TMI Blog1997 (11) TMI 515X X X X Extracts X X X X X X X X Extracts X X X X ..... ate arrival and the age of the ship carrying the cargo. BSFIC claimed to be entitled to forfeit the bond in respect of X's breaches of contract. X in turn claimed that the breaches were in fact caused by the default of BSFIC. X also claimed that, in any event, BSFIC suffered no loss because the market price of the sugar had fallen over the period between the date of contract and the date for delivery. The disputes led to the commencement of litigation in various jurisdictions, which was eventually compromised by an agreement of the parties dated 12th April 1996, under which it was agreed inter alia that the matter was to be submitted for determination before the Commercial Court. The parties further agreed that the Court should determine two preliminary issues, on the assumption for the purpose of such determination that X were indeed in breach of contract as alleged by BSFIC. The two preliminary issues were ordered to be tried by Rix J on 2nd May 1996 in the following form: (1) Whether on the true construction of the contract of sale dated 16th June 1994 and on the assumption that the Plaintiffs were in breach of the contract in the respects alleged at paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earnest Money/Bid bond and Performance Guarantee . In that respect clause 10 provided: (a) The tenderer/bidder will furnish 1 per cent of the total quoted value as earnest Money/Bid bond in the form of Bank Draft/Bank Guarantee in favour of this Corporation as per format given at Annexure-A ... (c) The earnest money in respect of the tenderer/bidder whose offers have been accepted will be released to them only after they have furnished performance guarantee and signed the contract. The Corporation reserves the right to forfeit the earnest money if the tenderers/Bidders fail to sign the contract or to furnish Performance Guarantee for performance of the contract within the time stipulated and/or allowed for the purpose ... d) In the event of the acceptance of this tender by the Corporation, a Letter of Intent will be issued to the successful tenderer/bidder (hereinafter referred to as the Supplier) who shall provide, within 7 (seven) days from the date of the issue of the Letter of Intent, the Performance Guarantee in the form of a Bank Guarantee in the format given at annexure B . The Performance Guarantee is liable to encashed/forfeited (i) if the succes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third important document: the contract of sale. Under its terms the respondents agreed to sell C F (C) to the appellant 12,500 metric tonnes of sugar plus or minus five per cent at the seller's option. There was an express promise by the respondent to ensure the arrival of the sugar at Chittagong before 15th September 1994 positively . There was also a stipulation in the contract that the cargo would be shipped in a vessel which was not more than 20 years old. Clause 13 of the contract of sale provided as follows: 13: Performance Bond. The seller has already submitted a Performance Bond to the BUYER in the form of Bank Guarantee equivalent to 10 per cent of the total offered C F (C) value of 12,500 m.tons plus or plus or minus 10 per cent of sugar. The Performance Bond is liable to be forfeited by the BUYER if the SELLER fails to fulfil any of the terms or conditions of the contract ... and also if any loss/damage occurs to the BUYER due to any fault of the SELLER. Clause 16 of the contract of sale provided as follows: 16: Special clause. i) The arrival period/time is the essence of the contract. Therefore the SELLER shall strictly adhere to the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereas the Seller forfeited his right for any overpayment, then much plainer words would have been required to take this case away from the general principles as I perceive them to be. That being so, it seems to me that treating the two parts of the clause disjunctively and treating the right to forfeit as arising if either there was a breach or if any loss or damage occurred to the Buyer due to any fault of the seller (which might not be a breach) would make commercial good sense. The Buyer is stipulating clearly that, as between himself and the Seller, all he needs to show to be entitled to call on the Bond as a breach of contact; he need not show damage (although damage will almost always follow); if on the other hand, say by a misrepresentation by the seller, damage was caused to the buyer then the right to call the bond was conferred by the second half of the clause. But in either event there will be an accounting at trial or arbitration to ensure the buyer has not been underpaid or overpaid. Further, it seems to me that the more natural reading of the clause is to treat the events giving rise to a right to forfeit the bond as disjunctive. The words also if would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are required to avoid the general principles expounded by the judge, and that, if he failed in his contention that clauses 13 and 16 contained such clear words, then he must fail in this appeal. However, on the assumption that he was entitled to succeed, he submitted in his skeleton argument that the judge was wrong to go on to hold that clauses 13 and 16 were penal in effect, and therefore enforceable only to the extent of damage actually suffered by BSFIC. He submitted that neither clause 13 or 16 is in any conventional sense a penalty clause, providing as each does for money already provided by the seller pursuant to a well-recognised tripartite commercial arrangement which, as Mr Hossain submits, would be undermined by introduction of doctrine of relief from penalties. He submitted that, whatever the statements of general principle made in authorities and text books, there is no reported authority directed to an analogous situation which could assist X in this respect. Mr Hossain's arguments may well have force. They did not attract Morison J who, without deciding the point, certainly appears to have considered the principles relating to penal provisions were apt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction to propound a general or generally accepted principal ... (and) ... then to seek to force the provisions of the ... (the contract) ... into the straightjacket of that principle. On the other hand, modern principles of construction require the Court to have regard to the commercial background, the context of the contract and the circumstances of the parties, and to consider whether, against that background and in that context, to give the words a particular or restricted meaning would lead to an apparently unreasonable and unfair result. As Lord Reid observed in Wickman Machine Tool Sales Ltd v. Schuler AG [1974] AC 235 at 251: The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it, the more necessary it is that they shall make that intention abundantly clear. That approach may fairly be said to have reached a high watermark in the recent decision of the House of Lords in Charter Reinsurance Co Ltd v. Fagan [1997] AC 313 in which the landscape of the instrument of a whole as Lord Mustill put it at page 384, led the Court effectively to construe the words actually paid in the ultimate ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne would expect if Mr Hossain were right) to the monies paid under the bond. While Mr Hossain submits the point is a technicality and that, by their reference to the bond the parties must in fact have intended to refer to the monies paid under it, I consider that the term has simply been used as a shorthand for the exercise of the buyer's right to call for payment under the bond. In other words it refers to the position as between BSFIC and the bank, not BSFIC and X. This seems to me to be consistent with a further feature, that the bond is said to be liable to be forfeited by the buyer , whereas if the clause were intended to convey that the sum paid or payable under the bond would be forfeit, in the sense of irrecoverably lost to X, a reference to forfeiture by the seller would have been more appropriate. Further, the decision of the judge to read the words liable to be forfeited , in the context in which they appear, as equivalent to liable to be called or encashed accords more with reason, fairness and commercial good sense than does the meaning for which Mr Hossain contends. The effect of Mr Hossain's construction would be to provide BSFIC with a substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n into account the possible loss of 10 per cent of the price, which might be sustained under any forfeiture of the bond. 3. That clause 13 of the contract should be construed by reference to, and in harmony with, the earlier bid bond required to be provided by way earnest to the value of one per cent of the contract price, in which respect clause 10 of the invitation to tender provided that BSFIC reserved the right to forfeit the earnest money if the tenderers/bidders failed to sign the contract or furnish the performance guarantee. I find none of those arguments persuasive. 1. I do not think it is right to stigmatise the obligation to provide the bond as commercially worthless simply because the monies paid over under its terms are not to be regarded as irrecoverable by the seller. I have already touched upon the commercial advantage to the buyer in obtaining a bond. The right to call on the bond at an early stage in respect of any breach or suspected breach by the seller is plainly of value. It acts as an obvious incentive for his performance. It achieves the effect of an early payment against loss or possibility of loss without the need to resort to litigation, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other considerations in mind; however, bearing in mind the width of the judge's discretion in the matter of costs, I see no reason or warrant to interfere with the order which he made. I would dismiss the appeal. LORD JUSTICE SWINTON THOMAS: This case has been succinctly and extremely well argued on both sides. The issue is as to the meaning to be given to the words forfeit and forfeited in clauses 13 and 16 of the contract. Although I have not found this an altogether easy question to answer, I agree with the conclusions reached by Lord Justice Potter and for the reasons given by him I will also dismiss this appeal. As to costs, I do not think it is possible in this case successfully to challenge the judge's exercise of discretion. LORD JUSTICE STAUGHTON: If my heart ruled my head I would award the $526,000 to the State Corporation of X and not to an arm of the X empire. But I have to decide this appeal according to law. I regard the law as providing that the X Sugar Food Corporation cannot keep the money, except to the extent that they can establish loss from a breach of contract by X. The general situation as to performance bonds is that they pro ..... 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