Whether the Seller is obliged to refund prepayment for non-delivered goods: it is not so simple

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Vital recommendations by the English court.

 

At first glance, the obligation to refund prepayment for undelivered goods is quite obvious. However, just for the last six months, the High Court of London has considered two cases whereunder the Sellers argued that they were not required to refund prepayment for goods they could not deliver. While the court supported the Buyers in both cases, the court made important conclusions to be kept in mind by traders while drafting contracts.

In Nord Naphtha Ltd v. New Stream Trading AG [2021] EWCA Civ 1829 , the Buyer has made prepayment amounting to 16 million USD for diesel fuel, to be purchased by the Seller from the plant for the purpose of its further delivery to the Buyer. In turn, the plant issued to the Buyer a Letter of Guarantee which confirmed its obligation to the Seller for diesel fuel supply.

The plant was unable to deliver fuel to the seller in due time, while the Seller notified the Buyer on force majeure and announced on later delivery. Later, the Buyer found out that the plant had commenced bankruptcy proceedings. The Buyer terminated the contract with the Seller and requested for refund of prepayment. The Seller refused to refund prepayment, arguing that it had transferred all the funds (minus its own commission fee) to the plant, so the plant is currently obliged to refund prepayment to the Buyer. The Seller also reinforced its position by the fact that the contract did not contain a clause providing for prepayment refund in case of non-delivery. The Buyer stated that it was an implied term.

Since the contract contained no direct condition regarding prepayment refund, the court, in order to make its decision, had to conduct a commercial interpretation of the contract and to determine the Parties’ true intention regarding prepayment. The court ruled that the essence of force majeure clause is aimed to restore the Parties’ position to the same as before entering into the contract. Therefore, the court interpreted terms of the contract in such a way that the Seller undertook to refund prepayment in case of non-fulfillment on its obligations due to force majeure, although it was not expressly stated in the contract itself. In view of its decision, the court did not deem as necessary to consider whether the contract contained an implied term regarding prepayment refund.

The issue of implied term was considered in a related case, BP Oil International Limited v. (1) Vega Petroleum Limited & (2) Dover Investments Limited [2021] EWHC 1364 (Comm) , whereunder the Buyer transferred to the Seller over 17 million USD as prepayment for delivering 211,000 barrels of oil in the framework of a series of contracts. The Seller failed to deliver oil, so the Buyer requested for prepayment refund. After the Seller’s rejection, the Buyer commenced legal proceedings.

The contracts also did not contain a clause on prepayment refund. The buyer demanded for prepayment refund under the right of restitution and accused the Seller of unjust enrichment. Alternatively, the Buyer argued that the contracts contained an implied term upon prepayment refund, since such a term was so obvious that it was not necessary to explicitly include it in the contracts. The Seller, on the other hand, claimed that prepayment was unconditional, since it had delivered oil to the terminal, while the Buyer could take oil from the terminal upon expiration of the contractual delivery period. In fact, the contract was drawn up very ambiguously, and at first glance it is difficult to determine the Parties’ true intentions regarding terms of delivery.

The court interpreted in details terms of the contract and ruled that in fact it was a contract on FOB delivery and the Seller had failed to fulfill its obligations. Therefore, the court ruled that the Buyer was entitled to refund prepayment. In the absence of an appropriate contractual clause, the court justified the Buyer’s such right by the fact that the Buyer did not receive any consideration in exchange for made prepayment, and, while in case of non-fulfillment of obligations and absence of consideration under the contract, English law provides for prepayment refund.

Meantime, the court considered the Buyer’s argument regarding the implied term and disagreed with it. The Court ruled that, if it had not recognized the Seller as failed to fulfill its delivery obligations, it would not have agreed that the contract contained an implied term requiring the Seller to refund prepayment. In such case, as the court stated in its decision, it would adhere to orthodox approach of the English law, stating that “if the contract does not expressly provide what should happen in case of a certain event or under a certain situation, most often we may state that nothing should happen, and no terms should be treated as implied”.

The above court decisions showed the importance of formulating contractual terms, while determining rights and obligations of the parties. Contractual terms should, as far as possible, take into account all possible situations, including moment and terms for prepayment refund. Given the approach applied by the English Court, it is unreasonable to rely on implied terms in order to fill-in gaps in contracts.

For more interesting cases from Black Sea & global practice, you may visit Grain & Maritime Days in Istanbul on May 24-25.

 

Igor Kostov,

Interlegal associate attorney

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