#6825 - Stockznia V. Latvian Shipping Co. - Restitution of Unjust Enrichment BCL

Stockznia v. Latvian Shipping Co.

Facts

The plaintiff shipyard in 1992 entered into six contracts to build refrigerated vessels for the defendant buyers. Under each contract the price was payable in installments, the second of which, amounting to 20 per cent. of the total, was payable within five days of receipt of notice of keel-laying as defined in the contract. Clause 5.05 provided that the yard were entitled, in the event of default by the buyers, to rescind the contract and to retain installments already paid, and went on to make provision for the calculation of the amounts due. Work was begun on the first two vessels, but the buyers failed to pay the installments due on keel-laying, and the yard rescinded the contracts. The yard sought to trigger the payments due for the remaining vessels by reallocating the keels already laid for the first two vessels and issuing fresh notices. When the payments were not forthcoming they rescinded those contracts in turn. In an action by the yard claiming the instalments due on keel-laying of the first two vessels and damages.

Nature of the Contract: 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…. Provision was made in clause 5.02 for the price to be paid in four installments.

Forfeiture clause under the contract:

(2) In the event of such rescission by the seller of this contract due to the purchaser's default as provided for in this clause, the seller shall be entitled to retain and apply the instalments already paid by the purchaser to the recovery of the seller's loss and damage.

Holding

Lord Goff

Impact of the forfeiture clause

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the keel-laying instalments in respect of vessels 1 and 2, its right having accrued before the date when the yard rescinded contracts 1 and 2 under clause 5.05(1).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.

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.

Failure of Consideration

The argument here was similar to the one made in Proper – the defendants argued that the installments are not payable because had they been paid, they would have been recoverable on the ground of total failure of consideration.

Argument for the plaintiffs: 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?

Argument for the defendants: 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.

Total Failure of Consideration – Conceded, and bound by Hyundai

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 inHyundai Heavy Industries Co. Ltd. v. Papadopoulos [1980] 1 W.L.R. 1129, which is directly in point on this aspect of the case.

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 (Judicial Precedent) [1966] 1 W.L.R. 1234 to depart from the decision in the Hyundai case.

Whether there was Total Failure of Consideration – Construction of the Contract

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 notreceivedanything 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.

In such a case, therefore, contrary to the submission of Mr. Glennie, there can be no total failure of consideration, notwithstanding that the...