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

The House considered construction and effect of contractual payment and rescission provisions in six shipbuilding contracts governed by English law, in particular clause 5.02(b) (the keel‑laying instalment) and clause 5.05 (rights on rescission for non‑payment). The court held that (a) the keel‑laying instalment falls due only when the hull sections have been joined as part of the construction of that particular contract on the berth where that vessel is being built, so the yard could not trigger second instalments for hulls 3–6 by re‑numbering sections laid for hulls 1–2; (b) clause 5.05 does not, on its true construction, displace the builder's accrued common‑law right to recover unpaid instalments which had already fallen due before rescission; and (c) there was no total failure of consideration for the keel‑laying instalments on hulls 1–2 because the design and construction work formed part of the contractual consideration. The result was that summary judgment for the builder for the second instalments on hulls 1 and 2 was restored, the Court of Appeal's order directing assessment of damages under clause 5.05 in respect of hulls 3–6 was set aside, and the remaining proceedings were remitted to the Commercial Court to proceed in the ordinary way.

This is an appeal from the Court of Appeal concerning six shipbuilding contracts between a Polish yard (the appellants) and Liberian/Latvian buyers. The contracts required staged payments (clause 5.02), including a 20% second instalment payable on keel laying, and provided a remedy on purchasers' default (clause 5.05) allowing rescission, retention of paid instalments and sale of the vessel with specified application of proceeds. After keels were laid for hulls 1 and 2 and second instalments became payable but were not paid, the yard rescinded under clause 5.05 and attempted to trigger second instalments under contracts 3–6 by appropriating and re‑numbering the same physical keels.

The yard sought summary judgment for the second instalments and damages; the Commercial Court (Clarke J. and Waller J.) gave different interlocutory outcomes. The Court of Appeal held that clause 5.05 supplied an exhaustive remedy on rescission and displaced accrued common‑law rights to recover unpaid instalments, and treated the keel notices for hulls 3–6 as ineffective.

The House framed three principal issues: (1) whether the yard obtained accrued rights to the second instalments for hulls 3–6 by re‑numbering keels; (2) whether clause 5.05 displaced the builder's accrued common‑law right to recover instalments which had fallen due prior to rescission; and (3) whether recovery of the second instalments would be defeated by total failure of consideration.

• On (1) the House held clause 5.02(b) must be read to require that the sections be joined as part of the construction of the particular vessel "on the berth where the vessel is being constructed"; re‑numbering and re‑using keels laid for different contracts did not satisfy that requirement, so second instalments for hulls 3–6 did not fall due.
• On (2) the House held that clause 5.05, properly construed, does not exclude or destroy an accrued common‑law right to sue for a debt represented by an instalment which has already fallen due; the contractual sale/mitigation mechanics in clause 5.05 are consistent with recovery of accrued instalments and with the clause's scheme for applying sale proceeds.
• On (3) the House held there was no total failure of consideration in respect of the keel‑laying instalments for hulls 1 and 2 because shipbuilding contracts are contracts to design and construct as well as to transfer title, and the builder had performed work forming part of the contractual consideration.

The Lords therefore restored summary judgment for the builder for the second instalments on hulls 1 and 2, set aside the Court of Appeal order requiring assessment of damages under clause 5.05 for hulls 3–6, and remitted the actions to the Commercial Court to proceed (including permitting appropriate pleading amendments and trial of remaining issues, including anticipatory repudiation if pursued).

Appeal allowed in part. The House restored summary judgment for the yard in respect of the second (keel‑laying) instalments on hulls 1 and 2, held that clause 5.02(b) precluded the yard from triggering second instalments for hulls 3–6 by re‑numbering keels, and rejected the Court of Appeal's conclusion that clause 5.05 displaced the builder's accrued right to sue for instalments already due; there was also no total failure of consideration preventing recovery of the accrued instalments. The remaining matters were remitted to the Commercial Court for further proceedings.

Commercial Court interlocutory decisions: Clarke J. granted summary judgment for the yard as to keel‑laying instalments for hulls 1 and 2; Waller J. refused summary judgment for hulls 3–6 and gave leave to defend. Court of Appeal (28 March 1996, reported [1996] 2 Lloyd's Rep. 132) allowed the buyers' appeal from Clarke J., held clause 5.05 displaced common‑law recovery of accrued instalments and ordered damages assessed under clause 5.05; further proceedings in the Commercial Court (Longmore J., Colman J.) dealt with particulars and amendment applications. The yard obtained leave to appeal to the House of Lords, which delivered judgment ([1998] UKHL 9) restoring part of Clarke J.'s decision and setting aside parts of the Court of Appeal and subsequent orders.