|Stocznia Gdanska S.A. v. Latvian Shipping Co. and Others continued|
|(back to preceding text)|
Hulls 1 and 2
Article 5 of the contract provides as follows:
"5.01 All payments due under this contract shall be made in dollars.
"5.02 Unless otherwise agreed between the parties the contract price shall be paid by the purchaser to the seller in four (4) instalments in the manner set out below:
"5.03 The payment of all such instalments shall be effected by cable transfer to the seller's bank.
"5.04 If the purchaser fails to make any payment required in clause 5.02 above the purchaser shall, subject to clause 14.02, pay interest at the rate of ten (10) per cent. per annum on the unpaid amount of such payment from the date when due up to and including the date of actual payment.
"5.05 (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:
(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."
For the sake of clarity I have numbered the separate paragraphs of clause 5.05. As already mentioned the keel laying instalments on hulls 1 and 2 undoubtedly fell due. They were not paid. So the yard was entitled to rescind contracts 1 and 2, which they did: see clause 5.05(1). Under the first half of clause 5.05(2) the yard then became entitled to retain instalments already paid in the event of rescission. So the yard was entitled to retain the first instalment of five per cent on hulls 1 and 2. But the clause says nothing about recovering unpaid instalments. The Court of Appeal has held, in effect, that once the machinery of clause 5.05 has begun to operate, over-due instalments cease to be payable. With respect I cannot go along with this view. The right to claim the keel laying instalment had already accrued before the plaintiffs rescinded the contracts. It would take very clear language to deprive the plaintiffs of their right to recover those instalments in debt. I do not find such language in clause 5.05(2). The right to retain instalments which have already been paid does not exclude the right to recover instalments which have not been paid. I can see no purpose in drawing a distinction between paid and unpaid instalments, provided the instalments have fallen due under clause 5.02. The crucial distinction is between instalments which have fallen due (whether paid or unpaid) and instalments which have not fallen due. As will be seen, the remaining provisions of clause 5.02 work sensibly and fairly on that basis.
The second half of clause 5.05(2) gives the yard the right to complete and sell the vessels on such terms as the plaintiffs deem reasonable. This is what the plaintiffs in fact did. Paragraph 39 of the agreed statement of facts reads:
Thus the keels built for hulls 1 and 2 (there were no other keels) were "appropriated" to the two new contracts with Lorient Maritime, on substantially the same terms as the contracts which had just been rescinded. The fact that the specifications were not identical is irrelevant. In practical terms the hulls were completed and sold within the meaning of clause 5.05(2). If vessels 1 and 2 had already been launched before rescission, there could have been no doubt as to the application of 5.05(2). It would be absurd to require the yard to complete the vessels as a speculation before selling to a third party. The fact that these particular contracts were rescinded at an earlier rather than a later stage cannot affect the construction of the clause.
That only leaves the purported assignment of hulls 1 and 2 to contracts 3, 4, 5 and 6 by successive renumbering of the keels. For reasons which I shall come to later, I regard these so-called assignments as a device to enable the plaintiffs to recover keel laying instalments to which they were not entitled under the contract. Such devices do not incline one in the plaintiff's favour. But they cannot affect the reality. In the real world there were only ever two keels. It was the plaintiff's duty to mitigate their damages in respect of contracts 1 and 2. They did so by completing those vessels and selling them to Lorient Maritime for U.S.$ 22.5 million. The proceeds of that sale are now to be "applied" in accordance with clause 5.05(3), first in reimbursing the costs of the sale, and second in satisfaction of the outstanding balance of the contract price.
The outstanding balance of the contract price will, of course, be the contract price, including profit, less any instalments already paid at the date of rescission and any overdue instalments recovered between the date of rescission and the date when the final calculation comes to be made. If, for some reason, the overdue instalments have not been recovered at the date of the calculation, the unpaid balance of the contract price will be that much the greater. This consideration does not, however, cast any doubt on the plaintiff's right to recover overdue instalments in debt prior to the final calculation. It is in this respect, and this respect only, that I respectfully disagree with the Court of Appeal. Since the machinery of clause 5.05 works equally well whether overdue instalments are paid or not, there is no need to imply any exclusion of the plaintiffs accrued right to recover the keel laying instalments in debt. Still less is there any express exclusion of that right.
There is a slight awkwardness in the language of clause 5.05(3) since the reference to the proceeds of sale and the instalments both being "applied" in satisfaction of the unpaid balance of the contract price might suggest that they are both to be applied in the same way. But as the Court of Appeal correctly pointed out, that would make no sense at all. The instalments are to be taken into account in calculating the unpaid balance of the contract price. The proceeds of sale are then to be applied in satisfaction of the unpaid balance of the purchase price, whatever it may be.
If the proceeds of sale are more than the unpaid balance of the purchase price then the difference belongs to the buyers under clause 5.05(3). But if it is less, then the yard is entitled to recover the difference from the buyers under clause 5.05(4). By completing the hulls and selling vessels 1 and 2 the plaintiffs will have mitigated their damages as required by the clause and will at the same time have recovered their contractual loss of profit.
Mr. Glennie argued that there had been a total failure of consideration in respect of the keel-laying instalments on hulls 1 and 2 on the ground that the buyers have enjoyed no benefit under either contract. Accordingly even if the keel-laying instalment were otherwise payable under the contract, it would be immediately repayable on the ground of total failure of consideration. Mr. Glennie relies in this connection on the judgment of Stable J. in Dies v. British and International Mining and Finance Corporation Ltd.  1 K.B. 724, 742.
The difficulty with Mr. Glennie's argument is that it runs counter to the decision of the House in Hyundai Heavy Industries Co. Ltd. v. Papadopoulos  1 W.L.R. 1129. That case, like the present, concerned a shipbuilding contract. The contract provided that the second instalment of the contract price should be payable on a day certain. It gave the builders the right to rescind the contract in the event of non payment. The buyers failed to pay the second instalment, and the builders rescinded. Two questions arose for decision, namely, (1) whether the effect of the rescission was to deprive the builders of their right to claim the second instalment, and (2) whether, if not, the second instalment could be recovered by the buyers on the ground of total failure of consideration. In relation to question (2) the buyers (or more accurately their guarantors) relied, as they do here, on Dies.
Viscount Dilhorne and Lord Fraser of Tullybelton rejected the guarantors' argument. Lord Fraser pointed out, at p. 1148, that the contract was not of the same simple character as the contract of sale in Dies. The builders were obliged to carry out work, and incur expense, from the moment the contract was signed. It seemed likely that the instalments bore some relation to the anticipated rate of expenditure. But it was unnecessary to make a nice comparison. It was enough that the builder was bound to incur considerable expense in carrying out his part of the contract before the actual sale could take place.
Mr. Glennie points out that Lord Russell of Killowen and Lord Keith of Kinkel expressed doubt on the first question, and did not deal specifically with the second question. Nor did Lord Edmund-Davies. Thus there was no majority, so it is said, in favour of the views expressed on the second question by Viscount Dilhorne and Lord Fraser. Alternately Mr. Glennie invites your Lordships to depart from Hyundai on the ground that the decision on the second question is inconsistent with the earlier decision of the House in Fibrosa Spolka Akcyjna v. Fairbairn, Lawson, Combe Barbour Ltd.  A.C. 32.
I cannot accept these submissions. It is true that Lord Edmund-Davies does not refer to the second question. But the whole tenor of his speech is in agreement with that of Viscount Dilhorne and Lord Fraser. If he had disagreed on any point, he would surely have said so. In any event the views of Viscount Dilhorne and Lord Fraser are, if I may respectfully say so, plainly correct, and directly applicable to the facts of this case.
Mr. Glennie submitted that the question whether there has been a total failure of consideration is to be judged from the buyer's point of view; in other words the question is not whether the plaintiffs have suffered a detriment in performing the contract, but whether the buyers have enjoyed any benefit. He relied on Chitty on Contracts (1994) 27th ed., vol. 1, para. 29-034, and Goff and Jones, The Law of Restitution (1993) 4th ed., p. 401. But if that is the right question, there can be only one answer on the facts of the present case. For this was not a simple contract of sale. The contract required the plaintiffs to design and construct the vessels. That was part of the benefit which the buyers were to receive under the contract. When the contracts were rescinded, construction of the vessels had reached the point at which the second instalment had already fallen due. Even though the buyers have not enjoyed the whole of the benefit for which they contracted, which included the completion and delivery of the vessels, their enjoyment of part of the benefit is sufficient to defeat any claim to recover back the second instalment. The construction put upon the word "benefit" in section 1 (3) of the Law Reform (Frustrated Contracts) Act of 1943 by Robert Goff J. in B. P. Exploration Co. (Libya) Ltd. v. Hunt  1 W.L.R. 783, 802 does not stand in the way of this conclusion.
As for Fibrosa, the contract in that case called for the delivery of certain machinery c.i.f. Gdynia. A third of the price was to be paid with the order, and the balance against shipping documents. The outbreak of war frustrated the contract. The question in the case was whether the rule in Chandler v. Webster  1 K.B. 493 under which, when a contract is frustrated, "the loss lies where it falls" was still good law. The House held that it was not. Chandler v. Webster was overruled.
But there was a second question. Mr. Valentine Holmes K.C., for the sellers, argued that there was no total failure of consideration. For the contract had been partly performed by the manufacture of the machinery, even though delivery was no longer possible. This argument did not find favour. The contract was treated throughout as a simple contract of sale, in which the consideration was the delivery of the machinery. This is clear from the speeches of Lord Russell of Killowen, at p. 56, Lord Wright, at p. 64, and Lord Porter, at p. 83. Since the machinery never was delivered, the buyers were entitled to recover their payment in advance. I agree that the distinction between a simple contract of sale, in which the only consideration is the transfer of title, and a contract of sale which also includes the provision of services prior to delivery, may sometimes be a fine one. But the distinction is sound in principle. I can see nothing in the decision in Fibrosa which is in anyway inconsistent with the subsequent decision of the House in Hyundai. I do not find it surprising that Fibrosa was not even cited in argument.
Finally, under this head, Mr. Glennie argued that if there was a total failure of consideration in respect of the first instalments on hulls 3-6, then the buyers can rely on their right to recover those instalments as a set off against the plaintiffs' claim on hulls 1 and 2. But no such set off has ever been pleaded. It was not relied on as a defence when the case was argued before Clarke J. It should not now be allowed to stand in the way of summary judgment in respect of the keel laying instalments on hulls 1 and 2. I would therefore allow the appeal in respect of those instalments, and restore the judgment of Clarke J.
It will be remembered that Waller J. gave unconditional leave to defend in respect of the keel laying instalments on hulls 3-6 on the uncomplicated ground put forward by the buyers that the keel laying instalments on those hulls never fell due. He also gave unconditional leave to defend in respect of the plaintiffs' alternative claim for summary judgment on liability for repudiation of all six contracts, with damages to be assessed, on the ground that the alternative case was not open on the pleadings. The Court of Appeal decided the first point in favour of the buyers, but on a different ground (with which I have already respectfully disagreed) that the plaintiffs' only claim lies under clause 5.05. There was an order for damages to be assessed under that clause. Should it have arisen, the Court of Appeal would have decided the arguable point on which Waller J. gave leave to defend in favour of the buyers.
Did the keel laying instalments on hulls 3-6 ever fall due?
My instinctive answer, and that which would, I think, be given by any fair-minded man, is "of course not," There only ever were two hulls. How can two hulls be made to serve the purpose of six contracts? The renumbering of the hulls was an artifice to enable the plaintiffs to recover six keel laying instalments when they had only laid two keels.
Would it then have made any difference if, as was suggested in the course of the argument, the plaintiffs had dismantled the two keel sections of hulls 1 and 2, taken them back to the works, returned them to the berth, and rejoined them as the two keel sections for hulls 3 and 4? My answer would be no. For the plaintiffs were obliged under the general law, and specifically under clause 5.05(2), to mitigate their damages under contracts 1 and 2. This they have in fact done, in the real world, by completing hulls 1 and 2 and selling those vessels to Lorient Maritime. If the plaintiffs had dismantled the keels, and then rebuilt them for the sole purpose of claiming the keel laying instalments on hulls 3-6, so far from doing what was reasonable to mitigate their damages on contracts 1 and 2, they would have been acting most unreasonably so as to increase their damages on hulls 3-6, or at any rate to accelerate their cash flow.
And so I turn to the wording of clause 5.02(b). Waller J. held that it was arguable that the wording does not enable the plaintiffs to say that the first and second sections of hulls 3-6 were joined at a time or place where those vessels were being constructed. They were joined on the berth where hulls 1 and 2 were being constructed. In my opinion Waller J. was right. Indeed I would go further, and decide the point now in favour of the buyers under R.S.C., Ord. 14A. One can test the position by assuming that vessels 3-6 had been sold to a different purchaser. Would the purchaser of vessel 3 have been obliged to accept sections which had already been constructed in the workshop and joined on the berth in respect of another vessel? Clearly not. I agree that under clause 11.01 the property in the two sections would have remained in the plaintiffs. But under clause 6.01(b) the purchaser of vessel 3 would have been entitled to appoint a supervisor to supervise every aspect of the construction of the vessel. Thus the purchaser of vessel 3 could in theory have objected to the keel sections of hull 1 being appropriated to his contract, since his supervisor would not have had any opportunity to inspect, for example, the integrity of the welding. No doubt the purchaser would in practice have accepted the keel sections of hull 1 by agreement. But on the facts as they are, the buyers never agreed to the keel sections for hulls 1 and 2 being renumbered 3-6. If the plaintiffs rely on a technicality to recover the keel laying instalments on hulls 3-6, they should not be surprised to receive a technical answer.
For completeness I should mention a further point. Mr. Glennie relied strongly on the obiter dictum of Lord Reid in White and Carter (Councils) Ltd. v. McGregor  A.C. 413, 431. In so far as the plaintiffs may be said to have performed contracts 3-6 by renumbering the keels, they had "no legitimate interest, financial or otherwise" in doing so. On that view they ought not to be allowed to saddle the buyers with an additional burden, with no benefit to themselves. This argument would, if correct, provide the buyers with a further defence to the plaintiffs' claim for the keel laying instalments on hulls 3-6. But since I would in any event decide the point in favour of the buyers on the wording of clause 5.02(b), I need say no more.
For the reasons which I have given, I consider that Waller J. came to the correct conclusion, and that the buyers ought to have unconditional leave to defend in respect of hulls 3-6, save for the point which should now be decided in their favour.
But I ought, out of courtesy, to say a little more about the formal orders made by the Court of Appeal at the conclusion of their judgment. As to the first action (hulls 1-2) they ordered that damages be assessed in accordance with clause 5.05. Save that I would restore the judgment of Clark J. in respect of the plaintiff's claim under R.S.C., Ord. 14 for the keel laying instalments, I would uphold the order of the Court of Appeal. Damages should now be assessed under clause 5.05 in the manner I have indicated.