Stocznia Gdanska SA v Latvian Shipping Co

Termination of a shipbuilding contract does not extinguish an accrued right to an instalment unless clear contractual language produces that result. A contractual remedial regime may coexist with recovery of the instalment as a debt, provided the sum is accounted for when the parties’ final liability is calculated.

Total failure of consideration depends on whether the promisor performed any contractual duty for which the payment was due. It does not depend solely on whether property or another specific benefit passed to the promisee. Design and construction may therefore constitute consideration under a shipbuilding contract before delivery.

The yard agreed to design, construct and deliver six vessels. The price was payable by instalments, including 20 per cent after notice that the first two hull sections had been joined on the berth where the vessel was being constructed. After the buyers failed to pay, the yard rescinded the first two contracts under clause 5.05. It also renumbered the same two keels successively for vessels 3 to 6 and demanded four further instalments.

Clarke J granted summary judgment for the instalments on vessels 1 and 2. Waller J refused summary judgment concerning vessels 3 to 6. The Court of Appeal, reported at [1996] 2 Lloyd's Rep. 132, held that clause 5.05 displaced the yard’s common law rights and ordered damages under that clause for all six contracts.

The principal questions were whether the later keel-laying instalments accrued, whether clause 5.05 displaced accrued debts, and whether recovery was defeated by total failure of consideration.

1. The appeal was allowed in part unanimously. Lord Goff of Chieveley delivered the leading speech. Lord Hoffmann, Lord Hope of Craighead and Lord Hutton agreed with it, while Lord Lloyd of Berwick agreed with the proposed disposal.

2. Per Lord Goff, the instalments for vessels 3 to 6 never accrued. Clause 5.02(b), construed in its contractual setting, required the hull sections to have been joined as part of constructing the particular vessel under the relevant contract. Sections joined under contracts 1 and 2 could not be appropriated unilaterally to later contracts and used repeatedly to trigger new instalments. The notices also purported to record current keel laying when the sections had actually been joined months earlier. Judgment for the buyers on those instalments was therefore upheld.

3. Per Lord Goff and Lord Lloyd, clause 5.05 did not extinguish the yard’s accrued right to recover the instalments for vessels 1 and 2 as debts. Clear words are required before a contractual remedy is construed as excluding remedies arising by law. The clause contained no such words. Recovery of an overdue instalment was compatible with the clause because it reduced the unpaid balance used in the final accounting after any sale. Clarke J’s summary judgment was restored.

4. Per Lord Goff, the relevant inquiry for total failure of consideration was whether the promisor had performed any contractual duties in respect of which payment was due, rather than whether the promisee had received property or another specific benefit. These were contracts to design, build, complete and deliver vessels, not simple contracts of sale. Design and construction formed part of the contractual consideration. Work had reached the stage at which the instalments accrued, so there was no total failure of consideration. The House followed the majority reasoning in Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 W.L.R. 1129 and declined to depart from it.

5. Per Lord Goff, the Court of Appeal’s direction that damages for vessels 3 to 6 be assessed under clause 5.05 was erroneous because no qualifying instalment default had occurred under those contracts. Its broader statement that clause 5.05 displaced all common law rights was also too sweeping. The subsequent orders of Longmore J and Colman J were set aside. Both actions were returned to the Commercial Court, where the yard could amend its claims and the buyers could respond.

1. House of Lords: Allowed the yard’s appeal in part. It restored summary judgment for the instalments on vessels 1 and 2, upheld judgment against the yard concerning the instalments on vessels 3 to 6, set aside the erroneous damages directions and subsequent orders, and returned both actions to the Commercial Court.

2. Court of Appeal: In [1996] 2 Lloyd's Rep. 132, allowed the buyers’ appeal from Clarke J, dismissed most of the yard’s appeal from Waller J, entered judgment against the yard on all disputed instalments and directed that damages for all six vessels be assessed under clause 5.05.

3. High Court, Longmore J: Struck out the yard’s particulars of damage for failure to comply with the Court of Appeal’s direction, while permitting possible reformulation.

4. High Court, Colman J: Refused permission to amend the claims to rely on anticipatory repudiation.

5. High Court, Clarke J and Waller J: Clarke J granted summary judgment for the instalments on vessels 1 and 2. Waller J refused summary judgment concerning vessels 3 to 6 and the damages claims.