Stocznia Gdanska SA v. Latvian Shipping Co and Others [1998] UKHL 9; [1998] 1 All ER 883; [1998] 1 WLR 574 (26th February, 1998)

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	United Kingdom House of Lords Decisions
You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Stocznia Gdanska SA v. Latvian Shipping Co and Others [1998] UKHL 9; [1998] 1 All ER 883; [1998] 1 WLR 574 (26th February, 1998) URL: http://www.bailii.org/uk/cases/UKHL/1998/9.html Cite as: [1998] UKHL 9, [1998] 1 WLR 574, [1998] WLR 574, [1998] 1 All ER 883

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."

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).

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 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; and he rejected an argument, based on White & Carter (Councils) Ltd. v. McGregor [1962] AC 413, that in the circumstances the yard had acted wholly unreasonably in proceeding to lay the keels.

Waller J. A second application was made by the yard for summary judgment, in respect of the second instalments of the price for vessels 3, 4, 5 and 6, and for damages to be assessed in respect of all six contracts. The application was heard by Waller J., who refused it on 23 November 1995. In relation to the second instalments, he held that it was arguable that, on the terms of clause 5.02, the yard was not entitled simply to renumber the keels constructed for vessels 1 and 2 and then use them to claim the second instalments for other vessels. He refused judgment for damages to be assessed because the yard was pursuing "the article 5 route", and that would have to be completed before there could be any assessment of damages.

The Court of Appeal. There followed appeals to the Court of Appeal from both judgments. On 28 March 1996 the Court of Appeal gave judgment, holding that the effect of clause 5.05 was that, if the yard rescinded the contract under the clause by reason of the buyers' default, its rights were governed exclusively by the regime under the clause and its common law rights were displaced by that regime. It followed that none of the second instalments was recoverable by the yard, and judgment was entered for the buyers on that point under Order 14A. The court indicated that, but for the effect of clause 5.05, the instalments for vessels 1 and 2 would have been recoverable by the yard, but the instalments for vessels 3 to 6 would not because, on the facts, the terms of clause 5.02(b) were not complied with. In the result the Court of Appeal allowed the buyers' appeal from the decision of Clarke J., but "for the most part" dismissed the yard's appeal from the decision of Waller J., and ordered that the yard's damages should be assessed in accordance with clause 5.05 in respect of all six vessels.

It is from that decision that the yard now appeals to your Lordships' House, with the leave of this House. However, in the meantime further proceedings have taken place. Pursuant to the order of the Court of Appeal that damages be assessed under clause 5.05, a consent order was made by Moore-Bick J. that the yard should serve particulars of the damages claimed by it. This the yard did, claiming damages calculated in the traditional manner for loss of profit and wasted expenditure but giving credit in respect of the sale to Lorient Maritime. The buyers considered that this claim did not accord with the order of the Court of Appeal that damages be assessed under clause 5.05, and applied for an order that the particulars should be struck out as not complying with the Court of Appeal's order.

Longmore J. On 3 October 1996 Longmore J. gave judgment on the application. With regard to the yard's claim for damages in respect of vessels 1 and 2, he held that the particulars of damage did not comply with the order of the Court of Appeal and struck them out. He refused however to dismiss the yard's claim, leaving it open to the yard to reformulate it to bring it into line with clause 5.05, and he made a declaration with regard to the form that it should take. With regard to vessels 3 to 6, he felt a difficulty because, since the Court of Appeal held that the second instalments for these vessels never became due, it was not clear to him whether the contract was brought to an end under clause 5.05. The yard proposed to reformulate its claim to allege that the buyers were in repudiatory breach of these four contracts, and that the builder was entitled to, and did, accept the repudiation and was justified in bringing the contracts to an end on that basis. Longmore J., however, thought it right for him to comply strictly with the order of the Court of Appeal that damages were to be assessed in accordance with clause 5.05, and so, since the yard's particulars of damage in respect of these four contracts did not comply with the Court of Appeal's order, he struck them out as well. He declined however to make a declaration as to the form of the claim, because he considered that the claim in respect of these four vessels would on any view have to be reconstituted.

Colman J. There followed an application by the yard to amend its points of claim in both actions to claim damages on the basis that the buyers were in anticipatory repudiation of all six contracts. It was common ground that the buyers' conduct amounted to an anticipatory repudiation of all six contracts. On that basis the yard alleged that it accepted the repudiation and so became entitled to recover damages at common law as distinct from compensation under clause 5.05, thereby escaping from the restricted damages regime under clause 5.05 and the problem relating to vessels 3 to 6. In answer to this application, the buyers took a number of points, two of which Colman J., who heard the application, held (in his reasons for judgment dated 6 March 1997) to be fatal to the application. The first was that the proposed amendments raised a series of claims which, if pursued, had no prospect of success. Colman J. had no doubt that, at least by 3 December 1993, the buyers were in anticipatory breach of all six contracts. It was then open to the yard to treat each contract as terminated, but it did not do so. Instead, it proceeded to operate the contractual machinery for putting the buyers under an accrued liability to pay the second instalments. This conduct was, he held, entirely inconsistent with an intention to treat the contracts as at an end by reason of anticipatory breach, and so the yard, having elected to continue to enforce the contracts, could not revert to its right to terminate the contracts on the ground of anticipatory breach. Second, since the Court of Appeal had given judgment for damages to be assessed under clause 5.05 (at least in relation to the first two contracts), it was too late to introduce a different allegation of liability. Third, the yard having failed in the previous litigation to advance its alternative claim based on anticipatory breach, it would, by reason of the principle stated by Wigram V.-C. in Henderson v. Henderson (1843) 3 Hare 100, 114-115, be an abuse of process for it now to be allowed to pursue its reformulated claim on that basis.

With this preamble, I now turn to consider the appeal to your Lordships' House. Three main issues were developed before the Appellate Committee: (1) whether the yard acquired accrued rights to the second instalments of the contract price in respect of vessels 3 to 6; (2) the impact of clause 5.05 on the yard's right to recover second instalments of the price; and (3) whether the yard's action to recover second instalments of the price must fail because, if recovered, they would immediately be repayable on the ground of total failure of consideration. I shall consider each of these three issues in turn. A fourth issue, based on White & Carter (Councils) Ltd. v. McGregor [1962] AC 413, was the subject of argument; but on the view which I take of the case that point no longer arises for decision in connection with vessels 3 to 6, and Mr. Glennie decided, rightly in my opinion, not to pursue the point in relation to vessels 1 and 2. It is therefore unnecessary for me to consider it in this opinion.

During the argument, counsel drew attention to the decisions of Longmore J. and Colman J. to which I have already referred. A suggestion was made that your Lordships' House might rule on those decisions as part of a global consideration of the case; and as a consequence, further written cases were submitted to the Appellate Committee. I shall consider this suggestion at the end of this opinion.

It is not in dispute that the yard acquired accrued rights to the second instalments of the price under contracts 1 and 2. There is however a serious dispute whether they did so under the remaining four contracts. As I have already recorded, the yard sought to take advantage of the keels already laid under contracts 1 and 2 in order to trigger payment of the second instalments first under contracts 3 and 4 and then, when predictably the buyers failed to pay the second instalments under those contracts, under contracts 5 and 6.

At first sight, it seems surprising that the yard should be entitled to proceed in this way under contracts 3 to 6. How can it be right, the buyers asked, that the keels constructed for contracts 1 and 2 could, so to speak, be used again to trigger further instalments under four other contracts before being finally incorporated into the ships built for Lorient Maritime? This question calls for an answer; though it is fair to comment that the adverse reaction, intended to be provoked by the question, is likely to stem more from the repetitive use of the keels in circumstances in which it was known that the buyers were unable to pay for any of the vessels, than from the simple fact of re-using a keel for a second vessel to be built under an identical specification.

In fact, the problem falls to be solved by the ordinary process of construction of the relevant contractual provision. This is clause 5.02(b), which legislates for the second instalment and provides that the instalment is to be paid:

Rival submissions were advanced before the Appellate Committee as to the effect of this provision. For the buyers, Mr. Glennie drew attention in particular to the words of the clause which required that the sections should have been joined "on the berth where the vessel is being constructed." In the present case, he pointed out, they were joined on the berth where vessels 1 and 2 were being constructed, not on the berths where vessels 3 and 4, or 5 and 6, were being constructed. It was this argument which persuaded the Court of Appeal to hold, in three terse sentences, that the keel laying notices in respect of vessels 3 to 6 were ineffective. Furthermore, it was suggested, to hold otherwise would deprive the buyers of their right of supervision of the construction of the keels for the last four vessels. For the yard, Mr. Cordara pointed out that what triggers the obligation to pay the instalment is not the keel laying as such, but the giving of a notice that the first and second sections "have been joined" on the relevant berth, together with simultaneous confirmation of that fact by the classification society. Furthermore there was, he submitted, no basis for the contention that each keel had to be constructed under the particular shipbuilding contract. As for supervision, the buyers did in fact supervise the laying of both keels, so they were not in fact deprived of any right to supervise; and there was no contractual requirement for the yard to build the vessel in any particular way, so that (for example) prefabrication was not excluded. Lastly he claimed that the re-use of the keels "probably" constituted fulfilment by the yard of its duty to mitigate its damage.

I am bound to say that I did not find Mr. Cordara's argument on mitigation persuasive. It could hardly be said that the incorporation by the yard of the keels for vessels 1 and 2 into vessels 3 and 4, and then into vessels 5 and 6, was done in exercise of the yard's duty to mitigate, when, as the yard knew, the buyers had already made it plain that they were unable to pay for any of the vessels. The yard's purpose was, of course, quite different. Mitigation did not occur in this respect until the keels were incorporated into the vessels built for Lorient Maritime. But that apart, there was considerable force in Mr. Cordara's submission, which merited far greater consideration than was given to it by the Court of Appeal. In particular, I am satisfied that the essential function of clause 5.02(b), like (a), (c) and (d), was to identify the event of which notice had to be given to trigger the relevant payment, rather than to legislate for the manner in which the keel was to be laid, i.e. the sections were to be joined.

But what was that event? On the yard's argument, it was that the stage had been reached when it was appropriate for the second instalment to be paid; and the stage so chosen was when the two sections were in fact joined together on the relevant berth, so that construction could proceed from that point. The buyers' answer was that, under the clause, the stage was chosen because it showed that construction of the vessel under the contract had reached a certain stage, viz. that the two sections had been joined on the berth where the vessel was being constructed. To that the yard riposted--this is absurd. There are the two sections, which comply with the contract specification, and are joined together; and there they are, on the berth where construction of the vessel is going to take place. Moreover, the buyers were really requiring that the two sections must be dismantled, and then joined together again on the same berth. The answer of the buyers was to take their stand on the words used in the clause, which contemplated that the sections would be joined on the berth where the vessel was being constructed, as part of the construction of the vessel under the contract. Moreover this, I imagine, reflected the normal practice, because it does not seem sensible to join the sections elsewhere and then transport them together to the berth where the remainder of the construction of the vessel is to take place.

I have come to the conclusion that, in a case such as this, it is right that the buyers' argument should be preferred because it is most consistent with the intention of the parties as contained in the words of the contract. In truth, what the yard was doing was to appropriate to contracts 3 and 4 (and subsequently to contracts 5 and 6) sections which had been joined as part of the construction of a vessel being built under a different contract. There was nothing to stop them doing that, if the buyers agreed. In normal circumstances, it might well be possible to obtain such agreement; but in a case such as the present, there was no chance of it being obtained. Moreover, if the yard's argument is right, they were entitled to do this as of right in a case where the contracts in question were with different buyers. In such a case it would be most surprising if the yard could so proceed without first obtaining the consent of the second buyer. On the buyers' construction of the clause, such a step would not be open to the yard. Furthermore their construction fully recognises the right of the buyers to supervise the construction of the vessel under their contract with the yard. The fact that, in the present case, the buyers happened to have the opportunity of supervising the joining of the sections under previous contracts is of no relevance to the construction of the clause.

Moreover, as I read the clause, the buyers' argument is supported by the clear intention that the required notice should be a notice of the fact that the keel has been laid, i.e. that the relevant sections of the vessel's hull have been joined. It cannot, in my opinion, have been intended that the yard should give, possibly months after the event, a generalised notice of the fact that the keel had been laid in the past instead of giving notice of the event of keel laying and specifying the date on which that event occurred. Obviously, it would in normal circumstances be in the interests of the yard to give the notice as soon as possible after the keel was laid; but in the present case we find the yard giving notices in respect of vessels 3 to 6 long after the keels which were the subject of the notices had in fact been laid.

This approach, which supports the submission of the buyers, receives confirmation from the form of the notices actually given by the yard under the clause. So, for vessel 1, the yard gave notice on 3 December 1993 that the keel "has today been laid;" and the classification society confirmed that "bottom sections D1 and D2 have been joined on the slipway on 3 December 1993." Likewise, for vessel 2, the yard gave notice on 14 March 1994 that the keel "has been laid on 9 March 1994," and the classification society confirmed that "bottom sections D9 and D10 have been joined on the slipway on 9 March 1994." Obviously the dates so given relate to the actual joining of the sections.

It is, moreover, of significance that, when notices came to be given for vessels 3 to 6, the yard and the classification society still clung to the same form of wording, viz. that the keel has been laid, or the sections have been joined on the slipway, on a certain date. Thus, for example, in the case of vessel 4 we find the yard stating that the keel "has been laid today, 15 April 1994," and the classification society confirming that the bottom sections "have been joined on the slipway on the 15 April 1994." Notices and confirmations were given in similar terms for vessels 3, 5 and 6. These notices and confirmations were, on their face, incorrect. The true position was that the keels had been laid, i.e. the sections had been joined, some months previously, on the berths where vessels 1 and 2 were then being constructed under different contracts. However, a notice which conveyed that message would not, in my opinion, have been a notice which complied with the terms of clause 5.02(b) in respect of vessels 3 and 4, or vessels 5 and 6.

For these reasons, I find myself to be in agreement with the conclusion reached on this point by the Court of Appeal. I must confess that I would have felt happier if the matter had been canvassed at trial in the normal way, as Waller J. ordered, rather than decided on an application for summary judgment under Order 14, especially as the applicant for summary judgment (the yard) was contending for the opposite conclusion. However, after all this time and after a number of further steps have been taken in the proceedings, I am most reluctant to send this matter back for trial; and, having reached a clear conclusion as a matter of construction, which is the same conclusion as that reached by the Court of Appeal, I am content simply to uphold the decision of the Court of Appeal on this point.

The impact of clause 5.05 on the yard's accrued right to recover instalments of the price

I now turn to the impact of clause 5.05 on the yard's right to recover the keel-laying instalments in respect of vessels 1 and 2, its right having accrued before the date when the yard rescinded contracts 1 and 2 under clause 5.05(1). It was the submission of Mr. Glennie, for the buyers, that clause 5.05 provides an exhaustive code governing the yard's rights and remedies in the event of a rescission under the article for non-payment of an instalment due under clause 5.02(b), (c) or (d); and that the effect was to exclude what would otherwise have been the yard's right at common law to sue for such an unpaid instalment as a debt. This submission was rejected by Clarke J. but was accepted by the Court of Appeal, who then ordered that damages should be assessed under clause 5.05 in both actions, i.e. in respect of all six contracts. Since however the Court of Appeal held that the yard was not entitled to rescind any of contracts 3 to 6 under clause 5.05 on the ground of non-payment of the second instalment, because it had not given any valid notice as required under clause 5.02(b), it followed that clause 5.05 had no application in respect of these four contracts (as Longmore J. appreciated, though he felt obliged loyally to give effect to the Court of Appeal's order in this respect). As I have already indicated, I agree with the conclusion of the Court of Appeal that no such notice was given under those contracts. It follows that, as Mr. Glennie recognised, the question of the impact of clause 5.05 arises only in relation to contracts 1 and 2, on the appeal from Clarke J. I am satisfied that, on this point, Clarke J. reached the right conclusion, for essentially the correct reasons. Even so, I propose to set out my reasons for agreeing with him in my own words.

I start by recording that, as Mr. Cordara for the yard pointed out, to deprive the seller of such a right could have serious consequences for him. The basis for winding up the purchaser by reference to the unpaid instalment could be lost; a guarantor of the instalment might cease to be liable under his guarantee; and an assignment or charge of the debt to a third party could lose its value. Considerations such as these lend added weight in this context to the familiar principle of construction that clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law: see, e.g., Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689, 717, per Lord Diplock. I can find no such expression of intention on the part of the seller that he should, by exercising his right of rescission under clause 5.05(2), abandon his right at common law to recover as a debt unpaid instalments of the price which have already accrued due. I would, however, go further. For I am satisfied that, on a true construction of clause 5.05, the recovery of such instalments is consistent with the provisions of the article applicable in the event of a rescission.

Under clause 5.05(2), 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 auction." The Court of Appeal expressed the opinion that this provision imposed on the seller an obligation to sell the completed or uncompleted vessel. But this is not what clause 5.05(2) says; and there may be circumstances in which there is no buyer available, or in which the seller's duty to mitigate requires a different course to be taken. At all events the article contemplates that, if a sale takes place, it may occur either when the vessel has or has not been completed, and makes provision for the application of the proceeds of sale (after deducting the reasonable costs and expenses of the sale) in either circumstance.

I take first a sale where the vessel has been completed. In such a case the seller is required to apply the proceeds received by him from the sale, and the instalments already paid and retained by him, in or towards the satisfaction of the unpaid balance of the contract price. However, as the Court of Appeal pointed out, the instalments already paid must first be taken into account in order to identify the amount of the unpaid balance of the contract price. Then the proceeds of the sale fall to be applied in or towards the satisfaction of the balance. Any balance of the proceeds goes to the purchaser, and any deficiency has to be made good by him on demand. This provision makes perfectly good sense, the intention being that the seller shall receive the full contract price; and, since the price reflects the element of profit, he will be indemnified against his loss of profit.

I feel bound to say that I can find nothing in this provision inconsistent with the seller being entitled to enforce his accrued right to recover an unpaid instalment as a debt at common law. Indeed, his right to recover such an instalment arises under another provision (clause 5.02(b)) of the same contract, and I can see no reason why that article and clause 5.05 should not, in the absence of any contrary intention, be construed so as to live together. Let it be supposed that the seller does enforce his right to recover an accrued instalment which remains unpaid. If he recovers the instalment, the effect will be to reduce pro tanto the unpaid balance of the contract price, and so reduce the amount in or towards satisfaction of which the proceeds of sale fall to be applied. The result is either that the deficiency which the purchaser has to pay will be reduced, or that the balance to be paid to him will be increased. I can detect no inconsistency here.

The same is true of the case where the vessel has been sold in an uncompleted state. The applicable provision, in clause 5.05(3)(ii), is a little obscure; but it is plain that in order to establish the extent of any balance or deficiency, it will be necessary to take into account any instalments paid and retained by the seller; and any accrued instalment still unpaid which the seller recovers as a debt at common law will likewise fall to be taken into account for that purpose.

I wish to add that the provisions contained in paragraphs (3) and (4) of clause 5.05, regarding the application by the seller of proceeds of sale, only apply where the seller has sold the vessel, either completed or uncompleted. If the seller has not sold the vessel, the only applicable provision appears to be the provision in paragraph (2) that 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. If that is right then, in such a case, there is again nothing inconsistent with the seller enforcing an accrued right to recover an unpaid instalment as a debt.

It is recorded in the agreed statement of facts and issues in the present case that:

As Mr. Cordara for the yard pointed out to the Appellate Committee, it is wholly at large whether in these circumstances there was any sale of "the vessel" within clause 5.05 of the contract between the yard and the buyers. It could, I suppose, be argued either that the two "vessels" were sold in their uncompleted state when the two keels were appropriated to the contracts for the two vessels to be built for Lorient Maritime, or that the building of those two vessels under those contracts with the keels so appropriated constituted, for the purposes of clause 5.05 of contracts 1 and 2 in the present case, the completion of the vessels being built for the buyers. Whether either argument is likely to be pursued, your Lordships do not know. Certainly, neither was advanced before the Appellate Committee; and in these circumstances I do not consider it appropriate for your Lordships to express any opinion upon them. In any event it is my opinion, for the reasons I have already given, that it makes no difference for present purposes whether there was a sale or not, for in either event there is no inconsistency between clause 5.05 and the enforcement by the yard of its accrued right to recover unpaid instalments of the price as a debt at common law.

Finally on this aspect of the case I wish to record that the conclusion which I have reached on this point of construction is consistent with the conclusion reached by the House of Lords in Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129 on a shipbuilding contract in substantially similar terms to that in the present case. The Court of Appeal in the present case sought to distinguish the Hyundai case on the basis that the right of cancellation there conferred on the builder was expressed to be "in addition to such other rights, powers and remedies as the builder may have elsewhere in this contract and/or at law, at equity or otherwise." I do not however read the decision of the majority in that case as being dependent on that provision: see in particular p. 1141B-E per Lord Edmund-Davies, and p. 1148B-G, per Lord Fraser of Tullybelton. I shall have to consider the Hyundai case in more detail in the next section of this opinion.

It is for these reasons that I prefer the conclusion of Clarke J. on this point to that of the Court of Appeal.

It was recognised by Mr. Glennie for the buyers that the second (keel-laying) instalments of the price payable in respect of vessels 1 and 2 accrued due under clause 5.02(b). However he submitted that, after rescission of the contracts, an action by the yard for the recovery of the instalments must fail because, if paid, the instalments would immediately be recoverable by the buyers on the ground that they had been paid for a consideration which had wholly failed. It was Mr. Glennie's submission that there would in such circumstances have been a total failure of consideration, because the buyers would have received nothing under the contract, no property in the vessel or any part of it having been transferred to them. The relevant question was: had the buyers received the benefit of any part of that which they had bargained for? The answer to that question must be in the negative, because any time or money spent by the yard in building the keels enured solely for the benefit of the yard, in whom the property remained. The situation was therefore different from that under an ordinary building contract, where the building as it is erected belongs to the building owner as the owner of the land on which it is being built.

This submission was challenged by Mr. Cordara for the yard, both on principle and authority. He relied in particular on the fact that, under the contracts in question, the yard was bound not merely to transfer the property in the vessels, when built, to the buyers. On the contrary it was bound to design, build, complete and deliver the vessels which were to be built in accordance with the agreed specification. The contracts were not therefore contracts of sale simpliciter, but "contracts for work and materials," though they included an obligation to transfer the property in the finished product to the buyers. The contractual performance of the yard began with the translation of the agreed specification into a design which complied with its requirements, the next stage in the performance being the translation of the design into a completed vessel, subject of course to amendments to the design agreed by the parties in the course of construction. Only at a late moment would the title in the completed vessel pass to the buyers.

Before addressing the rival submissions of the parties, I pause to observe that these were both founded on the premise that the issue was simply one of total failure of consideration. I am, of course, well aware of the continuing debate among scholars and law reformers as to the circumstances in which, and the basis on which, a party in breach of contract can recover a benefit conferred by him on the innocent party under the contract before it was terminated by reason of his breach, as to which see, for example, the admirable discussion by Professor Jack Beatson in The Use and Abuse of Unjust Enrichment (1991), chapter 3. However, I am content to approach this aspect of the case on the premise, common to both parties, that the issue is one of total failure of consideration since, as I understand it, this is consistent with the approach of the majority in Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129, which is directly in point on this aspect of the case.

I find myself to be in agreement with Mr. Cordara's submission on this point. I start from the position that failure of consideration does not depend upon the question whether the promisee has or has not received anything under the contract like, for example, the property in the ships being built under contracts 1 and 2 in the present case. Indeed, if that were so, in cases in which the promisor undertakes to do work or render services which confer no direct benefit on the promisee, for example where he undertakes to paint the promisee's daughter's house, no consideration would ever be furnished for the promisee's payment. In truth, the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due. The present case cannot, therefore, be approached by asking the simple question whether the property in the vessel or any part of it has passed to the buyers. That test would be apposite if the contract in question was a contract for the sale of goods (or indeed a contract for the sale of land) simpliciter, under which the consideration for the price would be the passing of the property in the goods (or land). However before that test can be regarded as appropriate, the anterior question has to be asked: is the contract in question simply a contract for the sale of a ship? or is it rather a contract under which the design and construction of the vessel formed part of the yard's contractual duties, as well as the duty to transfer the finished object to the buyers? If it is the latter, the design and construction of the vessel form part of the consideration for which the price is to be paid, and the fact that the contract has been brought to an end before the property in the vessel or any part of it has passed to the buyers does not prevent the yard from asserting that there has been no total failure of consideration in respect of an instalment of the price which has been paid before the contract was terminated, or that an instalment which has then accrued due could not, if paid, be recoverable on that ground.

I am satisfied that the present case falls into the latter category. This was what the contracts provided in their terms. Moreover, consistently with those terms, payment of instalments of the price was geared to progress in the construction of the vessel. That this should be so is scarcely surprising in the case of a shipbuilding contract, under which the yard enters into major financial commitments at an early stage, in the placing of orders for machinery and materials, and in reserving and then occupying a berth for the construction of the vessel. Indeed if Mr. Glennie's argument is right, it would follow that no consideration would have been furnished by the yard when instalments of the price fell due before the moment of delivery, notwithstanding all the heavy and irreversible financial commitments then undertaken by the yard.

As authority for the construction of the contracts in question, Mr. Cordara was able to invoke the decision of your Lordships' House in Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129, to which I have already referred, which was concerned with a shipbuilding contract in substantially the same form as that under consideration in the present case. In that case the question at issue was whether the defendant's liability as guarantor continued in existence despite the termination of the contract. All five members of the Appellate Committee held that it did. But the basis on which three members of the Committee reached that conclusion was that the instalment of the price in question remained due notwithstanding the termination of the contract. Viscount Dilhorne, at p. 1136 put on one side cases of contracts for the sale of land or goods. I interpolate that in such cases it has been held that the buyer's remedy is contractual, the seller's title to retain the money being conditional upon his completing the contract: see, e.g., Dies v. British and International Mining and Finance Corporation Ltd. [1939] 1 K.B. 724 (sale of goods), and the much-quoted judgment of Dixon J. in McDonald v. Dennys Lascelles Ltd. (1933) 48 C.L.R. 457, 475-479 (sale of land). Viscount Dilhorne did not find it necessary to consider whether the decision in Dies was correct, since he was satisfied that in the case before him the contract was not just for the sale of a ship. His conclusion [1980] 1 W.L.R. 1129, 1136 was that:

He further concluded, at p. 1137F that in the case before him, despite the cancellation of the contract, the buyer remained liable for the second instalment which had accrued due, there having been no total failure of consideration for the payment.

The position was put very clearly by Lord Fraser of Tullybelton when he said, at pp. 1148-1149:

In such a case, therefore, contrary to the submission of Mr. Glennie, there can be no total failure of consideration, notwithstanding that the buyer has received no specific benefit under the contract in the sense of property in the vessel being transferred to him, in whole or in part. Lord Edmund Davies (at pp. 1140F-1141E) expressly rejected as unacceptable an argument by the guarantor that, under the terms of the shipbuilding contract, the builders on cancellation of the contract lost their accrued right to recover the relevant instalment of the price, and fortified this conclusion with "sound commercial reasons". The other members of the Appellate Committee, Lord Russell of Killowen and Lord Keith of Kinkel, while doubting the conclusion of the majority on the issue of construction of the contract (though not specifying the reasons for their doubt), held that, even so, the cancellation of the contract did not bring to an end the guarantor's obligation under his guarantee.

Faced with this authority, Mr. Glennie submitted first that your Lordships were not bound by that decision, on the ground that the view on the construction of the contract expressed by Viscount Dilhorne and Lord Fraser of Tullybelton was not shared by Lord Edmund Davies. Like Clarke J., however, I do not so read the opinion expressed by Lord Edmund Davies. Mr. Glennie next invited your Lordships' House to depart from the decision of the majority in that case, in exercise of the power under the Practice Statement. I however consider that it would not be appropriate to do so, having regard to the recent date of the decision and the reasoning of the majority.

Mr. Glennie advanced a number of particular arguments in support of the latter submission. He relied on the fact that contracts for the manufacture and sale of chattels had been characterised as contracts for the sale of goods for the purposes of, for example, the now repealed section 4 of the Sale of Goods Act 1893. I do not, however, consider that these cases are directly in point, since they do not address the particular question under consideration in the present case. He referred in particular to the decision of your Lordships' House in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32, in which a contract for the supply by the respondents of special machinery to be manufactured by them was treated as an ordinary contract for the sale of goods. However, the fact that the relevant contract involves the manufacture of the goods by the supplier does not necessarily mean that the manufacture constitutes part of the contract consideration; and it was held that on the facts of that case, in which incidentally the only advance instalment of the price was payable with the order, the contract was simply one of sale. Finally, Mr. Glennie referred to certain academic criticisms of the decision in the Hyundai case; but these seem to be directed not so much to the conclusion that the construction of the vessel constituted part of the contractual consideration, as to the consequences of the rule that, for money to be recovered on the ground of failure of consideration, the failure must be total. This rule has been subject to considerable criticism in the past; but it has to be said that in a comparatively recent Report (Law Com No.121 (1983) concerned with Pecuniary Restitution on Breach of contract) the Law Commission has declined to recommend a change in the rule, though it was there considering recovery by the innocent party rather than by the party in breach. I for my part am unpersuaded by matters such as these to exercise the power under the Practice Statement to depart from the decision in the Hyundai case.

For these reasons, I am unable to accept the argument of the buyers on this point.

In the light of my conclusions on the three central issues, I now turn to consider the disposal of the appeals. I shall first consider the two actions separately, together with the decision of Longmore J.; and I shall then turn to consider the decision of Colman J. in relation to both actions.

I have already recorded that, on the pleadings before your Lordships, the first action relates only to the contract for vessel 1. It appears, however, that it has been treated as applicable to the contract for vessel 2 as well (I assume by reason of an amendment). I shall therefore proceed on the same basis.

First of all the Court of Appeal was, for the reasons I have given (with which I understand all of your Lordships agree), wrong to allow the buyers' appeal from Clarke J. It follows that the order made by them in this action under Order 14A should be set aside, and the summary judgment granted by Clarke J. in respect of the second instalments of the price for vessels 1 and 2 should be restored.

Furthermore, since the yard was entitled to, and did, rescind the contracts for these two vessels under clause 5.05 the Court of Appeal was right to order (as they did) damages in respect of these two contracts to be assessed under that article, and indeed (your Lordships were informed) the yard asked for such an order to be made. However, Longmore J., in striking out the yard's particulars of damage in respect of these contracts, proceeded on the basis of certain observations made by Staughton L.J. [1996] 2 Lloyd's Rep. 132, 138 in his judgment, when he said:

It was on the basis of Staughton L.J.'s statement that the regime in clause 5.05 displaced the common law rights of the yard that Longmore J. struck out the yard's particulars of damage. I have to say however that, in my opinion, this statement of Staughton L.J. is too sweeping. In the first place, as I have already indicated, clause 5.05 did not have the effect of divesting the yard of its right to recover instalments of the price which had already accrued due. But in addition it was, in my opinion, open to the yard to argue that, on a true construction of clause 5.05, the yard's right to recover damages (recognised in clause 5.05(2)) may in certain circumstances refer to damages on the measure recoverable at common law. Such an argument could, for example, be advanced on the basis that (a) the yard's "full right and power" to sell the vessel under clause 5.05(2) was (contrary to the opinion expressed by Staughton L.J.) no more than a power of sale and as such not mandatory; and (b) on the facts of the case the appropriation of the two keels from vessels 1 and 2 to the two vessels subsequently constructed by the yard for Lorient Maritime did not constitute a sale of vessels 1 and 2, uncompleted, to Lorient Maritime within the meaning of clause 5.05(3)(ii). On this basis, the yard can argue that clause 5.05(3) and (4) had no application, and that it can simply fall back on clause 5.05(2) to claim damages measured on a common law basis. It follows that Longmore J. was misled by this sweeping, and therefore misleading, statement of Staughton L.J. into striking out the yard's particulars of damage in respect of these two contracts. If he had not been so misled, he should have allowed the yard to plead its damage on a common law basis, if it thought fit to do so. It follows that the order of Longmore J. in respect of these two contracts made in reliance on that statement should also be set aside.

I add in parenthesis that the same applies to Longmore J.'s decision to strike out the particulars of damage in respect of the contracts for vessels 3-6; but this is of no moment because (for reasons which will appear) the Court of Appeal should never have ordered that damages in the case of those contracts should be assessed under clause 5.05.

The conclusion of the Court of Appeal, and the reasoning on which it was based, is to be found in the judgment of Staughton L.J. [1996] 2 Lloyd's Rep. 132, 139. His conclusion was that the yard could not recover any of the second instalments of the price, because it subsequently treated the contracts as repudiated, i.e. it purported to rescind the contracts under clause 5.05. Since, however, it is my opinion (shared by all of your Lordships) that rescission under clause 5.05 did not divest the yard of its right to recover instalments of the price which had already accrued due, it follows that this conclusion of the Court of Appeal cannot stand. In the alternative, however, Staughton L.J. concluded that the yard could not recover the second instalments of the price under the contracts for vessels 3-6, because they had not been joined on the berths where the vessels were being constructed. With that conclusion, I agree; and, as I have already indicated, I am content to uphold the decision of the Court of Appeal, not only that the yard's appeal from Waller J. should be dismissed, but that judgment should be entered against the yard on this point under Order 14A.

However, the Court of Appeal went further and ordered that the yard's damages in respect of these four contracts should be assessed under clause 5.05. With all respect, this cannot be right; because, if the second instalments of the price did not fall due, the yard had no right to rescind these contracts under clause 5.05. This was, I understand, appreciated by both Longmore J. and Colman J., though Longmore J. at least felt himself bound by this order of the Court of Appeal. It follows that this part of the Court of Appeal's order must be set aside.

The setting aside of this part of the Court of Appeal's order has repercussions on the judgment of Longmore J. He struck out the yard's particulars of damage in respect of these four contracts on the ground that they did not comply with the Court of Appeal's order that damages be assessed under clause 5.05 (see page 15 of his judgment). His decision to do so must therefore fall with the Court of Appeal's order on this point, and so must likewise be set aside.

I wish to preface my consideration of this aspect of the case with the observation that, in the light of what I have already said, the proceedings in both actions appear to have gone seriously awry. Before the Court of Appeal there were simply two appeals from decisions on applications for judgment under Order 14. In the case of the first action, all the Court of Appeal needed to do was to dismiss the buyers' appeal from the summary judgment ordered by Clarke J. In the case of the second action, all they needed to do was to dismiss the yard's appeal from the order of Waller J. giving the buyers leave to defend; though they could, having examined the point of construction in depth, have entered (as they did) judgment for the buyers under Order 14A. In the latter event, the remainder of the two actions should simply have gone to trial, on the yard's claim for damages under clause 5.05 in the first action, and on the yard's claim for damages for anticipatory repudiation in the second action. If so, the parties' cases in both actions should have been fully pleaded out in the ordinary way, taking account of the orders made for disposing of part of each action. As it is, instead of the remainder of the actions going to trial on the merits, they have become lost in procedural points, many of which have, through no fault of Longmore J. and Colman J., been decided on a false basis.

It is against this background that I turn to consider Colman J.'s judgment, and I shall do so first with particular reference to the grounds on which he refused leave to the yard to amend its points of claim in the second action to claim damages on the basis of anticipatory repudiation. As I have already recorded, he did so on three grounds, viz.: (1) that the claim for damages for anticipatory repudiation was bound to fail; (2) that, since the Court of Appeal had given judgment for damages to be assessed under clause 5.05 ("at least as regards hulls 1 and 2"), it was too late to introduce a different allegation of liability; and (3) application of the well-known principle in Henderson v. Henderson (1843) 3 Hare 100, 114-115, per Wigram V.C. The latter two of these grounds assume a prior adjudication on liability; and, on the basis that your Lordships decide to set aside the Court of Appeal's order that damages be assessed in respect of these four contracts under clause 5.05, there will have been no such adjudication in respect of these contracts other than that the yard was not entitled to rescind them under that article. It is true that, in relation to the second ground, Colman J. introduced the qualification "at least as regards hulls 1 and 2," obviously because he appreciated that the Court of Appeal's order for assessment of damages under contracts 3-6 appeared to have been made on an erroneous basis; but he made no such qualification to his conclusion on the third ground. It follows that the basis of the second ground (if applicable) and the third ground will, so far as those four contracts are concerned, disappear.

I turn next to the first ground on which Colman J. refused the yard leave to amend its points of claim in the second action to claim damages on the basis of anticipatory breach, viz. that the action was bound to fail. His decision on this ground led to the remarkable conclusion that the yard, whose complaint was that the buyers were admittedly refusing to perform these contracts, was not only left without a remedy, but was denied the right to present its case at trial in the ordinary way. In my opinion, this conclusion must to some extent have been coloured by the facts that (1) Longmore J. had already struck out the yard's particulars of damage (on the basis of an order of the Court of Appeal which should never have been made), and (2) Colman J. concluded (on the basis of the same erroneous order), that the yard was in any event precluded from claiming damages for anticipatory breach on at least the third ground for his decision. It was, in my opinion, this unusual state of affairs which led him to consider the whole substance of the yard's case for damages for anticipatory repudiation in the second action, involving findings on a number of issues of fact and law, as an appropriate matter for final disposal on an application for leave to amend the pleadings instead of allowing it to go to trial in the usual way.

Before your Lordships it was proposed that this House should, in effect, hear an appeal from Colman J.'s judgment in place of the Court of Appeal, before whom such an appeal is already pending. I must confess to being reluctant to leapfrog the Court of Appeal in such a case as this. I prefer to approach the matter on the realistic basis that Colman J.'s decision to dispose of the second action in the way he did found its origin in an erroneous decision of the Court of Appeal, which led Colman J. mistakenly to believe that the substance of the yard's claim in this action should be disposed of on an application for leave to amend; and that on that basis your Lordships' House should set aside his decision in toto so far as it relates to the second action. If that is done, full consideration can in particular be given at the trial to the yard's substantial argument, which was outlined before your Lordships by Mr. Cordara for the yard, that the buyers' anticipatory repudiation of the contracts for vessels 3-6 should be regarded as a repudiation of a continuing nature and so could, despite the yard's unsuccessful attempt to invoke the right of rescission under clause 5.05 in respect of these contracts, subsequently be accepted by the yard as a ground for terminating the contracts and claiming damages for their breach. That this argument is of a substantial nature is fortified by Sir Gunther Treitel's Note on the present case in (1998) 114 L.Q.R. 22; I wish to add that the point in question did not arise for consideration in The Kanchenjunga [1990] 1 Lloyd's Rep. 39, a case relied upon by Colman J. in his judgment. Full consideration can also be given at the trial to the question when, on the evidence, the anticipatory repudiation occurred--a potentially important question which, on the submissions advanced before your Lordships, appears to be in contention.

If the second action had been allowed to take its ordinary course on the issue of anticipatory repudiation, and the yard had included in its points of claim in the first action an alternative claim for damages for anticipatory repudiation, I doubt if any attempt would have been made to strike such an allegation out. Obviously, there are substantial arguments which the buyers would wish to advance against such a claim which may be fatal to it, in particular that clause 5.05, if applicable, provides an exhaustive code which excludes any claim for damages for anticipatory breach--a point on which Colman J. however declined to express any view. But the buyers would simply have raised these matters in their Points of Defence and, on the issues so identified, the point would (if it proved to be relevant) have been disposed of at the trial with (I suspect) relatively little extra argument. In these circumstances, and bearing in mind that the whole question of anticipatory repudiation will have to be explored in depth in the second action anyway, common sense suggests that the yard should be allowed, if it wishes, to raise the point by way of amendment in the first action. For these reasons, I would set aside the judgment of Colman J. in relation to the first action also.

In the result, the two actions should now return to the Commercial Court, to resume their ordinary course. In both actions the yard should now be allowed to amend its pleadings to set out the basis or bases on which it claims damages, and the buyers will, of course, be free to respond in the normal way. It is to be hoped that, when the outstanding issues have been duly defined, these two actions can, if not settled, be resolved at a trial with reasonable expedition.

If these proposals for the disposal for the actions are acceptable to the remainder of your Lordships, submissions should be invited from the parties on the matter of costs.

The appellants are a Polish shipbuilding company. They are the plaintiffs in an action brought against the Latvian Shipping Co. of Riga under six contracts dated 11 September 1992 for the construction and delivery of six refrigerated vessels (or "reefers") at a price of $27,639,000 each. The initial instalment of five per cent. of the price was duly paid on all six vessels, and work began on hulls 1 and 2. Unfortunately freight rates for reefer vessels began to fall. By October 1993 the buyers were seeking to renegotiate. There was a meeting between the parties on 26 October in the course of which the buyers asked for a 20 per cent. reduction in the price. By letter dated 3 December the buyers wrote that they still wanted to take delivery of all six vessels, but this might be impossible in the current state of the market.

Meanwhile work on hulls 1 and 2 was proceeding. On 3 December 1993 the yard gave notice that the keel of hull 1 had been laid, thus triggering the second instalment of 20 per cent. of the price. But the buyers did not pay that instalment within five banking days as they were obliged to do under the contract. So on 7 January 1994 the yard issued a writ (the first action) in which they claimed, inter alia, the sum of £5,527,800 as the second instalment on hull 1. The keel of hull 2 was laid on 9 March 1994. But again the buyers failed to pay the second instalment on time.

Thereafter events took an unusual course. The plaintiffs abandoned work on hulls 1 and 2, renumbering the existing hulls 3 and 4, and giving two fresh keel-laying notices on 14 and 15 April respectively. They then abandoned hulls 3 and 4 (having done no further work in the meantime) and renumbered the same hulls 5 and 6. They gave two further keel-laying notices on 13 and 17 June respectively. On 29 April 1994 they issued a fresh writ (the second action) in which they claimed keel-laying instalments in respect of vessels 3-6, totalling $22,831,200, even though they had only laid two actual keels.

In due course the yard issued a summons under Order 14. At first the claim for summary judgment was confined to the keel-laying instalments on hulls 1 and 2. The summons came before Clarke J. In a careful and lengthy judgment (a number of different points were raised by way of defence) the learned judge held that the buyers had no arguable defence to a claim for the keel-laying instalments on vessels 1 and 2. But he went on to point out that the position might be very different with regard to hulls 3-6. He proved to be right, at least in the short run. For in a subsequent judgment given on 23 November 1995, Waller J. held that the buyers did, indeed, have an arguable defence in respect of the keel-laying instalments on hulls 3-6, on the ground that those instalments had never fallen due.

But the plaintiffs had a second string to their bow. They claimed summary judgment in respect of all six contracts with damages to be assessed. But Waller J. held that the plaintiffs could not succeed in that claim on the pleadings as they stood. So in respect of the claim for damages, he gave unconditional leave to defend in respect of all six vessels.

Both judgments were then appealed to the Court of Appeal. The buyers appealed against Clarke J.'s judgment. The plaintiffs appealed against the judgment of Waller J. The Court of Appeal allowed the former appeal, and "for the most part" dismissed the latter. I shall come back to Staughton L.J.'s reasons a little later. But in broad terms, the court held that the plaintiffs were not entitled to claim the keel laying instalments on hulls 1 and 2 as an accrued debt under the contract. The plaintiffs' sole remedy was to claim damages under the detailed provisions of clause 5.05 of the contract. Accordingly the court set aside the summary judgment in favour of the plaintiffs in respect of hulls 1 and 2, and further ordered that damages be assessed in accordance with clause 5.05 in respect of all six vessels.

The plaintiffs now appeal to the House of Lords. But in the meantime the decision appealed against has spawned a succession of further proceedings. On 3 October 1996 Longmore J. held that the claim for damages in the first action had been incorrectly formulated in accordance with clause 5.05, as ordered by the Court of Appeal. As for hulls 3-6, he held that if the claim was to succeed, the second action would have to be "reconstituted." For there was no allegation in the points of claim that the plaintiffs had ever accepted the buyers' conduct as a repudiation of the contract. This led to an immediate application for leave to amend the points of claim. The application came before Colman J. on 6 March 1997. He refused leave to amend on the ground that it was now too late for the plaintiffs to change course. In any event the proposed amendment disclosed no reasonable cause of action. The plaintiffs have appealed to the Court of Appeal against both these judgments. Neither appeal has been heard. No doubt the Court of Appeal are awaiting the outcome of the appeal before your Lordships.

Despite the procedural tangles in which the parties have become enmeshed (each side at one time or another having changed course through 180 degrees), the basic issues are relatively simple. I consider first the yard's claim in respect of hulls 1 and 2.

For the sake of clarity I have numbered the separate paragraphs of clause 5.05. As already mentioned the keel laying instalments on hulls 1 and 2 undoubtedly fell due. They were not paid. So the yard was entitled to rescind contracts 1 and 2, which they did: see clause 5.05(1). Under the first half of clause 5.05(2) the yard then became entitled to retain instalments already paid in the event of rescission. So the yard was entitled to retain the first instalment of five per cent on hulls 1 and 2. But the clause says nothing about recovering unpaid instalments. The Court of Appeal has held, in effect, that once the machinery of clause 5.05 has begun to operate, over-due instalments cease to be payable. With respect I cannot go along with this view. The right to claim the keel laying instalment had already accrued before the plaintiffs rescinded the contracts. It would take very clear language to deprive the plaintiffs of their right to recover those instalments in debt. I do not find such language in clause 5.05(2). The right to retain instalments which have already been paid does not exclude the right to recover instalments which have not been paid. I can see no purpose in drawing a distinction between paid and unpaid instalments, provided the instalments have fallen due under clause 5.02. The crucial distinction is between instalments which have fallen due (whether paid or unpaid) and instalments which have not fallen due. As will be seen, the remaining provisions of clause 5.02 work sensibly and fairly on that basis.

The second half of clause 5.05(2) gives the yard the right to complete and sell the vessels on such terms as the plaintiffs deem reasonable. This is what the plaintiffs in fact did. Paragraph 39 of the agreed statement of facts reads:

Thus the keels built for hulls 1 and 2 (there were no other keels) were "appropriated" to the two new contracts with Lorient Maritime, on substantially the same terms as the contracts which had just been rescinded. The fact that the specifications were not identical is irrelevant. In practical terms the hulls were completed and sold within the meaning of clause 5.05(2). If vessels 1 and 2 had already been launched before rescission, there could have been no doubt as to the application of 5.05(2). It would be absurd to require the yard to complete the vessels as a speculation before selling to a third party. The fact that these particular contracts were rescinded at an earlier rather than a later stage cannot affect the construction of the clause.

That only leaves the purported assignment of hulls 1 and 2 to contracts 3, 4, 5 and 6 by successive renumbering of the keels. For reasons which I shall come to later, I regard these so-called assignments as a device to enable the plaintiffs to recover keel laying instalments to which they were not entitled under the contract. Such devices do not incline one in the plaintiff's favour. But they cannot affect the reality. In the real world there were only ever two keels. It was the plaintiff's duty to mitigate their damages in respect of contracts 1 and 2. They did so by completing those vessels and selling them to Lorient Maritime for U.S.$ 22.5 million. The proceeds of that sale are now to be "applied" in accordance with clause 5.05(3), first in reimbursing the costs of the sale, and second in satisfaction of the outstanding balance of the contract price.

The outstanding balance of the contract price will, of course, be the contract price, including profit, less any instalments already paid at the date of rescission and any overdue instalments recovered between the date of rescission and the date when the final calculation comes to be made. If, for some reason, the overdue instalments have not been recovered at the date of the calculation, the unpaid balance of the contract price will be that much the greater. This consideration does not, however, cast any doubt on the plaintiff's right to recover overdue instalments in debt prior to the final calculation. It is in this respect, and this respect only, that I respectfully disagree with the Court of Appeal. Since the machinery of clause 5.05 works equally well whether overdue instalments are paid or not, there is no need to imply any exclusion of the plaintiffs accrued right to recover the keel laying instalments in debt. Still less is there any express exclusion of that right.

There is a slight awkwardness in the language of clause 5.05(3) since the reference to the proceeds of sale and the instalments both being "applied" in satisfaction of the unpaid balance of the contract price might suggest that they are both to be applied in the same way. But as the Court of Appeal correctly pointed out, that would make no sense at all. The instalments are to be taken into account in calculating the unpaid balance of the contract price. The proceeds of sale are then to be applied in satisfaction of the unpaid balance of the purchase price, whatever it may be.

If the proceeds of sale are more than the unpaid balance of the purchase price then the difference belongs to the buyers under clause 5.05(3). But if it is less, then the yard is entitled to recover the difference from the buyers under clause 5.05(4). By completing the hulls and selling vessels 1 and 2 the plaintiffs will have mitigated their damages as required by the clause and will at the same time have recovered their contractual loss of profit.

Mr. Glennie argued that there had been a total failure of consideration in respect of the keel-laying instalments on hulls 1 and 2 on the ground that the buyers have enjoyed no benefit under either contract. Accordingly even if the keel-laying instalment were otherwise payable under the contract, it would be immediately repayable on the ground of total failure of consideration. Mr. Glennie relies in this connection on the judgment of Stable J. in Dies v. British and International Mining and Finance Corporation Ltd. [1939] 1 K.B. 724, 742.

The difficulty with Mr. Glennie's argument is that it runs counter to the decision of the House in Hyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129. That case, like the present, concerned a shipbuilding contract. The contract provided that the second instalment of the contract price should be payable on a day certain. It gave the builders the right to rescind the contract in the event of non payment. The buyers failed to pay the second instalment, and the builders rescinded. Two questions arose for decision, namely, (1) whether the effect of the rescission was to deprive the builders of their right to claim the second instalment, and (2) whether, if not, the second instalment could be recovered by the buyers on the ground of total failure of consideration. In relation to question (2) the buyers (or more accurately their guarantors) relied, as they do here, on Dies.

Viscount Dilhorne and Lord Fraser of Tullybelton rejected the guarantors' argument. Lord Fraser pointed out, at p. 1148, that the contract was not of the same simple character as the contract of sale in Dies. The builders were obliged to carry out work, and incur expense, from the moment the contract was signed. It seemed likely that the instalments bore some relation to the anticipated rate of expenditure. But it was unnecessary to make a nice comparison. It was enough that the builder was bound to incur considerable expense in carrying out his part of the contract before the actual sale could take place.

Mr. Glennie points out that Lord Russell of Killowen and Lord Keith of Kinkel expressed doubt on the first question, and did not deal specifically with the second question. Nor did Lord Edmund-Davies. Thus there was no majority, so it is said, in favour of the views expressed on the second question by Viscount Dilhorne and Lord Fraser. Alternately Mr. Glennie invites your Lordships to depart from Hyundai on the ground that the decision on the second question is inconsistent with the earlier decision of the House in Fibrosa Spolka Akcyjna v. Fairbairn, Lawson, Combe Barbour Ltd. [1943] AC 32.

I cannot accept these submissions. It is true that Lord Edmund-Davies does not refer to the second question. But the whole tenor of his speech is in agreement with that of Viscount Dilhorne and Lord Fraser. If he had disagreed on any point, he would surely have said so. In any event the views of Viscount Dilhorne and Lord Fraser are, if I may respectfully say so, plainly correct, and directly applicable to the facts of this case.

Mr. Glennie submitted that the question whether there has been a total failure of consideration is to be judged from the buyer's point of view; in other words the question is not whether the plaintiffs have suffered a detriment in performing the contract, but whether the buyers have enjoyed any benefit. He relied on Chitty on Contracts (1994) 27th ed., vol. 1, para. 29-034, and Goff and Jones, The Law of Restitution (1993) 4th ed., p. 401. But if that is the right question, there can be only one answer on the facts of the present case. For this was not a simple contract of sale. The contract required the plaintiffs to design and construct the vessels. That was part of the benefit which the buyers were to receive under the contract. When the contracts were rescinded, construction of the vessels had reached the point at which the second instalment had already fallen due. Even though the buyers have not enjoyed the whole of the benefit for which they contracted, which included the completion and delivery of the vessels, their enjoyment of part of the benefit is sufficient to defeat any claim to recover back the second instalment. The construction put upon the word "benefit" in section 1 (3) of the Law Reform (Frustrated Contracts) Act of 1943 by Robert Goff J. in B. P. Exploration Co. (Libya) Ltd. v. Hunt [1979] 1 W.L.R. 783, 802 does not stand in the way of this conclusion.

As for Fibrosa, the contract in that case called for the delivery of certain machinery c.i.f. Gdynia. A third of the price was to be paid with the order, and the balance against shipping documents. The outbreak of war frustrated the contract. The question in the case was whether the rule in Chandler v. Webster [1904] 1 KB 493 under which, when a contract is frustrated, "the loss lies where it falls" was still good law. The House held that it was not. Chandler v. Webster was overruled.

But there was a second question. Mr. Valentine Holmes K.C., for the sellers, argued that there was no total failure of consideration. For the contract had been partly performed by the manufacture of the machinery, even though delivery was no longer possible. This argument did not find favour. The contract was treated throughout as a simple contract of sale, in which the consideration was the delivery of the machinery. This is clear from the speeches of Lord Russell of Killowen, at p. 56, Lord Wright, at p. 64, and Lord Porter, at p. 83. Since the machinery never was delivered, the buyers were entitled to recover their payment in advance. I agree that the distinction between a simple contract of sale, in which the only consideration is the transfer of title, and a contract of sale which also includes the provision of services prior to delivery, may sometimes be a fine one. But the distinction is sound in principle. I can see nothing in the decision in Fibrosa which is in anyway inconsistent with the subsequent decision of the House in Hyundai. I do not find it surprising that Fibrosa was not even cited in argument.

Finally, under this head, Mr. Glennie argued that if there was a total failure of consideration in respect of the first instalments on hulls 3-6, then the buyers can rely on their right to recover those instalments as a set off against the plaintiffs' claim on hulls 1 and 2. But no such set off has ever been pleaded. It was not relied on as a defence when the case was argued before Clarke J. It should not now be allowed to stand in the way of summary judgment in respect of the keel laying instalments on hulls 1 and 2. I would therefore allow the appeal in respect of those instalments, and restore the judgment of Clarke J.

It will be remembered that Waller J. gave unconditional leave to defend in respect of the keel laying instalments on hulls 3-6 on the uncomplicated ground put forward by the buyers that the keel laying instalments on those hulls never fell due. He also gave unconditional leave to defend in respect of the plaintiffs' alternative claim for summary judgment on liability for repudiation of all six contracts, with damages to be assessed, on the ground that the alternative case was not open on the pleadings. The Court of Appeal decided the first point in favour of the buyers, but on a different ground (with which I have already respectfully disagreed) that the plaintiffs' only claim lies under clause 5.05. There was an order for damages to be assessed under that clause. Should it have arisen, the Court of Appeal would have decided the arguable point on which Waller J. gave leave to defend in favour of the buyers.

My instinctive answer, and that which would, I think, be given by any fair-minded man, is "of course not," There only ever were two hulls. How can two hulls be made to serve the purpose of six contracts? The renumbering of the hulls was an artifice to enable the plaintiffs to recover six keel laying instalments when they had only laid two keels.

Would it then have made any difference if, as was suggested in the course of the argument, the plaintiffs had dismantled the two keel sections of hulls 1 and 2, taken them back to the works, returned them to the berth, and rejoined them as the two keel sections for hulls 3 and 4? My answer would be no. For the plaintiffs were obliged under the general law, and specifically under clause 5.05(2), to mitigate their damages under contracts 1 and 2. This they have in fact done, in the real world, by completing hulls 1 and 2 and selling those vessels to Lorient Maritime. If the plaintiffs had dismantled the keels, and then rebuilt them for the sole purpose of claiming the keel laying instalments on hulls 3-6, so far from doing what was reasonable to mitigate their damages on contracts 1 and 2, they would have been acting most unreasonably so as to increase their damages on hulls 3-6, or at any rate to accelerate their cash flow.

And so I turn to the wording of clause 5.02(b). Waller J. held that it was arguable that the wording does not enable the plaintiffs to say that the first and second sections of hulls 3-6 were joined at a time or place where those vessels were being constructed. They were joined on the berth where hulls 1 and 2 were being constructed. In my opinion Waller J. was right. Indeed I would go further, and decide the point now in favour of the buyers under R.S.C., Ord. 14A. One can test the position by assuming that vessels 3-6 had been sold to a different purchaser. Would the purchaser of vessel 3 have been obliged to accept sections which had already been constructed in the workshop and joined on the berth in respect of another vessel? Clearly not. I agree that under clause 11.01 the property in the two sections would have remained in the plaintiffs. But under clause 6.01(b) the purchaser of vessel 3 would have been entitled to appoint a supervisor to supervise every aspect of the construction of the vessel. Thus the purchaser of vessel 3 could in theory have objected to the keel sections of hull 1 being appropriated to his contract, since his supervisor would not have had any opportunity to inspect, for example, the integrity of the welding. No doubt the purchaser would in practice have accepted the keel sections of hull 1 by agreement. But on the facts as they are, the buyers never agreed to the keel sections for hulls 1 and 2 being renumbered 3-6. If the plaintiffs rely on a technicality to recover the keel laying instalments on hulls 3-6, they should not be surprised to receive a technical answer.

For completeness I should mention a further point. Mr. Glennie relied strongly on the obiter dictum of Lord Reid in White and Carter (Councils) Ltd. v. McGregor [1962] AC 413, 431. In so far as the plaintiffs may be said to have performed contracts 3-6 by renumbering the keels, they had "no legitimate interest, financial or otherwise" in doing so. On that view they ought not to be allowed to saddle the buyers with an additional burden, with no benefit to themselves. This argument would, if correct, provide the buyers with a further defence to the plaintiffs' claim for the keel laying instalments on hulls 3-6. But since I would in any event decide the point in favour of the buyers on the wording of clause 5.02(b), I need say no more.

For the reasons which I have given, I consider that Waller J. came to the correct conclusion, and that the buyers ought to have unconditional leave to defend in respect of hulls 3-6, save for the point which should now be decided in their favour.

But I ought, out of courtesy, to say a little more about the formal orders made by the Court of Appeal at the conclusion of their judgment. As to the first action (hulls 1-2) they ordered that damages be assessed in accordance with clause 5.05. Save that I would restore the judgment of Clark J. in respect of the plaintiff's claim under R.S.C., Ord. 14 for the keel laying instalments, I would uphold the order of the Court of Appeal. Damages should now be assessed under clause 5.05 in the manner I have indicated.

As to the second action, the court ordered that the appeal from Waller J. should be "for the most part dismissed." Yet the court went on to order that damages in respect of hulls 3-6 should be assessed under clause 5.05, as in the case of the first action. Longmore J., in his admirable judgment, found this hard to follow. For if it be right that the keel laying instalments on hulls 3-6 never fell due, as the Court of Appeal thought, there could not have been any default in payment of those instalments within the meaning of clause 5.05(1), in which case the contractual machinery for assessing damages under clause 5.05 never began to turn. Longmore J. describes this as a "wrinkle." It is more like a mantrap, and one into which the plaintiffs have deservedly fallen by seeking to recover summary judgment in respect of the keel laying instalments on hulls 3-6 when they should have been content to make an ordinary claim for damages for repudiation of those contracts.

Is it now possible for the plaintiffs to extricate themselves from the mantrap? The difficulty here is the judgment of Colman J. As already mentioned, Colman J. held that it is too late for the plaintiffs to amend their pleadings. By serving keel laying notices in respect of hulls 3-6, and by pursuing their claim for the keel laying instalments before Waller J. and the Court of Appeal, they have elected to keep those contracts alive. They cannot revert to the position as it was before they served the keel laying notices. Having affirmed the contracts, the plaintiffs cannot now rely on the buyers' anterior repudiation. Accordingly Colman J. refused leave to amend.

I have much sympathy with Colman J.'s approach. Indeed it might be said that he had no real alternative in the light of the Court of Appeal's order (by which he was, of course, bound) that damages were to be assessed in accordance with clause 5.05. It would be unusual to allow an amendment so as to allege a new basis of claim after final judgment on liability.

But the position is now changed. If the Court of Appeal's order is set aside, and the judgment of Waller J. giving unconditional leave to defend is restored, save as to the point which I would decide now in favour of the buyers, the question of affirmation can be approached afresh.

I had reached this point in my judgment, or a little further, when I had the advantage of reading in advance the concluding paragraphs of my noble and learned friend Lord Goff of Chieveley's speech as to the disposal of these appeals. The solution which he proposes attracts me as the best--and perhaps the only--way of getting these two actions back on the rails. I believe it to be consistent with the views which I have expressed. I agree so entirely with what he says that it would be superfluous for me to add anything.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Goff of Chieveley. For the reasons he gives I, too, agree the proposals he makes for the disposal of these appeals.

I have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend, Lord Goff of Chieveley. I agree with it, and for the reasons which he has given I would dispose of the appeals in both actions in the same way.

I would therefore make the same orders in regard to the yard's right to recover the keel-laying instalments as those which he has proposed in relation to those made by the Court of Appeal. I would also, for the same reasons as he has given, set aside that part of the order of the Court of Appeal which dealt with the assessment of the yard's claims for damages together with the orders which were made thereafter by both Longmore J. and Coleman J., so that the two actions may now return to the Commercial Court to resume their ordinary course in regard to these claims.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Goff of Chieveley. I agree with it, and for the reasons he gives I, too, would dispose of these appeals in the way which he proposes.

United Kingdom House of Lords Decisions

Stocznia Gdanska SA v. Latvian Shipping Co and Others [1998] UKHL 9; [1998] 1 All ER 883; [1998] 1 WLR 574 (26th February, 1998)