Stocznia Gdanska SA v Latvian Shipping Company and Others

JurisdictionUK Non-devolved
Judgment Date26 February 1998
Judgment citation (vLex)[1998] UKHL J0226-3
Date26 February 1998
CourtHouse of Lords
Stocznia Gdanska S.A.
Latvian Shipping Co.

And Others


[1998] UKHL J0226-3

Lord Goff of Chieveley

Lord Lloyd of Berwick

Lord Hoffmann

Lord Hope of Craighead

Lord Hutton



My Lords,


This appeal arises out of proceedings relating to six shipbuilding contracts dated 11 September 1992, each for the construction of a single refrigerated vessel (commonly known as a reefer vessel). The appellants, Stocznia Gdanska S.A., who are the plaintiffs in the proceedings, are Polish shipbuilders who contracted to build the ships for Latreefers Inc., a Liberian company which is a wholly owned subsidiary of Latvian Shipping Co. In substance, therefore, the dispute is between Polish shipbuilders and Latvian buyers. There were in fact five defendants in all in the proceedings, Latvian Shipping Co. being the first defendants, and Latreefers Inc. being the second defendants; but Latreefers Inc., as parties to the shipbuilding contracts, are the sole respondents to the present appeal. I shall for convenience refer to the appellants as "the yard" and to the respondents as "the buyers."


The shipbuilding contracts


Under each of the contracts, the yard undertook (see clause 2.01) to "design, build, complete and deliver" the vessel, property in the vessel not passing to the buyers until delivery (see clause 11.01). The price (see article 4) was U.S.&$27,639,000 each for vessels 1 to 3; originally the price for each of vessels 4 to 6 was U.S.&$28,839,000, but this was later increased to U.S.&$29,119,000. Article 5 is entitled "terms of payment." Provision was made in clause 5.02 for the price to be paid in four instalments. Broadly speaking these were as follows: (a) five per cent. within seven banking days after receipt by the buyers of a bank guarantee to be furnished by the yard; (b) 20 per cent. within five banking days after the yard had given notice to the buyers of keel laying (defined in the clause as meaning that "the first and second sections of the vessel's hull have been joined on the berth where the vessel is being constructed"); (c) 25 per cent. within five banking days after the yard had given notice to the buyers of the successful launching of the vessel; and (d) the balance of 50 per cent. upon delivery of the vessel. Clause 5.05, which lies at the heart of the present case, provided for the rights of the parties following default by the buyers in the payment of any amount due under instalments (b), (c) or (d). Article 6 made provision for supervision by the buyers during the period of building. By clause 12.01, the contracts were to be governed by English law.


I shall now set out the text of clause 5.05 in full. I have, like the Court of Appeal, numbered the four paragraphs of the clause, in which the yard is referred to as "the seller" and the buyers as "the purchaser;" and I have also numbered in roman numerals the sub-paragraphs of paragraph (3).

"(1) If the purchaser defaults in the payment of any amount due to the seller under sub-clauses (b) or (c) or (d) of clause 5.02 for twenty-one (21) days after the date when such payment has fallen due the seller shall be entitled to rescind the contract. "(2) In the event of such rescission by the seller of this contract due to the purchaser's default as provided for in this clause, the seller shall be entitled to retain and apply the instalments already paid by the purchaser to the recovery of the seller's loss and damage and at the same time the seller shall have the full right and power either to complete or not to complete the vessel and to sell the vessel at a public or private sale on such terms and conditions as the seller deems reasonable provided that the seller is always obliged to mitigate all losses and damages due to any such purchaser's default. "(3) The proceeds received by the seller from the sale and the instalments already paid and retained shall be applied by the seller as mentioned hereinabove as follows: (i) First, in payment of all reasonable costs and expenses of the sale of the vessel. (ii) Second, if the vessel has been completed, in or towards satisfaction of the unpaid balance of the contract price, or if the vessel has not been completed in or towards satisfaction of the unpaid amount of the cost incurred by the seller prior to the date of sale on account of construction of the vessel, including work, labour and materials which the seller would have been entitled to receive if the vessel had been completed and delivered. (iii) Third, the balance of the proceeds, if any, shall belong to the purchaser and shall forthwith be paid over to the purchaser by the seller. "(4) In the event of the proceeds from the sale together with payments retained by the seller being insufficient to pay the seller, the purchaser shall be liable for the deficiency and shall pay the same to the seller upon its demand."


The course of events


In 1992 work began on vessels 1 and 2. It is the yard's case that design, ordering and construction work was carried out during 1992 and 1993 pursuant to all six contracts; but, apart from work carried out in the course of laying keels for vessels 1 and 2, this is not accepted by the buyers. The first instalments of the price for all six vessels were duly paid.


However, in July 1993 agents for the buyers raised queries as to the price payable under all six contracts, and then in October 1993 drew attention to problems in obtaining finance for the vessels. There followed a specific proposal for a 20 per cent. reduction in the price for each vessel, together with a five-year deferral of payment of &$4m. of the new reduced price and delayed delivery of all the vessels, both of which would have disrupted the yard's cash flow and work programme. It was said that this proposal was due to a downturn in the reefer market; but it is the yard's case (though this is not admitted by the buyers) that the market was already in downturn when both sets of contracts were placed in late 1992 and early 1993. Following further meetings, the buyers' agent informed the yard by letter dated 3 December 1993 that, although the buyers wanted the vessels, taking delivery of them might be impossible.


On the same day, 3 December 1993, the keel of vessel 1 was laid, and a keel laying notice was served on the buyers. However, the second instalment for vessel 1 was not paid, and the yard then served on the buyers a notice rescinding the contract under clause 5.05. The same happened with vessel 2. The keel was laid on 9 March 1993, and a keel laying notice was served; but the second instalment for this vessel too was not paid, and again the yard served a notice rescinding the contract under clause 5.05.


There followed a series of controversial events, as the yard sought to take advantage of the keels laid for vessels 1 and 2 in order to trigger the second instalments, first for vessels 3 and 4, and then for vessels 5 and 6. The purpose of the yard in doing this was plainly to secure accrued rights to the second instalments for all four of these vessels, thereby putting itself in a stronger financial position than it would have been in if it only had a right to claim damages. At all events, the keels which had originally been laid in connection with the contracts for vessels 1 and 2 were simply renumbered for vessels 3 and 4, and fresh keel laying notices were then served on 14 and 15 April 1994. The second instalments for these vessels were not paid, and on 16 May 1994 the yard gave notice rescinding the contracts for the two vessels under clause 5.05. Exactly the same procedure was then followed in respect of vessels 5 and 6, appropriating the same keels to the contracts for these two vessels, and serving keel laying notices in respect of them. Predictably, the second instalments were not paid, and again the yard gave notice of rescission of both contracts under clause 5.05. Whether the yard was entitled to act in this way constitutes an important issue in the present litigation. Subsequently, by two contracts of sale dated 20 September 1994, the yard agreed to sell two hulls to Lorient Maritime for U.S.&$22.5m. each, and appropriated the two keels to these contracts. The terms of the contracts between the yard and Lorient Maritime were substantially the same as the terms of the six contracts between the yard and the buyers.


The proceedings: the two actions.


The yard commenced two actions against (among others) the buyers. In the first action, the yard claimed the second instalment in respect of vessel 1, and apparently also vessel 2 (presumably by amendment, though the amendment was not before your Lordships). In the second action, the yard claimed the second instalments in respect of vessels 3-6. The yard asserted that the buyers had repudiated all six contracts and further claimed, in respect of each contract, that it was entitled to recover damages in addition to the second instalment, after it had rescinded the contract under clause 5.05 for non-payment of the instalment.


Clarke J. An application was made by the yard for summary judgment in respect of the second instalments of the price for vessels 1 and 2 alone. On 5 December 1994, Clarke J. granted the application. In so doing, he rejected a number of arguments advanced by the buyers. In particular, he held that the instalments remained due and owing, despite the rescission of the two contracts under clause 5.05, and rejected as unarguable a submission by the buyers that, on rescission, they were entitled under clause 5.05 to recover instalments already paid. He also held that there had been no total failure of consideration, because the contracts were not just for sale but for the construction and sale of the vessels, the construction forming part of the contract consideration;...

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