What is commercial common sense?
Commercial common sense is one of the tests used by the Courts when interpreting a contract. Essentially the court asks whether the contract is consistent with the purposes and intentions of both contracting parties.
What happened in the case of Nord Naphtha Limited v New Steam Trading AG?
Nord Naphtha agreed to buy 30,000 metric tonnes of ultra-low sulfur diesel from New Stream. The contract provided that Nord Naphtha would make an advance payment of 90% of the purchase price, which equated to $16,059,600.
On 17 April 2019, New Stream notified Nord Naphtha that delivery of the diesel would be delayed due to ‘operational and production issues at the refinery. New Steam considered this to be a force majeure event. Despite various promises, the delivery never materialised.
On 30 June 2020, Nord Naphtha terminated the contract and sought repayment of the advance. New Stream denied it was under any contractual obligation to repay it and relied on a force majeure clause in the contract which said that neither party should be “deemed in breach of contract or liable to the other to the extent that any failure, omission, delay or hindrance arose from any force majeure event resulting from circumstances reasonably beyond the control of either party”.
This clause went on to list various events which would be viewed as force majeure events, including those “related to hindrances or delays in delivery” and “interference with supplies”. Unluckily for New Steam the contract also contained a rather contradictory clause which essentially said, “nothing herein shall impair the obligations by the Seller to repay to the Buyer the amount of the advance payment or any Outstanding Advance Amount under this Contract in the event that the delivery of the Product is not made or only partially made due to Force Majeure Event.”
Nord Naphtha issued a claim demanding repayment of the advance on the following basis:
- There was a right of repayment of the advance pursuant to the contract; and/or
- There was a right of repayment of the advance on the basis of unjust enrichment.
New Stream argued that there was no unjust enrichment as they had already paid the Advance to the refinery (less commission).
The Commercial Court held that it would be a “surprising” outcome if Nord Naphtha were unable to recover the advance in any circumstances under the contract. The Court held that the contract contained an express obligation for New Stream to repay Nord Naphtha. Even if this were not the case, a repayment obligation was “so obvious” that it would be an implied term of the contract.
On appeal, the Court of Appeal rejected New Stream’s argument that the words of the contract were open to interpretation. When looking at the wider commercial context of a sale of goods contract, the Court found 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.
Applying commercial common sense
Nord Naphtha serves as a helpful reminder that businesses should properly review and, if necessary, negotiate the terms of any contract before entering into it. If a dispute arises over the interpretation of any conflicting clauses, the party whose interpretation makes commercial common sense is likely to come out smiling.
Makes sense right?
Jeremy Crook is a senior associate in the Commercial Disputes Resolution team at Stephens Scown, advising businesses, public bodies and individuals in relation to commercial disputes. He is also able to advise on disputes that straddle both civil litigation and employment law.
If you have any questions about this article, please contact Jeremy Crook via email at J.Crook@stephens-scown.co.uk, by calling 01726 627309 or alternatively visit https://www.stephens-scown.co.uk/business/disputes/commercial-disputes/