Shipbuilding Contract - Ability to Claim Damages at Common Law

In Stocznia Gydnia SA v Gearbulk Holdings Ltd [2008] EWHC 944 Burton J overturned an arbitration award of Sir Brian Neill, subsequent to leave to appeal granted by Cooke J. The shipyard had contracted with Gearbulk to build three bulk carriers but the hulls were not delivered at all. The arbitrator found that the shipyard was in repudiatory breach of contract. Gearbulk had terminated the contracts under contractual provisions and enforced the Refund Guarantees, recovering the pre-delivery instalments it had paid. Gearbulk also sought damages at large and were initially awarded them by the arbitrator.  

The contract terms run to many pages but the decision can be considered without referring to them in any great detail here. It is sufficient to say that the contract provided at Article 10 for price reductions for delay in delivery but after a delay of 150 days, Gearbulk had the right to terminate the contract and upon such termination the shipyard were to repay all the contractual instalments paid to date by Gearbulk with interest thereon. 

Three questions, which Gearbulk needed to address to maintain their award of damages, were considered by the court: 

1. Did the contractual termination provisions constitute a complete code thus excluding common law rights of termination for these events?
2. Did the contract exclude a claim for damages in respect of these events? and
3. Whether Gearbulk were precluded from claiming to having terminated at common law given its reliance on the contractual termination provisions? 

As to the first issue, the test to apply in deciding whether parties intended to “oust” common law remedies such as to form the contract into a complete code can be found in Gilbert-Ash (Northern) ltd v Modern Engineering (Bristol) Ltd (1974) in which Lord Diplock held: 

“In construing such a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption.” 

Burton J found that the words of this contract had not ousted the rights of Gearbulk to accept repudiation at common law.  

The second question arose from a provision that said: 

“The Purchaser shall not be entitled to claim any other compensation and the Seller shall not be liable for any other compensation for damages sustained by reason of events set out in this Article and/or direct or indirect consequences of such events other than liquidated damages specified in this Article.” 

On this issue, Burton J said it would flout business common sense if that provision extended to exclude liability for repudiatory breach which on his finding on the first issue stood outside the code formulated in the Article. The Article in question provided for deductions and repayment in the event of delayed or non-delivery and did not exclude damages for repudiatory breach. 

It is the third issue that is the most interesting. The shipyard’s case on this was that having expressly referred to specific contractual rights to terminate in letters sent at the time, Gearbulk had affirmed the contracts and elected to terminate in accordance with the contract rather than by accepting the shipyard’s repudiation and as such Gearbulk were prevented from claiming damages at large. 

The letters were phrased as follows: 

“We hereby give you notice that we hereby exercise our rights of termination…and call upon you, in accordance with the provisions of Article…to repay to us immediately the predelivery instalment that we have paid to you…” 

Significantly, Gearbulk then went on the claim under the Refund Guarantees. 

 The Judge made it clear that Gearbulk’s failure to expressly accept the shipyard’s repudiation did not prevent it from later arguing retrospectively it had done so. As per Clarke J in Dalkia Utilities Services plc v Celtech International Ltd [2006] EWCH 63: 

“The same conduct may be such as to give rise to a contractual right to terminate and a common law entitlement to accept a repudiatory breach … In such a case, the innocent party can exercise either his contractual or his common law right of termination. Prima facie he can rely on both. He is not disentitled to rely on the latter on the ground that recourse to the former constitutes an affirmation of the contract since in both cases he is electing to terminate the contract for the future (i.e. to bring to an end the primary obligations of the parties remaining unperformed) in accordance with rights that are either given to him expressly by contract or arise in his favour by implication of law. If he can rely on both there is no reason in principle why, if he terminates the contract without stating the basis on which he does so, he cannot be treated as doing so under any clause which entitles him to do and in accordance with his rights at common law … Even if he refers to a particular clause upon which he relies, that would not inevitably mean that he was only relying on that clause. If that were so, an innocent party who, in the face of a repudiatory breach, terminated the contract by reference to a clause which was in fact inapplicable, might, on that account, find himself disentitled to terminate at all..” 

Up to this point Gearbulk’s claim to damages at large seemed to be maintained.  

However Gearbulk had affected a recovery of the predelivery instalments under the Refund Guarantee. Gearbulk had thus enforced a provision in the contract enabling it to obtain a secured sum against a third party, the Refund Guarantor, which right was only available to it under the contract. That guarantee was termed such that it could only be enforced should Gearbulk terminate the contract in accordance with any provisions thereof. 

Burton J reviewed United Dominions Trust (Commercial) Ltd-v Ennis [1968] 1 QB 54. In that case, the Court of Appeal found that a hire purchase agreement had been terminated, not, as asserted by the hire purchase company, by the hirer pursuant to clause 10 of the contract but rather by the hire purchase company under clause 8, which entitled the company, in accordance with the provisions of another clause of the contract, clause 11, to a minimum payment by the hirer (which in the event the Court of Appeal found to have been a penalty.) The hire purchase company sought in the alternative to contend that its termination of the contract was an acceptance of the hirer's repudiation. Even though, either way, the contract was terminated, the Court of Appeal held that the hirer had affirmed the contract, electing against acceptance of repudiation, by enforcing its terms (the minimum payment provision under clause 11), by treating the contract as "still continuing" or "binding". 

By doing as it did, Gearbulk had affirmed the contract and elected against acceptance of repudiation. It could not therefore claim damages at large, having already recovered the instalments and interest under the Refund Guarantee. Gearbulk has been granted leave to appeal to the Court of Appeal.