Contractual interpretation: Court of Appeal takes commercial context into account

Nord Naphtha Limited v New Steam Trading AG [2021] EWCA Civ 1829

The question

Could the Buyer recover a 90% advance after the sale contract was terminated for Force Majeure reasons?

The key takeaway

When interpreting the contract, it was a key consideration that it would make no commercial or common sense for the buyer to enter into a contract whereby it could not recover the advance in force majeure circumstances. 

The background

Nord Naphtha (the Buyer) and New Stream (the Seller) entered into a contract for the sale of 30,000 metric tonnes of ultra-low sulphur diesel (the Contract). The Contract included an advance payment from the Buyer of 90% of the purchase price (the Advance).

The Seller contracted with a refinery to fulfil the Contract. The refinery issued a comfort letter (the Letter) to the Buyer which included a guarantee that the refinery would repay the Advance to the Buyer in the event of the value of the product delivered being “less than the advance amount received”. The Letter could be revoked at any time at the sole discretion of the refinery and with immediate effect, following notice to the Buyer. Further, the Letter had an expiration date. 

The delivery of the diesel was late. The parties agreed an extended delivery window and the refinery extended the expiration date on the Letter accordingly. However, the diesel was still not delivered within the extended delivery window. The Letter therefore expired. 

The Buyer subsequently terminated the Contract and sought repayment of the Advance pursuant to the Contract or on the basis of unjust enrichment. However, the Seller argued that there had been no unjust enrichment as they had already paid the Advance to the refinery (less commission). 
The Buyer issued proceedings against the Seller for repayment of the Advance and applied for summary judgment. 

The Commercial Court granted summary judgment and held that it would be a “surprising” outcome if the Buyer was unable to recover the Advance in any circumstances under the Contract. Further, the Contract was interpreted by the Court as containing an express obligation for the Seller to repay the Buyer, or in the alternative that a repayment obligation “is so obvious” that it would be an implied term of the contract. 

The Seller appealed, arguing that the Judge had adopted a “back to front approach” and should have first looked at the specific words in the contract before considering the effect of the clause. 

The decision

The Court of Appeal unanimously rejected the appeal, upholding the decision of the Commercial Court.

The Court rejected the Seller’s argument that the words of the contract were open to interpretation. The Court of Appeal held that any “reasonable person” would interpret the Contract as providing a right of repayment of the Advance for non-delivery as a result of a force majeure event. 

In addition, the Court noted that the construction of the clause was consistent with common and commercial sense. The Court held that, when looking at the wider commercial context of a sale of goods contract, it would “offend business common sense and ordinary common sense” for any buyer to enter into a contract where they would not be entitled to repayment of an advance payment in force majeure circumstances.

Why is this important?

This case is an example of the Court interpreting contractual provisions in the wider commercial context. If a suggested interpretation offends business and ordinary common sense, the Court will be reluctant to apply such an outcome. 

Any practical tips?

Ensure contractual provisions are expressed clearly and unambiguously - particularly payment and repayment provisions. Consider setting out the wider commercial context and background facts in the recitals. If there are other relevant documents (eg a comfort letter), consider how these relate to the contract and specify the consequences.