Key takeaways
Refund guarantee as a 'financial cornerstone'
An obligation to provide a refund guarantee will not be treated as a condition merely because of its financial importance to the contract.
Contractual termination rights as a substitute for condition status
An express right of termination can provide commercial certainty without requiring the underlying obligation to be classified as a condition.
Commerciality and interdependence of terms
If a term is a condition precedent to the ability of another party to perform an essential term of the contract, it is more likely to be treated as a condition.
SLB and Others -v- PAK and Others [2026] EWHC 449 (Comm)
The Court has upheld an arbitral tribunal’s determination that a shipbuilder’s obligation to provide refund guarantees within 120 days of contract novation was an innominate term rather than a condition, dismissing appeals by the buyers which sought loss of bargain damages of up to US$ 83 million per vessel.
The background facts
Ten subsidiaries of a major container vessel operator agreed to purchase ten container vessels from a group of companies operating substantial shipyards. The shipbuilding contracts were novated versions of existing contracts. Each provided for payment of the contract price (approximately US$ 83 million per vessel) in four instalments: three advance payments before delivery and one upon delivery and acceptance.
The first instalment in each contract would only become due and payable upon the buyer receiving a refund guarantee from a nominated bank. This guarantee would secure the return of instalments should the contract be validly terminated.
Article X(A)(f) of each contract provided that the seller would be in default if the refund guarantee was delivered more than 120 days after the date that the contract was amended, novated and restated, or such later date as the buyer might designate in writing from time to time. Upon such default, the buyer could terminate the contract, obliging the seller to refund all sums paid with interest at 6% per annum.
When the defendant sellers failed to provide the refund guarantees within the 120-day period, the buyers terminated the contracts and claimed loss of bargain damages of between US$ 73 and 83 million per vessel. The arbitral tribunal unanimously held that although the buyers were entitled to exercise their contractual right of cancellation, they were not entitled to loss of bargain damages because the refund guarantee obligation in Article X(A)(f) was an innominate term, not a condition.
The buyers appealed on the narrow question of law whether Article X(A)(f) was a condition.
The law on conditions and innominate terms
The Court comprehensively reviewed the governing principles established in the leading authorities, including Bunge -v- Tradax [1981] 1 WLR 711, United Scientific Holdings Ltd -v- Burnley BC [1978] AC 904, and, more recently, The Spar Capella [2015] EWHC 718 (Comm).
A condition is a term, the failure to perform which entitles the other party to claim damages for loss of bargain and treat the contract as at end. The remedy for breach of an innominate term depends on the nature, consequences, and effect of the breach.
A term will not be treated as a condition unless the contract makes clear, either expressly or by necessary implication, that the parties intended to do so. Courts should not be too ready to interpret contractual clauses as conditions. Where breach of a term may result in consequences ranging from the trivial to the grave, this generally indicates an innominate term. However, the need for certainty in commercial contracts is a significant factor, and in some contexts, particularly where performance by one party is a condition precedent to the ability of the other party to perform an essential obligation, time stipulations will generally be treated as conditions.
The Court noted that one of the most critical factors identified in Bunge -v- Tradax concerns interdependence. Where Party A’s performance is a condition precedent to Party B’s ability to perform another essential term, the time requirement for Party A’s performance will ordinarily be treated as a condition. However, the Court emphasised that this must depend upon the true construction of the contract in its factual setting.
The Commercial Court decision
The absence of interdependence
The Court found the absence of true interdependence to be a critical factor. In Bunge -v- Tradax, the buyer’s 15-day notice of "probable readiness of vessel(s) and the approximate quantity required to be loaded" was essential because the seller could not nominate the loading port without it. Here, by contrast, the refund guarantee obligation was not a condition precedent to the seller’s obligation to build the vessel.
Indeed, the sellers’ obligation to build and deliver the vessel by the contractual delivery date was unaffected by the absence of a refund guarantee. The sellers continued to be exposed to liquidated damages claims for late delivery even if instalments had not been paid due to the sellers’ own failure to provide the guarantee.
The judge rejected the buyers’ argument that the practical reality was that without refund guarantees, vessels would not be built, and instalments would not be paid. The Tribunal had found as a matter of fact that at the time of contracting there was no question as to the sellers’ solvency and ability to commence construction even without advance payment. The buyers could not impermissibly go behind such factual findings.
Protection of buyers’ funds
Another important factor was that the buyers’ funds were not imperilled. Since pre-delivery instalments only became due upon receipt of the refund guarantee, any delay in providing the guarantee did not deprive the buyers of security for those instalments. This protected the buyers. If no guarantee was provided, no instalments fell due and the buyers were not in default. The buyers were not left unsecured. This distinguished the case from scenarios where a breach of a security obligation genuinely put the innocent party’s money at risk.
Even though refund guarantees are undoubtedly a “financial cornerstone” of shipbuilding contracts, the Court adopted the reasoning in The Hansa Murcia [2012] EWHC 3104 (Comm) in holding that unless the buyers’ funds were actually imperilled, such a breach could not go to the root of the contract.
The contractual termination right
The Court also identified the express contractual termination right as a strong factor supporting the innominate classification. Article X(A)(f) gave the buyers an option to terminate the contract if the refund guarantee was not delivered within 120 days. Article X.3 then provided that upon such termination, all obligations, duties and liabilities of the parties would be forthwith completely discharged.
The very inclusion of an express contractual right to terminate suggested that in its absence there would be no such right at common law. If the buyers had intended to preserve a right to claim loss of bargain damages, the express contractual mechanism providing for mutual discharge of obligations made no sense. Following The Spar Capella, the contractual termination right provided certainty without requiring the condition classification. The trade-off between certainty and avoiding disproportionate consequences to technical breaches had been achieved through the contractual mechanism itself.
Distinction from deposits and other analogies
The buyers advanced arguments by analogy to cases concerning deposits, letters of credit, and ordinary guarantees. The Court comprehensively rejected these arguments. Letters of credit and ordinary guarantees were distinguishable due to a clear lack of interdependence of terms in the present case. A refund guarantee does not guarantee the future performance of the seller, it simply secures the return of advance payments upon valid termination. A deposit is paid by the buyer as an earnest of performance, guaranteeing the buyer’s commitment. The shipyard demonstrates its commitment by building the vessel and incurring substantial costs. No earnest of performance is required from the seller. The fundamental difference in function meant analogies to deposits were misplaced.
Comment
The judgment dismisses the appeal and upholds the arbitral award. The refund guarantee obligation was properly classified as innominate. Although the sellers’ breach entitled the buyers to exercise their contractual right to cancel, it did not entitle the buyers to claim loss of bargain damages absent proof that the breach was repudiatory in nature.
The decision reinforces important principles for drafting complex commercial contracts. Whilst certainty remains important, the modern approach, reflected in cases such as The Spar Capella, is that terms should not be too readily classified as conditions. The inclusion of express contractual remedies, careful attention to the interdependence of obligations (or lack thereof), and consideration of whether the innocent party’s substantive interests are genuinely imperilled all inform the proper classification.
For shipbuilding contracts specifically, the decision clarifies that refund guarantees, though commercially important, are not inevitably conditions merely by virtue of their significance. Their status depends on the contractual context, the relationship between the refund guarantee and the buyer’s payment obligations, and whether the parties have otherwise provided for the buyer’s protection through express contractual rights or by making payment obligations conditional upon provision of the refund guarantee.
Therefore, courts should not be too ready to classify time stipulations as conditions unless the contract makes clear that this was the parties' intention. The attractions of certainty should be balanced against the undesirability of minor or technical breaches having disproportionate consequences.
