Instalment deliveries: termination of a contract if previous instalments are not paid for

Instalment deliveries: termination of a contract if previous instalments are not paid for

In the June 2021 edition of Gaftaworld Danil Hristich, Senior Associate, and Sergey Platonov, Associate, explained the contractual obligations relating to instalment deliveries and the right, or not, to terminate a contract, with specific reference to Gafta 78.

Background

Our client was selling wheat on DAP terms. The first small instalments were duly accepted and paid for by the Buyers. The Sellers then delivered several big lots but this time the Buyers refused to pay and attempted to justify their position with various reasons (errors in documents, set-off under another, unrelated contract etc.).

The Sellers had a difficult choice to make: (i) either to refuse the performance of further deliveries and to run the risk of being declared in default in view of the “separate contract clause” with all that it implies, or (ii) to deliver further cargo and risk increasing the amount of non-payment.

We advised our client not to perform. The Buyers consequently declared the Sellers in default and the case went to Gafta arbitration.

Our case

The starting point was s. 31 of the Sale of Goods Act 1979 (SOGA), which states:

“31. Instalment deliveries.

(2) Where there is a contract for the sale of goods to be delivered by stated instalments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more instalments, or the buyer neglects or refuses to take delivery of or pay for one or more instalments, it is a question in each case depending on the terms of the contract and the circumstances of the case whether the breach of contract is a repudiation of the whole contract or whether it is a severable breach giving rise to a claim for compensation but not to a right to treat the whole contract as repudiated.”

The issue to be then considered is when exactly a buyer’s breach entitles the innocent party to rescind the whole contract. The answer may be found in Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 K.B. 148:

“… in applying the sub-section to a particular case, the main tests to be considered are, first, the quantitative ratio which the breach bears to the contract as a whole, and, secondly, the degree of probability that such a breach will be repeated.”

Thus, the relevant test under s. 31(2) of SOGA is (although the case refers to SOGA 1893, the wording of the clause remained the same):

• the proportion the failure bears to the whole contract; and

• the likelihood of a failure recurring.

Turning to our case:

• the Buyers failed to pay for 56% of the goods that the Sellers delivered to them under the Contract; and

• the Buyers seemed determined to withhold payments from the Sellers for as long as the Sellers continued to refuse to accept the Buyers’ purported set-off with the debt. In addition, the Sellers could not have reasonably been expected to continue delivering goods to the same party that refused to pay over 50% of the cargo it had already received under the same contract.

Findings

The Gafta first-tier tribunal found in favour of the Sellers. The matter then went to the Board of Appeal. The Board confirmed that notwithstanding the general rule under clause 2 of the Gafta 78 contract, the Sellers were right in deciding not to make further deliveries.

Lessons learned

Many Gafta clauses appear to be simpler than they are, and therefore one should always dig a bit deeper to reveal the true meaning of the particular clause. In the case of the “separate contract clause” the Sellers or Buyers may still refuse to pay or deliver in case they satisfy the Maple Flock test. However, the test is strict and cases like these are rare examples.

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