or plant belongs immediately before the occurrence of that event, be treated as if it were a balancing charge."

82. It was submitted that the recoverable sum on withdrawal of a Capital Allowance was not technically a balancing charge and that therefore the use of that form of words could not be linked to such withdrawal. I reject that submission as it is clear in my judgment that the two are clearly linked in the sub-clauses and that the common way of referring to the Revenue's recovery of such money is to use the words "balancing charge".
83. It is of course only if the Disposal Value on sale and the Writing Down Value are the same that no balancing charge arises and, as is plain from the clauses in the Lease to which I have already drawn attention, these parties contemplated the possibility that the disposal proceeds would exceed the Written Down Value.
84. By clause 3.3.12 of the Financial Schedule, the assumption was made that the Disposal Value would be not less than the Written Down Value and by virtue of clause 4.2.1, that assumption was not to be reflected in Cash Flow Reports. If the Disposal Value did turn out to be less than the Written Down Value, then clause 4.3 provided for an additional payment, outside the terms of the Cash Flow Report.
85. Moreover under clause 5.3 there was a non variable assumption that the First Year Allowance and Writing Down Allowances referred to in clauses 3.3.3 and 3.3.4 would not be higher than the 40% and 25% figures set out, so that if they were in excess, then the Lessor obtained the benefit of them and the Charterer did not share in them. Here there is, as the parties recognised, an element of tax benefit to the Lessor which, expressly, is not to redound to the Charterer's advantage. Perhaps more critically, the terms of clause 18(G)(vi) of the Lease, provides that the Charterer is to indemnify the Lessor against tax liability suffered "on account of any balancing charge … arising as a result of the sale or disposal of the vessel or the price at which or the terms on which such sale or disposal was effected". Such indemnity was to be paid outside the terms of any Cash Flow Report.
86. The Lease thus specifically provides for the situation where a balancing charge arises in the context of sale or disposal and if clauses 3.3.3 and 3.3.4 were to be read as referring to balancing charges on sale, as opposed to balancing charges in the context of First Year Allowances or Written Down Allowances, those sub-clauses would be inconsistent with it. The cross-reference at the end of clause 18(G)(vi), upon which Mr Millett relied to say that matters relating to the sale could find their way into the Cash Flow Reports, in fact refers not to a payment to be made under the Cash Flow Reports at all but the payment under clause 4.3 of the Financial Schedule, where the disposal value is less than the Written Down Value, which falls to be made outside the terms of the Cash Flow Reports.
87. Whether therefore regard is had to clause 3.3.3 or 3.3.4 of the Financial Schedule there was no failure of any assumption.

Conclusion

88. On a proper construction of the Lease and Financial Schedule, the provisions which relate to the sale of the vessel, the Net Proceeds, the Disposal Value and the Written Down Value offer a one way protection for the Lessor and none for the Charterer. The Lessor is protected in the event of a sale for less than the Written Down Value and against tax liabilities arising from balancing charges or chargeable gains "or otherwise" as a result of the sale of the vessel. There is no corresponding provision whereby the Charterer is to benefit, should the sale proceeds exceed the Written Down Value. If the Net Proceeds of sale exceed the original cost then the Charterer benefits because it receives the 99.5% rebate of that figure but if for whatever reason this does not shelter the Lessor from a liability for the capital gain, the Charterer must indemnify the Lessor against that tax liability. If however the Lessor, by virtue of an Indexation Allowance is sheltered from liability for the capital gain, and then makes the rebate payment and thus incurs a tax loss, there is no provision in this Lease by which the Charterer can lay claim to any part of it. The Lessor obtains a tax benefit since it can surrender this tax loss to another company in its group for a cash sum but this falls outside the terms of any of the Cash Flow Reports and nothing in the Lease of Financial Schedule requires that benefit to be shared with the Charterers under a clause 6.2.4 calculation of Termination Rental.
89. In these circumstances the Charterer's claim fails. As a matter of construction of this Lease and Financial Schedule, the Charterer is, in my judgment, wrong on the crucial questions. Starting from an a priori assumption as to what a Finance Lease should do, its case involved a contrived construction of individual phrases in particular clauses in the Lease and Financial Schedule with an over arching assumption that at the end of the day, the Lessor should not retain anything more than the Assumed ATPTO. When regard is had to the structure of the Lease and Financial Schedule it is, to my mind, clear that the sale of the vessel, the Net Proceeds, the 99.5% rebate, the 0.5% retention and the tax effects that flow, are all excluded from the Cash Flow Reports which are designed to achieve the Assumed ATPTO. Moreover, when the critical clause upon which the Charterers relied contains a specific exemption for the receipt of sale proceeds, it can be seen that the Charterer's case cannot succeed.
90. Had I been in favour of the Charterer, I would have found in its favour on the issue of the currency in which damages should be awarded, being satisfied that any loss it suffered would have been felt in US Dollars and that at the time the contract was made the parties would have contemplated that.
91. Unless there are some extraordinary factors of which I am unaware, costs must follow the event and the Charterer must pay the Lessor's costs of this action. If there are any peculiarities in relation to issues of costs, the parties can address me on them at the handing down of this judgment but otherwise I would hope that the parties can produce an agreed order which reflects this judgment.

The Schedule

The Lease

"1. DEFINITIONS

"Charter Period" means the Primary Period, the Secondary Period (if applicable), and the Tertiary Period (if applicable);

"Net Proceeds" means the proceeds of sale of the Vessel received and retained by Lessor after deducting all the expenses (which, for the avoidance of doubt, shall not include any Termination Rental or any sum calculated by reference to Clauses 6.1.1 and 6.1.2 of the Financial Schedule) or the cost of any drydocking of the Vessel which the Charterer is required to carry out in performing its obligations under this Charterparty but which shall include the cost of any drydocking of the Vessel which the Charterer would not otherwise have been obliged to carry out under this Charterparty and which it is required to carry out (at its cost) pursuant to the terms of any sale agreement) and Taxes of the Lessor (excluding the Lessor's Corporation Tax) of whatsoever nature connected with the sale of the Vessel and incurred in laying-up, insuring, maintaining, protecting, obtaining possession or having possession of the Vessel and all the expenses and costs of the Lessor which the Lessor would not have incurred but for the termination of the chartering of the Vessel pursuant to this Charterparty;

"Primary Period" means the period commencing on the Delivery Date and ending fifteen (15) years thereafter or, if earlier, on the date of termination of the chartering of the Vessel pursuant to this Charterparty;

"Secondary Period" means a period commencing on the day of expiry by effluxion of time of the Primary Period and ending ten (10) years thereafter or, if earlier, on the date of termination of the chartering of the Vessel during such ten (10) year period pursuant to this Charterparty;

"Termination Event" means any event specified in Clause 16(A);

"Termination Payment Date" means the date of termination of the hiring of the Vessel during the Charter Period pursuant to Clause 16(A);

"Termination Rental" means the amount calculated in accordance with Clauses 6 and 7 of the Financial Schedule;

"Tertiary Period" has the meaning ascribed thereto in Clause 7(B);

"Voluntary Termination" means the termination of the chartering of the Vessel by the service of a Voluntary Termination Notice;

"Voluntary Termination Date" means the date that the chartering of the Vessel shall terminate pursuant to Clause 8(A); and

"Voluntary Termination Notice" means a notice of voluntary termination served by the Charterer on the Lessor pursuant to Clause 8(A).

7(A) The term of the charter of the Vessel shall (unless extended on the terms stated herein) be the Primary Period.

(B) Unless the Charterer notifies the Lessor in writing to the contrary at least one (1) month before the expiry of the Primary Period by effluxion on time, the chartering of the Vessel hereunder shall continue for a further period of ten (10) years from the day of the expiration of the Primary Period. The Charterer may thereafter request a further charter period for the Vessel (the "Tertiary Period") upon terms to be agreed between the Lessor and the Charterer but without obligation on either party PROVIDED THAT in no case can the Charter Period be extended beyond the useful life of the Vessel as determined solely by the Lessor and it is agreed that if the Vessel is being used in the normal course of the Charterer's business, its useful life shall be deemed to be continuing.

(C) During the Secondary Period the provisions of this Charterparty shall continue in full force and effect.

8(A) The Charterer shall be entitled to terminate the chartering of the Vessel on any date by giving to the Lessor not less than one month's written notice to terminate the chartering of the Vessel hereunder (subject to the operation of Clause 8(B).

(C) Payments on Voluntary Termination

(i) On the termination of the charter of the Vessel under this Clause 8, the obligation of the Charterer to pay charterhire calculated under Clauses 2.1 and 7.1.2 of the Financial Schedule (but not otherwise) becoming due on any date which falls on or after the Voluntary Termination Date shall cease (without prejudice to the obligations of the Charterer pursuant to any provision of the Agreements (to which it is a party) to pay to the Lessor all sums which may become due to the Lessor or be ascertained after the date of termination) and the Charterer shall pay to the Lessor, as compensation for the Lessor's full financial loss consequent upon such termination, an amount which shall be calculated as set out below (but subject always to the application, both before and after the date on which such payment is made, of the provisions of the Financial Schedule). The payment to be made by the Charterer to the Lessor shall be equal to the aggregate of:-

(a) the Termination Rental, calculated as at the Voluntary Termination Date;

(b) all instalments of charterhire which have become due up to but excluding the Voluntary Termination Date; and

(c) all other amounts due from the Charterer to the Lessor pursuant to any of the Agreements including, but without limitation such sum as the Lessor shall conclusively determine to be the Cost of Lessor's Management Time in respect of such Voluntary Termination.

9(A) The Charterer shall in respect of the Primary Period, pay to the Lessor charterhire for the Vessel at the times and in the amounts set out in the Financial Schedule.

(B) The Charterer shall during the Secondary Period (if any) pay to the Lessor charterhire for the Vessel at the times and in the amounts set out in the Financial Schedule.

12(B) Total Loss

If a Total Loss shall occur on or after the Delivery Date:-

(i) the Charterer shall within one hundred and twenty (120) days (or such longer period as the Lessor may agree in writing) from the date of the Total Loss pay to the Lessor the aggregate of (i) the Termination Rental applicable as at the date of payment; and (ii) all other sums due from the Charterer to the Lessor under any other provisions of this Charterparty. …

14(C)(i) It is specifically agreed between the parties hereto, as being a fundamental basis on which the Agreements are being entered into by the Lessor that the Lessor is entering into the Agreements at the request (although not on behalf) of the Charterer so that the Vessel can be purchased and chartered to the Charterer hereunder and that to the maximum extent possible neither the Lessor nor the Hong Kong Owner should be under any liability in respect of the Vessel or the manufacture, supply, import, ownership, chartering, possession, use or operation thereof or the subsequent sale or disposal thereof and accordingly the Charterer hereby agrees to indemnify the Lessor and shall keep it indemnified at all times from and against:- …

(g) all liabilities, claims, losses, damages, costs or expenses suffered or incurred by the Lessor in connection with the termination or expiry of the Charter Period.

16(A) The Lessor and the Charterer agree that it is a fundamental term and condition of this Charterparty that none of the following events shall occur during the Charter Period and that the occurrence of any of the following events shall constitute a repudiatory breach and shall be a repudiation of this Charterparty:-

[clause goes on to refer to various different types of breach of charterparty obligation]

Where any such event occurs the Lessor may immediately terminate the chartering of the Vessel hereunder and retake possession of the Vessel, provided that such termination shall be effected by the Lessor giving the Charterer notice in writing thereof…

(B)(i) On the Termination Payment Date the Charterer shall pay to the Lessor as compensation for the Lessor's full financial loss consequent upon such termination the aggregate of the following amounts:-

(a) all arrears of charterhire which are due and payable under Clause 8 before the date of termination of the chartering of the Vessel hereunder and all other sums due under the terms of this Charterparty together with interest thereon (after as well as before judgment) at the Specified Rate from the date on which such charterhire or other sums fell due for payment hereunder to the Termination Payment Date;

(b) all costs and expenses of and in connection with or arising out of the repossession of the Vessel or redelivery of the Vessel pursuant to this Charterparty (including without limitation legal fees on a full indemnity basis) together with interest thereon (after as well as before judgment) at the Specified Rate form the date on which the expenditure was incurred up to the Termination Payment Date; and

(c) the Termination Rental calculated for the Termination Payment Date on which the hiring of the Vessel was terminated….

(iv) Following the Termination Payment Date the Charterer and the Lessor shall pay such further amounts determined in accordance with the Financial Schedule as an adjustment to the compensation referred to in Clause 16(B)(i) above.

17. REDELIVERY AND SALE OF VESSEL

(A) Redelivery

Upon the expiry by effluxion of time of the Charter Period or termination of the chartering of the Vessel (otherwise than as a result of a Total Loss) or as soon as practicable if, at such expiry or termination, the Vessel is subject to requisition for hire or is in the course of a voyage, the Charterer shall (subject as hereinafter mentioned) forthwith re-deliver to the Lessor possession of the Vessel at a safe port to be mutually agreed….

17(B)(i) The Charterer shall act as the sole and exclusive agent of the Lessor for the purpose of negotiating the sale of the Vessel and any sale of the Vessel shall be on such terms and conditions as the Lessor has approved in writing (such approval not to be unreasonably withheld)…

(ii) Upon the termination (other than upon the occurrence of a Total Loss except as provided in Clause 12(B)(v)) or the expiry by effluxion of time of the Charter Period the Vessel shall be sold and:-…

(C) Except in the event of termination of the chartering pursuant to Clause 12(B) (in which event the provisions of the said Clause 12(B) shall apply) after the Net Proceeds shall have been calculated the Lessor shall, subject to Clause 18(G)(i), upon a sale of the Vessel pay to the Charterer by way of rebate of charterhire a sum equivalent to ninety-nine and a half per centum (99.5%) of the Net Proceeds subject to the right of the Lessor to retain therefrom moneys owing by the Charterer to the Lessor under the terms of this Charterparty including without limitation any amounts which may be due to the Lessor pursuant to Clauses 8(C), 16(B) or 18(G) or calculated under the Financial Schedule.

18(G)(i) Where it is provided under this Charterparty that the Lessor will make a rebate of charterhire to the Charterer:-

(a) if such rebate is not expected by the Lessor to be wholly allowed as a deductible trading expense for tax purposes of the Lessor in the Accounting Period of the Lessor in which if the rebate is to be made then the amount of such rebate shall be the product of multiplying the amount that would have been rebated if it were a deductible trading expense by

100 – x

100

Where "x" is the effective percentage rate of corporation tax for the relevant accounting period;

(vi) The Charterer will indemnify the Lessor on demand against any Tax Liability suffered or incurred by the Lessor whether on account of any balancing charge or chargeable gains or otherwise arising as a result of the sale or disposal of the Vessel or the price at which or the terms on which such sale or disposal was effected and the amount of any indemnity payable pursuant to this Clause 18(G)(vi) shall be paid on the basis of the Lessor's estimate of such liability or loss and such adjustments shall subsequently be made as the Lessor may determine are necessary to correct the position should any of the assumptions used in giving such estimates not be realised. For the avoidance of doubt, no amount shall be recoverable by the Lessor under this Clause 18(G)(vi) to the extent that the Tax Liability is taken into account in calculating any amount payable in accordance with the Financial Schedule."

The Financial Schedule

"1. DEFINITIONS

"Assumed ATPTO" means the ATPTO which the Lessor would receive if all the assumptions referred to in Clause 3 of this Financial Schedule were to prove to be correct and the charterhire set out and calculated in accordance with Clause 2.1 of this Financial Schedule were paid, being a constant rate of 1.246 per centum per annum from the date of the first payment made by the Lessor of or on account of the Total Cost (which expression shall for these purposes include, without limitation, any fees, costs, expenses or stamp duty incurred by the Lessor and not reimbursed by the Charterer) until the Final Date.

"ATPTO" means the after-tax profit take out rate being the rate per centum per annum calculated on a daily basis which each entry in the column of the Cash Flow Report headed "Profit Take-Out" bears to the daily negative balances in the column of the Cash Flow Report headed "Total Funds Employed" as shown in the Cash Flow Report, on the date three months after the Delivery Date and quarterly thereafter until the Final Date so that on the Final Date the entry in the column of the Cash Flow Report headed "Total Funds Employed" is zero or as nearly zero as possible.

"Cash Flow Report" means any cash flow report headed as such, including the Example Cash Flow Report, the Original Cash Flow Report and the most recently revised cash flow report made in accordance with Clause 4 or 6 of this Financial Schedule (the "Revised Cash Flow Report") as the context may require.

"Example Cash Flow Report" means the Cash Flow Report set out in the Second Annex to this Financial Schedule.

"Final Accounting Period" means the Accounting Period during which the Primary Period expires whether by effluxion of time or otherwise.

"Final Date" means the Tax Date for the Final Accounting Period or such later date as the Lessor determines necessary to ensure the proper preparation of the relevant Cash Flow Report.

"Original Cash Flow Report" means the Cash Flow Report produced in accordance with Clause 4.1 immediately after delivery which reflects any change in assumptions relevant at that time.

"Primary Period" means the period commencing on the Delivery Date and ending 15 years thereafter or, if earlier, on the date of termination of the chartering of the Vessel under the Charterparty.

"Tax Date" means in respect of any Accounting Period the date on which United Kingdom resident companies may become liable to pay Corporation Tax assessed for an Accounting Period.

"Termination Rental" means in relation to any date the sum calculated in respect of that date pursuant to Clause 6 of this Financial Schedule.

"Total Cost" means the actual sums incurred by the Lessor on the provision of the Vessel by the Lessor, excluding recoverable Value Added Tax.

"Total Funds Employed" means, for any date, the entry in the column of the Cash Flow Report (and including any Revised Cash Flow Report) headed "Total Funds Employed" for that date or, if there is no such entry for that date, the entry in that column for the immediately preceding date for which an entry is made.

2. CHARTER HIRE

Primary Period

2.1 Subject to the terms of this Financial Schedule and the Charterparty, each payment of charterhire is payable semi-annually in advance by the Charterer to the Lessor, pursuant to Clause 9(A) of the Charterparty during the Primary Period, and is as set out in Clause 7 below (and calculated on the basis of the Sterling amounts set out in Clause 2.1.1 below).

2.1.1 Sterling amounts

Charterhire Payment of Charterhire

Payment Date

The Delivery Date £ 973,333.33

Each of the next twenty- £1,772,783.00

nine Charter hire Payment

dates

Followed by a single payment six months after the thirtieth Charterhire Payment Date of £10,000,000.00

2.2 Payments of Charter hire in respect of the Secondary Period

2.2.1 At the end of the Primary Period the Charterer has the option to terminate the chartering of the Vessel but if that option is not exercised then the chartering of the Vessel will be extended for a further period of up to ten years in accordance with the provisions of Clause 7 of the Charterparty (the "Secondary Period"), during which the payments of charterhire are payable in Sterling annually in advance on the first day of the Secondary Period and each anniversary thereof…

3. VARIABLE ASSUMPTIONS

The charterhire set out in Clause 2.1 of this Financial Schedule and in the Example Cash Flow Report have been calculated on the following assumptions.

3.3 Taxation

3.3.1 The Corporation Tax Rate is thirty three per centum (33%) for the Financial Year 1993 and thereafter.

3.3.2 There will be no published change to the law and practice relating to the taxation of companies and groups of companies prevailing in the United Kingdom at the date of this Financial Schedule in any respects affecting this Charterparty and all matters relating to it.

3.3.3 The whole of the Total Cost qualifies for, and the Lessor is entitled to, a First Year Allowance, of at least 40% in the Accounting Period in which the Total Cost is incurred by the Lessor and that the First Year Allowance is not withdrawn in whole or in part and that no balancing charge arises.

3.3.4 In each subsequent Accounting Period up to and including the Accounting Period immediately before the Final Accounting Period the Lessor is entitled to a Writing Down Allowance of an amount equal to at least twenty-five per centum (25%) of the Reducing Balance, and that in the Final Accounting Period the Lessor is put in no worse an economic position than if it had been entitled to Writing Down Allowances of an amount equal to the whole of the Writing Down Allowances remaining to be claimed in respect of the Total Cost either because it is so entitled or by virtue of a deduction in computing its profits for Corporation Tax purposes in respect of the rebate of charter hire paid in accordance with Clause 17(C) of the Charterparty and that the Writing Down Allowances are not withdrawn in whole or in part and that no balancing charge arises.

3.3.5 The Tax Date is the last day of the ninth(9^th) month following the end of an Accounting Period.

3.3.6 Any losses for Corporation Tax purposes arising from the transaction contemplated by the Agreements will be capable of being surrendered by way of group relief by the Lessor within the group of companies of which the Lessor is a member in accordance with Sections 402, 403, 407, 408, 409, 411, 412, and 413 of the Income and Corporation Taxes Act 1988.

3.3.7 A payment equal to the amount of the losses in 3.3.6 above multiplied by the Corporation Tax Rate for the Accounting Period in respect of which such losses are surrendered will be made to the Lessor and that such payment received by the Lessor in pursuance of such surrender is not taxable in the hands of the Lessor.

3.3.12 On the last day of the Primary Period or the date of earlier termination of the leasing for whatever reason the Vessel is sold and that in the Final Accounting Period the disposal value of the Vessel determined by reference to Section 26 of the Capital Allowances Act 1990 or any statutory modification or re-enactment thereof (the "Disposal Value") is not less than the Lessor's qualifying expenditure (as defined in Section 25 of the Capital Allowances Act 1990) at the beginning of the Final Accounting Period and on the basis that the transaction the subject of this Charterparty is the only transaction carried on by the Lessor but on the basis of a continuing trade (the "Written Down Value").

4.1 Original Cash Flow Report

4.1.1 As soon as practicable after the Delivery Date the Lessor shall prepare and deliver to the Charterer a replacement Cash Flow Report (the "Original Cash Flow Report") which shall take into account:-

[the Loan Rate, the Loan, the Fixed Funding Rate and various other items including the amount of the first payment and the thirty-first payment, each converted into sterling from $1.46 million and $15 million respectively at the appropriate rate determined by the Lessor and "the facts and events material to the assumptions realised at the time of the preparation of the Original Cash Flow"]

but otherwise on a basis consistent with the basis upon which the Example Cash Flow Report was prepared.

4.1.2 If the amounts of the payments of the charterhire shown in the Original Cash Flow (other than the first and the thirty-first which shall be determined in accordance with Clause 4.1.1.(vii)) above differ from those shown in the Example Cash Flow, each such payment of charterhire shall be adjusted upwards or downwards (as the case may require) in accordance with the provisions of this Financial Schedule to ensure that the ATPTO is the same as the Assumed ATPTO.

4.2 Adjustments during the Primary Period

4.2.1 On each occasion that any of the assumptions in Clause 3, except that in Clause 3.3.12, of this Financial Schedule, as adjusted by the previous operation of this Clause 4 proves not to be correct, the Lessor shall deliver to the Charterer a Revised Cash Flow Report which will be prepared on a basis consistent with the basis upon which the Original Cash Flow Report was prepared but taking into account the facts material to the assumptions realised at the time of preparation of the Revised Cash Flow Reports and any change to the "Total Funds Employed" by reason thereof shall be reflected in the column headed "Overdraft" of that Revised Cash Flow Report.

4.2.2 If the amounts of the payments of charterhire in the Revised Cash Flow Report remaining to be paid (subject to Clause 7) during the Primary Period under Clause 2.1.1 of this Financial Schedule differ from those shown in the later of the immediately preceding Revised Cash Flow Report, or the Original Cash Flow Report, each payment of charterhire (as adjusted by any previous operation of this Clause 4.2.2) remaining to be paid (subject to Clause 7) during the Primary Period shall be adjusted upwards or downwards (as the case may require), but excluding the thirty-first payment of charter hire during the Primary Period as provided for under Clause 2.1, save where that payment is the only remaining payment of charterhire in accordance with the provisions of this Financial Schedule to ensure that the ATPTO is the same as the Assumed ATPTO.

4.2.3 If the amounts of the payments of charterhire in the Revised Cash Flow Report prepared in terms of the preceding Clause 4.2.2 are adjusted upwards the difference between the payment shown in the Revised Cash Flow Report and the Original Cash Flow Report will be payable by the Charterer as Sterling additional payment of charterhire on the relevant date.

4.2.4 If the amount of payment of charterhire in the Revised Cash Flow Report prepared in terms of Clause 4.2.2 are adjusted downwards the difference between the payment shown in the Original Cash Flow Report and that shown in the Revised Cash Flow Report will be rebated to the Charterer as a Sterling rebate of charterhire on the relevant date.

4.3 Adjustments at the end of the Primary Period etc.

If on the last day of the Primary Period or the Secondary Period, whichever is later, the Disposal Value is less than the Written Down Value (as each is defined in Clause 3.3.12) the Charterer shall then immediately pay to the Lessor an additional payment of charter hire ("the Supplemental Payment of Charterhire") which shall be calculated by applying the following formula:…

4.4 Adjustments after expiry or other termination

Unless otherwise provided for in this Financial Schedule any adjustment to payments of charterhire required to be made after expiry or other determination of the hiring during the Primary Period, or when no payment of charterhire remains to be paid for the Primary Period, shall be payable as a single additional payment of charterhire by the Charterer, or rebate of payment of charterhire by the Lessor, whichever the case may be, within five (5) Business Days after the receipt by the Charterer of the Lessor's notice to the Charterer.

4.5 Adjustments for interest after the Primary Period to the end of the Final Accounting Period

4.6 Additional/Rebate payments of charterhire if the rate of Corporation Tax changes between the end of the Final Accounting Period and the Final Date and LIBOR is different from the Assumed LIBOR

4.7 Adjustments for Mis-match

[Relating to the Reinvestment Balance as compared with the Original Reinvestment Balance and interest receivable or payable thereon.]

5. NON-VARIABLE ASSUMPTIONS

The following assumptions are non-variable (so no adjustment whatever will be made to payments of charterhire or other sums payable pursuant to the Agreements to the extent that any assumption in Clause 3 of this Financial Schedule proves not to be correct due to any of the following assumptions in this Clause 5 proving not to be correct).

5.1 Profits

There will be sufficient profits in corresponding accounting periods of other members of the group of companies of which the Lessor is a member against which losses resultant from the Charterparty can be surrendered by the Lessor by way of group relief and the payment for such surrender is made on the Tax Date for the Accounting Period referred to in Clause 3.3.7 of this Financial Schedule.

5.3 First Year Allowance and Writing Down Allowance Limit

Unless the Lessor otherwise agrees in writing with the Charterer the Lessor will not be entitled to a First Year Allowance or any other capital allowance or other deduction of a similar nature in relation to any expenditure incurred in excess of a First Year Allowance and Writing Down Allowances specifically referred to in Clause 3.3.3 or 3.3.4 of this Financial Schedule (as the case may be).

6. CALCULATION OF TERMINATION PAYMENTS OF CHARTERHIRE

6.1 Funding

6.1.1 Following a Total Loss, or as the case may be, in connection with any other termination pursuant to Clauses 8 (Voluntary Termination), 16 (Termination) or otherwise of the Charterparty ("Termination") or following any Notice under Clause 8(A) of the Charterparty (which does not result in a Termination), the Lessor may at its discretion (following consultation with the Charterer, save where any of the Termination Events (referred to in Clause 16(A) of the Charterparty) shall have occurred and be continuing) cancel or pre-pay loans in whole or in part, withdraw deposits in whole or in part, wholly or partly cancel commitments to make deposits, or make new loans or new deposits to maintain the funding of Total Funds Employed or otherwise in connection with the transactions contemplated by this Charterparty and the Charterer shall indemnify the Lessor against all termination payments, penalties, costs, interests and other expenses incurred by the Lessor in consequence thereof. For the purposes of this Clause the expression "loan" shall include any swap, exchange agreement or other financial instrument which may require to be reversed or otherwise disposed of.

6.1.2 The Lessor shall notify the Charterer of the amount of any termination payments, penalties, costs, interest and other expenses or any benefit that accrues to it and such amount shall be entered as a negative or positive amount in the column of the Cash Flow Report headed "Commission Expenses Grants etc." with effect on and from the date any such cost is incurred or benefit is received by the Lessor and shall accordingly be taken into account in the preparation of the Revised Cash Flow Report referred to in the calculation of the Termination Rental payable in accordance with Clause 6.2 unless no Termination shall, in fact, have occurred.

6.2 Amounts payable on a Total Loss or other Termination of the Charterhire

6.2.1 The Termination Rentals set out below and, subject to Clause 7, payable on Termination have been calculated on the basis of assumptions contained in Clause 3 being realised.

6.2.2 Subject to any adjustments to be made pursuant to the provisions of Clause 4, the Termination Rental at any given time during the Primary Period shall be determined in accordance with the provisions of Clause 6.2.4. Subject as aforesaid, the amount shown in the table below will be used for the determination of the Termination Rental where the Termination Rental is payable on the corresponding date shown.

Date Termination Rental

£

27 July 1993 34,640,522,880

27 January 1994 34,178,927,450

27 July 1994 34,092,633,740

27 January 1995 33,602,601,350

27 July 1995 33,406,546,970

27 January 1996 32,790,392,130

27 July 1996 32,532,133,170

27 January 1997 31,811,423,070

27 July 1997 31,476,097,600

27 January 1998 30,666,559,400

27 July 1998 30,261,129,530

27 January 1999 29,372,786,140

27 July 1999 28,895,442,100

27 January 2000 27,938,434,500

27 July 2000 27,392,926,580

27 January 2001 26,371,009,520

27 July 2001 25,741,247,400

27 January 2002 24,657,029,740

27 July 2002 23,944,902,640

27 January 2003 22,798,425,400

27 July 2003 21,999,040,060

27 January 2004 20,792,295,250

27 July 2004 19,904,750,710

27 January 2005 18,635,451,000

27 July 2005 17,644,810,200

27 January 2006 16,310,719,130

27 July 2006 15,214,667,960

27 January 2007 13,812,219,080

27 July 2007 12,603,523,210

27 January 2008 11,130,613,210

27 July 2008 9,803,590,230

6.2.3 On or as soon as practicable before the Delivery Date the Lessor will supply to the Charterer the table of Termination Rentals payable (subject to Clause 7) in accordance with Clauses 8 (Voluntary Termination), 12 (Total Loss) or 16 (Termination) (each a "Termination Clause") whereupon such amounts shall be incorporated in Clause 6.2.2 above as if they were herein set out seriatim. The Termination Rental figures so supplied shall reflect the events and matters realised prior to the Delivery Date in the manner contemplated by Clause 4.

6.2.4 As soon as is practicable on or before the date when the appropriate Termination Rental is payable the Lessor shall prepare and provide to the Charterer and attach to this Financial Schedule a Revised Cash Flow Report to reflect the Total Loss or other Termination and all other events and facts material to the assumptions then realised (save for the receipt of sales proceeds and the Supplemental Payment of Charterhire (if any) payable under Clause 4.2, and any additional charterhire or rebate of charterhire calculated in accordance with Clauses 4.4, 4.5, 4.6 and 4.7, together with any other matters affected by the Lessor's actions under the terms of this Clause 6 and the Termination Rental as applicable and payable in accordance with the relevant Termination Clause shall be calculated on the basis of such Revised Cash Flow Report and on the same basis used in the calculation of the figures set out in the table shown above to reflect such events and facts material to the assumptions then realised to ensure that upon payment of the amounts payable in accordance with the Termination Clause (subject to the provisions of Clause 3) the ATPTO is the same as the Assumed ATPTO as if the Total Loss or other Termination had not taken place and on the basis that the entry in the Cash Flow Report headed "Total Funds Employed" on the Final Date is zero or as nearly zero as possible.

6.2.5 On each occasion when the Lessor pursuant to Clause 4 produces and delivers to the Charterer a Revised Cash Flow Report, the Lessor shall supply to the Charterer a new table of Termination Rentals reflecting the events and matters taken into account in producing that Revised Cash Flow Report.

6.2.6 If and on each occasion that, following the date of Termination any of the assumptions upon which the relevant Revised Cash Flow Report was produced, other than the assumptions set out in Clause 3.2 above, or covered by Clauses 4.5, 4.6 or 4.7 proves not to be correct, then the Lessor shall produce a further Revised Cash Flow Report taking into account the assumptions as corrected and taking into account any cost or benefit referred to in Clause 6.1.2 above. The Revised Cash Flow Report shall be used to produce the amount of any further payment of charterhire payable by the Charterer to the Lessor or rebate of payment of charterhire to be made by the Lessor to the Charterer subject to and in accordance with Clause 7 which will produce an ATPTO equal to the Assumed ATPTO. Such further payment of charterhire or rebate of payment of charterhire shall be paid within five (5) Business Days of the delivery of the Revised Cash Flow Report.

6.3 Termination on or before the fifth anniversary of the Delivery Date

6.3.1 If the Charterparty is terminated for any reason (other than by reason of a Total Loss or in response to a notice or demand by the Lessor under Clause 18(Q)(ii) of the Charterparty, (in respect of an "increased cost") PROVIDED THAT such Termination occurs within four months of such notice or demand) on or before the fifth anniversary of the Delivery Date then there will be added to the sum so required on the date of such Termination an additional sum ("the Early Payment Sum") calculated in accordance with Clause 6.3.2.

6.3.2 The Early Payment Sum will be calculated by taking from the Cash Flow Report (as amended by the terms of this Financial Schedule other than by reason of any Termination) the sums shown in the column headed "Profit Take-Out" from the date of Termination to the fifth anniversary of the Delivery Date, (both dates inclusive) and discounting them back to the date of Termination at the rate of 6% per annum compounded 3 monthly from the fifth anniversary of the Delivery Date, and then multiplying by the factor (100/100 – x)); where x equals the Corporation Tax Rate, expressed as a whole number (and not as a percentage).

6.4 Disputes

If the Charterer does not accept that the Termination Rental calculated in accordance with the provisions of this Financial Schedule is correctly calculated, the provisions of Clause 4.8 of this Financial Schedule shall apply mutatis mutandis.

7. US DOLLAR CHARTERHIRE AND TERMINATION RENTALS

7.1 Funding

7.1.1 At the request of the Charterer in order to enable the Charterer to pay charterhire in US Dollars during the Primary Period the Lessor will enter into a US Dollar/Sterling exchange and on the assumption that the US Dollar/Sterling exchange rates on Delivery are US$1.5:£1 and that the long term US Dollar rates (for the US Dollar sums equivalent to the Loan) are 6.502% per annum compounded semi-annually (together the "Dollar Assumptions").

7.1.2 Thirty-one payments comprising of thirty consecutive semi-annual payments of charterhire (exclusive of Value Added Tax) the first being payable on the Delivery Date and in each case thereafter on the first day of each succeeding period of six months therefrom and one further single payment of charterhire (exclusive of Value Added Tax) payable on the last day of the Primary Period (each such date a "Charterhire Payment Date"), in US Dollars as follows:-

7.1.3 US Dollars

Charterhire Payment of Charterhire

Payment Date

The Delivery Date $1,460,000.00

Each of the next twenty-nine $2,355,068.00

Charterhire Payment Dates

followed by a single payment six months after the thirtieth Charterhire Payment Date of US$15,000,000.00.

7.1.4 As soon as practicable after the Delivery Date the Lessor shall re-calculate each of the amounts referred to in Clause 7.1.3 (other than the first and thirty-first payment of charterhire) above and 7.2.2 below, taking account of the facts and events material to the correction of the Dollar Assumptions (but otherwise on the same basis as the payments set out in Clause 7.1.3 above and 7.2.2 below respectively).

7.2 Termination Rentals

7.2.1 The Termination Rentals detailed in Clause 6.2.2 will on the basis of this Clause 7 be partially payable in US Dollars and partially in Sterling as follows:-

7.2.2 Date Total Termination Rentals

US$ - plus - £Sterling

27^th July 1993 $49,568,869.00 – plus - £2,287,420.64

27^th January 1994 $51,190,192.12 – plus - £1,330,763.89

27^th July 1994 $50,406,404.10 – plus - £1,665,513.28

27^th January 1995 $49,623,022.87 – plus - £1,527,492.52

27^th July 1995 $48,788,810.86 – plus - £1,849,267.16

27^th January 1996 $47,952,520.59 – plus - £1,619,490.21

27^th July 1996 $47,072,665.39 – plus - £1,925,954.59

27^th January 1997 $46,180,242.58 – plus - £1,633,039.46

27^th July 1997 $45,235,258.41 – plus - £1,920,438.06

27^th January 1998 $44,282,736.79 – plus - £1,581,043.96

27^th July 1998 $43,276,699.98 – plus - £1,850,202.99

27^th January 1999 $42,260,116.85 – plus - £1,481,330.68

27^th July 1999 $41,189,001.83 – plus - £1,731,489.37

27^th January 2000 $40,104,133.25 – plus - £1,349,320.03

27^th July 2000 $38,970,359.42 – plus - £1,581,107.02

27^th January 2001 $37,812,922.38 – plus - £1,196,499.61

27^th July 2001 $36,598,717.97 – plus - £1,406,853.85

27^th January 2002 $35,363,708.10 – plus - £1,023,787.42

27^th July 2002 $34,070,699.72 – plus - £1,213,089.93

27^th January 2003 $32,753,002.17 – plus - £839,481.43

27^th July 2003 $31,375,993.79 – plus - £1,006,955.19

27^th January 2004 $29,970,156.48 – plus - £651,903.37

27^th July 2004 $28,508,518.43 – plus - £797,688.94

27^th January 2005 $27,008,890.30 – plus - £467,552.13

27^th July 2005 $25,447,063.95 – plus - £589,540.04

27^th January 2006 $23,847,300.26 – plus - £285,088.41

27^th July 2006 $22,183,749.10 – plus - £383,259.87

27^th January 2007 $20,477,247.29 – plus - £110,872.57

27^th July 2007 $18,705,263.98 – plus - £184,557.67

27^th January 2008 $16,884,986.16 – plus - (£48,565.83)

27^th July 2008 $15,000,000.00"