In a recent judgment, the Commercial Court dismissed appeals under s.69 of the Arbitration Act 1996 against 10 arbitral awards arising from shipbuilding contracts: SLB and others v PAK and others [2026] EWHC 449 (Comm). 

It held that the seller's obligation to provide refund guarantees within 120 days was not a strict contractual condition, breach of which would automatically entitle the innocent party to terminate and claim loss of bargain damages at common law. Instead it was an "innominate term", meaning that a breach would only justify termination at common law if it was sufficiently serious to be repudiatory. 

The distinction was significant because it meant the buyers were entitled to exercise their contractual termination right for breach of the obligation, but (as the breach was not repudiatory) they were not entitled to loss of bargain damages at common law.

In its judgment, the court emphasised that whether time is "of the essence" in relation to a contractual deadline, so as to make the term a strict condition, is always a question of interpretation of the term in the light of the surrounding circumstances. The fact that a contract is of a commercial or mercantile nature is not sufficient, and courts should not be too ready to interpret clauses as conditions unless clearly required.

In this instance, several factors indicated that time was not of the essence, including the existence of an express contractual right to terminate for non-provision of the refund guarantee. The court considered this to be a strong indication that the parties did not intend the obligation to be a strict condition, as there would be no need for a contractual termination right if any breach would give rise to a right to terminate at common law. 

The decision underlines the need for parties to commercial contracts to consider carefully whether they intend a breach of a particular provision to give rise merely to a contractual termination right, or also a right to terminate at common law with the important corollary of a right to claim loss of bargain damages. In either case, the drafting should clearly reflect that intention so as to avoid subsequent disputes. 

Background

The disputes arose out of 10 substantially identical shipbuilding contracts, each for the construction of large container vessels, which had been novated in late 2021 to special purpose vehicle buyers within a wider shipping group. The contracts required the buyers to pay the contract price in four instalments, three pre‑delivery and one on delivery and acceptance of the vessel.

The contract required the shipyard to provide on‑demand refund guarantees from approved Chinese banks. These were intended to secure repayment of any pre‑delivery instalments if the contracts were terminated. The buyers’ obligation to pay each of the three pre‑delivery instalments was expressly contingent on receipt of the relevant refund guarantee.

The shipyard was required to deliver the refund guarantees “no later than” 120 days after novation, subject to any extension designated by the buyer. If the guarantees were not provided within that period, the buyers were given an express contractual right to terminate the contracts. Upon termination, the contracts provided for the refund of any instalments paid and for the complete discharge of all obligations, duties and liabilities between the parties.

It was common ground that the shipyard failed to provide the refund guarantees within the 120‑day period. The buyers exercised their contractual termination rights and commenced London arbitrations, claiming substantial loss‑of‑bargain damages on the basis that the failure to provide the guarantees was either a breach of condition or, alternatively, a repudiatory breach.

The arbitral tribunal rejected those claims. It held that the obligation to provide the refund guarantees within 120 days was an innominate term, not a condition, and that the delay was not repudiatory. While the buyers were entitled to terminate under the express contractual provision, they were confined to the contractual consequences of termination and could not recover loss‑of‑bargain damages.

The buyers appealed under s.69 of the Arbitration Act 1996, contending that the tribunal had erred in law in its classification of the refund guarantee obligation. Their primary case was that, in a mercantile shipbuilding contract, a clearly expressed deadline for the provision of a refund guarantee should be treated as a condition, particularly given the commercial importance of refund guarantees as a means of credit protection.

Decision

The Commercial Court dismissed the appeal and upheld the tribunal’s conclusion that the obligation to provide refund guarantees within 120 days was an innominate term, not a condition. The buyers had therefore been entitled to terminate the shipbuilding contracts under the express contractual machinery, but not to recover loss of bargain damages at common law.

Mr Justice Calver emphasised that the classification of a term as a condition, warranty (breach of which will never justify termination at common law) or innominate term is a question of orthodox contractual construction, assessed by reference to the contract as a whole and its commercial context. A term will not be treated as a condition unless the contract makes that intention clear, either expressly or by necessary implication. There is no presumption that time stipulations in commercial contracts are conditions, where there is no interdependence between the term in question and the core obligations under the contract. 

The judge referred to a number of features of the contract, construed in its commercial context, which led to his conclusion that the obligation to provide refund guarantees was an innominate term rather than a condition. These included the following:

  • The obligation was not expressed to be a condition. The "no later than 120 days" wording did not in itself make the term a condition and, indeed, the contract expressly contemplated that the 120‑day period could be extended "from time to time" by the buyers. This sat uneasily with the notion of a "longstop", or time being of the essence. 
  • The obligation was not interdependent with the shipyard’s core obligations, such as building and delivering the vessels: failure to provide a refund guarantee did not prevent performance of the primary obligation sand the contracts expressly deferred the buyer’s obligation to pay pre‑delivery instalments until a refund guarantee was provided. The absence of a guarantee therefore did not derail contractual performance in the way required to justify treating the obligation as a condition.
  • The contracts contained a carefully calibrated termination regime. The buyers had a clear contractual right to terminate if the guarantees were not provided within 120 days, and the consequences of that termination were exhaustively defined, providing inter alia for liquidated damages, refund of any instalments paid, and a mutual discharge of all liabilities (which the judge said was itself inconsistent with common law damages). The judge considered that this strongly indicated that the parties did not intend a breach to give rise to an automatic common law right to terminate for breach of condition with accompanying loss of bargain damages. If that had been the intention, the express termination machinery would have been unnecessary. The judge recognised the need for certainty in commercial contracts, but said that had to be balanced against the desirability of not allowing termination where a breach is highly technical. In this case, breaches of the obligation to provide a refund guarantee could range from the extremely trivial to the extremely grave, which the judge described as the hallmark of an innominate term. 
  • The judge accepted that the provision of the refund guarantees was a “financial cornerstone” of the contract, but that did not require the obligation to be classified as a condition. While refund guarantees were undoubtedly important, their function was limited to securing repayment of instalments if paid. Given that the buyers were not obliged to pay any pre‑delivery instalments until a guarantee was provided, their funds were not imperilled by delay alone.