In the recent case of SLB and others v Pak and others (1) Calver J was asked to decide on appeal whether a provision in ten shipbuilding contracts (that the shipyard provide a refund guarantee within a stated period) was in fact a condition breach of which entitled the buyers to loss of bargain damages. He decided that it was not.
Those interested in the decision can click here to read it but the key part is at paragraphs 111 to 122 where the judge set out his view that the clause was not expressed to be a condition and the qualifying words “[the Refund Guarantee must be provided on [X] date] or such later date as the BUYER may designate in writing from time to time” were fatal to that argument on the basis that a deadline which one party can unilaterally push back as often as it pleases is, almost by definition, not a longstop date of the essence.
The case is perhaps more useful for its review of the leading authorities – United Scientific v Burnley BC (2), Bunge v Tradax (3) and the Court of Appeal decisions in The Star Capella (4) and The Arctic (5). Those cases collectively set out the principles, namely
- Whether a term is a condition is always a question of construction in context.
- Labelling a contract “commercial” or “mercantile” is not enough.
- Unless the wording or context clearly indicates otherwise, the starting point is that the term is innominate. Courts should not be “too ready” to find conditions.
- Time stipulations are conditions in mercantile contracts where there is interdependence of obligations – in Bunge, the buyer’s notice of readiness was a condition because without it the seller could not perform.
The judge went on to distinguish Bunge-style interdependence. The RG was a condition precedent to the Buyers’ obligation to pay instalments but not to the Yard’s obligation to build and deliver the vessel. The Yard remained on risk for liquidated damages for late delivery regardless. As the Tribunal found, the absence of a RG would impede practical progress but would not cause the SBC to fall into unworkable disarray [at 151].
Another relevant factor was that the Buyers’ money was never at risk. Calver J followed Cooke J’s reasoning in The Hansa Murcia (6): a failure to provide refund guarantees only goes to the root of the contract where the buyers are exposed to a real practical risk of losing the instalments they have paid. He held that this was not the case here.
Also important was the express termination right in the contract. Calver J followed reasoning in The Spar Capella (4) on the basis that a termination provision would be superfluous if damages were available for breach of a condition. The termination provision was also inconsistent with a claim for loss of bargain damages as it stated that following a full refund there would be no further obligations, duties or liabilities on the yard. It made no sense therefore for a common law right to confer benefits that were expressly excluded by the termination provision.
There were also some sensible common sense observations – which is perhaps one of the best things about English law judges. On what basis could it be held to be sensible for the parties to agree that a buyer could terminate for a one-day delay in the provision of the RG and claim damages at large when the contract itself only provided for liquidated damages after 210 days of delay?
The outcome was that in the normal manner the Buyers recovered their pre-delivery advance payments (around USD 3 million) with interest at 6% per annum. The claim for north of USD 1 billion for loss of bargain damages was dismissed. Calver J subsequently refused permission to appeal on the basis that there was no question of general public importance which can be read as code for – it’s blindingly obvious what the clause was intended to mean! The judgment therefore stands.
This decision confirms that within a comprehensive contractual regime of termination rights, liquidated damages, and mutual discharge it is difficult to imply that a single timing obligation is a common-law condition. If Buyers want loss of bargain damages for a missed RG deadline, they must describe the obligation expressly as a condition, remove any Buyer-side extension mechanism, and avoid a mutual-discharge termination clause. Where parties have spelled out a specific remedy (termination plus refund with mutual discharge), courts will not readily imply a more onerous common-law alternative in its place.
The BDM team have substantial experience of ship building contracts and disputes on all the various standard contracts. We represent many yards in Japan, PRC and Korea but also trading houses, buyers, financiers and charterers where the vessel is built to order. We have substantial experience of all types of shipbuilding disputes which are commonly resolved in LMAA or LCIA arbitration proceedings and on appeal to the English High Court.
Nick Burgess
Partner
Gregory McManus
Associate
