CTI Group Inc v Transclear SA

Where a seller makes an unqualified promise to supply non-specific goods, the seller ordinarily bears the risk that its contemplated supplier will fail to supply, unless the supplier is entitled to rely on frustration. The position differs where the contract specifies the source or goods. A seller can protect itself by obtaining an enforceable supply contract or making its promise conditional on availability. A supplier’s default cannot be attributed to the seller unless the supplier was under a legal obligation to make the supply. An implied term discharging the parties cannot be inserted where it is inconsistent with the express allocation of risk, or where it is unnecessary for business efficacy and not obvious.

The buyers appealed by leave from a partial final arbitration award concerning two f.o.b. contracts for cement to be shipped from Indonesia and Taiwan to Mexico. The tribunal held that the contracts had been frustrated because Cemex’s intervention prevented the intended suppliers from supplying the cement. Alternatively, it held that the contracts contained an implied term discharging both parties if suppliers refused to supply because of the cargo’s intended destination or use.

The appeal concerned whether the tribunal had erred in law on frustration and implied terms.

1. Appeal allowed. The tribunal’s findings that the contracts were frustrated, alternatively discharged under an implied term, were set aside.
2. The relevant contracts were unqualified f.o.b. promises to supply non-specific goods. Once performance had become impossible because the contemplated suppliers refused to supply, the decisive question was where the risk of supplier failure lay. This was distinct from cases in which performance remained possible but had become radically different or more onerous.
3. Where a seller makes an unqualified promise to sell, the seller bears the risk of failure of its contemplated source of supply where the source is not contractually specified, the goods are not specific, and the supplier is not excused by frustration. The seller is able to protect itself by making an enforceable supply contract or by making its promise conditional on availability. Atisa SA v Aztec AG was treated as supporting this risk-allocation approach, and Intertradex SA v Lesieur Tourteaux SARL supported the possibility of a conditional promise.
4. A supplier’s failure could not be treated as the seller’s fault unless the supplier had been legally obliged to make the supply. The absence of a binding supply contract therefore defeated the buyers’ attributed-fault argument based on Lebeaupin v Richard Crispin and Company.
5. The proposed implied term was fundamentally inconsistent with the express allocation of risk. It was neither necessary to give the contracts business efficacy nor so obvious as to go without saying, and it could not be implied as a matter of law. No such term formed part of either contract.

Consequential orders, including whether damages issues should be referred back to the tribunal, were reserved for further submissions.

• High Court (Commercial Court): appeal by leave from a partial final arbitration award dated 1 December 2006. The tribunal’s findings on frustration and implied discharge were set aside.