Stocznia Gdanska S.A. v. Latvian Shipping Co. and Others  continued

(back to preceding text)

    But what was that event? On the yard's argument, it was that the stage had been reached when it was appropriate for the second instalment to be paid; and the stage so chosen was when the two sections were in fact joined together on the relevant berth, so that construction could proceed from that point. The buyers' answer was that, under the clause, the stage was chosen because it showed that construction of the vessel under the contract had reached a certain stage, viz. that the two sections had been joined on the berth where the vessel was being constructed. To that the yard riposted--this is absurd. There are the two sections, which comply with the contract specification, and are joined together; and there they are, on the berth where construction of the vessel is going to take place. Moreover, the buyers were really requiring that the two sections must be dismantled, and then joined together again on the same berth. The answer of the buyers was to take their stand on the words used in the clause, which contemplated that the sections would be joined on the berth where the vessel was being constructed, as part of the construction of the vessel under the contract. Moreover this, I imagine, reflected the normal practice, because it does not seem sensible to join the sections elsewhere and then transport them together to the berth where the remainder of the construction of the vessel is to take place.

    I have come to the conclusion that, in a case such as this, it is right that the buyers' argument should be preferred because it is most consistent with the intention of the parties as contained in the words of the contract. In truth, what the yard was doing was to appropriate to contracts 3 and 4 (and subsequently to contracts 5 and 6) sections which had been joined as part of the construction of a vessel being built under a different contract. There was nothing to stop them doing that, if the buyers agreed. In normal circumstances, it might well be possible to obtain such agreement; but in a case such as the present, there was no chance of it being obtained. Moreover, if the yard's argument is right, they were entitled to do this as of right in a case where the contracts in question were with different buyers. In such a case it would be most surprising if the yard could so proceed without first obtaining the consent of the second buyer. On the buyers' construction of the clause, such a step would not be open to the yard. Furthermore their construction fully recognises the right of the buyers to supervise the construction of the vessel under their contract with the yard. The fact that, in the present case, the buyers happened to have the opportunity of supervising the joining of the sections under previous contracts is of no relevance to the construction of the clause.

    Moreover, as I read the clause, the buyers' argument is supported by the clear intention that the required notice should be a notice of the fact that the keel has been laid, i.e. that the relevant sections of the vessel's hull have been joined. It cannot, in my opinion, have been intended that the yard should give, possibly months after the event, a generalised notice of the fact that the keel had been laid in the past instead of giving notice of the event of keel laying and specifying the date on which that event occurred. Obviously, it would in normal circumstances be in the interests of the yard to give the notice as soon as possible after the keel was laid; but in the present case we find the yard giving notices in respect of vessels 3 to 6 long after the keels which were the subject of the notices had in fact been laid.

    This approach, which supports the submission of the buyers, receives confirmation from the form of the notices actually given by the yard under the clause. So, for vessel 1, the yard gave notice on 3 December 1993 that the keel "has today been laid;" and the classification society confirmed that "bottom sections D1 and D2 have been joined on the slipway on 3 December 1993." Likewise, for vessel 2, the yard gave notice on 14 March 1994 that the keel "has been laid on 9 March 1994," and the classification society confirmed that "bottom sections D9 and D10 have been joined on the slipway on 9 March 1994." Obviously the dates so given relate to the actual joining of the sections.

    It is, moreover, of significance that, when notices came to be given for vessels 3 to 6, the yard and the classification society still clung to the same form of wording, viz. that the keel has been laid, or the sections have been joined on the slipway, on a certain date. Thus, for example, in the case of vessel 4 we find the yard stating that the keel "has been laid today, 15 April 1994," and the classification society confirming that the bottom sections "have been joined on the slipway on the 15 April 1994." Notices and confirmations were given in similar terms for vessels 3, 5 and 6. These notices and confirmations were, on their face, incorrect. The true position was that the keels had been laid, i.e. the sections had been joined, some months previously, on the berths where vessels 1 and 2 were then being constructed under different contracts. However, a notice which conveyed that message would not, in my opinion, have been a notice which complied with the terms of clause 5.02(b) in respect of vessels 3 and 4, or vessels 5 and 6.

    For these reasons, I find myself to be in agreement with the conclusion reached on this point by the Court of Appeal. I must confess that I would have felt happier if the matter had been canvassed at trial in the normal way, as Waller J. ordered, rather than decided on an application for summary judgment under Order 14, especially as the applicant for summary judgment (the yard) was contending for the opposite conclusion. However, after all this time and after a number of further steps have been taken in the proceedings, I am most reluctant to send this matter back for trial; and, having reached a clear conclusion as a matter of construction, which is the same conclusion as that reached by the Court of Appeal, I am content simply to uphold the decision of the Court of Appeal on this point.

The impact of clause 5.05 on the yard's accrued right to recover instalments of the price

    I now turn to the impact of clause 5.05 on the yard's right to recover the keel-laying instalments in respect of vessels 1 and 2, its right having accrued before the date when the yard rescinded contracts 1 and 2 under clause 5.05(1). It was the submission of Mr. Glennie, for the buyers, that clause 5.05 provides an exhaustive code governing the yard's rights and remedies in the event of a rescission under the article for non-payment of an instalment due under clause 5.02(b), (c) or (d); and that the effect was to exclude what would otherwise have been the yard's right at common law to sue for such an unpaid instalment as a debt. This submission was rejected by Clarke J. but was accepted by the Court of Appeal, who then ordered that damages should be assessed under clause 5.05 in both actions, i.e. in respect of all six contracts. Since however the Court of Appeal held that the yard was not entitled to rescind any of contracts 3 to 6 under clause 5.05 on the ground of non-payment of the second instalment, because it had not given any valid notice as required under clause 5.02(b), it followed that clause 5.05 had no application in respect of these four contracts (as Longmore J. appreciated, though he felt obliged loyally to give effect to the Court of Appeal's order in this respect). As I have already indicated, I agree with the conclusion of the Court of Appeal that no such notice was given under those contracts. It follows that, as Mr. Glennie recognised, the question of the impact of clause 5.05 arises only in relation to contracts 1 and 2, on the appeal from Clarke J. I am satisfied that, on this point, Clarke J. reached the right conclusion, for essentially the correct reasons. Even so, I propose to set out my reasons for agreeing with him in my own words.

    I start by recording that, as Mr. Cordara for the yard pointed out, to deprive the seller of such a right could have serious consequences for him. The basis for winding up the purchaser by reference to the unpaid instalment could be lost; a guarantor of the instalment might cease to be liable under his guarantee; and an assignment or charge of the debt to a third party could lose its value. Considerations such as these lend added weight in this context to the familiar principle of construction that clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law: see, e.g., Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689, 717, per Lord Diplock. I can find no such expression of intention on the part of the seller that he should, by exercising his right of rescission under clause 5.05(2), abandon his right at common law to recover as a debt unpaid instalments of the price which have already accrued due. I would, however, go further. For I am satisfied that, on a true construction of clause 5.05, the recovery of such instalments is consistent with the provisions of the article applicable in the event of a rescission.

    Under clause 5.05(2), 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 auction." The Court of Appeal expressed the opinion that this provision imposed on the seller an obligation to sell the completed or uncompleted vessel. But this is not what clause 5.05(2) says; and there may be circumstances in which there is no buyer available, or in which the seller's duty to mitigate requires a different course to be taken. At all events the article contemplates that, if a sale takes place, it may occur either when the vessel has or has not been completed, and makes provision for the application of the proceeds of sale (after deducting the reasonable costs and expenses of the sale) in either circumstance.

    I take first a sale where the vessel has been completed. In such a case the seller is required to apply the proceeds received by him from the sale, and the instalments already paid and retained by him, in or towards the satisfaction of the unpaid balance of the contract price. However, as the Court of Appeal pointed out, the instalments already paid must first be taken into account in order to identify the amount of the unpaid balance of the contract price. Then the proceeds of the sale fall to be applied in or towards the satisfaction of the balance. Any balance of the proceeds goes to the purchaser, and any deficiency has to be made good by him on demand. This provision makes perfectly good sense, the intention being that the seller shall receive the full contract price; and, since the price reflects the element of profit, he will be indemnified against his loss of profit.

    I feel bound to say that I can find nothing in this provision inconsistent with the seller being entitled to enforce his accrued right to recover an unpaid instalment as a debt at common law. Indeed, his right to recover such an instalment arises under another provision (clause 5.02(b)) of the same contract, and I can see no reason why that article and clause 5.05 should not, in the absence of any contrary intention, be construed so as to live together. Let it be supposed that the seller does enforce his right to recover an accrued instalment which remains unpaid. If he recovers the instalment, the effect will be to reduce pro tanto the unpaid balance of the contract price, and so reduce the amount in or towards satisfaction of which the proceeds of sale fall to be applied. The result is either that the deficiency which the purchaser has to pay will be reduced, or that the balance to be paid to him will be increased. I can detect no inconsistency here.

    The same is true of the case where the vessel has been sold in an uncompleted state. The applicable provision, in clause 5.05(3)(ii), is a little obscure; but it is plain that in order to establish the extent of any balance or deficiency, it will be necessary to take into account any instalments paid and retained by the seller; and any accrued instalment still unpaid which the seller recovers as a debt at common law will likewise fall to be taken into account for that purpose.

    I wish to add that the provisions contained in paragraphs (3) and (4) of clause 5.05, regarding the application by the seller of proceeds of sale, only apply where the seller has sold the vessel, either completed or uncompleted. If the seller has not sold the vessel, the only applicable provision appears to be the provision in paragraph (2) that 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. If that is right then, in such a case, there is again nothing inconsistent with the seller enforcing an accrued right to recover an unpaid instalment as a debt.

    It is recorded in the agreed statement of facts and issues in the present case that:

      "By two contracts of sale dated 20 September 1994 the yard agreed to sell two hulls to Lorient Maritime for a total price of U.S.$22.5m. each. The [yard] appropriated the two keels to these contracts. Save for the price and certain aspects of the specification, the terms of the contracts between the yard and Lorient were on substantially the same terms as the contracts between the [yard] and the [buyers]."

As Mr. Cordara for the yard pointed out to the Appellate Committee, it is wholly at large whether in these circumstances there was any sale of "the vessel" within clause 5.05 of the contract between the yard and the buyers. It could, I suppose, be argued either that the two "vessels" were sold in their uncompleted state when the two keels were appropriated to the contracts for the two vessels to be built for Lorient Maritime, or that the building of those two vessels under those contracts with the keels so appropriated constituted, for the purposes of clause 5.05 of contracts 1 and 2 in the present case, the completion of the vessels being built for the buyers. Whether either argument is likely to be pursued, your Lordships do not know. Certainly, neither was advanced before the Appellate Committee; and in these circumstances I do not consider it appropriate for your Lordships to express any opinion upon them. In any event it is my opinion, for the reasons I have already given, that it makes no difference for present purposes whether there was a sale or not, for in either event there is no inconsistency between clause 5.05 and the enforcement by the yard of its accrued right to recover unpaid instalments of the price as a debt at common law.

    Finally on this aspect of the case I wish to record that the conclusion which I have reached on this point of construction is consistent with the conclusion reached by the House of Lords in Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129 on a shipbuilding contract in substantially similar terms to that in the present case. The Court of Appeal in the present case sought to distinguish the Hyundai case on the basis that the right of cancellation there conferred on the builder was expressed to be "in addition to such other rights, powers and remedies as the builder may have elsewhere in this contract and/or at law, at equity or otherwise." I do not however read the decision of the majority in that case as being dependent on that provision: see in particular p. 1141B-E per Lord Edmund-Davies, and p. 1148B-G, per Lord Fraser of Tullybelton. I shall have to consider the Hyundai case in more detail in the next section of this opinion.

    It is for these reasons that I prefer the conclusion of Clarke J. on this point to that of the Court of Appeal.

Total failure of consideration

    It was recognised by Mr. Glennie for the buyers that the second (keel-laying) instalments of the price payable in respect of vessels 1 and 2 accrued due under clause 5.02(b). However he submitted that, after rescission of the contracts, an action by the yard for the recovery of the instalments must fail because, if paid, the instalments would immediately be recoverable by the buyers on the ground that they had been paid for a consideration which had wholly failed. It was Mr. Glennie's submission that there would in such circumstances have been a total failure of consideration, because the buyers would have received nothing under the contract, no property in the vessel or any part of it having been transferred to them. The relevant question was: had the buyers received the benefit of any part of that which they had bargained for? The answer to that question must be in the negative, because any time or money spent by the yard in building the keels enured solely for the benefit of the yard, in whom the property remained. The situation was therefore different from that under an ordinary building contract, where the building as it is erected belongs to the building owner as the owner of the land on which it is being built.

    This submission was challenged by Mr. Cordara for the yard, both on principle and authority. He relied in particular on the fact that, under the contracts in question, the yard was bound not merely to transfer the property in the vessels, when built, to the buyers. On the contrary it was bound to design, build, complete and deliver the vessels which were to be built in accordance with the agreed specification. The contracts were not therefore contracts of sale simpliciter, but "contracts for work and materials," though they included an obligation to transfer the property in the finished product to the buyers. The contractual performance of the yard began with the translation of the agreed specification into a design which complied with its requirements, the next stage in the performance being the translation of the design into a completed vessel, subject of course to amendments to the design agreed by the parties in the course of construction. Only at a late moment would the title in the completed vessel pass to the buyers.

    Before addressing the rival submissions of the parties, I pause to observe that these were both founded on the premise that the issue was simply one of total failure of consideration. I am, of course, well aware of the continuing debate among scholars and law reformers as to the circumstances in which, and the basis on which, a party in breach of contract can recover a benefit conferred by him on the innocent party under the contract before it was terminated by reason of his breach, as to which see, for example, the admirable discussion by Professor Jack Beatson in The Use and Abuse of Unjust Enrichment (1991), chapter 3. However, I am content to approach this aspect of the case on the premise, common to both parties, that the issue is one of total failure of consideration since, as I understand it, this is consistent with the approach of the majority in Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129, which is directly in point on this aspect of the case.

    I find myself to be in agreement with Mr. Cordara's submission on this point. I start from the position that failure of consideration does not depend upon the question whether the promisee has or has not received anything under the contract like, for example, the property in the ships being built under contracts 1 and 2 in the present case. Indeed, if that were so, in cases in which the promisor undertakes to do work or render services which confer no direct benefit on the promisee, for example where he undertakes to paint the promisee's daughter's house, no consideration would ever be furnished for the promisee's payment. In truth, the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due. The present case cannot, therefore, be approached by asking the simple question whether the property in the vessel or any part of it has passed to the buyers. That test would be apposite if the contract in question was a contract for the sale of goods (or indeed a contract for the sale of land) simpliciter, under which the consideration for the price would be the passing of the property in the goods (or land). However before that test can be regarded as appropriate, the anterior question has to be asked: is the contract in question simply a contract for the sale of a ship? or is it rather a contract under which the design and construction of the vessel formed part of the yard's contractual duties, as well as the duty to transfer the finished object to the buyers? If it is the latter, the design and construction of the vessel form part of the consideration for which the price is to be paid, and the fact that the contract has been brought to an end before the property in the vessel or any part of it has passed to the buyers does not prevent the yard from asserting that there has been no total failure of consideration in respect of an instalment of the price which has been paid before the contract was terminated, or that an instalment which has then accrued due could not, if paid, be recoverable on that ground.

    I am satisfied that the present case falls into the latter category. This was what the contracts provided in their terms. Moreover, consistently with those terms, payment of instalments of the price was geared to progress in the construction of the vessel. That this should be so is scarcely surprising in the case of a shipbuilding contract, under which the yard enters into major financial commitments at an early stage, in the placing of orders for machinery and materials, and in reserving and then occupying a berth for the construction of the vessel. Indeed if Mr. Glennie's argument is right, it would follow that no consideration would have been furnished by the yard when instalments of the price fell due before the moment of delivery, notwithstanding all the heavy and irreversible financial commitments then undertaken by the yard.

    As authority for the construction of the contracts in question, Mr. Cordara was able to invoke the decision of your Lordships' House in Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129, to which I have already referred, which was concerned with a shipbuilding contract in substantially the same form as that under consideration in the present case. In that case the question at issue was whether the defendant's liability as guarantor continued in existence despite the termination of the contract. All five members of the Appellate Committee held that it did. But the basis on which three members of the Committee reached that conclusion was that the instalment of the price in question remained due notwithstanding the termination of the contract. Viscount Dilhorne, at p. 1136 put on one side cases of contracts for the sale of land or goods. I interpolate that in such cases it has been held that the buyer's remedy is contractual, the seller's title to retain the money being conditional upon his completing the contract: see, e.g., Dies v. British and International Mining and Finance Corporation Ltd. [1939] 1 K.B. 724 (sale of goods), and the much-quoted judgment of Dixon J. in McDonald v. Dennys Lascelles Ltd. (1933) 48 C.L.R. 457, 475-479 (sale of land). Viscount Dilhorne did not find it necessary to consider whether the decision in Dies was correct, since he was satisfied that in the case before him the contract was not just for the sale of a ship. His conclusion [1980] 1 W.L.R. 1129, 1136 was that:

     "save in the case of sales of land and goods and where there has been a total failure of consideration . . . cancellation or rescission of a contract in consequence of a repudiation did not affect accrued rights to the payment of instalments of the contract price unless the contract provided that it was to do so."

He further concluded, at p. 1137F that in the case before him, despite the cancellation of the contract, the buyer remained liable for the second instalment which had accrued due, there having been no total failure of consideration for the payment.

    The position was put very clearly by Lord Fraser of Tullybelton when he said, at pp. 1148-1149:

      "Much of the plausibility of the argument on behalf of the guarantor seemed to me to be derived from the assumption that the contract price was simply a purchase price. That is not so, and once that misconception has been removed I think it is clear that the shipbuilding contract has little similarity with a contract of sale and much more similarity, so far as the present issues are concerned, with contracts in which the party entitled to be paid had either performed work or provided services for which payment is due by the date of cancellation. In contracts of the latter class, which of course includes building and construction contracts, accrued rights to payment are not (in the absence of express provisions) destroyed by cancellation of the contract."

In such a case, therefore, contrary to the submission of Mr. Glennie, there can be no total failure of consideration, notwithstanding that the buyer has received no specific benefit under the contract in the sense of property in the vessel being transferred to him, in whole or in part. Lord Edmund Davies (at pp. 1140F-1141E) expressly rejected as unacceptable an argument by the guarantor that, under the terms of the shipbuilding contract, the builders on cancellation of the contract lost their accrued right to recover the relevant instalment of the price, and fortified this conclusion with "sound commercial reasons". The other members of the Appellate Committee, Lord Russell of Killowen and Lord Keith of Kinkel, while doubting the conclusion of the majority on the issue of construction of the contract (though not specifying the reasons for their doubt), held that, even so, the cancellation of the contract did not bring to an end the guarantor's obligation under his guarantee.