Shipbuilding: Commercial Court considers Refund Guarantees, Conditions and Innominate Terms

The Commercial Court has confirmed in the recent judgment of SLB & Others v PAK & Others [2026] EWHC 449 (Comm) that a shipyard’s obligation to provide refund guarantees by a specified time — even where those guarantees play a central role in the financial structure of a shipbuilding project — does not automatically amount to a condition.

Although the buyers were entitled to cancel when the guarantees were delivered late, they were not entitled to loss‑of‑bargain damages, because the obligation was treated as an innominate term rather than a condition.

The judgment reinforces that the mere fact that a term carries financial significance and contractual timing stipulations do not dictate its classification nor elevate an obligation to a condition.

Background

The dispute arose out of ten shipbuilding contracts for large container ships, each contract being a novated version of earlier agreements. Each contract followed a typical newbuilding payment structure: three advance instalments payable prior to delivery and a final payment upon delivery and acceptance. The contractual scheme provided that the first instalment became due only upon the buyers’ receipt of a refund guarantee from a nominated financial institution. The guarantee operated to secure repayment of instalments in the event of valid termination.

Article X(A)(f) of each contract imposed a requirement on the shipyard to issue these guarantees within 120 days of the date of amendment, novation and restatement, subject to any later date the buyers might designate in writing. Failure to issue the guarantees within that period entitled the buyers to cancel the contract and receive reimbursement of all sums paid, with interest at 6% per annum.

The shipyard did not provide the guarantees within the contractual period. The buyers terminated and sought substantial loss‑of‑bargain damages on the basis that the time‑limited obligation to provide the guarantees constituted a condition, breach of which entitled them to the full contractual measure of damages.

Arbitration

The arbitral tribunal unanimously rejected the buyers’ contention that Article X(A)(f) amounted to a condition. While accepting that the late provision of the refund guarantees constituted a contractual default entitling the buyers to exercise their express right of cancellation, the tribunal held that the clause did not carry the automatic loss‑of‑bargain consequences associated with breach of a condition. Instead, the tribunal concluded that the obligation was properly characterised as an innominate term, the breach of which did not entitle the buyers to loss‑of‑bargain damages.

The buyers appealed the tribunal’s award.

Central legal issue

The central issue for consideration by the Commercial Court on appeal was whether the shipyard’s obligation under Article X(A)(f) to provide the refund guarantees within 120 days of the amendment, novation and restatement of the contracts constituted a contractual condition or whether the obligation was properly characterised as an innominate term. The question turned on the correct classification of the clause, assessed in light of the contractual structure, the parties’ allocation of risk, and the relationship between the refund guarantee obligation and the core performance obligations under the shipbuilding contracts.

Commercial Court judgment

i) Classification depends on construction, not commercial significance

The court emphasised that the classification of a contractual term as a condition, warranty, or innominate term is a matter of construction in the context of the agreement as a whole. Although refund guarantees may constitute a “financial cornerstone” of shipbuilding transactions, the importance of a term does not justify treating it as a condition. Nor does the presence of a deadline automatically transform the obligation into one whose breach attracts loss‑of‑bargain remedies.

Calver J held that the contractual wording demonstrated that the parties had already allocated the consequences of late provision by expressly conferring on the buyers a right of cancellation and restitution. That express allocation weighed strongly against an implication that breach should carry the more severe remedy of loss‑of‑bargain damages.

ii) Absence of interdependence between the guarantee obligation and performance of the ship construction

A critical factor in the court’s analysis was the lack of functional interdependence between the obligation to provide the guarantee and the shipyard’s ability to perform its primary obligations. The shipyard remained obliged to construct the ships by the contractual delivery dates and remained exposed to liquidated damages for delay, regardless of whether instalments had become payable.

The buyers’ contention that the guarantee was practically indispensable because a prudent shipyard would not commence construction without advance funding was rejected. The tribunal had made a factual finding that, at the time of contracting, there was no concern regarding the shipyard’s solvency or ability to begin construction without instalments. Those findings were not susceptible to challenge on appeal.

iii) Analogies with deposits, letters of credit, and performance guarantees were misconceived

The court dismissed attempts to characterise refund guarantees by analogy with deposits, letters of credit, or performance guarantees, noting that each category serves a distinctive commercial function. A refund guarantee does not secure future performance of the shipyard but merely ensures reimbursement of advances if the contract is terminated. Its purpose is not analogous to a deposit — which serves as an earnest of the buyer’s commitment — nor to instruments supporting payment obligations under documentary credit practices.

Because the commercial function of refund guarantees differs markedly from these instruments, analogical reasoning could not support elevating Article X(A)(f) to a condition.

iv) Presence of a bespoke contractual remedy was decisive

The court noted that the parties had incorporated an express, self‑contained remedy in the event of non‑compliance: cancellation and repayment of instalments with interest. Where a contract expressly sets out the remedy for a particular breach, there is a strong inference that the agreed remedy is intended to be exclusive of more consequential remedies unless the contract clearly states otherwise. The absence of wording indicating that failure to meet the deadline would amount to a repudiatory breach was therefore decisive.

Conclusion and contractual guidance

The court’s reasoning in dismissing the buyers’ appeal underscores that classification flows from construction of a clause, not from the commercial gravity of the provision. The presence of an express cancellation mechanism, the absence of any functional interdependence with the shipyard’s primary obligation to construct and deliver the ships, and the distinct commercial purpose of refund guarantees collectively pointed towards classification as an innominate term.

For contracting parties, the judgment highlights the need for precise drafting where the intention is to attach repudiatory consequences to non‑performance, and it encourages careful alignment between the security regime, payment provisions and intended remedies. Parties should ensure that any assumed link between the provision of security and the ability to commence or continue construction is expressly articulated, that the contractual remedies reflect the seriousness of any intended breach, and that the overall structure does not inadvertently confine a critical obligation to innominate term status.

Clarity at the drafting stage therefore remains the most effective safeguard against uncertainty in the allocation of risk and remedies.

If Members have any questions in relation to the above issues they are invited to contact the Club for further information.