STOCZNIA GDANSKA S.A. v. LATVIAN SHIPPING CO., LATREEFER INC. AND OTHERS. [2002] EWCA Civ 889

A contractual rescission clause will not exclude common-law damages for repudiation unless clear language does so. A provision regulating the application of sale proceeds may modify the ordinary measure of recovery, but does not necessarily create an exhaustive code.

An innocent party may keep a contract alive temporarily while deciding whether to accept an anticipatory repudiation. Conduct seeking performance is not necessarily an unequivocal affirmation. Even after affirmation, a continuing refusal to perform may amount to a fresh repudiation; silence may be repudiatory when, in its commercial context, it clearly communicates continuing non-performance.

A third party may indirectly induce breach of contract by deliberately using unlawful means, including breach of its own funding obligation, to prevent performance.

A shipyard contracted with a purchaser to construct six refrigerated vessels. The purchaser paid the initial instalments but did not pay the keel-laying instalments. The shipyard terminated the first two contracts under a rescission clause and purported to terminate the remaining four after reallocating existing keels, an allocation later held invalid in an earlier House of Lords stage.

Thomas J held that the purchaser had repudiated all six contracts and that its parent company had indirectly induced those breaches by unlawfully failing to fund the purchaser. His judgment is reported at [2001] 1 Lloyd's Rep 537.

The purchaser and parent appealed. The shipyard cross-appealed on direct inducement, conspiracy and other alleged bases of liability. The central issues were the effect of clause 5.05, affirmation and continuing repudiation, and whether the parent’s conduct satisfied the tort of inducing breach of contract by unlawful means.

1. Appeal and cross-appeal dismissed unanimously. Lord Justice Rix gave the reasons, with which Lord Justice Tuckey and Lord Justice Aldous agreed. Thomas J’s conclusions were upheld.

2. Clause 5.05 did not constitute an exhaustive contractual code excluding common-law damages for repudiation. Its language concerning recovery of loss and damage, mitigation and any sale deficiency was consistent with common-law damages underpinning the contractual calculation. Where a vessel was sold, the clause made special provision for the proceeds, including any surplus payable to the purchaser. It did not otherwise displace common-law remedies. The ordinary starting point in Sale of Goods Act 1979, section 10 did not prevent the parties from making continued non-payment after the agreed grace period a condition or consensually repudiatory breach.

3. The purchaser had repudiated both of the first two contracts by the dates of rescission. In particular, continued non-payment after the 21-day period in clause 5.05 was a breach of condition, or conduct the parties had agreed should be treated as repudiatory. The shipyard could therefore recover repudiation damages, subject to the clause’s provisions concerning the proceeds of the subsequent sale.

4. The keel-laying notices for contracts 3–6 were not an unequivocal affirmation. The shipyard was seeking performance while retaining the practical position that it would terminate if performance did not occur. Alternatively, applying Safehaven v Springbok, the purchaser’s continuing refusal to perform after any assumed affirmation was a continuing repudiation. Its silence, read against its prior conduct and the commercial need for clarity, unequivocally conveyed continued non-performance.

5. The parent company had not directly induced breach: the trial judge was entitled not to infer an instruction to the purchaser’s independent directors to break the contracts. However, it indirectly induced the breaches by unlawful means. It deliberately breached its own contractual duty to keep the purchaser sufficiently funded, intending thereby to prevent performance and to force renegotiation or destroy the contracts. The unlawful withholding of funding for the first two vessels was part of the means used to procure repudiation of all six contracts.

6. The additional claims for conspiracy and unlawful interference added nothing. Quantum of the shipyard’s tort claim, including the purchaser’s possible ability to finance performance otherwise, remained for later determination.

• Court of Appeal (Civil Division): dismissed the purchaser’s and parent company’s appeals and the shipyard’s cross-appeal. It upheld the findings of contractual repudiation and indirect inducement by unlawful means.

• Commercial Court (Thomas J): held that the purchaser had repudiated all six shipbuilding contracts and that the parent had indirectly induced the breaches by unlawful means, but rejected direct inducement and conspiracy: [2001] 1 Lloyd's Rep 537.