Lloyd's Maritime and Commercial Law Quarterly
REFUND GUARANTEES—CONDITION OR INNOMINATE TERM AGAIN
Timothy Young *
Does the failure by a shipyard to procure a refund guarantee under a shipbuilding contract on the SAJ form, leading to the buyer’s terminating the contract, carry with it a right of the buyer to recover “loss of bargain” damages? It has been held in SLB v PAK, on the ground that the obligation to procure a refund guarantee is not a “condition”, that it does not, at least in the absence of an independent renunciation by the shipyard. This (to some) surprising result seems founded on some specific findings made in an arbitration award and they may deprive the judgment of general impact in law. This paper considers the general applicability of the judgment.
Introduction
A breach of condition (strictly called) and a breach of an innominate term each give rise to a right to damages to place the injured party in the same position financially in which he would have been had the contract containing them been performed by the breaching party.1 The only difference between a condition and an innominate term is that any breach of the former also gives the injured party the right to determine the contract, whereas a breach of the latter does not give that right unless the consequences of the breach are so serious as to “go to the root of the contract” or (less metaphorically) deprive the injured party of substantially the whole benefit of the contract. These are generally accepted and well-known principles. Or so one would have thought. However, in the appeal reported as SLB v PAK,2 Calver J has put something of a “cat among the pigeons” in the world of shipbuilding contracts and the widely (if apparently not universally) perceived appreciation of the contractual requirement for refund guarantees.
Refund guarantees
Modern shipbuilding contracts on the SAJ form require payment of the purchase price by instalments at various stages, customarily after contract signing, steel cutting and keel laying, with the final instalment payable on delivery, and, if delivery is materially later than the delivery date, the price payable would be reduced by liquidated damages.3
* KC, 20 Essex Street, London.
1. Robinson
v
Harman (1848) 1 Exch 850; through to Sharp Corp Ltd v Viterra BC [2024] UKSC 14; [2024] 1 Lloyd’s Rep 568; [2024] Bus LR 871.
2. [2026] EWHC 449 (Comm) (SLB v PAK”).
3. The liquidated damages are not recoverable otherwise than by a reduction of the price. If there is a cancellation by the buyer, any apparently accrued liquidated damages cease to be payable. This was apparently a point overlooked by Calver J.
450