Say it or lose it: The cost of assuming time is of the essence

Background

The Defendants, subsidiaries of Z Co (“the Yard”), agreed to build and sell ten container vessels. The ten shipbuilding contracts were novated to SPVs within C Inc (“the Buyers”).  The contracts contained a term that the Yard was to provide Refund Guarantees to the Buyers.  Under each contract, the Refund Guarantees were to be delivered “no later than 120 days” after novation.

The Yard failed to provide the Refund Guarantees within the 120-day period. The Buyers exercised their contractual right to terminate the shipbuilding contracts and claimed that the Refund Guarantee obligation was a condition of the contract, allowing them to terminate the contract and recover loss of bargain damages, amounting to between USD 730 - 830 million. 

The dispute was first referred to arbitration under the terms of the shipbuilding contracts. The arbitral tribunal found that the obligation to provide the Refund Guarantees was not a contractual condition, but instead an innominate term (such that the Buyers were entitled only to the contractual remedy under the shipbuilding contracts and not loss of bargain damages). The Buyers appealed to the High Court under s.69 Arbitration Act 1996. Permission to appeal was granted in June 2025 by Foxton J (as he then was).  The only question on appeal was whether the obligation to provide a refund guarantee within 120 days of the novation of the relevant shipbuilding contract was a condition of the shipbuilding contracts.

High Court decision

Calver J agreed with the arbitral tribunal's finding that the clause was an innominate term and accordingly dismissed the appeals.  He made the following findings.

Express wording of clause

Calver J held that the obligation to provide Refund Guarantees was not expressed as a condition in the contracts.  Whether a provision as to time in a contract is to be ‘of the essence' depends upon how that term appears in the contract as against the surrounding circumstances.  

Calver J held that time will not be considered to be of the essence unless the parties expressly stipulate that provisions as to time must be strictly complied with.  Where that is not the case, the Court should only find that time is of the essence where the subject matter of the contract or the surrounding circumstances clearly show that time was considered to be ‘of the essence' when the contract was concluded.  Calver J further held that Courts “should not be too ready to interpret contractual clauses as conditions unless the contract in question clearly requires the court to do so”.  (Emphasis added).

Specific termination scheme

Calver J further held that a strong factor pointing to the term not being a condition of the contract was the inclusion of a specific termination scheme.

The contract provided that, if there was an event of default on the part of the Yard (such as failure by the Yard to deliver the Refund Guarantee within 120 days), the Buyer had the right to terminate, rescind or cancel the contract by giving notice to the Yard.   The contract provided that upon receipt of notice of rescission, the Yard was to promptly refund to the Buyer all sums paid by it, together with interest. 

Calver J held that the parties had a “clear contractual scheme at work”.  If the Refund Guarantee was not provided within 120 days, the Buyer had the option either to extend the time or to rescind the contract.  If the Buyer chose to rescind, the parties had agreed that all obligations, duties and liabilities be completely and mutually discharged and, accordingly, there would be no contractual entitlement to recover loss of bargain damages. 

Trivial breaches

Calver J further held that failure to provide a Refund Guarantee under the shipbuilding contracts would not in all cases amount to a serious breach of contract. For example, breaches of the Refund Guarantee could, depending on the facts and circumstances, range from trivial to grave (as was the case here).   He held that this was the “hallmark” of an innominate term and was a further factor supporting his finding that the Refund Guarantee was not a true contractual condition.

Takeaways

Parties must approach the drafting of their contracts, especially their most important contracts, with precision and care to prevent disputes later arising.  This case shows that the financial costs of not doing so can be extremely severe (here in the region of USD 730 - 830 million in total). Parties intending for terms to be construed as “conditions” (thereby allowing for termination and claims for loss of bargain damages at common law on breach) must expressly say so.   

In our experience, even if the question were not expressly considered at the time the contract was concluded, most parties, if asked, would wish to preserve their ability to claim damages for non-compliance with a time limit if the time limit is not met.  If, however, there is no agreed scheme for compensation in the contract or the time limit is not expressed to be a condition with which compliance is a strict requirement, then it is likely that problems will arise.

Parties that do not consider this at the outset risk being at the mercy of their non-performing counterparty when a problem arises and subject to an increased likelihood of litigation (therefore incurring further financial cost).  It is essential, therefore, that key contracts are not negotiated in a commercial vacuum and that before signature, they are reviewed to identify and minimise litigation risks should a dispute later arise.

Authored by Ivan Shiu, Jourdan Penrice, and Reanne Jones.