CENARGO LIMITED v IZAR CONSTRUCCIONES NAVALES SA [2002] EWCA Civ 524

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
(Mr Justice Andrew Smith)
[2002] EWCA Civ 524Case No Case Nos. A3/2001/0370, /0374; /0916, /0916AVenue Royal Courts of Justice, Strand, London WC2
Between
CENARGO LIMITEDAppellantIZAR CONSTRUCCIONES NAVALES SA(formerly EMPRESA NACIONAL BAZAN DE CONSTRUCCIONESNAVALES MILITARES SARespondentIZAR CONSTRUCCIONES NAVALES SA(formerly EMPRESA NACIONAL BAZAN DE CONSTRUCCIONESNAVALES MILITARES SAAppellantCENARGO LIMITEDRespondent
Before
Lord Justice PillLord Justice LongmoreSir Martin NourseMr B Eder QC and Mr J Smouha (instructed by Messrs Stephenson Harwood, London EC4) appeared on behalf of Cenargo Limited (Buyers).Mr D Kendrick QC and Mr R Waller (instructed by Messrs Sinclair Roche Temperley, London EC2) appeared on behalf of Izar Construcciones Navales SA (Builders).Date 26 March 2002

LORD JUSTICE PILL :

Lord

Justice Longmore will give the first judgment.

LORD JUSTICE LONGMORE : On 30th January 2001 Mr Justice Andrew Smith gave a judgment dealing with many points arising from two shipbuilding contracts, made between Spanish builders in Seville and British buyers, for the construction of two roll-on roll-off vessels, now known as MV Dawn Merchant and MV Brave Merchant. This appeal is concerned with only four aspects of the judgment, which the parties have otherwise accepted. These four aspects are as follows: (A)The true construction of the contractual terms relating to trailer carrying capacity. (B)Whether on their true construction there was a breach of these terms and, if so, in what respect. (C)Whether any breach gave rise to a right to recover liquidated damages as provided by the contract. (D)Whether the right to invoke the liquidated damages clause had been lost.

[3]The relevant contractual clauses are as follows:
" ARTICLE I - DESCRIPTION AND CLASS 1.VESSEL'S DESCRIPTION The Builder undertakes to build at the Builder's yard at Seville and to properly install all Buyer's supplied items and to deliver to the Buyer, who hereby orders and undertakes to accept delivery of one Roll-on Roll-off Cargo Passenger Vessel of approximately 6,300 metric tons deadweight in sea water of specific gravity of 1,025 on a draft of 6.5 metres, the Vessel, which shall have, for the purpose of identification only, the Builder's Hull Number 287 subject to and in accordance with this Contract and relevant Specification No. 56.118 dated 25/01/96 (`the Specification') and Plan No. 6118/001/01 (`the Plan') signed by both parties, which form an integral part of this Contract. The Specification and the Plan are intended to explain each other and anything shown on the Plan and not stipulated in the Specification and anything stipulated in the Specification and not shown on the Plan shall be deemed to be contained in both. In the event of any conflict between this Contract and the Specification and/or the Plan, the provisions of this Contract shall prevail. In the event of any conflict between the Specification and the Plan the provisions of the Specification shall prevail. 4.CAPACITY The Vessel shall have a RoRo freight capacity of at least 146, 13 metre slots. ARTICLE II - PRICE AND TERMS OF PAYMENT 2.TERMS OF PAYMENT Not later than delivery of the Vessel, any variations in the Contract Price ... but excluding any damages payable in accordance with Article III, will be calculated and the payment due upon delivery of the Vessel will be varied accordingly. At the same time and as a condition thereof the Builder will pay the Buyer any amount payable under Article III of this Contract. 5.PAYMENT FOR LIQUIDATED DAMAGES Any amounts for liquidated damages under Article III shall be calculated and determined on delivery of the Vessel and shall be paid by the Builder to the Buyer on the Vessel's delivery. ARTICLE III - DAMAGES 5.DEFICIENCY IN TRAILER CARRYING CAPACITY In this Clause 5 `trailers' refers to fully laden trailers with a mean carrying capacity of thirty (30) mt. (a)If the actual trailer carrying capacity of the Vessel is less than 146 Units of 13 metres each the Builder shall pay to the Buyer as liquidated damages One hundred and fifty thousand United States Dollars ($150,000) for each trailer unit by which the Vessel is deficient but excluding the first one (1) in respect of which deficiency no liquidated damages shall be payable. If the deficiency in trailer carrying capacity is ten (10) or more the Buyer as an alternative to receiving the aforementioned liquidated damages may rescind the Contract. (b)In the event of deficiency in a deadweight and trailer carrying capacity the Buyer may elect whether to claim under sub clause 4 or sub clause 5 of this Article III. ARTICLE X - WARRANTY QUALITY 1.GUARANTEE OF MATERIAL WORKMANSHIP AND DESIGN The Builder for the period twelve (12) of months from the date of acceptance of delivery of the Vessel, guarantees the Vessel, her engines and accessories and all parts and equipment thereof, that are manufactured or furnished or supplied by the Builder or its Subcontractors under this Contract, against all defects which are due to faulty design (excluding matters of general arrangement and layout of accommodation or deck or machinery all insofar as operational convenience or ergonomics are concerned, defective material and/or poor workmanship and are not result of incompetence, mismanagement, negligence, accident or wilful neglect of the Buyer, or its agents and/or employees. 5.FRAME OF RESPONSIBILITY The guarantees contained as herein above in this Article replace and exclude any other liability (and whether contractual or tortious, including liability for negligence), guarantee, warranty and/or condition imposed or implied by the law, customary, statutory, admiralty or otherwise, by reason of the construction and sale of the Vessel by the Builder for and to the Buyer."
[4]There are also relevant terms of the specification under the general head of " Main Particulars ": " 101 TYPE OF VESSEL The vessel will be a RO-RO PASSENGER VESSEL designed and built for service in world wide traffic, carrying road trailers, cars and passengers as specified herebelow, with a capacity at least of 2,000 Lane meters, equivalent to 146 slots of 13m length, (width 3 meters), 47 Officers and Crewmen and 214 passengers, 114 in cabins and 100 in airline seats. 104 DESIGN CAPACITIES (a) Cargo capacities Lane meters (width 3m): . On Upper Deck (8 lanes in breadth), about 1,075m . On Main Deck (6 lanes in breadth), about875m Total 2,000m (sic) Road trailers (length: 13m; 30 t/trailer) . On Upper Deck80 road trailers . On Main Deck66 road trailers Total 146 road trailers 202 SCANTLING - GENERAL Decks will be designed for the following deck loads: Upper deck...(Trailers weight 45 t max) Main deck...

(A) Trailer carrying capacity

[5]This is a matter of construction of the contract as a whole. The debate is whether, as the builders contend, they were obliged to provide 146 slots, each of 13 metres long, or whether, as the buyers contend, each of the 146 slots had to be capable of fitting a trailer of 13 metres in length. If the latter, the slots would, of course, have to be somewhat longer to allow for clearance and manoeuvrability. How much longer was debated at trial, but it was agreed by the experts that the appropriate figure was 0.15 of a metre, although other figures of 0.45 of a metre and 0.75 of a metre had been canvassed. The judge upheld the builders' contention for three general reasons and six special reasons related to the precise wording of the contract. The three general reasons were (with a little elaboration of my own) that: (1)Since one of the purposes of a liquidated damages clause is to ease the calculation of damage, the builders were more likely to be correct. Any breach could be ascertained by a single act of measurement, whereas, on the buyers' construction, calculating the extent of the breach would be a complex operation. For the purpose of the trial, there had to be a practical exercise resulting in agreement between the experts that, on the basis of an extra length of 0.15 of a metre, ten fewer trailers could be loaded than, on the buyers' interpretation, the contract required. (2)Nothing in the contract made any provision for the amount of extra space required for clearance and manoeuvrability purposes; it was unlikely that the builders would be intended to calculate this for themselves; it was only at trial that a figure of 0.15 of a metre had emerged, by way of agreement between the experts, after consideration of other figures. (3)Since trailers of exactly 13 metres in length were rare and were on the evidence often greater or smaller in length, the figure of 13 metres could only have been intended to designate a notional average length. But the longer the trailer the more space would in fact be needed for clearance and manoeuvrability. The contract was, therefore, ambiguous as to whether the vessel was to accommodate any combination of trailers in the notionally extended space provided the overall average length was not more than 13 metres or whether it would suffice if at least one such combination could be accommodated.[6]Mr Eder QC, who appeared for the buyers in this appeal, countered these general observations by submitting that the judge's comments only meant that it would be easier for the builders to build the ship if the contract had the construction advanced on their behalf. But it was nothing unusual, he said, for a builder to be required to work out tolerances for clearance and manoeuvrability. Builders had to do that kind of thing all the time. Likewise, liquidated damages clauses often gave rise to calculations of some complexity being required and the contract was perfectly workable on the buyers' construction. He also made the point that any question of construction had to be determined by the actual words of the contract rather than by general considerations of the sort advanced by the judge.[7]As to the wording of the contract, the judge's reasons were: (1)that the reference to 13 metre slots in Article I.4 of the contract was more naturally a reference to the length of the slot rather than the length of the trailer which was to fit into the slot; (2)that the wording of the liquidated damages clause itself in Article III.5 specified payment of $150,000 "for each trailer unit by which the Vessel is deficient"; the word "unit" referred back to "146 Units of 13 metres each"; the trailer unit had, grammatically, to be a space since a vessel could correctly be said to be deficient in spaces but not to be deficient in trailers; (3)that the absence of any reference in Article III.5 to the stipulated length being an average told against the buyers' contention; (4)that Article V.1, in relation to the obligation of the builders to make requested modifications, was conditional on an agreement to any necessary adjustment of "the number of units of trailer carrying capacity"; in that clause also the word "units" had to refer to spaces rather than trailers; (5)that the terms of paragraph 101 of the specification repeated the phrase "146 slots of 13m length" but this time in conjunction with the phrase "width 3 metres". There was no dispute that the width referred to the lanes in which trailers were to go and thus to the spaces in such lanes. What was true of width of spaces was also true for length of spaces. (6)that, while paragraph 104 of the specification, if construed in isolation, lent some support to the buyers' contention, it had to be interpreted consistently with paragraph 101.[8]Mr Eder criticised these conclusions of the judge. He submitted: (1)The judge had excluded the phrase "freight capacity" from his consideration of Article I.4. Once that phrase was brought into the equation, it was clear that the slot measurement was a measurement of a unit of freight. The slot, therefore, had to accommodate a unit of freight of 13 metres; in other words, it had to accommodate a trailer of 13 metres. (2)Likewise, the phrase "trailer unit by which the Vessel is deficient" in Article III.5 must refer to a trailer of 13 metres, especially since the clause took the trouble at its beginning to define the word "trailer", although the word did not appear in the clause itself. (3)The same construction applied to Article V.1 if (which he denied) it was helpful to consider that clause at all. (4)Paragraph 101 of the specification provided for a capacity of at least 2,000 lane meters which was said to be equivalent to 146 slots of 13-metre length. In fact, 146 slots of 13 metres gave an overall length of 1,898 metres. It was thus always contemplated that the slots would be longer than 13 metres. The fact that on this calculation each slot would have an additional length of 0.69 of a metre did not impinge on the allegation that the breach was failing to provide a slot of 13 metres plus 0.15 of a metre since that figure of 0.15 of a metre was merely the agreed figure for the purposes of calculating the liquidated damages. (5)Paragraph 104 of the specification, to which the judge gave far too little weight, expressly referred to road trailers as having a length of 13 metres. This was a clear confirmation that 13 metres was intended to be the length of the trailer fitting into the slot and not the length of the slot itself. Paragraph 202, which specified that decks were to be designed for trailers with a maximum weight of 45 tons, showed that the figure of 30 tons for a trailer in paragraph 104 of the specification was a merely notional weight; likewise, the length of the trailer was a notional length, but it was that notional length of trailer that had to be accommodated in the slot.[9]Although it takes time to set out the parties' contentions, the point is a short one. I can say little more than that I agree with the judge essentially for the reasons he gave. I agree with him that the phrase "146, 13 metre slots", in what is after all the primary article of the contract itself (Article I.4), is more easily read as referring to the length of the slot rather than to the length of whatever it is that is to be put into the slot. The fact that it is said to be a measure of "RoRo freight capacity" does not to my mind make it any the less likely that the obligation is to provide a slot of the length of 13 metres. One has to describe the capacity in some words. The words chosen seem to me to bear the meaning ascribed to them by the builders.[10]Similarly, the wording in the critical Article III.5, "trailer unit by which the Vessel is deficient", is more apt to refer to a deficiency of space rather than a deficiency of trailers. The phrase "trailer unit" refers back to the trailer carrying capacity being "less than 146 Units of 13 metres". The words "146 Units" in that context must, to my mind, be a reference to the "146 slots" required by Article I.4. That sense carries over to the phrase "trailer unit" later in the clause. The definition of the word "trailers" at the beginning of the clause cannot assist. It might be different if the word "Unit" had been so defined, but it was not.[11]Mr Eder puts more weight on paragraph 101 of the specification than it can properly bear. The obligation on the builders to provide 2,000 lane metres is to do just that. Those lane metres can be anywhere in the vessel and there is no requirement that in so doing all those metres have to be available as uninterrupted slots. After all, motorcycles and cars take up much less room on board than the trailers. What does have to be available by way of uninterrupted space is 146 slots which have to be 13 metres in length. The parties express themselves to be satisfied that 2,000 lane metres will give 146 such uninterrupted spaces, but that does not help as to the length of these uninterrupted spaces; that can only be determined from other provisions of the contract. It is significant that no complaint has ever been made that 2,000 lane metres were not provided. The fact that the overall space calculated by reference to the total lane metreage would be considerably longer than the length in fact required for 146 13-metre trailers also militates against the buyers' construction of the paragraph.[12]That leaves paragraph 104 of the specification which, as the judge said, does lend some support to the buyers' argument if considered in isolation. In the context of the contract as a whole, however, that support is weak. The paragraph is headed "Design Capacities". The sub-head "road trailers" has a bracket providing "length: 13m" as well as providing for weight. The word "length", if read consistently with other terms of the contract, refers to the contractual provisions in relation to length, viz the slots for the trailers. It is, in my judgment, more appropriate to read the specification in this way in the light of the previous clause rather than to require the use of the phrase "length: 13m" in this paragraph of the specification to be read backwards into the earlier provisions of the contract. Mr Kendrick QC, for the builders, accused Mr Eder of reading the contract backwards; this Mr Eder stoutly denied, and it is true that he makes his submissions on the clauses of the contract in the order in which those clauses appear. But his reading of the earlier clauses struck me as strained and it was only when he got to paragraph 104 of the specification that he found the right context which was able to justify his submissions on the earlier parts of the contract. It is, of course, relevant to remember that Article XXII of the contract provides that, if there is any conflict between the terms of the contract and any of the terms of the specification, the provisions of the contract are to prevail. That says no more than is set out in the provisions of Article I which I have already quoted.[13]On the wording of the contract as a whole, therefore, I have no doubt that the judge was correct to prefer the builders' submissions. For my part, I would also agree with the judge's more general comments. As Mr Eder said, however, it must be the contractual words that govern the matter. On that wording he fails and the buyers' appeal must be dismissed. In the light of this conclusion it becomes unnecessary to hear a cross-application for permission to appeal by the builders on the grounds that the judge was wrong to have excluded evidence sought to be introduced by them after the close of the rest of the evidence in the case, and for my part I do not feel the need to say any more about that.

(B) Breach of the provisions for contractual carrying capacity

[14]The buyers had a fall-back position at trial that, even if they were wrong on construction and thus could not complain of a lack of ten slots, they were still entitled to argue that six out of the required 146 slots had not been provided. The judge held that they were right about four of the slots but wrong about the other two. Neither side was satisfied with this result and both sides appealed his decision in so far as it went against them. The spaces can conveniently be dealt with in pairs.[15]The first pair of trailer units of spaces in respect of which it is said that the vessel was deficient within the wording of Article III.5 are at the forward end of the ship, in lanes G, H and I of the main deck. At this point the lanes taper due to the flair of the bow. Space is further restricted due to extended scupper valve spindles and the location of the blades of the spare propeller. This problem can be solved by using space at the aft end of lanes G and I, provided that two additional lashing points in each of the lanes can be provided in the same way as they are in the other spaces; these lashing points (colloquially known in the trade as "elephant's feet") were not originally provided in these spaces by the builders and would therefore now have to be provided by the buyers. A set of elephant's feet costs £11.93; the cost of fitting would be in the region of £453.[16]The second pair of spaces said to be unavailable are at the forward end of lanes A2 and H2 on the upper deck, where crash barriers have been installed to protect passenger accommodation access doors. In fact, the barriers (which are not needed to meet any statutory or regulatory requirement) can be moved and still serve their purpose and give the required space of a 13-metre slot. One barrier would have to be moved 25 centimetres, the other a mere two centimetres, to achieve a full 13-metre slot.[17]The third pair of unavailable spaces are in lanes A1 and H1 of deck 5. The spaces can be used, but fire damping ventilator flaps cannot then be closed; in practice it is essential that the flaps, which are hinged, should be capable of being used while the vessel is in operation. If the hinged flaps were replaced by sliding covers, the difficulty would disappear and the spaces could be used.[18]The cost of the work necessary to make these six spaces available would be $11,000 if Cenargo ordered the work to be done by a European shipyard. Their claim, however, under Article III.5 is for $750,000.[19]Mr Kendrick, for the builders, submitted to the judge that the facts I have set out disclosed snagging problems which could easily be put right at small cost and not a breach of contract in relation to the trailer carrying capacity. The judge held that the question was whether what he called "the constraints" were properly to be characterised as affecting the actual trailer carrying capacity of the vessel. If so, there would be a breach of contract giving rise to liquidated damages. He agreed with the builders in relation to the ventilator flaps, which he characterised as relating to the vessel's safety equipment, not its carrying capacity. But he did not agree with them about the elephant's feet and the crash barriers; he held that those problems did affect the carrying capacity and awarded liquidated damages for breach of trailer carrying capacity in the sum of $450,000. It was not $600,000 because Article III.5 allows a margin of one missing space.[20]Mr Eder supported the judge's general approach but submitted that he failed to apply that approach to the ventilator flaps since, at delivery, the space next to the flaps could not be used. There was thus a failure in trailer carrying capacity just as much in this case as in the other two.[21]To my mind, the difficulty with the judge's approach is that, by asking whether a constraint is to be characterised as affecting trailer carrying capacity as opposed to affecting safety equipment, he is almost inviting the answer that it is the former. There is not a true dichotomy between trailer carrying capacity on the one hand and safety equipment on the other; if there were, it is not immediately apparent (to me at least) why absence of lashing points and crash barriers are not matters equally relating to safety equipment on the vessels. The question which the judge, with respect, ought to have asked himself is whether the absence of the contractual number of spaces on the date of delivery amounted to a failure of carrying capacity on that date. If the right number of spaces could have been made available at modest cost, it would be difficult to say that there was a breach of the warranted capacity, whereas, if there was an inherent difficulty about providing the contracted number of spaces on board the vessel as constructed, no doubt a breach of Article I.4 could be proved and liquidated damages under Article III.5 would be payable.[22]Although Mr Kendrick did not make this precise point, the heading which the judge gave to this section of his judgment can be seen to be itself somewhat misleading. That heading is, "If Astilleros' obligation was to provide spaces of 13 metres in length, did they do so?" The issue, however, was not whether the builders provided the right number of spaces, but whether they delivered a vessel which had the relevant freight capacity, viz a vessel which was capable of providing the right number of spaces. It may seem a small difference, but it is not an unimportant one.[23]The facts of the present case show that in relation to the elephant's feet there was a deficiency of design inasmuch as no lashing points were available on delivery in two spaces that could be used for carrying trailers; similarly, the siting of the crash barriers constituted a defect of design (or perhaps workmanship) in that the siting prevented two spaces from being properly used; likewise, the hinged ventilator flaps prevented the nearby spaces from being used, when sliding covers would have obviated the problem - again there was a defect of design. No one would suggest that, if one ignored the liquidated damages clause and if these comparatively minor matters could be put right for about $11,000, any loss to the buyers should be assessed by reference to any incapacity of the vessel to carry trailers. It would be assessed by reference to the cost of correcting the defects of design or workmanship which existed on delivery. These considerations show, to my mind, that the vessel had the capacity at delivery of providing 146 13-metre spaces and it follows that, on delivery, there was no breach of Article 1.4 of the contract, whatever other breaches there may have been.[24]It was important for this part of Mr Kendrick's argument that he conceded (and indeed asserted) that the builders were in breach of their obligations as to design and workmanship. It must follow that the builders are accepting a liability to the buyers in the sum of $11,000, at any rate if the defects of design or workmanship were notified within the 12-month guarantee period set out in Article X.1 of the contract.[25]Mr Eder sought to counter the conclusion that there was no breach of trailer carrying capacity by saying that it was the builders' obligation to provide, on delivery, 146 spaces in which trailers could "safely" be carried and that until the defects had been rectified trailers could not safely be carried in the relevant spaces. This, to my mind, does not advance the matter. As Sir Martin Nourse said in the course of argument, the true question is whether the vessel was capable, on delivery, of carrying 146 trailers in 13-metre slots. In my judgment, it was capable of so doing, even if some comparatively modest adjustments were required to enable 146 13-metre trailers to be carried in fact.[26]It seems to me, therefore, that the builders were not in breach of Article I.4 and, strictly speaking, no claim can arise under Article III.5 for liquidated damages. But, in case that conclusion is wrong, I would propose to consider the clause.

(C) True construction of the liquidated damages clause

[27]If there was a breach of Article I.4, I would, for my part, conclude that the true loss of the buyers cannot have been intended to be covered by the liquidated damages clause. There is a danger that, if a liquidated damages clause is held to apply to trifling breaches of contract or breaches of contract which result in a trifling loss, the whole clause might be struck down as a penalty clause. In the court below Mr Kendrick did indeed make that submission in relation to Article III.5, but he did not wish to repeat that submission to this court; that was, no doubt, because liquidated damages clauses of the kind used in the present case have a genuinely useful function in pre-estimating damage which is likely to result. But it is important that such contracts should be construed, if possible, to avoid the result that breaches of contract resulting in minor losses will be covered by such clauses. As Lord Woolf said in Philips Hong Kong Ltd v Attorney General of Hong Kong (1993) 61 BLR 49 at p.59:
"So long as the sum payable in the event of non-compliance with a contract is not extravagant, having regard to the range of losses that it could be reasonably anticipated it [the relevant clause] would have to cover at the time the contract was made, it can still be a genuine pre-estimate of the loss that would be suffered and so a perfectly valid liquidated damage provision."
[28]That shows that it is important to have in mind the range of losses the parties would anticipate the clause would cover when they made their contract. I do not consider that the parties in this case, when agreeing liquidated damages in relation to trailer carrying capacity, could have had in mind defects in design or workmanship which could be rectified without incurring major expense, even if it could be said that until such defects were rectified the vessel's spaces were, in breach of contract, not fully available.[29]This approach to construction of a liquidated damages clause is similar to that of the Privy Council in Webster v Bosanquet [1912] AC 394 , where it was held that a potentially penal clause did not apply to every sale contrary to a right of pre-emption clause (for breach of which liquidated damages were agreed to be payable) but only to sales in the sort of commercial quantity which the parties must have had in mind when they made their contract.[30]Mr Kendrick relied on a passage in the 10th edition (1999) of Professor Sir Guenther Treitel's book on the Law of Contract, at p.932 as follows:
"A sum may, therefore, be regarded as penal if it might have become due on a trifling breach, even though the breach which actually occurred was quite a serious one, and one for which the sum could be regarded as a genuine pre-estimate. In this way, the rule can invalidate perfectly fair bargains. The courts will do their best to avoid such results by construing the contract so as to make the sum payable only on major breaches, for which it is a valid pre-estimate."
[31]For this proposition Webster v Bosanquet is cited. Mr Eder attacked the passage, firstly, as not justified by Webster v Bosanquet and, secondly, as being difficult to justify in principle since a distinction between major breaches and minor breaches of contract would give rise to uncertainty and unnecessary argument.[32]For my part, I think the passage correctly states the law, for the reasons that I have given, so long as one understands the phrase "major breaches" as referring to breaches of contract giving rise to substantial loss of the kind contemplated by the liquidated damages clause.[33]For these reasons I would hold that, even if there was a breach of Article I.4 of the contract to the extent of an inability on the part of the vessel to provide six required slots, the loss resulting from that breach was not intended to be covered by the liquidated damages clause. I would therefore allow the builders' appeal by setting aside the judgment for $450,000 given against them.

(D) Loss of right to rely on liquidated damages clause

[34]Mr Kendrick had a substantial argument to the effect that Articles II.2 and II.5 required liquidated damages of all kinds to be calculated, determined and paid at the time of delivery of the vessel either to the buyers or (if there was a dispute) into escrow. If my Lords agree with what I have said so far, the builders' appeal against the judgment for $450,000 will succeed, and anything I say on this topic is unnecessary to my decision. But I will express my views on it briefly.[35]Article III.5 is only one part of the liquidated damages clause, which applies also to delays in delivery, insufficient speed, excessive fuel consumption and deficiency in deadweight tonnage. It is true, as Mr Kendrick submitted, that any delay in delivery will be known at delivery and that speed and consumption are tested at sea trials and shop trials respectively, so that deficiencies in speed and consumption can be calculated and determined at delivery. There is, however, no pre-delivery trial in relation to trailer carrying capacity (nor, so far as I am aware, in relation to deadweight tonnage). It might well be the case that any deficiency in trailer carrying capacity will only emerge after the vessel has done at least one fully laden voyage. Complaints were not, in fact, made to the builders in the present case until some months after delivery. I cannot detect any provision in the contract positively excluding a claim for liquidated damages once delivery is made and it would not be fair for the builders to seek to do so if, in fact, it was a possibility that a genuine claim for deficiency in trailer carrying capacity would not emerge until the vessel had been successfully operated. If there had been a good claim in this case, I would not have held that it was barred by virtue of the fact that Article II provides for liquidated damages to be calculated, determined and paid on delivery. The only barring clause is Article X.5 and that, as the judge said, is not apt to bar claims for breaches of express contractual obligations. Conclusion[36]For these reasons I would dismiss the buyers' appeal and allow the builders' appeal.

SIR MARTIN NOURSE : I agree.

LORD JUSTICE PILL : I also agree.

Order

buyers' appeal dismissed and builders' appeal allowed; counsel to lodge an agreed minute of order dealing with all consequential matters.

Cited in 4 later judgments