Stocznia Gdynia SA v Gearbulk Holdings Ltd

A contractual right to terminate for a breach which goes to the root of the contract may embody the same right as the common law right to accept a repudiation. Its exercise ordinarily carries the usual right to damages for loss of bargain.

A contract excludes valuable remedies arising by law only where its language makes that intention sufficiently clear. A provision fixing liquidated damages for lesser breaches does not, without clear wording, exclude damages following termination for a repudiatory breach.

Invoking a contractual repayment mechanism which survives termination does not affirm the contract. Nor is repayment of advance instalments inherently inconsistent with a claim for loss-of-bargain damages, provided there is no double recovery.

The Yard contracted to construct six vessels for Gearbulk. This appeal concerned three vessels which were never delivered. Gearbulk terminated the contracts, recovered its advance instalments under refund guarantees and claimed damages for loss of bargain.

The arbitrator found that the Yard had repudiated all three contracts and that the contractual termination provisions neither displaced common law termination rights nor excluded damages. On an appeal under section 69 of the Arbitration Act 1996, Burton J rejected the Yard's construction arguments but held that Gearbulk had affirmed the contracts by invoking the contractual termination and refund provisions. He varied the award accordingly in [2008] EWHC 944 (Comm).

Gearbulk appealed on affirmation and election. The Yard cross-appealed on whether Article 10 constituted an exclusive contractual code and excluded loss-of-bargain damages.

1. Appeal allowed and cross-appeal dismissed. Moore-Bick LJ, with whom Smith and Ward LJJ agreed, held that Article 10 neither displaced Gearbulk's right to treat the contracts as discharged nor excluded damages for loss of bargain. The High Court judgment was set aside and the arbitrator's award restored.

2. Where a contract grants a right to terminate for a breach which goes to the root of the contract, the contractual and common law rights may be the same in substance. The contract must be construed as a whole, in its commercial context, to determine the intended consequences. Here, the agreed thresholds for termination identified breaches which the parties intended to treat as repudiatory.

3. Article 10's introductory provisions fixed liquidated damages for lesser delay and performance deficiencies. They did not govern the consequences of termination. The reference to events covered by Article 10 was directed to events attracting liquidated damages, which were payable through a reduction in the delivery instalment. No delivery instalment became payable after termination. Article 10.7 also indicated that liquidated damages ceased to be available upon termination, leaving ordinary damages recoverable.

4. A party is unlikely to abandon a valuable remedy arising by law unless the contract makes that intention sufficiently clear. The more valuable the right, the clearer the required language. Nothing in Article 10 clearly deprived the buyer of damages for the loss of a commercially valuable bargain.

5. Termination and affirmation were inconsistent. Gearbulk's termination letters unequivocally discharged the contracts. Its right to repayment of instalments, secured by the bank guarantees, arose upon termination and was intended to survive it. Exercising that surviving right could not constitute affirmation.

6. Repayment of advance instalments was not an exclusive alternative to loss-of-bargain damages. A buyer may ordinarily recover advance payments for total failure of consideration and separately claim damages, although it cannot obtain double recovery. Article 10.7 provided an additional contractual repayment remedy rather than an exclusive remedy.

7. Acceptance of repudiation requires clear and unequivocal communication of an intention to treat the contract as discharged. Where contractual and common law rights correspond, no election between them is necessary. Gearbulk's letters were effective even where they invoked contractual provisions rather than the general law, because each clearly communicated that the contract was discharged.

1. Court of Appeal (Civil Division): In [2009] EWCA Civ 75, unanimously allowed Gearbulk's appeal, dismissed the Yard's cross-appeal, set aside the High Court judgment and restored the arbitrator's award.
2. High Court, Commercial Court: Burton J in [2008] EWHC 944 (Comm) rejected the Yard's arguments that Article 10 was an exclusive code and excluded damages, but held that Gearbulk had affirmed the contracts by using the contractual termination and refund provisions. He allowed the statutory appeal and varied the award.
3. Arbitration: Sir Brian Neill found that the Yard had repudiated all three contracts, that Gearbulk had not affirmed them and that Article 10 did not exclude termination at common law or loss-of-bargain damages. He determined liability in Gearbulk's favour.