To terminate or not to terminate? How knowledge of English contractual terms could save a trader costs and time

To terminate or not to terminate? How knowledge of English contractual terms could save a trader costs and time

Imagine that your counterparty breaches a contract, and you wish to know whether you can terminate as a result of the breach. This is what happened in our recent case.

A European company, Fortior’s client, was selling corn on FOB Odessa terms. The payment terms provided for 2-stage prepayment: 10% upon signing of the contract and 20% upon nomination of a vessel. Despite numerous reminders, the Buyer paid the 10% invoice only in part, without explaining the reason for its failure to adhere to the terms of the contract. The Buyer then nominated its vessel for the loading of part of the cargo, although the contact clearly provided for delivery “in one bottom”. In addition, the Buyer attempted to depart further from the original terms of the contract, and stated that it would pay the 20% prepayment only upon nomination of its second vessel.

The Seller was willing to deliver the cargo, however the Buyer’s approach to the interpretation of the contract and its attempts to unilaterally amend its terms appeared, at the very least, suspicious. The Seller therefore contacted us in order to clarify whether it could terminate the contract in the circumstances.

Analysis

Under English law all contractual terms are divided into three groups:

  • conditions — the most important, core terms of a contract;
  • warranties —all other, less important terms;
  • innominate terms — terms which can be either a condition or a warranty depending on the circumstances of the case.

Only a breach of a condition allows the innocent party to terminate the contract as well as to claim damages.

Generally, the nomination of the vessel is a condition of the contract. In this case, however, the Buyer still had time to make a valid nomination under the contract. Under such circumstances, it would have been premature for the Seller to declare the Buyer in default for the originally wrongful nomination.

The second issue concerned the Buyer’s failure to make the advance payment in full. In this regard, one should have in mind that although payment is a condition of the contract, the time of payment usually is not, which means that, generally, a failure to make the payment on time does not entitle the innocent party to terminate the contract immediately. In our case, however, the Seller wrote numerous reminders to the Buyer in relation to the payment, thereby eliminating any doubts as to whether the term was a condition.

Shortly upon receipt of the notice of default, the Buyer approached the Seller to resolve the dispute. Consequently, the Buyer agreed to make a prepayment of 90% of the contractual price, which was around EUR 3.5 million. This time the contract was performed without any breaches and delays.

We always encourage companies to check the relevant legal position with their legal advisors. This case shows that very often there may be a simple, time and cost-effective solution” – Danil Hristich, the case lead, said. Danil Hristich, Head of Fortior’s Kyiv Office, and Sergey Platonov, Associate, were advising and acting for the Seller.

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