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Court of Appeal confirms seller’s obligation to return advance payment following non-delivery of goods

Insights / / London

Nord Naphtha Ltd v. New Stream Trading AG [2021] EWCA Civ 1829

The Court of Appeal has recently upheld a Commercial Court decision that found the buyer of diesel under a sale contract was entitled to the return of an advance payment following non-delivery of the diesel due to a force majeure event at the refinery. Both the lower and appeal courts dismissed an argument that the buyer’s only recourse was under a comfort letter issued by the refinery which had, in the meantime, gone into liquidation.

The background facts

Nord Naphtha Limited and New Stream Trading AG entered into a contract dated 21 February 2019 (“Contract”) for the purchase of 30,000mts of ultra-low sulphur diesel (“Product”). The Contract provided that Nord Naphtha would make an advance payment to Nord Stream representing 90% of the value of the Product, approximately. US$ 16 million (“Advance Payment”). The Advance Payment was paid the next day, on 22 February 2019.

The intention was for New Stream to source the Product from a Refinery, for which New Stream described themselves as the Refinery’s marketing and sales agent. The Refinery issued a comfort letter dated 21 February 2019 to Nord Naphtha referring to the Contract and offering guarantees and confirmations (“Comfort Letter”).

On 17 April 2019, New Stream notified Nord Naphtha of a force majeure event under the Contract, stating that delivery was delayed due to operational and production issues at the Refinery. It was envisaged that delivery would still take place but in a later delivery window at the end of April or beyond. The Comfort Letter was extended to the middle of May 2019.

The Product was not delivered within the later delivery window because the Refinery went into liquidation and, by letter dated 30 June 2020, Nord Naphtha terminated the Contract and sought repayment of the Advance Payment.

Whilst it was common ground that the termination was valid, New Stream denied that it was under any contractual obligation to repay the Advance Payment and denied any unjust enrichment on its part in circumstances where: (i) the Advance Payment had been paid to the Refinery, less a commission; and (ii) liability to repay rested with the Refinery under the terms of the Comfort Letter.

The Commercial Court decision

At first instance, Nord Naphtha obtained summary judgment against New Stream.

The Court’s starting point in analysing the Contract was that it would be a very surprising result if a buyer had no ability to reclaim its prepayment from a seller in any circumstances. Against that background, the Court read an express obligation into one of the contractual clauses to repay the Advance Payment and if that analysis was wrong, the Court considered that a repayment obligation was so obvious that it fulfilled the requirements for an implied term.

Nord Stream appealed.

The Court of Appeal decision

Nord Stream argued that the Commercial Court had adopted a “back to front” approach to construction of the Contract, starting from the premise that it would be surprising if the Contract did not contain a right to the return of the Advance Payment in a force majeure situation and using that premise to construe the Contract as containing such a term, expressly or impliedly. Nord Stream argued that the starting point should be a textual analysis of the contractual language and that the reason that the Contract did not contain an express right of return of the Advance Payment was because the Comfort Letter issued by the Refinery catered for that eventuality and put the obligation on the Refinery if delivery failed because of force majeure.

Nord Naphtha countered that the judge’s approach was not “back to front” and was consistent with previous English cases on construction of commercial contracts. Further, the Comfort Letter provided no comfort at all, having been revocable at will by the Refinery in the event of force majeure and having expired in the middle of May 2019, prior to the termination of the Contract.

Where diesel was being traded, the Court was entitled to assume that the parties had a level of commercial sophistication matching experienced traders operating in that market. Here, the Court of Appeal found that the Contract was a straightforward bargain for the sale of diesel, albeit with clumsy drafting in places. Looking at the language of the Contract, the Court of Appeal found that the purpose of the force majeure clause as a whole was to return the parties to their original, pre-contractual positions and that where that was the purpose of the clause, Nord Naphtha would expect to have the right to claim repayment of monies paid by way of an advance.

Furthermore, from a commercial perspective it would be surprising in a contract for the sale of goods not to find a provision requiring repayment of money paid in advance in the event that delivery of the goods did not take place. The Comfort Letter offered no real comfort in the event of a failure in delivery due to force majeure and the Court of Appeal concluded, therefore, that no reasonable buyer would put the Advance Payment at risk in that way.

The Court of Appeal concluded that the disputed contractual clause expressly provided Nord Naphtha with a right of repayment of the Advance Payment in the event of non-delivery for force majeure reasons. There was, therefore, no need to imply such a term.

Nord Stream’s appeal was, therefore, dismissed.

Comment

This dispute highlights the importance of stating expressly and clearly in both sale of goods and provision of services contracts whether and when advance payments are repayable. The contractual provisions should insofar as possible cater for all eventualities, including when any monies advanced under the contract are deemed earned and are consequently non-refundable. It is unwise to rely on implied terms to fill the gaps.

The ineffectiveness of the Comfort Letter, particularly where the Refinery became insolvent, is also worth noting.

Paul Griffiths

Paul Griffiths Partner

James Rose

James Rose Managing Associate

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