The Court of Appeal has recently considered whether a termination clause in a contract excluded the common law right to treat the contract as discharged on the basis of a repudiatory breach and to claim damages.
Gearbulk ordered three bulk carriers from Stocznia. Stocznia agreed to build the container ships and deliver them to Gearbulk by a specified date. The contract gave Gearbulk the right to cancel the order and terminate the agreement if delivery was late, and also permitted Gearbulk in these circumstances to recover pre-paid instalments of the purchase price and interest (the contractual remedies). The contract excluded Stocznia's liability for 'any other compensation for damages sustained by ... delay'.
When Stocznia failed to deliver on time, Gearbulk cancelled the order and sought the contractual remedies. In addition, Gearbulk claimed damages for loss of bargain (which typically represent the additional cost of sourcing replacement goods). However, Stocznia argued that by exercising its contractual right to terminate, Gearbulk had affirmed the contract and was only entitled to claim the contractual remedies, and not common law damages for loss of bargain.
The Court of Appeal disagreed with Stocznia, finding that although the contract provided for the payment of damages as compensation for delay, there came a point when 'the delay is so serious that it should entitle Gearbulk to terminate the contract' under the common law, thus enabling Gearbulk to claim damages as well. The court consequently rejected Stocznia's argument that the contractual provisions excluded the common law right to treat the contract as repudiated and thus claim common law remedies. The court was unwilling to accept that a party would give up valuable common law rights, unless its intention to do so was clear from the terms of the contract. As a result, Gearbulk was entitled to repayment of the instalments of the price plus damages for loss of bargain.
This case highlights the need for careful drafting of termination clauses. Since a contractual termination clause does not automatically exclude a party's common law right to damages following a repudiatory breach, clear language must be used to reflect that the parties are waiving a valuable common law right. Conversely, if this is not the intention of the parties, it may be advisable to expressly reserve the right to recover common law damages in addition to any contractual remedies.
Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75
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