M & J Polymers Ltd v Imerys Minerals Ltd

A contractual take-or-pay provision may be subject to the rule against penalties where the payment obligation is linked to breach of a minimum-order obligation. The court must examine the provision’s predominant function and its commercial context, including whether it was commercially justifiable, oppressive or intended to deter breach.

In an instalment supply contract, anticipatory rejection of future instalments requires proof that earlier deliveries involved a serious breach and that such breach was more likely than not to continue. A buyer cannot rely on undisclosed internal standards to establish unfitness for purpose where the contract imposes reciprocal obligations concerning the supplier’s product and the buyer’s application.

M & J Polymers Ltd supplied dispersants to Imerys Minerals Ltd under a three-year supply agreement dated January 2005. Imerys purported to terminate the agreement in May 2006 after refusing further deliveries of one dispersant, Jaypol 1160.

The court determined whether Jaypol 1160 was unfit for its purpose, whether Imerys was entitled to reject future deliveries, whether the take-or-pay clause was an unenforceable penalty, and whether certain December orders counted towards Imerys’s January minimum-order obligation.

1. Jaypol 1160. The supply agreement was capable of being analysed as comprising severable instalment obligations. Imerys could reject future instalments only if it established that previous deliveries involved a serious or repudiatory breach, and that such breach was more probable than not to continue in future. The evidence did not satisfy that test.
2. Article 10.3 required the product to be compatible with the expressly notified purpose, while also requiring the buyer to ensure that the product fitted its own application. Jaypol 1160 complied with its contractual specification and was not shown to be incompatible with its purpose. Imerys’s undisclosed internal viscosity standards could not establish breach. The evidence instead showed variability in the clay and satisfactory performance in most uses.
3. Imerys was not entitled to reject further deliveries after 31 August 2005. The damages for the later repudiation therefore included the loss relating to Jaypol 1160. The Arjo Wiggins counterclaim failed because breach and causation were not established.
4. Take-or-pay clause. Article 5.5 was not automatically outside the rule against penalties merely because the claim was framed as a debt for the price. The obligation arose only in circumstances involving a failure to order the minimum quantities under Article 5.3. The principle in Export Credits Guarantee Dept v Universal Oil Products Co [1983] 1 WLR 399 therefore applied.
5. The clause was commercially justifiable. It was freely negotiated by parties of comparable bargaining power against the background of scarce acrylic acid, the supplier’s commitment of production capacity and the buyer’s need for reliable supply. It was not oppressive, in terrorem, or predominantly deterrent. The take-or-pay claim was consequently enforceable.
6. December 2004 orders could not be treated as January orders. No implied term, estoppel or waiver was established. However, the court could not be satisfied that the Lixhe and Sundsvall orders were duplicates. Imerys therefore received credit for both.
7. The agreed consequences were a take-or-pay sum of £1,818,296, post-termination damages of £3,897,982, and dismissal of the Arjo Wiggins counterclaim. Interest and costs were reserved.