Gearbulk Holdings Limited v. Stocznia Gdynia SA [2008] EWHC 944 (Comm)
In today’s market this is a very significant decision, as the Commercial Court has extended existing authorities and held that by recovering monies under the refund guarantee the Buyer had affirmed the contract and was therefore precluded from claiming damages at common law.
The Defendant Yard failed to construct and deliver three bulk carriers which had been ordered by the Claimant Buyer. The Buyer therefore terminated the contracts and called on the refund guarantee for repayment of the pre-delivery instalments/advances plus interest. The Buyer then commenced arbitration against the Yard claiming damages at large for repudiatory breach.
The Sellers’ obligations in respect of refunds of the pre-delivery instalments were set out in clause 5 of the contracts. The clause provided that those obligations would be secured by a Refund Guarantee.
Clause 10 of the contracts, which applied in the event of the Seller’s default, included a provision that the “Purchaser shall not be entitled to claim any other compensation and the Seller shall not be liable for any other compensation for damages sustained by reason of events set out in this Article and/or direct consequences of such events other than liquidated damages specified in this Article”.
Mr Justice Burton has held that the wording of clause 10 did not exclude the Buyer’s right to terminate the contract if the Yard were in repudiatory breach, nor did the wording exclude or limit the Buyer’s right to claim damages at common law. However, he also held that the Buyer was precluded from claiming damages at common law for repudiation by virtue of it having affirmed the contracts and recovered monies, plus interest, from the refund guarantor in accordance with the provisions of the contract.
On appeal to the Commercial Court by the Yard Mr Justice Burton upheld the decision of the arbitrator (Sir Brian Neill) that:
a. In order to exclude common law rights there have to be clear words in the contract and there were no such clear words in this contract to rebut the presumption that the Buyer retained its common law rights arising out of repudiation.
b. That the wording in clause 10 did not limit the Yard’s liability in circumstances where a Buyer terminated at common law, as the relevant clause only referred to the specific events set out and not to termination for repudiatory breach.
Mr Justice Burton allowed the appeal and differed from the arbitrator when he found that the Buyer was precluded from claiming damages at common law, by virtue of them having affirmed the contracts and recovered monies plus interest from the refund guarantor in accordance with the provisions of the contract.
Mr Justice Burton considered the law and reached his conclusion on the basis that the Buyer chose to enforce a provision in the contract which was very significant to it (i.e. seeking payment under the refund guarantee) and enforce the contractual provisions, which enabled it to obtain a secured sum against a third party and that the Buyer claimed interest in accordance with the contractual provision. He concluded that this meant that the Buyer had affirmed the contract and elected against repudiation. He found that the refund guarantee could only be enforced “in the event that the purchaser shall exercise its right to terminate this contract pursuant to any of the provisions hereof”. In accordance with the agreed terms he therefore found that the Buyer’s right to a refund could only be accessed by enforcing the terms of the contracts, which they did in each case, therefore affirming the contract and electing against repudiation. Mr Justice Burton considered that his judgment was in line with the law as established by the Court of Appeal decision in United Dominion Trust (Commercial) Ltd v Ennis [1968] 1 QB 54 and that he was bound by it.
It is also important to note that although one of the letters which terminated the ship building contract expressly put the Yard on notice that they were in repudiatory breach, that such breach was being accepted and that the exercise of their right of termination was made without prejudice to their right to claim damages by reason of the repudiatory conduct, Mr Justice Burton found that was not sufficient to protect the Buyer’s right to common law damages, as they could call on the guarantee (which they did) only if they terminated the contract in accordance with its provisions and effectively affirmed the contracts.
Therefore although it is possible to protect a Buyer’s rights to claim damages at common law for repudiatory breach and to claim a refund for instalments paid in advance, this must be done in the wording of the contract, not the termination notice. Where there is no clear indication in the wording of the contract, it appears that Owners will be faced with a choice if a Yard fails to deliver – either to claim a refund of the instalments paid from the refund guarantor or to pursue the yard for damages arising out of the repudiatory breach.
Leave to appeal to the Court of Appeal has been granted and a hearing is scheduled to take place late 2008/early 2009. Watch this space!