Cenargo Limited v Izar Construcciones Navales SA

A contractual requirement for a vessel to have a stated number of slots of a specified length ordinarily concerns the available spaces, rather than the length of trailers placed in them. A vessel has the warranted capacity if it is capable of providing the required spaces on delivery, even though modest adjustments may be needed to correct design or workmanship defects. A liquidated damages clause should be construed by reference to the range of substantial losses the parties contemplated when contracting. It does not ordinarily extend to minor defects capable of inexpensive rectification. A contractual provision requiring calculation and payment of liquidated damages on delivery does not bar a genuine capacity claim that could emerge only during subsequent operation, absent clear words to that effect.

Two appeals arose from contracts for Spanish-built roll-on roll-off vessels. The buyers challenged the construction of contractual provisions requiring a freight capacity of at least 146 13-metre slots and claimed liquidated damages for six allegedly unavailable spaces. The builders challenged the award of $450,000 for four spaces.

The High Court held that the contract required 146 spaces of 13 metres, found four spaces deficient, and awarded liquidated damages subject to the contractual one-space margin. The central issues in the Court of Appeal were the proper construction of the capacity provisions, whether the vessel lacked the warranted capacity on delivery, whether the liquidated damages clause covered the alleged deficiency, and whether the buyers had lost the right to rely on it.

1. The buyers’ appeal was dismissed and the builders’ appeal was allowed. The contractual reference to 146 13-metre slots was construed as requiring 146 spaces, each 13 metres long. It did not require each space to accommodate a trailer longer than 13 metres to allow for clearance and manoeuvrability. The wording of Article I.4, read with Article III.5 and the specification, favoured the builders’ construction. The contractual words governed, although the general commercial considerations relied on by the trial judge were also accepted.
2. The relevant question on breach was whether, on delivery, the vessel was capable of providing the required 146 spaces. The absence of lashing points, the position of crash barriers, and hinged ventilator flaps created correctable design or workmanship defects. They did not establish a failure of the warranted carrying capacity where the spaces could be made usable by comparatively modest adjustments. The builders nevertheless accepted liability for the cost of correcting those defects, subject to the 12-month guarantee in Article X.1.
3. Assuming that Article I.4 had been breached, the resulting loss was not within Article III.5. The clause was to be construed by reference to the range of losses contemplated when the contract was made. It was not intended to cover minor defects capable of inexpensive rectification, since applying the fixed sum to trifling losses could expose the clause to challenge as a penalty. The approach was consistent with Webster v Bosanquet [1912] AC 394 and the statement in Philips Hong Kong Ltd v Attorney General of Hong Kong (1993) 61 BLR 49 at 59.
4. Obiter, the court would not have treated Articles II.2 and II.5 as barring a genuine trailer-capacity claim merely because liquidated damages were to be calculated, determined and paid on delivery. No pre-delivery test established trailer capacity, and the contract contained no sufficiently clear exclusion. Article X.5 was not apt to bar claims for breach of express contractual obligations.

• Court of Appeal (Civil Division): On 26 March 2002, the buyers’ appeal was dismissed and the builders’ appeal was allowed. The court set aside the award of $450,000 for liquidated damages and directed counsel to lodge an agreed minute dealing with consequential matters. [2002] EWCA Civ 524
• High Court of Justice, Queen’s Bench Division, Commercial Court: On 30 January 2001, Mr Justice Andrew Smith construed the capacity provisions as requiring 146 13-metre spaces, found four spaces unavailable, and awarded the buyers $450,000 under the liquidated damages clause.