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House of Lords
Session 1997-98
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Judgments - Stocznia Gdanska S.A. v. Latvian Shipping Co. and Others


  Lord Goff of Chieveley   Lord Lloyd of Berwick   Lord Hoffmann
  Lord Hope of Craighead   Lord Hutton







My Lords,

    This appeal arises out of proceedings relating to six shipbuilding contracts dated 11 September 1992, each for the construction of a single refrigerated vessel (commonly known as a reefer vessel). The appellants, Stocznia Gdanska S.A., who are the plaintiffs in the proceedings, are Polish shipbuilders who contracted to build the ships for Latreefers Inc., a Liberian company which is a wholly owned subsidiary of Latvian Shipping Co. In substance, therefore, the dispute is between Polish shipbuilders and Latvian buyers. There were in fact five defendants in all in the proceedings, Latvian Shipping Co. being the first defendants, and Latreefers Inc. being the second defendants; but Latreefers Inc., as parties to the shipbuilding contracts, are the sole respondents to the present appeal. I shall for convenience refer to the appellants as "the yard" and to the respondents as "the buyers."

The shipbuilding contracts

    Under each of the contracts, the yard undertook (see clause 2.01) to "design, build, complete and deliver" the vessel, property in the vessel not passing to the buyers until delivery (see clause 11.01). The price (see article 4) was U.S.$27,639,000 each for vessels 1 to 3; originally the price for each of vessels 4 to 6 was U.S.$28,839,000, but this was later increased to U.S.$29,119,000. Article 5 is entitled "terms of payment." Provision was made in clause 5.02 for the price to be paid in four instalments. Broadly speaking these were as follows: (a) five per cent. within seven banking days after receipt by the buyers of a bank guarantee to be furnished by the yard; (b) 20 per cent. within five banking days after the yard had given notice to the buyers of keel laying (defined in the clause as meaning that "the first and second sections of the vessel's hull have been joined on the berth where the vessel is being constructed"); (c) 25 per cent. within five banking days after the yard had given notice to the buyers of the successful launching of the vessel; and (d) the balance of 50 per cent. upon delivery of the vessel. Clause 5.05, which lies at the heart of the present case, provided for the rights of the parties following default by the buyers in the payment of any amount due under instalments (b), (c) or (d). Article 6 made provision for supervision by the buyers during the period of building. By clause 12.01, the contracts were to be governed by English law.

    I shall now set out the text of clause 5.05 in full. I have, like the Court of Appeal, numbered the four paragraphs of the clause, in which the yard is referred to as "the seller" and the buyers as "the purchaser;" and I have also numbered in roman numerals the sub-paragraphs of paragraph (3).

     "(1) If the purchaser defaults in the payment of any amount due to the seller under sub-clauses (b) or (c) or (d) of clause 5.02 for twenty-one (21) days after the date when such payment has fallen due the seller shall be entitled to rescind the contract.  "(2) In the event of such rescission by the seller of this contract due to the purchaser's default as provided for in this clause, the seller shall be entitled to retain and apply the instalments already paid by the purchaser to the recovery of the seller's loss and damage and at the same time the seller shall have the full right and power either to complete or not to complete the vessel and to sell the vessel at a public or private sale on such terms and conditions as the seller deems reasonable provided that the seller is always obliged to mitigate all losses and damages due to any such purchaser's default.  "(3) The proceeds received by the seller from the sale and the instalments already paid and retained shall be applied by the seller as mentioned hereinabove as follows:   (i) First, in payment of all reasonable costs and expenses of the sale of the vessel.   (ii) Second, if the vessel has been completed, in or towards satisfaction of the unpaid balance of the contract price, or if the vessel has not been completed in or towards satisfaction of the unpaid amount of the cost incurred by the seller prior to the date of sale on account of construction of the vessel, including work, labour and materials which the seller would have been entitled to receive if the vessel had been completed and delivered.   (iii) Third, the balance of the proceeds, if any, shall belong to the purchaser and shall forthwith be paid over to the purchaser by the seller.  "(4) In the event of the proceeds from the sale together with payments retained by the seller being insufficient to pay the seller, the purchaser shall be liable for the deficiency and shall pay the same to the seller upon its demand."

The course of events

    In 1992 work began on vessels 1 and 2. It is the yard's case that design, ordering and construction work was carried out during 1992 and 1993 pursuant to all six contracts; but, apart from work carried out in the course of laying keels for vessels 1 and 2, this is not accepted by the buyers. The first instalments of the price for all six vessels were duly paid.

    However, in July 1993 agents for the buyers raised queries as to the price payable under all six contracts, and then in October 1993 drew attention to problems in obtaining finance for the vessels. There followed a specific proposal for a 20 per cent. reduction in the price for each vessel, together with a five-year deferral of payment of $4m. of the new reduced price and delayed delivery of all the vessels, both of which would have disrupted the yard's cash flow and work programme. It was said that this proposal was due to a downturn in the reefer market; but it is the yard's case (though this is not admitted by the buyers) that the market was already in downturn when both sets of contracts were placed in late 1992 and early 1993. Following further meetings, the buyers' agent informed the yard by letter dated 3 December 1993 that, although the buyers wanted the vessels, taking delivery of them might be impossible.

    On the same day, 3 December 1993, the keel of vessel 1 was laid, and a keel laying notice was served on the buyers. However, the second instalment for vessel 1 was not paid, and the yard then served on the buyers a notice rescinding the contract under clause 5.05. The same happened with vessel 2. The keel was laid on 9 March 1993, and a keel laying notice was served; but the second instalment for this vessel too was not paid, and again the yard served a notice rescinding the contract under clause 5.05.

    There followed a series of controversial events, as the yard sought to take advantage of the keels laid for vessels 1 and 2 in order to trigger the second instalments, first for vessels 3 and 4, and then for vessels 5 and 6. The purpose of the yard in doing this was plainly to secure accrued rights to the second instalments for all four of these vessels, thereby putting itself in a stronger financial position than it would have been in if it only had a right to claim damages. At all events, the keels which had originally been laid in connection with the contracts for vessels 1 and 2 were simply renumbered for vessels 3 and 4, and fresh keel laying notices were then served on 14 and 15 April 1994. The second instalments for these vessels were not paid, and on 16 May 1994 the yard gave notice rescinding the contracts for the two vessels under clause 5.05. Exactly the same procedure was then followed in respect of vessels 5 and 6, appropriating the same keels to the contracts for these two vessels, and serving keel laying notices in respect of them. Predictably, the second instalments were not paid, and again the yard gave notice of rescission of both contracts under clause 5.05. Whether the yard was entitled to act in this way constitutes an important issue in the present litigation. Subsequently, by two contracts of sale dated 20 September 1994, the yard agreed to sell two hulls to Lorient Maritime for U.S.$22.5m. each, and appropriated the two keels to these contracts. The terms of the contracts between the yard and Lorient Maritime were substantially the same as the terms of the six contracts between the yard and the buyers.

The proceedings: the two actions.

    The yard commenced two actions against (among others) the buyers. In the first action, the yard claimed the second instalment in respect of vessel 1, and apparently also vessel 2 (presumably by amendment, though the amendment was not before your Lordships). In the second action, the yard claimed the second instalments in respect of vessels 3-6. The yard asserted that the buyers had repudiated all six contracts and further claimed, in respect of each contract, that it was entitled to recover damages in addition to the second instalment, after it had rescinded the contract under clause 5.05 for non-payment of the instalment.

    Clarke J. An application was made by the yard for summary judgment in respect of the second instalments of the price for vessels 1 and 2 alone. On 5 December 1994, Clarke J. granted the application. In so doing, he rejected a number of arguments advanced by the buyers. In particular, he held that the instalments remained due and owing, despite the rescission of the two contracts under clause 5.05, and rejected as unarguable a submission by the buyers that, on rescission, they were entitled under clause 5.05 to recover instalments already paid. He also held that there had been no total failure of consideration, because the contracts were not just for sale but for the construction and sale of the vessels, the construction forming part of the contract consideration; and he rejected an argument, based on White & Carter (Councils) Ltd. v. McGregor [1962] A.C. 413, that in the circumstances the yard had acted wholly unreasonably in proceeding to lay the keels.

    Waller J. A second application was made by the yard for summary judgment, in respect of the second instalments of the price for vessels 3, 4, 5 and 6, and for damages to be assessed in respect of all six contracts. The application was heard by Waller J., who refused it on 23 November 1995. In relation to the second instalments, he held that it was arguable that, on the terms of clause 5.02, the yard was not entitled simply to renumber the keels constructed for vessels 1 and 2 and then use them to claim the second instalments for other vessels. He refused judgment for damages to be assessed because the yard was pursuing "the article 5 route", and that would have to be completed before there could be any assessment of damages.

    The Court of Appeal. There followed appeals to the Court of Appeal from both judgments. On 28 March 1996 the Court of Appeal gave judgment, holding that the effect of clause 5.05 was that, if the yard rescinded the contract under the clause by reason of the buyers' default, its rights were governed exclusively by the regime under the clause and its common law rights were displaced by that regime. It followed that none of the second instalments was recoverable by the yard, and judgment was entered for the buyers on that point under Order 14A. The court indicated that, but for the effect of clause 5.05, the instalments for vessels 1 and 2 would have been recoverable by the yard, but the instalments for vessels 3 to 6 would not because, on the facts, the terms of clause 5.02(b) were not complied with. In the result the Court of Appeal allowed the buyers' appeal from the decision of Clarke J., but "for the most part" dismissed the yard's appeal from the decision of Waller J., and ordered that the yard's damages should be assessed in accordance with clause 5.05 in respect of all six vessels.

    It is from that decision that the yard now appeals to your Lordships' House, with the leave of this House. However, in the meantime further proceedings have taken place. Pursuant to the order of the Court of Appeal that damages be assessed under clause 5.05, a consent order was made by Moore-Bick J. that the yard should serve particulars of the damages claimed by it. This the yard did, claiming damages calculated in the traditional manner for loss of profit and wasted expenditure but giving credit in respect of the sale to Lorient Maritime. The buyers considered that this claim did not accord with the order of the Court of Appeal that damages be assessed under clause 5.05, and applied for an order that the particulars should be struck out as not complying with the Court of Appeal's order.

    Longmore J. On 3 October 1996 Longmore J. gave judgment on the application. With regard to the yard's claim for damages in respect of vessels 1 and 2, he held that the particulars of damage did not comply with the order of the Court of Appeal and struck them out. He refused however to dismiss the yard's claim, leaving it open to the yard to reformulate it to bring it into line with clause 5.05, and he made a declaration with regard to the form that it should take. With regard to vessels 3 to 6, he felt a difficulty because, since the Court of Appeal held that the second instalments for these vessels never became due, it was not clear to him whether the contract was brought to an end under clause 5.05. The yard proposed to reformulate its claim to allege that the buyers were in repudiatory breach of these four contracts, and that the builder was entitled to, and did, accept the repudiation and was justified in bringing the contracts to an end on that basis. Longmore J., however, thought it right for him to comply strictly with the order of the Court of Appeal that damages were to be assessed in accordance with clause 5.05, and so, since the yard's particulars of damage in respect of these four contracts did not comply with the Court of Appeal's order, he struck them out as well. He declined however to make a declaration as to the form of the claim, because he considered that the claim in respect of these four vessels would on any view have to be reconstituted.

    Colman J. There followed an application by the yard to amend its points of claim in both actions to claim damages on the basis that the buyers were in anticipatory repudiation of all six contracts. It was common ground that the buyers' conduct amounted to an anticipatory repudiation of all six contracts. On that basis the yard alleged that it accepted the repudiation and so became entitled to recover damages at common law as distinct from compensation under clause 5.05, thereby escaping from the restricted damages regime under clause 5.05 and the problem relating to vessels 3 to 6. In answer to this application, the buyers took a number of points, two of which Colman J., who heard the application, held (in his reasons for judgment dated 6 March 1997) to be fatal to the application. The first was that the proposed amendments raised a series of claims which, if pursued, had no prospect of success. Colman J. had no doubt that, at least by 3 December 1993, the buyers were in anticipatory breach of all six contracts. It was then open to the yard to treat each contract as terminated, but it did not do so. Instead, it proceeded to operate the contractual machinery for putting the buyers under an accrued liability to pay the second instalments. This conduct was, he held, entirely inconsistent with an intention to treat the contracts as at an end by reason of anticipatory breach, and so the yard, having elected to continue to enforce the contracts, could not revert to its right to terminate the contracts on the ground of anticipatory breach. Second, since the Court of Appeal had given judgment for damages to be assessed under clause 5.05 (at least in relation to the first two contracts), it was too late to introduce a different allegation of liability. Third, the yard having failed in the previous litigation to advance its alternative claim based on anticipatory breach, it would, by reason of the principle stated by Wigram V.-C. in Henderson v. Henderson (1843) 3 Hare 100, 114-115, be an abuse of process for it now to be allowed to pursue its reformulated claim on that basis.

    With this preamble, I now turn to consider the appeal to your Lordships' House. Three main issues were developed before the Appellate Committee: (1) whether the yard acquired accrued rights to the second instalments of the contract price in respect of vessels 3 to 6; (2) the impact of clause 5.05 on the yard's right to recover second instalments of the price; and (3) whether the yard's action to recover second instalments of the price must fail because, if recovered, they would immediately be repayable on the ground of total failure of consideration. I shall consider each of these three issues in turn. A fourth issue, based on White & Carter (Councils) Ltd. v. McGregor [1962] A.C. 413, was the subject of argument; but on the view which I take of the case that point no longer arises for decision in connection with vessels 3 to 6, and Mr. Glennie decided, rightly in my opinion, not to pursue the point in relation to vessels 1 and 2. It is therefore unnecessary for me to consider it in this opinion.

    During the argument, counsel drew attention to the decisions of Longmore J. and Colman J. to which I have already referred. A suggestion was made that your Lordships' House might rule on those decisions as part of a global consideration of the case; and as a consequence, further written cases were submitted to the Appellate Committee. I shall consider this suggestion at the end of this opinion.

The second instalments of the contract price

    It is not in dispute that the yard acquired accrued rights to the second instalments of the price under contracts 1 and 2. There is however a serious dispute whether they did so under the remaining four contracts. As I have already recorded, the yard sought to take advantage of the keels already laid under contracts 1 and 2 in order to trigger payment of the second instalments first under contracts 3 and 4 and then, when predictably the buyers failed to pay the second instalments under those contracts, under contracts 5 and 6.

    At first sight, it seems surprising that the yard should be entitled to proceed in this way under contracts 3 to 6. How can it be right, the buyers asked, that the keels constructed for contracts 1 and 2 could, so to speak, be used again to trigger further instalments under four other contracts before being finally incorporated into the ships built for Lorient Maritime? This question calls for an answer; though it is fair to comment that the adverse reaction, intended to be provoked by the question, is likely to stem more from the repetitive use of the keels in circumstances in which it was known that the buyers were unable to pay for any of the vessels, than from the simple fact of re-using a keel for a second vessel to be built under an identical specification.

    In fact, the problem falls to be solved by the ordinary process of construction of the relevant contractual provision. This is clause 5.02(b), which legislates for the second instalment and provides that the instalment is to be paid:

     "within five (5) banking days after the seller has given notice by telex to the purchaser of keel laying of the vessel meaning that the first and sections of the vessel's hull have been joined on the berth where the vessel is being constructed, such a notice to be confirmed simultaneously by the classification society."

    Rival submissions were advanced before the Appellate Committee as to the effect of this provision. For the buyers, Mr. Glennie drew attention in particular to the words of the clause which required that the sections should have been joined "on the berth where the vessel is being constructed." In the present case, he pointed out, they were joined on the berth where vessels 1 and 2 were being constructed, not on the berths where vessels 3 and 4, or 5 and 6, were being constructed. It was this argument which persuaded the Court of Appeal to hold, in three terse sentences, that the keel laying notices in respect of vessels 3 to 6 were ineffective. Furthermore, it was suggested, to hold otherwise would deprive the buyers of their right of supervision of the construction of the keels for the last four vessels. For the yard, Mr. Cordara pointed out that what triggers the obligation to pay the instalment is not the keel laying as such, but the giving of a notice that the first and second sections "have been joined" on the relevant berth, together with simultaneous confirmation of that fact by the classification society. Furthermore there was, he submitted, no basis for the contention that each keel had to be constructed under the particular shipbuilding contract. As for supervision, the buyers did in fact supervise the laying of both keels, so they were not in fact deprived of any right to supervise; and there was no contractual requirement for the yard to build the vessel in any particular way, so that (for example) prefabrication was not excluded. Lastly he claimed that the re-use of the keels "probably" constituted fulfilment by the yard of its duty to mitigate its damage.

    I am bound to say that I did not find Mr. Cordara's argument on mitigation persuasive. It could hardly be said that the incorporation by the yard of the keels for vessels 1 and 2 into vessels 3 and 4, and then into vessels 5 and 6, was done in exercise of the yard's duty to mitigate, when, as the yard knew, the buyers had already made it plain that they were unable to pay for any of the vessels. The yard's purpose was, of course, quite different. Mitigation did not occur in this respect until the keels were incorporated into the vessels built for Lorient Maritime. But that apart, there was considerable force in Mr. Cordara's submission, which merited far greater consideration than was given to it by the Court of Appeal. In particular, I am satisfied that the essential function of clause 5.02(b), like (a), (c) and (d), was to identify the event of which notice had to be given to trigger the relevant payment, rather than to legislate for the manner in which the keel was to be laid, i.e. the sections were to be joined.