UK: Court Confirms Seller Has Right To Terminate Sale Contract Both At Common Law For Repudiatory Breach And Under Contractual Termination Provision

Last Updated: 2 June 2014
Article by Stuart Shepherd and Reema Shour

Newland Shipping and Forwarding Ltd v. Toba Trading FZC [2014] EWHJC 661 (Comm)

This sale contract dispute provides a useful reminder of some basic principles that the English courts will apply in construing commercial contracts. First, where there is any doubt or ambiguity as to what a contractual provision means, the courts will not find that the parties intended to agree to something that would be a "commercial nonsense". Secondly, they will not generally conclude that there is an implied agreement by a party to give up any contractual right it might otherwise have; the courts will look for an express agreement to give up such a right because they will not readily infer that a party would do so voluntarily. Thirdly, any express contractual right that a party has to terminate the contract co-exists alongside its common law rights to terminate the contract for repudiatory breach and claim damages for its loss of bargain. Where both rights are available (and unless the contract provides otherwise), a party can generally elect to exercise both rights at the same time.

The background facts

The parties to this dispute entered into four contracts with each other under which Newland sold and Toba bought petroleum products. The first two contracts were entered into in 2010 but the Seller failed to ship the goods due, allegedly, to lack of available stock. The Buyer had already made advance payments totalling approximately US$3.2 million under these contracts, which the Seller contended it could not repay. So the parties entered into two new contracts in 2011 pursuant to which a 20% deduction would be made from all invoices raised under these contracts and would go towards refunding the Buyer its earlier pre-payments under the 2010 contracts.

This dispute arose in relation to one of the two 2011 contracts ("the Contract") for the sale of 5,000MT +/- 10% in seller's option of hydropurified gasoil for delivery CPT (Carriage Paid to) Sekhetabad Station, Turkmenistan. This contract was terminated by the Seller for non-payment of the purchase price at a time when the goods were shipped but not yet delivered at their destination by the carrier. The Seller sued the Buyer under the Contract, claiming sums allegedly payable to it by virtue of the valid termination of the Contract. The Buyer denied that the Contract had been validly terminated or that any sums were payable and counterclaimed for restitution of the advance payments made under the previous 2010 contracts.

The Contract

The Contract specified the source of the product as Turkmenbashi Oil Refinery. The payment clause provided, among other things, as follows:

"payment for each shipped lot not less than 20 rtcs or 1000mt on seller's option to be done within 2 (two) banking days after the final price will be known, against the seller's invoice and copy of rwb [i.e. Railway Bill] and Customs Declaration...

in case if buyer fails to pay for cargo in period more than 5 days then the seller has the right to cancel the contract and to sell the cargo to other customers, and buyer will be obliged to compensate to seller all the losses and demurrage connected with such failure..."

The Seller arranged for the product to be loaded at the Turkmenbashi Railway Station over two days: 13 rail tank cars ("rtcs") loaded with 759.096 mt on 21 March 2011 and 5 rtcs loaded with 289.168mt on 22 March 2011. A preliminary invoice was issued in respect of each separate quantity loaded but a final invoice covering the whole cargo was issued on 23 March 2011. Pursuant to the payment clause, the Buyer should have made payment by 25 March. It did not do so. Instead, on 7 April, the Buyer asked the Seller for confirmation that the Afghani consignee had received the cargo, saying it needed this confirmation before remitting the payment amount. The Seller indicated that such a confirmation was not a requirement for payment under the Contract, demanded payment and, when this was not made, subsequently sent a notice to the Buyer terminating the Contract.

The Seller's case was that the Buyer failed to make payment within two banking days after the final price was known and also failed to pay within five days, giving the Seller the right to cancel the Contract under the payment clause and for repudiatory breach.  The Buyer countered with a number of defences, most of which were dismissed by the Court.

The Commercial Court decision

The Buyer's first argument was that payment only had to be made in accordance with the payment clause if there was a shipped lot of 20 rtcs or 1,000mts. Here, there were two lots of less than that amount loaded on different days and the subject of separate invoices. Consequently, no lot of 20 rtcs or 1,000 mts had been loaded and the payment clause was inapplicable. Instead, payment became due only on delivery, pursuant to the Sale of Goods Act 1979. As the Buyer never took delivery, the price never became payable and the Seller had no right to terminate. The Judge dismissed this argument outright: no reasonable commercial party could have intended that what constitutes a "lot" should depend on the number of invoices (or other documents) issued or on whether loading takes place without interruption. Once cargo in excess of 1,000mts had been loaded and invoiced, as had occurred by 23 March 2011, the Seller was entitled to claim payment within two banking days.

The Buyer's second argument was that there had been a variation of the Contract in early April with the effect that the goods would be delivered to the railway station at Turgundi in Afghanistan rather than at Serkhetabad station as originally agreed and that this resulted in the time for payment being postponed until two banking days after a final invoice had been issued that took into account the extra expense involved. Having reviewed the relevant correspondence, the Judge's view was that there was merely a negotiation but not a concluded agreement varying the Contract. Furthermore, he said, any agreement that the Buyer could postpone payment of the sums that were already overdue until two days after the final price of the additional carriage from Serkhetabad to Turgundi was known would need to have been made expressly. Such an intention could not be inferred simply because the Seller agreed to provide a preliminary invoice for the extra costs of delivery to Turgundi. While the Seller might agree to arrange a further stage of carriage to assist its customer, it was unlikely to agree to relinquish an accrued right of payment and this was evident from the fact that it kept pressing for payment without respite. The Judge also drew attention to a clause in the Contract, which required any amendment to the Contract to be in writing and signed by both parties. He commented that the email exchanges between the parties did not constitute such a signed written agreement.

The Buyer's third argument was in essence as follows:

  1. The notice of termination that the Seller had sent to the Buyer purported to terminate the contract due to the Buyer's repudiatory breach of contract.
  2. There was no repudiatory breach of the contract as time of payment was not of the essence of the sale contract. The notice of termination was, therefore, ineffective.
  3. The Seller had at best a contractual option to cancel the contract under the payment provision for failure to pay in time. However, the wording of the notice of termination did not make it clear that the Seller was exercising this contractual option. The notice was, therefore, ineffective to cancel the Contract.

The Judge agreed that the Buyer's failure to pay for the first shipped lot of goods at the time of the purported termination was not a repudiatory breach of contract, but held that there was an anticipatory breach by the Buyer when it made it made it clear it would not pay until the consignee received the goods. That anticipatory breach was sufficiently substantial to amount to a repudiation of the contract and to give the Seller a right to terminate at common law.

The Seller also had a contractual right to terminate under the payment clause and, as confirmed by the Court of Appeal in Stocznia Gdynia SA v. Gearbulk Holdings Ltd in 2010 (an Ince case), unless the contract says otherwise, an innocent party can rely on both its contractual and common law rights of termination at the same time. The two rights gave rise to different consequences in this case and so did not conflict. Further, the Judge found that the Seller had given valid notice of cancellation pursuant to its contractual option to do so and the compensation that the Buyer had to pay to the Seller under the payment provision for "all the losses and demurrage connected with" the failure to pay within the time specified was not necessarily the same as the damages recoverable by the Seller on termination for a repudiatory breach (usually loss of bargain damages). Indeed, the Judge held that the phrase "connected with" is of wide scope and sufficient to encompass indirect losses.

Turning to the Buyer's counterclaim for restitution of the advance payments made under the 2010 contracts, the Seller argued that the Contract replaced the Buyer's right to claim in unjust enrichment with a set of contractual rights to have sums deducted from invoices. When the Contract was terminated as a result of the Buyer's repudiatory breaches, the Buyer lost the benefit of those rights. The Judge disagreed, commenting that it was inherently improbable that the Buyer would have agreed to give up its unconditional right to repayment of about US$3.2 million and to receive instead rights to repayment that were conditional on the Contract being performed. The more likely interpretation was that the contractual provisions for repayment were intended to be a way of getting repaid as quickly as possible where the Seller did not have the cash immediately available, but this was not intended to be the only way in which the Buyer could recover the outstanding sum. The Buyer did not lose its right to repayment because it committed a repudiatory breach of the Contract and the Contract was terminated before the full outstanding balance was repaid.

Comment

It is clear since the Gearbulk decision that incorporating an express cancellation clause in a contract will not exclude the right to terminate the contract at common law for repudiatory breach unless the contract clearly says so. Furthermore, no particular formality is necessary to exercise a contractual right of termination or a right to terminate at common law for repudiatory breach; any communication that clearly conveys that the right is being exercised will be sufficient. In this case, the Buyer's argument that the wording of the Seller's notice of termination was ineffective to be valid notice of termination under the contractual payment provision was rejected, with the Judge taking a pragmatic approach to construing the wording of the Seller's notice of termination.

It remains important, however, that any notice of termination should make it clear whether rights to terminate are being exercised under the common law or pursuant to the contractual provisions or both. This is because, where the consequences of exercising the two rights are different, a notice that is unclear as to which right is being exercised, or whether both rights are being exercised simultaneously, could result in the Court finding that there has been no effective termination either at common law or under the contract or in fact at all.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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