Paal Wilson & Company A/S v Partenreederei Hannah Blumenthal

Since the speech to be delivered by my noble and learned friend, Lord Brandon of Oakbrook, will be the principal speech in this appeal, I have asked him, with the agreement of all your Lordships, that it should be delivered first. Such observations as I shall myself be making are intended to be supplementary to and in amplification of some parts of it; and I understand that those to be made by my noble and learned friends, Lord Roskill and Lord Brightman, are intended by them to be regarded in the same light.

The facts in this appeal and cross-appeal (in which I shall refer to the parties as "the Buyers" and "the Sellers" respectively), are sufficiently stated in the speech of my noble and learned friend, Lord Brandon of Oakbrook. I agree with and adopt his reasons for allowing this appeal; but, as author of the speech which constitutes the ratio decidendi of this House in Bremer Vulkan v. South India Shipping [1981] A.C. 909, it may not be inappropriate for me, in support of his reasoning, to add my own somewhat more detailed analysis of the concept of rescission of contract by abandonment and of the legal nature of the obligations assumed by the parties to a commercial contract under an arbitration clause contained in it.

In my view, the decision of the majority of the Court of Appeal in the instant case, from which Griffiths L.J. dissented, can only be upheld either:

( a) by holding that the agreement resulting from the submission of particular disputes that had arisen between the Buyers and the Sellers to arbitration under the arbitration clause in the Sale Agreement (which I will call "the arbitration agreement") had been abandoned; or

( b) by over-ruling the decision of this House in Bremer Vulkan.

I will deal first with abandonment and in doing so, and later in dealing with the obligations assumed by the parties under an arbitration clause in a commercial contract, I shall use the expressions "primary and secondary obligations" under a contract in the sense that I used them in Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827 and in Bremer Vulkan itself. Since I shall be dealing with bipartite synallagmatic contracts only, I will leave the adjectives to be understood whenever I speak of "contract".

Abandonment of a contract ("the former contract") which is still executory, i.e. one in which at least one primary obligation of one or other of the parties remains unperformed, is effected by the parties entering into a new contract ("the contract of abandonment") by which each party promises the other to release that other party from further performance of any primary obligations on his part under the former contract then remaining unperformed, without such non-performance giving rise to any substituted secondary obligation under the former contract to pay damages.

It is the latter part of the promise by each party, i.e. the release of the other party from all further secondary as well as primary obligations, that distinguishes the legal concept of abandonment of the former contract from the extinction of unperformed primary obligations of both parties under the former contract by fundamental breach of a primary obligation (or breach of condition) by one of them, followed by the election of the party not in breach to put an end to all primary obligations of both parties under the former contract remaining unperformed. Unlike the contract of abandonment this leaves the secondary obligations under the former contract of the party who committed the breach enforceable against him by the other party.

To the formation of the contract of abandonment, the ordinary principles of the English law of contract apply. To create a contract by exchange of promises between two parties where the promise of each party constitutes the consideration for the promise of the other, what is necessary is that the intention of each as it has been communicated to and understood by the other (even though that which has been communicated does not represent the actual state of mind of the communicator) should coincide. That is what English lawyers mean when they resort to the Latin phrase consensus ad idem and the words that I have italicised are essential to the concept of consensus ad idem, the lack of which prevents the formation of a binding contract in English law.

Thus if A (the offeror) makes a communication to B (the offeree) whether in writing, orally or by conduct, which, in the circumstances at the time the communication was received, (1) B, if he were a reasonable man, would understand as stating A's intention to act or refrain from acting in some specified manner if B will promise on his part to act or refrain from acting in some manner also specified in the offer, and (2) B does in fact understand A's communication to mean this, and in his turn makes to A a communication conveying his willingness so to act or to refrain from acting which mutatis mutandis satisfies the same two conditions as respects A, the consensus ad idem essential to the formation of a contract in English law is complete.

The rule that neither party can rely upon his own failure to communicate accurately to the other party his own real intention by what he wrote or said or did, as negativing the consensus ad idem, is an example of a general principle of English law that injurious reliance on what another person did may be a source of legal rights against him. I use the broader expression "injurious reliance" in preference to "estoppel" so as to embrace all circumstances in which A can say to B: "You led me reasonably to believe that you were assuming particular legally enforceable obligations to me", of which promissory or Hightrees estoppel affords another example; whereas "estoppel", in the strict sense of the term, is an exclusionary rule of evidence, though it may operate so as to affect substantive legal rights inter partes.

In the instant case, as in most cases where abandonment of a former contract is relied on, the contract of abandonment of the arbitration agreement is said by the Sellers to have been created by the conduct of the parties, consisting of their common inaction, after the Buyers' letter of 12th December 1979. Where the inference that a reasonable man would draw from the prolonged failure by the claimant in an arbitration procedure is that the claimant is willing to consent to the abandonment of the agreement to submit the dispute to arbitration and the respondent did in fact draw such inference and by his own inaction thereafter indicated his own consent to its abandonment in similar fashion to the claimant and was so understood by the claimant, the court would be right in treating the arbitration agreement as having been terminated by abandonment. In André & Cie v. Marine Transocean Ltd. (The Splendid Sun) [1981] 1 Q.B. 694, all three members of the Court of Appeal drew such an inference from the conduct of both parties in the arbitration. That case was, in my view, rightly decided, though not for reasons other than those which were given by Eveleigh and Fox L.JJ.

The facts in the instant case, however, are very different from those of The Splendid Sun. As my noble and learned friends Lord Brandon of Oakbrook and Lord Brightman both point out, they are inconsistent with any actual belief on the part of the Sellers that the Buyers had agreed to abandon the arbitration before their letter of 30th July, which stated their intention of continuing with it.

Your Lordships were urged to hold that the absence of any actual belief on the part of the Buyers did not matter so long as someone in the Buyers' position could not unreasonably have drawn the inference from the apparent inaction of the Buyers that they had abandoned the arbitration at some date between their letter of 12th December 1979, when they were manifestly treating the arbitration as being still alive, and 30th July 1980, when they wrote to the Sellers forwarding their expert's report and asking for a hearing date for the arbitration to be fixed. The absence of actual belief on the Sellers' part that the Buyers had abandoned the arbitration, however, would mean that there had in fact been no injurious reliance by the Sellers; and to treat that ingredient of consensus ad idem as unnecessary would introduce into the law of contract a novel heresy which your Lordships should, in my view, be vigilant to reject.

Applying the orthodox concept of termination of contract by abandonment, neither the trial judge nor any member of the Court of Appeal was prepared to hold that the Sellers were entitled to succeed on this ground; and even if your Lordships yourselves felt some doubt upon this issue, which I myself do not, I agree with my noble and learned friends that your Lordships would hesitate long before upsetting the unanimous decision of the judges in the lower courts on what, upon a proper application of the law of contract, is essentially a question of fact.

In considering the question of abandonment, I found of great assistance the tabulated chronology of events which the parties agreed and tendered to your Lordships after the cases had been prepared. Your Lordships may feel that such a chronology would be welcome and time-saving in many other appeals, particularly if lodged before the start of the hearing.

My Lords, as respects the propriety of this House declining to follow its own recent decision in Bremer Vulkan I have nothing to add to what is said on this topic by my noble and learned friends, Lord Roskill, Lord Brandon of...