Contractual Rights of Termination and Repudiatory Breach
Facts
This case related to the interpretation of shipbuilding contracts. Gearbulk Holdings Ltd (“Gearbulk”) entered into three contracts on similar terms with Stocznia Gdynia SA (“Stocznia Gdynia”) for the construction of three vessels. None of the three vessels were delivered. In each case, Gearbulk sent a notice exercising a right of termination (as provided for by Article 10 of each contract) and requesting repayment of instalments of the purchase price (Article 5 of each contract). In addition, however, Gearbulk purported to accept Stocznia Gdynia’s repudiatory breaches of all three contracts and reserved its rights, inter alia, to claim damages.
At an arbitration hearing, Stocznia Gdynia argued that it had not repudiated the three contracts and that, in any event, Gearbulk had not accepted any such repudiation. Instead, Gearbulk had exercised its contractual right to terminate and was therefore precluded from treating the contracts as repudiated. Furthermore, Stocznia Gdynia argued that Article 10 expressly excluded any claim for damages for loss of bargain following termination in accordance with the contract terms. Gearbulk’s remedy was therefore limited to the recovery of instalments in accordance with these contract terms. Stocznia Gdynia also claimed that Gearbulk had affirmed the contracts through its conduct.
The arbitrator, however, rejected Stocznia Gdynia’s submissions, holding that when the contracts were terminated, it was unable to perform the contracts and had repudiated them. Article 10 did not exclude the right to treat the contracts as discharged for repudiatory breach or the right to recover damages for loss of bargain. He also dismissed the claim that Gearbulk had affirmed the contract by conduct.
Stocznia Gdynia consequently appealed the decision of the arbitrator, raising three issues: (1) Article 10 excluded the right to treat the contract as repudiated; (2) Article 10 excluded the right to claim for damages for loss of bargain; and (3) termination of the contracts in reliance on contractual termination rights and the claim for repayment of instalments precluded Gearbulk from subsequently claiming to have terminated at common law and claiming damages for loss of bargain.
The High Court rejected Stocznia Gdynia’s arguments on the first two points, but found in Stocznia Gdynia’s favour on the third issue. The judge ruled on the third matter, that by seeking to recover the instalments, Gearbulk had affirmed the contract and was therefore prevented from claiming damages for loss of bargain at common law. Gearbulk appealed on the third point and Stocznia Gdynia cross-appealed on the first two points.
Decision
The Court of Appeal allowed Gearbulk’s appeal and dismissed Stocznia Gdynia’s cross-appeal.
In relation to the first point, it was held that Article 10 did not displace the right to treat the three contracts as repudiated. The primary purpose of Article 10 was to provide an agreed measure of compensation for breaches of contract by way of delay in delivery and deficiencies in capacity and performance which, although important, did not go to the root of the contract. However, the parties had also agreed that there was a point at which the delay or deficiency was so serious that it should entitle Gearbulk to terminate the contracts. They had to be taken to have agreed that at that point, the breach was to be treated as going to the root of the contract. In those circumstances, the right to terminate the contracts could not sensibly be understood as anything other than embodying the parties’ agreement that Gearbulk had the right to treat the contracts as repudiated, with the usual consequences. It was wrong to treat the right to terminate in accordance with the terms of the contract as different in substance from the right to treat the contract as discharged by reason of repudiation at common law.
In relation to the second point, the Court of Appeal held that Article 10 did not exclude the right to recover damages for loss of bargain in the event of termination by Gearbulk. As a matter of construction, the part of Article 10 which Stocznia Gdynia relied upon formed part of an introductory section to the article as a whole, which provided in general terms for the payment of liquidated damages for various breaches of contract later described in detail. Those introductory paragraphs were directed only to those parts of Article 10 that provided for the payment of liquidated damages and had no application to the situation that would arise on termination of the contracts.
Finally, in relation to the third point the Court of Appeal held that by choosing to terminate the three contracts pursuant to Article 10, Gearbulk did not lose its rights to treat the contracts as repudiated and to recover damages for repudiation. The exercise by Gearbulk of the right to treat the contracts as terminated under Article 10 was intended to, and did, operate to discharge the contract with the same consequences as if they had been discharged by repudiation in accordance with the general law. A person who exercised a contractual right of termination which arose on the other party’s breach was not inevitably prevented from treating the contract as discharged and recovering damages for the loss of his bargain. The exercise by Gearbulk of its right to recover instalments of the contract price under Article 10 did not involve an election on its part to affirm the contracts. There was no inconsistency in recovering instalments of the price under Article 10 and recovering damages for loss of bargain at common law. Stocznia Gdynia had repudiated the contracts by the time Gearbulk Holdings sent its letters of termination and they were sufficient to amount to an acceptance of Stocznia Gdynia’s repudiation.
Practical considerations
The decision in Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, makes it clear that if a party exercises a contractual right to terminate for breach, this will not mean that they cannot also rely on their common law right to repudiate the contract and seek damages for loss of bargain. This will depend on the intention of the parties which the Courts will consider on a case by case basis.
This Court of Appeal decision will be welcomed by parties to high value and long term contracts that are being let down by their counterparties. In some instances, companies are hesitant to terminate a contract and seek to enforce the remedies provided in it as they do not want to prejudice their ability to claim damages at common law. A party seeking repudiatory damages seeks a sum that will put it in the position it would have been in had the contract been performed properly. This amount can often be more than the total sums recoverable under the contract. However, the Stocznia Gdynia decision makes clear that in some cases they may be able to make both contractual and common law claims.
Suppliers and manufacturers should note that the outcome of this case may have been different if the contract had included a clause which stated that the remedies set out in the contract were to displace any rights and remedies provided by law. Although the effect of such a clause will depend on all the circumstances, this exclusion or waiver is well worth considering by suppliers or manufacturers.
