#6700 - M J Polymers V. Imerys - Commercial Remedies BCL

M&J Polymers v. Imerys

Facts

The defendant company, Imerys Minerals Ltd, was formerly known as English China Clays, which group was acquired by the Imerys Group in April 1999. The claimant company, M & J Polymers Ltd, had been supplying dispersants, which are chemicals used in the breakdown of clay and other materials, to English China Clays since 1991. From 1999, the claimant company continued to supply Imerys, and the most recent contractual arrangements between them, made in July 2003, were to expire in December 2004. Imerys decided to put out a proposed new contract for tender in September 2004.

The new supply contract, dated 25 January 2005, was signed on 26 January 2005. It related to the supply by the claimant to the defendant of 4 dispersants.

The Relevant Clauses:

5.3. During the term of this Agreement the Buyer will order the following minimum quantities of Products:

5.5 Take or pay: the Buyers collectively will pay for the minimum quantities of Products as indicated in this Article at 5.3 of Jaypol 1183, Jaypol BTC2 and Jaypol 1160 even if they together have not ordered the indicated quantities during the relevant monthly period.

The supply contract was purportedly terminated by the defendant in May 2006 by a notice which was treated by the claimant as an unlawful repudiation of the contract, which repudiation the claimant accepted on 19 May 2006.

Question

Whether the sums due to be paid by the defendant to the claimant in respect of the period prior to what is now accepted to have been the repudiatory breach by the defendant in May 2006 are recoverable in debt, in respect of the price of the minimum quantities of dispersants pursuant to the ‘take or pay’ clause set out in paragraph 4 above, or by way of damages (the ‘penalty issue’).

Holding

Does the law against penalties apply?

This argument, by reference for example to White & Carter (Councils) Ltd v McGregor [1962] AC 413 and its citation in Chitty on Contracts vol. 1 at 26–118 — ‘The law on penalties … is not relevant where the claimant claims an agreed sum (a debt) which is due from the defendant in return for the claimant's performance of his obligations’ — is in my judgment too simplistic. It is clear that, for example, a minimum payment clause in a hire purchase agreement can be held to be a penalty, even though expressed as a claim in debt. The claimant relies upon the decision of the House of Lords in Export Credits Guarantee Dept v Universal Oil Products Co [1983] 1 WLR 399, in which a payment provided to take place upon a specified event was held not to be susceptible to the law of penalties. That is what the claimant asserts to be the case here pursuant to the supply contract. Mr Parker refers to the obligation to make payment for the minimum quantities ‘even if [the buyers] have not ordered the indicated quantities during the relevant monthly period’. He therefore submits that the sum is due as a price irrespective of whether they have ordered the quantities — or as it might alternatively be stated ‘whether or not they have ordered the quantities’ or indeed ‘whether or not there has been a breach of Clause 5.3’.

However:

(i) The central dictum of Lord Roskill, in the only speech in the ECGD case, with which the rest of their Lordships agreed is: ‘The clause was not a penalty clause because it provided for payment of money upon the happening of a specified event other than a breach of a contractual duty owed by the contemplated payor to the contemplated payee.’

(ii) I do not see how a payment obligation can arise under Article 5.5 in a case other than where there has been a breach of the obligation to order under Clause 5.3. If the goods are in fact ordered, then they will be delivered, and the price will be due quite irrespective of Article 5.3 or 5.5.

(iii) There may be an option for a claimant to pursue its claim either for damages for breach of Article 5.3 or for the price in respect of Article 5.5, but on the face of it the ‘specified event’ in Article 5.5 is the same event as amounts to a breach of duty under Article 5.3.

Is the take or pay clause a penalty?

In Lordsvale Finance plc v Bank of Zambia [1996] CLC 1849; [1996] QB 752, in passages approved by the Court of Appeal in Euro London at 442–3, Colman J said at 1857–8; 762–4: “There would therefore seem to be no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided always that its dominant purpose was not to deter the other party from breach.”

Chadwick LJ in Euro London...