Guarantees, conditions and sinking claims (SLB v Pak)

SLB and others v Pak and others [2026] EWHC 449 (Comm)

What are the practical implications of this case?

This case provides valuable guidance on:

• •when a time stipulation in a commercial or mercantile contract will be treated as a condition, and
• •the relationship between express contractual termination rights and common law rights to loss of bargain damages

Commercial practitioners should be cautious before assuming that a fixed deadline, even one expressed as ‘no later than’ a specified date, will automatically be treated as a condition. The court emphasised that the question remains one of contractual construction. Unless the contract makes clear, by express wording or necessary implication, that a term is a condition, the court will generally be slow to reach that conclusion.

The judgment is also an important reminder that a contractual right to terminate is not the same as a common law right to terminate for repudiatory breach and claim loss of bargain damages. The parties had drafted an express regime allowing the buyers to cancel if refund guarantees were not provided within 120 days. That regime gave the buyers certainty and an exit route. It did not, however, necessarily follow that the same breach was to be treated as a breach of condition giving rise to damages for the loss of the whole bargain.

The decision highlights the importance of precise drafting where parties intend a particular obligation to have condition status. If the commercial intention is that failure to provide a refund guarantee, letter of credit, performance bond or other financial instrument by a specified date should entitle the innocent party to loss of bargain damages, that should be stated expressly. It is unlikely to be sufficient merely to provide a deadline and a right to cancel.

Finally, the case demonstrates the difficulty of challenging arbitral awards under AA 1996, s 69 where the appeal is framed as a question of law but depends heavily on the contractual and factual matrix found by the tribunal. The court repeatedly emphasised that the arbitrators were the ‘masters of the facts’. Parties cannot re-argue the commercial background or invite the court to make new factual findings under the guise of a point of law.

What was the background?

The claimants were ten special purpose vehicle companies (‘the Buyers’). The defendants were three companies involved in the construction and sale of large container vessels (‘the Yard’ or ‘the Seller’).

The dispute arose out of ten individual shipbuilding contracts as novated (‘the SBCs’). Under those contracts, the Yard agreed to build and sell ten container vessels (‘the Vessels’). The ten SBCs formed part of wider high-value arrangements involving 24 vessels on similar terms.

The contracts provided for the contract price to be paid by instalments. Three pre-delivery instalments were payable before delivery and acceptance of the vessel, with a final instalment payable on delivery. The first pre-delivery instalment was only due once the contract had become effective and the Buyer had received a refund guarantee by SWIFT in accordance with Article X of the SBC.

The refund guarantee was an on-demand guarantee. Its purpose was to secure repayment of the pre-delivery instalments and certain buyer’s supplies if the Buyer became entitled to a refund under the contract. It covered the three pre-delivery instalments, but not the final delivery instalment.

Article X(A), headed ‘Financial Default of the Seller’, identified various events of default by the Yard. These included insolvency events, failure to commence or continue construction, inability to complete the vessel by certain cancellation dates and, under Article X(A)(f), failure to deliver the refund guarantee to the Buyer in accordance with the contract ‘by no later than 120 days’ after the contract was amended, novated and restated, or such later date as the Buyer might designate in writing.

If one of the Article X(A) events occurred, the Buyer could ‘terminate, rescind or cancel’ the contract by notice in accordance with Article X. Article X then provided for refund of sums paid by the Buyer and stated that, upon such refund, all obligations, duties and liabilities of the parties would be completely discharged.

It was common ground before the tribunal that the Yard failed to provide the refund guarantees within the 120-day period required by Article X(A)(f). The Buyers terminated the SBCs 138 and 140 days after the relevant contracts were signed.

In the arbitrations, the Buyers claimed loss of bargain damages of approximately USD73 million to USD83 million per vessel, including loss of profit and the cost of purchasing substitute vessels. The tribunal determined issues of liability first.

The Buyers argued that the Yard’s failure to provide the refund guarantees within 120 days was a repudiatory breach and/or breach of condition. In the alternative, they argued that if the obligation was an innominate term, the Yard’s breach was sufficiently serious to be repudiatory.

The tribunal unanimously rejected those arguments. It held that the obligation to provide the refund guarantees within 120 days was an innominate term, not a condition. The Yard’s failure entitled the Buyers to exercise their express contractual rights of cancellation, but did not entitle them to loss of bargain damages.

Foxton J granted permission to appeal under AA 1996, s 69 on the following question of law: Whether the [Yard]’s obligation in Article X(A)(f) to provide a refund guarantee within 120 days of the novation of the relevant shipbuilding contract is a condition.

What did the court decide?

The appeal was dismissed. Mr Justice Calver held that the tribunal had correctly concluded that Article X(A)(f) was an innominate term and not a condition.

Issue 1—The applicable legal principles

The court reviewed the leading authorities on conditions, warranties and innominate terms, including Bunge Corporation v Tradax Export SA [1981] 1 WLR 711, United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, The Spar Capella [2016] 2 Lloyd’s Rep 447 and The Arctic [2019] 2 Lloyd’s Rep 603.

A condition is a term whose breach entitles the innocent party to treat the contract as at an end and claim damages for the loss of the bargain. A warranty sounds in damages only. An innominate term is one where the consequences of breach depend on the nature and seriousness of the breach.

The court confirmed that the central question is one of construction. Unless the contract makes it clear, either expressly or by necessary implication from its nature, purpose and context, that a term is a condition or only a warranty, it will generally be treated as innominate.

The court rejected any broad proposition that time stipulations in mercantile contracts are automatically conditions. The need for commercial certainty is an important factor and may be decisive in some cases, especially where one party’s performance is a condition precedent to the other party’s ability to perform. However, this must be balanced against the undesirability of treating technical or trivial breaches as entitling the innocent party to terminate and claim loss of bargain damages.

Issue 2—Whether Article X(A)(f) was expressed as a condition

The starting point was the wording of Article X(A)(f). The clause did not state that the obligation to provide a refund guarantee within 120 days was a condition. This was not decisive, but it was a significant consideration pointing away from condition status.

The Buyers relied on the phrase ‘by no later than 120 days’ and argued that this showed the parties intended strict compliance with the deadline. The court rejected the submission that those words were sufficient to make the term a condition. They fixed a final date for performance and gave rise to a contractual right to cancel if the guarantee was not provided. They did not, without more, establish an intention that any failure to meet the deadline would give rise to common law loss of bargain damages.

Issue 3—Interdependence and commercial certainty

The Buyers argued that the refund guarantees were the commercial cornerstone of the SBCs. Without them, the Buyers were not obliged to pay the pre-delivery instalments and, so they argued, the vessels would not be built. They submitted that this interdependence supported treating the obligation as a condition.

The court rejected that argument. The tribunal had found that the absence of refund guarantees would impede practical progress but would not cause the SBCs to fall into unworkable disarray. At the time of contracting there was no issue as to the Yard’s solvency or its ability to begin work even if the first instalment was not paid. The tribunal also found that the Buyers continued to expect the Yard to perform.

Those findings were binding on the court in a section 69 appeal. The Buyers could not re-characterise or supplement the factual matrix in order to improve their case on construction.

The court distinguished cases where one party’s timeous performance is a true condition precedent to the other party’s ability to perform. In Bunge v Tradax, for example, the buyer’s notice was necessary before the seller could nominate the loading port and perform its own obligations. By contrast, the tribunal had found no equivalent interdependence between the Buyers’ right to a refund guarantee and the Yard’s obligation to build the vessels.

Issue 4—The express contractual termination regime

A particularly important factor was that the SBCs contained an express contractual termination regime.

Article X(A)(f) gave the Buyers certainty. If the refund guarantees were not provided within 120 days, they could cancel the contracts. They were not left in indefinite limbo. However, the existence of that express cancellation right did not mean that the parties had also agreed that breach of the obligation would carry the full common law consequences of breach of condition.

The court considered the reasoning in The Spar Capella. There, an express withdrawal clause gave the owner a right to terminate future performance obligations for non-payment of hire, but that did not make the payment obligation a condition for the purposes of claiming loss of bargain damages. The same analysis applied here. The contractual right to cancel gave the Buyers a certain remedy. It did not convert the relevant obligation into a condition.

Article X.3 was also important. It provided that, upon refund, all obligations, duties and liabilities of the parties would be discharged. The tribunal had treated this as inconsistent with an intention that the same trigger for contractual termination should also be deemed a repudiatory breach at common law. The court agreed. The contractual regime pointed towards a carefully calibrated remedy rather than an automatic entitlement to loss of bargain damages.

Issue 5—Whether Teekay assisted the Buyers

The Buyers relied heavily on Teekay Tankers Ltd v STX Offshore & Shipbuilding Co Ltd [2018] 1 All ER 279. In that case, the shipbuilder had financial difficulties and was unable to provide refund guarantees. Walker J made observations about the importance of such guarantees in a shipbuilding context.

The court distinguished Teekay. Much of the relevant discussion was obiter and arose in a different factual and contractual context. In Teekay, the shipbuilder was insolvent or financially distressed and the vessels would not be built. In the present case, the tribunal had found that there was no issue as to the Yard’s solvency at the time of contracting and that the absence of refund guarantees would not prevent the SBCs from being performed.

The court therefore rejected the submission that Teekay compelled, or strongly supported, a finding that Article X(A)(f) was a condition.

Issue 6—The section 69 appeal

The court emphasised the limited nature of an appeal under AA 1996, s 69. The arbitrators were the masters of the facts. The court had to decide the legal question on the basis of the findings made in the awards.

Some of the Buyers’ submissions attempted to go behind those findings, including arguments about the commercial impact of the absence of refund guarantees, the alleged need to maintain finance indefinitely and the suggestion that the Yard had deliberately breached the contracts for commercial advantage. The court rejected those submissions because they were inconsistent with, or unsupported by, the tribunal’s findings.

The appeal was therefore dismissed. The Buyers were entitled to cancel the SBCs under the express contractual regime, but the Yard’s failure to provide the refund guarantees within 120 days was not a breach of condition and did not entitle the Buyers to loss of bargain damages.

Case details

• Court: High Court, KBD
• Judges: Mr Justice Calver
• Date of Judgment: 2 March 2026

Article by Alexander Whatley, first published by LexisNexis