UK: Court Of Appeal Decision In Relation To The Availability Of Damages Once Shipbuilding Contract Terminated

Last Updated: 4 March 2009
Article by Lindsay East

The Court of Appeal has recently handed down its decision in "Stocznia Gydnia SA and Gearbulk Holdings Limited [2009] EWCA Civ. 75". The Court of Appeal has dealt with the interesting question as to whether, if a Shipbuilding Contract is terminated under the terms of that contract, the buyers' remedy is limited to the recovery of the instalments of the price in accordance with the contract, or whether a claim for damages for repudiation can nevertheless survive. The Court of Appeal held that it could.

1. The Facts

Gearbulk Holdings Limited ("Gearbulk") entered into contracts with Stocznia ("the Yard") for the construction of six vessels for delivery on various dates between 2001 and the end of March 2004. There were separate contracts, but the same in all material respects. The case involved three of those vessels, Hulls 24, 25 and 26.

None of the three vessels in question were delivered. As a result, it became possible for Gearbulk to exercise its right to terminate the contract under the appropriate provisions of the Shipbuilding Contract, in particular under Article 10. Gearbulk in fact terminated each of the three contracts for delay using the provisions of Article 10.

Article 10 dealt with the effect of termination. It is helpful to quote parts of this Article.

"The Contract Price of the Vessel shall be adjusted by way of reduction on the event of any of the contingencies set out in this Article...
The Purchaser shall not be entitled to claim any other compensation, and the Seller shall not be liable for any other compensation for damages sustained by reason of events set out in this Article or direct consequences of such events other than liquidated damages specified in this Article.

10.7 Effect of Termination

Upon termination of this contract by the Purchaser in accordance with the provisions of Article 10... the Seller shall forthwith repay to the Purchaser all sums previously paid to the Seller under this contract, together with interest... until date of refund...

It is however further expressly understood and agreed upon by the parties hereto that, if the Purchaser terminated its contract under this article, the Purchaser shall not be entitled to any liquidated damages under Articles 10.1, 10.2, 10.3 or 10.4 hereof."

Article 10 contained provisions in relation to the payment of liquidated damages by way of reduction of the final instalment of the price in respect of shortcomings in the vessel's speed, fuel consumption and deadweight capacity.

The claims under the three contracts were referred to arbitration before Sir Brian Neill. Liability was tried as a preliminary issue. Gearbulk submitted that the Yard had repudiated each of the contracts, that in each case its repudiation had been accepted as terminating the contract and that Gearbulk was entitled to recover damages for the loss of its bargain in accordance with ordinary principles.

The Yard argued that it had not repudiated the contracts, but in any event, Gearbulk had not accepted any repudiation in relation to two of the hulls, 24 and 25, and that in each case Gearbulk had exercised the right to terminate under Clause 10 and so was precluded from treating the contract as repudiated and that Article 10 of the contract excluded any claim for damages following termination in accordance with its terms.

For the purpose of this Client Alert, I am concentrating only on the question as to whether or not Gearbulk were precluded, in the circumstances, from treating the contract as repudiated and whether they retained a right to general damages.

2. The Award

The Arbitrator rejected the Submissions of the Yard. The Arbitrator held that at the time each of the contracts was contractually terminated, the Yard was unable and unwilling to perform the contract, and had repudiated it. The Arbitrator held that Article 10 did not exclude any of the rights that would otherwise arise by operation of law, either the right to treat the contract as discharged on the grounds of repudiatory breach, or the right to recover damages for the loss of a bargain. He also rejected a separate argument that Gearbulk had by its conduct affirmed the contract. Accordingly, Gearbulk were successful.

3. The Commercial Court

The Yard obtained leave to appeal to the Commercial Court and the appeal was heard by Mr Justice Burton 2008 EWHC 944 (Wmm). The issues were slightly reformulated. Mr Justice Burton held that Article 10 did not exclude a claim for damages in respect of the situation that had occurred. He also held that Article 10 was not a contractual code which excluded all rights of termination in respect of the events that had occurred.

However, he did hold that terminating the Shipbuilding Contracts, relying upon the contractual termination provisions and making a claim under the Refund Guarantee, precluded Gearbulk from subsequently claiming to have terminated at common law. Mr Justice Burton therefore held that Gearbulk's claim for damages failed. The Judge himself gave Gearbulk permission to appeal to the Court of Appeal against this decision.

4. The decision of the Court of Appeal

The Court of Appeal handed down a detailed unanimous Judgment written by Lord Justice Moore-Bick. The Yard had argued that Article 10 was a complete code which provides for all the consequences of the various events with which it is concerned. As such, argued the Yard, it displaced any right to treat the contract as repudiated at common law. The argument was that there is, in effect, an election. Either Gearbulk could have treated the contracts as repudiated, in accordance with the general law, or the rights of termination under Article 10 could be exercised. The Court of Appeal considered the authorities in particular "Lockland Builders -v- Rickwood [1995] 77 BLR 42"; "Stocznia Gdanska SA -v- Latvian Shipping Co. [2002] EWCA Civ. 889" and concluded that the Yard's argument failed.

The Court then had to deal with the argument on behalf of the Yard that the second paragraph of Article 10 excludes the right to recover damages for loss of bargain in the event of termination by the Buyer, i.e. Gearbulk. The Yard placed particular reliance on the words "by reason of events set out in this article". The Yard argued that those words had to include all the events to which Articles 10.1 - 10.4 and 10.6 referred, including those which gave Gearbulk the right to give notice of termination. The Court of Appeal considered that there was no reason why the parties could not have agreed that Gearbulk should have no right to recover damages for loss of a bargain in those circumstances. However, the Court of Appeal pointed out that that would be a very draconian step. They pointed out that where a breach has arisen, on the part of the Yard, which gives rise to the right to terminate, it must be assumed that the parties accepted that this would go to the root of the contract and justify the extreme step of treating their contract as discharged. If the Yard's argument was correct, then the only remedy available to Gearbulk would be to recover what it had paid by way of instalments, together with interest. It would also mean that the Yard could at any time refuse to perform the contract without any liability other than to refund instalments of the price.

The Court referred to the comments of Lord Diplock in "Gilbert-Ash (Northern) Limited -v- Modern Engineering (Bristol) Limited [1974] AC 689" where he observed, at page 717, that

"One starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption."

The Court of Appeal formed the clear view that the reference in Article 10 to "events set out in this Article and/or direct consequences of such events" in the second paragraph of Article 10 are directed only to those parts of Article 10 that provide for the payment of liquidated damages, and have no application to the situation that would arise upon termination of the contract. For those reasons, the Court of Appeal agreed with the Judge that Article 10 did not, by its terms, exclude Gearbulk's right to recover damages at common law.

The Court of Appeal then had to go on to consider the point on which Mr Justice Burton had disagreed with the Arbitrator. He had found that giving notice of termination under the contract precluded Gearbulk from treating the contract as discharged at common law. The Court of Appeal concluded that once it is accepted that Article 10 does not exclude the right of Gearbulk to claim damages for the loss of their bargain, there is no good reason to construe Article 10.7 as providing an exclusive remedy of a kind that was intended to take away, by the back door, rights of potentially considerable value. The Court of Appeal therefore reversed that part of the Judgment of Mr Justice Burton and held that Gearbulk were not precluded from claiming damages at common law for the repudiation of the three contracts.

This decision is of some importance. Buyers under Shipbuilding Contracts have long been aware that in order to preserve their claims under the Refund Guarantees, they must terminate and/or rescind the contract strictly under its terms. The Court of Appeal has now brought clarity to the question as to whether or not, in those circumstances, a Buyer is also entitled to pursue a claim for damages by way of repudiation. It should be noted however, that this decision turned on the facts of the particular Shipbuilding Contract, and other contracts may have different provisions.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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