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What Happens to Instalment Payments if a Contract is Terminated?

Thursday, 18 July 2013

The courts have often been asked what should happen to money already paid in instalments if a contract is terminated. They have usually found that the payment of instalments is not intended as a forfeitable deposit.

However, in Cadogan Petroleum Holdings Ltd v Global Process Systems LLC [2013], the termination of a sale contract resulted in the seller (Cadogan) keeping the instalments paid by the buyer (Global Process Systems). Furthermore, adding insult to injury, the seller was also entitled to the remaining unpaid instalments.

Background to Cadogan Petroleum Holdings Ltd v Global Process Systems LLC

The case concerned the repurchase of two gas plants. The buyer was to buy back the gas plants from the seller. The buyer was to pay the seller USD 37.5 million in instalments with the property not passing to the buyer until the full price had been paid.

Under the terms of the contract if the buyer defaulted on the instalments, the buyer was entitled to terminate the sale agreement. The buyer paid USD 7.5 million but failed to pay further instalments so the seller exercised its right to terminate the sale agreement.

What Did the Agreement State?

The court had to decide whether the seller was entitled to keep the instalments paid by the buyer and whether the seller was entitled to recover the further instalments due under the sales agreement.

It was held by Eder J that the seller was entitled to keep the pre-paid instalments and was able to recover the further outstanding sums. This decision was based on the proper construction of the sale agreement which stated that the rescission of the contract was 'without prejudice' to any rights accrued by the seller. It was further held that the buyer was not entitled to seek relief against forfeiture.

A Warning to Buyers

This case provides a helpful warning to buyers that when the sale of goods or property has been terminated before the passing of title to the buyer, the pre-paid instalments payments may be forfeited.

However, this situation can be avoided if the buyer places a clause in the contract which allows them to avoid any accrued obligations. Such a clause could also be used as a mechanism to claim back any pre-paid instalments before the contract was terminated or rescinded.

Comment

Cadogan Petroleum Holdings Ltd v Global Process Systems LLC highlights how careful both parties need to be when preparing contracts dealing with instalment payments. Particular consideration should be given to what happens to pre-paid instalments and owed instalments if the contract is terminated. For more information please contact us on 0207 611 4848.

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