Ince&Co International Law Firm

Damages against a shipbuilder: the Gearbulk case

Tuesday 10 March, 2009

The English Court of Appeal has recently issued an important judgment that clarifies the exposure of a builder for damages if a shipbuilding contract is terminated by a buyer in circumstances where the builder is in breach.

In Gearbulk Holdings Limited v Stocznia Gdynia SA, the builder failed to construct and deliver three vessels. The buyer terminated the contracts, then recovered under the refund guarantees the pre-delivery instalments of the contract price plus interest. He also commenced arbitration against the builder, claiming damages for repudiatory breach.

The question for the Court was as follows: given that the buyer had exercised an express right to terminate the contracts and had called on the refund guarantees, was the buyer entitled also to recover damages?

Under English law, when there is a repudiatory breach, the innocent party has a choice: he can either accept it as bringing the contract to an end, or he can hold the other party to the contract. If he does something which is inconsistent with the contract terminating, he may be said to have “affirmed” the contract and so he may lose the right to treat it as ended. At first instance, the judge decided that the buyer had affirmed the contracts by terminating and claiming on the refund guarantees, because these were rights given to him by the contract terms.

The Court of Appeal did not agree with the judge. They said that the buyer’s exercise of the right to terminate under the express terms of the contract “was intended to and did operate to discharge the contract with the same consequences as if it had been discharged by repudiation in accordance with the general law”.

As for the refund guarantee:
“[T]he right to recover the instalments of the price, together with the right to obtain payment under the bank guarantee, arose only on and by reason of the termination of the contract. I think it is clear, therefore, that the parties intended it to survive the termination of the contract, just as, for example, they intended the arbitration clause to survive. Reliance on that obligation could not, therefore, amount to an election to keep the contract in being.”

Shipbuilding contracts very often contain clauses which at first sight might be thought to limit the buyer to claiming a refund and which exclude the buyer’s right to claim damages when he exercises a contractual right to terminate. However, very often the clauses fail to do so. In principle, the right to damages can be excluded or limited by drafting a suitable term in the contract. But for this purpose, the builder would have to get the buyer to agree to very clear words of exclusion.

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