Cadogan Petroleum Holdings Ltd v Global Process Systems LLC [2013] EWHC 214 (Comm)

Case No 2011 FOLIO 1030

[2013] EWHC 214 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 15/02/2013

Before

MR JUSTICE EDER

Between

CADOGAN PETROLEUM HOLDINGS LTDClaimant

GLOBAL PROCESS SYSTEMS LLCDefendant

Paul Stanley QC and Andrew Legg (instructed by Byrne and Partners LLP) for Claimant

Michael Bools QC (instructed by Herbert Smith Freehills LLP) for Defendant

Hearing Hearing dates: 5 – 7 February 2013

Judgment

Mr Justice Eder :

Introduction

[1]For almost 60 years, students of law have debated the example posed and considered by Denning LJ in Stockloser v Johnson [1954] 1 Q.B. 476, 491:

“…..Suppose a buyer has agreed to buy a necklace by instalments, and the contract provides that, on default in payment of any one instalment, the seller is entitled to rescind the contract and forfeit the instalments already paid. The buyer pays 90 per cent. of the price but fails to pay the last instalment. He is not able to perform the contract because he simply cannot find the money. The seller thereupon rescinds the contract and retakes the necklace and resells it at a higher price. Surely equity will relieve the buyer against forfeiture of the money on such terms as may be just….”

[2]At heart, that is what the present dispute is about – although the court is here concerned not with a necklace but rather two Gas Plants originally constructed by the defendant (“GPS”) in their fabrication yard in Mafraq, Abu Dhabi and intended for shipment to and use in Ukraine. The Gas Plants are currently still situated in Abu Dhabi where they have been - effectively “mothballed” – since 2009, almost 4 years ago. It is common ground that GPS appear to have been pro-active to ensure that the main equipment has been preserved in good condition and that the plants are in good shape.

The Gas Plants

[3]The Gas Plants are very large structures properly described as “gas stripping plants” each comprising of a number of different inter-connecting components such as separators, heaters, compressors, pipes, tanks and pumps. They utilise what is referred to as the “Joule-Thomson effect” with a capacity of up to 100 mmscf/d each (design capacity was 70 mmscf/d and 650 tonne/d condensates). As built, they were designed for(i) a high pressure reservoir (the richest feed having a methane content of 73.6% and fed to the plant at high pressure (138 barg));

(ii) a low temperature environment (including a comprehensive heating system to permit operation in severe winter conditions in Ukraine which would be largely redundant in hotter climates);

(iii) “sweet gas service” with the result that the plants cannot cope with other than trace levels of hydrogen sulphide or “lethal sour service”;

(iv) an onshore application; and

(v) the preparation of the waste water and condensates for trucking.

The Settlement Agreement dated 15 October 2009

[4]The present dispute arises out of a Settlement Agreement dated 15 October 2009 (the "Settlement Agreement"). The background to that agreement is most conveniently summarised in the recitals: i) GPS originally agreed to sell two gas condensate plants to two companies for use in Ukraine. Sale and purchase contracts both dated 16 July 2008 were entered into by GPS and two wholly owned subsidiaries of Cadogan Petroleum Holdings Ltd ("Cadogan"), LLC Astroinvest Ukraine (“Astro”) and Usenco Ukraine (“Usenco”). ii) Those contracts were both “rescinded” by agreements dated 9 April 2009 (Astro) and 29 May 2009 (Usenco). iii) By the same agreements, which rescinded the 16 July 2008 contracts (in the case of Usenco, as amended), GPS and Cadogan entered into two contracts for the “manufacture and delivery of equipment for the construction of complex gas treatment plant[s]” in the territory of the Poltava Region (Astro) and Lviv (Usenco). iv) By 29 May 2009, therefore, GPS and Cadogan had agreed that GPS would manufacture and supply, and Cadogan would buy, the two Gas Plants (with Cadogan selling those plants on to Astro and Usenco). v) By July 2009 a series of disputes had arisen between the parties. In particular: a) Those parties referred to as the “Claimants” (including Cadogan) alleged that GPS and Global Process Systems Inc. ("GPS Inc") were liable for various alleged secret commissions (referred to in Recital O); b) the Claimants also alleged that the business of SonicGauge and/or various shares in SonicGauge were held on trust for Cadogan and that the GPS Parties were liable to pay damages and/or equitable compensation (Recital O); and c) GPS maintained that Cadogan had accepted the Gas Plants and that, title having passed to Cadogan, it was liable to pay the outstanding balance of the purchase price (Recital Q). Two sets of proceedings (the "English Proceedings" and the "GPS Proceedings") were commenced.

[5]The Settlement Agreement was intended to resolve the three issues set out above, as reflected in Recitals (U) and (W): (U) It is in the commercial interests of the Parties to settle the English Proceedings and the GPS Proceedings and to resolve and release all claims between the Claimants and the GPS parties, and by this Agreement the Parties, on and subject to the terms set out below, have agreed to do so; and GPS LLC has agreed to repurchase the Gas Plants from Cadogan Holdings for the price and on the terms set out below. ... (W) Cadogan Holdings and GPS LLC have also agreed that in the events set out below they will incorporate a new company with a view to securing, developing and exploiting the use of sonic gauge technology from QinetiQ Limited.

[6]The Settlement Agreement comprised four main parts: i) an agreement between all of the 8 parties to the agreement (defined as the “Parties”) to compromise all of the disputes between them (Clauses 1 to 8, Settlement of proceedings and release of claims); ii) an express agreement by the Parties that property in the Gas Plants was vested in Cadogan (Clause 9) and, in effect, a cross-release of all claims and liabilities (Clause 10); iii) an agreement between Cadogan and GPS only for the sale and purchase of the Gas Plants (Clauses 11 to 22, Purchase and sale of the Gas Plants); and iv) an agreement between Cadogan and GPS and GPS Inc in relation to SonicGauge (Clauses 23 to 30, Sonic Gauge).

The “Sale Agreement” between Cadogan and GPS

[7]The focus of the current dispute is that part of the Settlement Agreement contained in Clauses 11-22 (Clauses 11-20 of which are referred to in Clause 22 as the “sale agreement”) and which provides in material part as follows:

“Purchase and sale of the Gas Plants 11. Cadogan … agrees to sell and GPS … agrees to buy each of the Gas Plants, completion of such sale and purchase by the passing of property and payment of the agreed price to take place as provided in paragraphs 12 and 17 and 18 or 19 and 20 below (as the case may be). 12. GPS … will, within 30 days of the date of this Agreement, pay the sum of US$1,000,000 to Cadogan… as part payment of the purchase price for the Gas Plants (being a sum of US$500,000 in respect of each Gas Plant). 13. Pending passing of property in the Gas Plants to GPS … and payment of the total price:- 13.1. Cadogan … 13.1.1. authorizes and permits GPS … and confers upon GPS … the exclusive right to market the Gas Plants and offer them for sale with a view to a New Supply Contract being entered into; 13.1.2. authorizes and permits GPS … to carry out any work on or take any steps in relation to the Gas Plants (or any part of them) for the purpose of maintaining, preserving or protecting them; 13.1.3. will not itself seek to market the Gas Plants or otherwise endeavour to sell them or authorize anyone else apart from GPS … to do so, nor to take any steps which might hinder or interfere with the marketing of the Gas Plants by GPS…, 14. GPS … will use all reasonable endeavours to enter into a New Supply Contract relating to both Gas Plants within 10 months of the date of this Agreement … 17.1 GPS … will pay Cadogan … as the price for a Gas Plant so contracted to be sold a further US$ 18.75 million (making a total price for each Gas Plant of US$ 19.25 million including the payment made pursuant to paragraph 12 above; and making a total price of US$ 38.5 million if both Gas Plants are so contracted to be sold). Such further US$ 18.75 million for each Gas Plant contracted to be sold shall be paid as follows:- 17.1.1. as to US$9 million on or at any time before the earlier of 17.1.1.1. 6 months after entry into the New Supply Contract pursuant to which the Gas Plant in question is contracted to be sold; and 17.1.1.2. 21 days after GPS has received payments totalling US$9 million in connection with such New Supply Contract. 7.1.2. as to the balance of US$ 9.75 million on or at any time before the earlier of 17.1.2.1. 12 months after entry into the New Supply Contract pursuant to which the Gas Plant in question is contracted to be sold; and 17.1.2.2. 21 days after GPS having received payments totalling US$ 18.75 million in connection such New Supply Contract. 18. Property and risk in a Gas Plant so contracted to be sold will pass to GPS LLC immediately on the sooner of the following occurring:- 18.1. payment in full to Cadogan … of the US$ 19.25 million due for that Gas Plant; alternatively 18.2. delivery to Cadogan … of an irrevocable letter of credit of or a performance bond or a bank guarantee issued in favour of Cadogan … by a recognised bank with a Standard & Poor’s rating of not less than A for payment of the purchase price or, if payment of part of the purchase price has already been made, for the outstanding balance of the purchase price; 19. If no New Supply Contract has been entered into in respect of a Gas Plant before the expiry period of 10 months after the date of this Agreement (“an unsold Gas Plant”), then immediately at the end of that 10 months GPS … will become liable to pay Cadogan as the price for that unsold Gas Plant a further US$ 37.5 million (making a total price for the Gas Plant of $US 18.75 million including the payment made pursuant to paragraph 12 above; and making a total price of $US 37.5 million if no New Supply Contract is made in respect of either Gas Plants within 10 months). Such further US$ 18.25 million for each unsold Gas Plant shall be paid as follows: 19.1. the first US$ 3.25 million on or at any time before 13 months after the date of this Agreement. 19.2. the next US$ 5 million on or at any time before 16 months after the date of this Agreement. 19.3. the next US$ 5 million on or at any time before 19 months after the date of this Agreement. 19.4. the final US$ 5 million on or at any time before 22 months after the date of this Agreement. 21. If any sum falls due from GPS … pursuant to any of subparagraphs 17.1.1, 17.1.2 and 19.1 to 19.4 but has not been paid within 30 days of it so falling due, then GPS … will pay simple interest on that sum from its due date until payment at the rate of 2% above the Bank of England base rate for the time being. 22. If any sum due from GPS … pursuant to any subparagraphs 17.1.1, 17.1.2 and 19.1 to 19.4 has not been paid within 60 days of it falling due, then Cadogan … shall be entitled to serve written notice on GPS … seeking to rescind its agreement to sell the Gas Plants pursuant to clauses 11 to 20 above (“the sale agreement”), and if the outstanding sum plus accrued interest is not thereafter paid within 14 days of GPS … receiving such notice, then the sale agreement shall be rescinded and the provisions of clause 13 shall cease to apply, but such rescission shall be without prejudice 22.1. to the other provisions of this Agreement; 22.2. any rights accrued to either Cadogan … or GPS … under the sale agreement; or 22.3. Cadogan’s … right to claim damages against GPS … for breach of the sale agreement…”

Relevant events following the Settlement Agreement

[8]Pursuant to Clause 12, GPS duly paid the sum of US$1m within 30 days of signing the Settlement Agreement. As contemplated by Clause 13.1.1, GPS also actively sought to market the Gas Plants. However, despite potential interest from various third parties, attempts to find a buyer foundered and, in the event, no New Supply Contract (as defined) was entered into during the 10 month period referred to in Clause 19 (i.e. by 14 August 2010).

[9]Meanwhile, in addition to the payment of the sum of US$1m under Clause 12, GPS paid the following sums viz(i) 12 December 2010: US$99,965.24;

(ii) 27 December 2010: US$2,499,990.45;

(iii) 4 January 2011: US$2,999,990.44. Thus, the total amounts paid by GPS to Cadogan total US$7,499,946.13 (for present purposes, say US$7.5m). However, GPS did not pay the further sums due under sub-clauses 19.2 and 19.3 namely US$5 million in respect of each Gas Plant in February 2011 and May 2011. Nor has it paid any further amounts. It is common ground that as a result of such non-payment, Cadogan was entitled to exercise the right of “rescission” under Clause 22; and, for the avoidance of doubt, it is also common ground that the term “rescission” is not intended to refer to rescission ab initio but rather to contractual termination of the Sale Agreement.

Termination of the Sale Agreement

[10]By a notice on 19 July 2011, Cadogan informed GPS of its intention to terminate the Sale Agreement if the outstanding payments were not made within 14 days. By a letter dated 1 August 2011, Cadogan agreed to extend the deadline for payment (and the date on which its notice of termination would take effect) to 9 August 2011. GPS made no further payments and Cadogan notified GPS, by letter dated 10 August 2011, that its termination notice therefore took effect as of 9 August 2011. It is common ground that the Sale Agreement was thereby effectively terminated and property in the Gas Plants has remained throughout with Cadogan.

Attempts to market the Gas Plants

[11]Following termination and with the acquiescence and indeed encouragement of Cadogan, GPS continued actively to market the Gas Plants and to seek to find a suitable buyer. These efforts (both before and after August 2010) appear from the voluminous documents included in the trial bundles and also the evidence of Mr Prescott who joined GPS in December 2007 as Director of GPS-Singapore and became the group’s Chief Executive Officer in May 2010. However, despite these considerable efforts over more than 3 years, the Gas Plants remain unsold even now – although Mr Prescott’s evidence was that negotiations were still continuing with a number of potential buyers and that he remained optimistic that a sale could be achieved within the relatively near future.

The main issues

[12]Against that background, the main issues which arose between the parties were as follows: i) Issue 1: Is Cadogan entitled to retain the $7.5 million that had been paid at the date of termination? Cadogan says that it is. GPS says that Cadogan is obliged to make restitution of that sum. This is essentially a question of construction and of law. ii) Issue 2: Is Cadogan contractually entitled to recover the further instalments, totalling $20 million, which had accrued due and payable at the date of termination, as a debt? Cadogan says that it is. GPS says that it cannot do so. This is also essentially a question of construction and of law. iii) Issue 3: Depending upon the answers to the questions set out above, is GPS entitled to “relief against forfeiture”? That is the Stockloser v Johnson point. In particular, on the assumption that Cadogan was prima facie entitled to the sums already paid and the further sums payable before termination (in round figures totalling approximately US$27.5m), was GPS entitled to “relief against forfeiture”? iv) Issue 4: What sum (if any) is Cadogan entitled to be paid by GPS as damages for breach of contract? In principle, it is common ground that this sum will be the difference between the contract price i.e. US$37.5m less(i) the value of the Gas Plants in August 2011 (or a reasonable time thereafter) and

(ii) whatever sums Cadogan is entitled to retain or to obtain in debt (i.e. the resolution of issues (1) and (2)). In summary, it was GPS’s case that the Gas Plants had a value of US$40-48 million and that, on this basis, Cadogan had suffered no loss at all and was only entitled to nominal damages. This was hotly disputed by Cadogan.

[13]As to the value of the Gas Plants, the parties served reports from two experts both of whom gave oral evidence and were cross-examined viz. on behalf of Cadogan, Mr Jan Paul van Driel, and, on behalf of GPS, Mr Philip Nutman. However, late in the trial in the course of final submissions, I was informed that the parties had agreed that Cadogan’s claim for damages should be adjourned to give further time to sell the Gas Plants and thereby possibly narrow the issues in that context. Thus, it is unnecessary for me to determine Issue 4 although, as appears below, the value of the Gas Plants is, at least on one view, potentially relevant to Issue 3.

Issue 1 and Issue 2

[14]It is convenient to consider these two issues together because both Mr Stanley QC and Mr Bools QC accepted that, in principle, these issues stood or fell together. In summary, such consideration involves the following main points viz i) As a matter of construction, what is the effect of the Sale Agreement ? ii) If, as a matter of construction, Cadogan is entitled to retain the sums paid and to recover the further sums outstanding at the date of rescission, is such prima facie entitlement defeated on the basis of(a) total failure of consideration and/or

(b) the law against penalties ?

Construction

[15]In summary, GPS says that it was a ‘condition’ of the payment of those instalments that were paid that there be no rescission under clause 22 and that sums accrued due and payable but not paid prior to rescission were, as a matter of construction and by virtue of the rescission, no longer due and payable. In particular, Mr Bools QC submitted as follows: i) As a matter of construction of the Sale Agreement, the agreed price and the instalments payable were by way of payment for the Gas Plants. Given that title in the Gas Plants would never pass to GPS until the full payment of the price (or the payment of the price being secured), on Cadogan's case, if GPS paid all the sums due up until the final instalment (due 22 months after the date of the agreement), but failed to pay that final instalment then 74 days later (Clause 22), Cadogan would be entitled to terminate the Sale Agreement, retain the Gas Plants, retain the US$27.5 million already paid and claim for the additional US$10 million. ii) The absurdity of such a situation demonstrates that that cannot have been the parties’ intention: they cannot have intended the instalments to be paid towards the price to constitute forfeitable deposits and, given that there is no basis for distinguishing the earlier payments from the later, it inexorably follows that none of the payments is properly characterised as a non-refundable deposit, rather than instalment payments of the final price. iii) This analysis is also supported by authority including: a) Dies et al v. British and International Mining and Finance Corporation, Ltd [1939] 1 K.B. 724 and, in particular, the observations of Stable J at p742 where he stated:

“In my judgment there would be a manifest defect in the law if, where a buyer had paid for his goods but was unable to accept delivery, the vendor could retain the goods and the money quite irrespective of whether the money so retained bore any relation to the amount of damage, if any, sustained as a result of the breach. The seller is already amply protected, since he can recover such damage as he has sustained and can, it seems, set off his claim for damages against the claim for the return of the purchase price.” b) McDonald et al v. Dennys Lascelles Ltd (1933) 48 CLR 457 and, in particular, the observations of Dixon J where he stated at 477: “It does not, however, necessarily follow from these principles that when, under an executory contract for the sale of property, the price or part of it is paid or payable in advance, the seller may retain both what he has received, or recover overdue instalments, and at the same time treat himself as relieved from the obligation of transferring the property to the buyer. When a contract stipulates for payment of part of the purchase money before the time has arrived for conveying the land; yet his title to retain the money has been considered not to be absolute but conditional upon the subsequent completion of the contract.”

In other words, if a pre-payment of an instalment is not intended to be by way of forfeitable deposit, the vendor’s right to retain is conditional upon completion of the contract by the conveyance of property in the goods or land.

[16]Ultimately, these questions turn on the proper construction of the contract: see, in particular, the most valuable analysis by (the young) Jack Beatson in Discharge For Breach: The Position of Instalments, Deposits and other Payments due before Completion, [1981] 97 LQR 388. On this basis, I am unable to accept Mr Bools QC’s submissions in this context. In particular, as submitted by Mr Stanley QC, it seems to me that Clause 22.2 expressly provides that rescission shall be ‘without prejudice … [to] any rights accrued to either Cadogan… or GPS….under the sale agreement’. At the time of rescission, Cadogan had accrued rights to be paid all the outstanding instalments. In my judgment, to treat them as conditional, as GPS seeks to, runs counter to the plain language of the agreement. When the Sale Agreement was “rescinded”, Cadogan had acquired accrued rights to be paid, but GPS had not yet acquired the right to receive title to the plants. That was the status quo at the time of the rescission, and the parties expressly agreed in effect that rescission should leave matters where they stood. If that is right, and given the parties’ agreement that all sums paid and payable at the date of rescission stand or fall together, it must necessarily follow that Cadogan were and are also entitled to retain the former as well as the latter.

[17]In response, Mr Bools QC submitted that the words relied upon by Mr Stanley QC in Clause 22.2 of the Sale Agreement merely state the effect of the common law i.e. a contract which is terminated for breach ceases to have any effect prospectively but incurred rights and obligations persist. However, Mr Bools QC submitted that(i) this begs the question as to what rights were accrued to Cadogan prior to its termination of the Sale Agreement;

(ii) any right which Cadogan acquired to retain (or to obtain) the pre-payments was conditional on the completion of the sale i.e. the transfer of property;

(iii) if any accrued right of Cadogan to retain (or to obtain) the pre-payments was conditional then, even though that right accrued to Cadogan prior to termination, it is only entitled to retain (or to obtain) the payments if the condition subsequent is satisfied; but

(iv) that became impossible on the termination of the Sale Agreement.

[18]Although this argument was advanced most persuasively by Mr Bools QC, I am unable to accept it. In particular, I do not consider that Clause 22.2 can properly be ignored or side-lined on the basis that it does no more than set out the common-law position. On the contrary, it seems to me that as a matter of construction, the wording of Clause 22.2 was included to make plain that Cadogan’s accrued rights were to be unaffected by the exercise of the right of termination; and that such accrued rights must necessarily include the right to recover the outstanding payments and, given the parties’ agreement, also to retain amounts already paid – although I accept that such right might nevertheless be overridden by the grant of relief from forfeiture on equitable grounds which I consider further below.

[19]This conclusion is, in my view, supported by the fact that Clause 22 expressly provides that in the event of termination, Clause 13 shall cease to apply. So the draftsman was well able to and did address the important question of the consequences of contractual termination on existing obligations which formed part of the Sale Agreement. I fully recognise that this argument cannot be taken too far because Clause 13 is concerned generally with the rights and obligations of the parties pending passing of property and is therefore not limited to accrued rights existing at the date of termination. However, the basic point remains. In addition, it is noteworthy that, unlike Clause 13, the parties did not agree to disapply Clause 21 after rescission which is, at the very least, consistent with the views expressed above.

[20]In my judgment, this conclusion is also supported by commercial considerations given, in particular, the terms of the Recitals and the general structure of the Sale Agreement which formed part of the overall Settlement Agreement. Contrary to Mr Bools QC’s submissions, it does not seem to me that such matters can properly be ignored. Further, it seems to me plain from the alternative scenarios addressed by Clauses 17 and 19 of the Sale Agreement that the parties obviously contemplated and expressly provided (in Clause 19) for the possibility that the Gas Plants might remain unsold after the stipulated 10 month period. Having regard to all of the foregoing, it seems to me uncommercial in the extreme that Cadogan’s accrued rights to the monies paid and outstanding immediately prior to rescission should in effect self-destruct and be replaced with a claim in damages when the right to rescind is exercised. I do not consider that this point is answered by Mr Bools QC’s response i.e. that Cadogan only has itself to blame for such self-destruction because, if it wished, Cadogan could have held back from exercising the right of rescission, kept the Sale Agreement alive and, in due course, sued for the full price and/or specific performance. In my view, any suggested unconscionability that might arise by the exercise of the right of rescission and the possibility of Cadogan retaining the sums paid and obtaining recovery of the payments outstanding at the date of rescission as well as keeping title to the Gas Plants can be addressed adequately by granting relief against forfeiture in such terms as might be just.

[21]Thus, it is my conclusion that as a matter of construction, Cadogan is prima facie entitled to retain the sum paid of (say) US$7.5m and to recover the further payments outstanding at the date of rescission i.e. US$20m.

Failure of Consideration ?

[22]In summary, it was GPS’s case that this conclusion was in effect defeated because there was here a total failure of consideration.

[23]By way of introduction to this part of his argument, Mr Bools QC noted that Stable J. decided Dies on the basis of the parties’ contractual intention and the fact that the payments made were not deposits or earnests to guarantee performance; and that although the learned Judge was invited to decide the case on the basis that the payments were recoverable because consideration had wholly failed, he declined to do so. Nevertheless, Mr Bools QC drew my attention to the analysis by Burrows, The Law of Restitution (3rd Ed 2011), pp.354-5 where it is argued most persuasively that Stable J. did so because, as the case predated the House of Lords’ decision in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd [1943] A.C. 32, he was bound to follow Chandler v. Webster [1904] 1 K.B. 493 which required a contract to have been void ab initio for a claim for money had and received to succeed on the basis of a total failure of consideration; but that following Fibrosa, which decided that a claim for restitution of a part payment of a purchase price could be brought even if the sale contract was not void, but (in that case) frustrated, it follows that the buyer’s right to reclaim such pre-payments is equally explicable in unjust enrichment terms as it is as a matter of contractual construction. Prof. Burrows may well be right; but it remains to consider the merits of GPS’s case in the present context.

[24]Mr Bools QC also submitted that a total failure of consideration arises when the promised performance wholly fails, even if that failure of performance results from a breach by the reclaiming party, relying upon the decision of the Court of Appeal Rover International Ltd v. Cannon Film Sales Ltd [1989] 1 W.L.R. 912. For present purposes, I am prepared to assume (but do not decide) that this is or at least may be so.

[25]In any event, Mr Stanley QC submitted that in order to give rise to any cause of action for restitution, the consideration must have wholly failed: see Mitchell et al, Goff and Jones on the Law of Unjust Enrichment (8th ed, 2011) para 12-16; Giedo van Der Garde BV v Force India Formula One Team Ltd

[2010] EWHC 2373 (QB)

[359]; Stocznia Gdanska

[1998] 1 WLR 574

at 588D-E; and that the consideration here had not wholly failed. In particular, he submitted that it was not right to say that the pre-payments were simply consideration for the transfer of title to the Gas Plants; that, on the contrary, they were part and parcel of an overall settlement agreement; and that even within that part of the agreement dealing with sale, GPS had already enjoyed rights (notably the right to attempt to find a third party buyer for the Gas Plants).

[26]In response, Mr Bools QC relied upon a passage in Rover International Ltd v. Cannon Film Sales Ltd [1989] 1 W.L.R. 912 at p923B-D:

“When referring to the provision of consideration in this context, in the same way as in the context of a failure of consideration discussed earlier in the Rover appeal, one is not referring to the original promise to perform the contract. The question is whether there was any consideration in the nature of part performance for which the instalment was payable.”

(emphasis added) In addition, Mr Bools QC relied upon a passage in Goff and Jones on the Law of Unjust Enrichment, para 12-24:

“…although the claimant might have received some benefit, if that benefit does not form part of what was understood to be given for the payment, the claim for total failure of basis remains intact: Comptoir d’Achat et de Vente du Boerenbond Belge S/A v Luis de Ridder Limitada (The Julia) [1949] A.C. 293…”

. Thus, Mr Bools QC submitted that Cadogan’s plea that consideration has not failed is doomed.

[27]Again, purely for the sake of argument, I am prepared to assume (without deciding the point) that this is a case where it might be said that there was here a failure of consideration in the nature of part performance for which the particular instalments were payable. Nevertheless, as submitted by Mr Stanley QC, in a contractual case, if a contract provides that one party can obtain or retain a benefit even if a contractual provision for termination is exercised, there has been no relevant failure of consideration: see Goff and Jones on the Law of Unjust Enrichment, para 12-19. Further, in any event, where the contract has explicitly provided for the circumstances in which benefits will be or will not be returned, its provisions govern: see Goff and Jones on the Law of Unjust Enrichment, para 3-28. Here, for the reasons given above, it is my conclusion that the contract expressly governed the matter and provided that accrued rights should not be affected by rescission under clause 22. Accordingly, if I am right with regard to the proper construction of the Sale Agreement, there is no room for the actual or putative restitutionary claim on which GPS relies. Indeed, on the basis that the premise is correct, I did not understand that Mr Bools QC suggested any different conclusion.

[28]For these reasons, I reject Mr Bools QC’s argument based upon total failure of consideration.

Penalty?

[29]In essence, Mr Bools QC submitted that if the pre-payments by GPS under the Sale Agreement are non-refundable as a matter of construction, then GPS prima facie forfeits those payments as a result of its breach in not paying the full price; and that, if that is the case, then the implied forfeiture of the pre-payments provided for by the Sale Agreement is unenforceable as a penalty. In support of that submission, Mr Bools QC relied on a passage in Treitel, The Law of Contract , 13th Ed 2011 (ed Peel) §20-149:

“A deposit is distinguishable from a penalty on the grounds that it is payable before, and not after breach. But the function of the two devices is similar: the only difference between “a guarantee that the contract shall be performed” and “a payment of money stipulated as in terrorem of the offending party” lies in the emotive force of the words used. The law as to penalties can therefore apply to deposits. In the Workers Trust case, for example, a contract for the sale of land provided for the payment by the purchaser of a deposit of 25 per cent of the price and for forfeiture of that deposit in the event of the purchaser’s default. After the purchaser had paid the deposit and then failed to complete on the due day, the vendor terminated the contract and purported to forfeit the deposit; but the Privy Council held that the deposit was not a reasonable pre-estimate of the loss which the vendor was likely to suffer in consequence of the default, that the deposit was therefore penal, and that it must be paid back to the purchaser. On the other hand, where the deposit is reasonable in relation to the loss likely to be suffered, it can be forfeited, particularly if the loss is such that it cannot be accurately assessed in advance.”

[30]In addition, Mr Bools QC relied upon a further passage in Treitel at paragraph 20-150, with regard to what he stated was the well-established exception to these principles viz. that a deposit of 10% in respect of a sale of land is regarded as reasonable and not subject to striking down as a penalty, even if it is not in the circumstances a reasonable pre-estimate of loss. All of the points made in these passages are, submitted Mr Bools QC, supported by the observations of the Privy Council in the authority cited, Workers Trust & Merchant Bank Ltd v. Dojap Investments Ltd [1993] A.C. 573, in particular the following passages in the speech of Lord Browne-Wilkinson: “……In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such a provision can be justified as being a payment of liquidated damages being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach…….Ancient law has established that the forfeiture of such a deposit [ie a customary deposit of 10%]... does not fall within the general rule and can be validly forfeited even though the amount of the deposit bears no reference to the anticipated loss to the vendor flowing from the breach of contract…..” [p578E-F] “…..In the view of their Lordships these passages[i.e. those previously cited from Stockloser v. Johnson [1954] 1 Q.B. 476 and Linggi Plantations Ltd v. Jagetheesan [1972] 1 M.L.J 89] accurately reflect the law. It is not possible for the parties to attach the incidents of a deposit to the payment of a sum of money unless such sum is reasonable as earnest money…...” [p579B-G] “…..In the view of their Lordships, since the 25 per cent. deposit was not a true deposit by way of earnest, the provision for its forfeiture was a plain penalty. There is clear authority that in a case of a sum paid by one party to another under a contract as security for the performance of that contract, a provision for its forfeiture in the event of non-performance is a penalty from which the court will give relief by ordering repayment of the sum so paid, less any damage actually proven to have been suffered as a result of non-completion: Commissioner of Public Works v. Hills….” [p582D-E]

[31]Thus, Mr Bools QC submitted as follows: i) It is clearly established, therefore, that (contracts involving deposits relating to the sale of real property aside) any contractual term which, expressly or impliedly, results in the forfeiture of a sum pre-paid under a contract, is subject to the law on penalties and repayment of the pre-paid sum will be ordered in the event that it is not shown to be a genuine pre-estimate of the loss which will be incurred under the contract in the event of a breach. ii) The staged pre-payments under the Sale Agreement cannot on any view be justified as pre-estimates of loss. This is most simply demonstrated by the fact that Clause 19 provides, for example, for three stage payments of US$5 million at three month intervals. The loss which Cadogan might suffer by reason of a failure of GPS to make the payments is the difference in value at the date of breach between the contract price which Cadogan would have received and the value of the Gas Plants at that date. For Cadogan to establish that its entitlement to retain the pre-payments was a genuine pre-estimate of loss, it would have to establish that it was anticipated, at the time of contracting, that the value of each of the Gas Plants was likely to fall by US$5 million each quarter. That is clearly nonsense. iii) The reality is that the stage payments were calculated to spread the cost of payment by GPS and not because they represented an estimate of loss in any sense at all. iv) As a result, any forfeiture of the pre-payments would amount to a penalty and the court will grant relief by ordering their repayment. (For the same reason the court will not order the payment of unpaid overdue instalments because to do so would be to enforce a penalty or, if such sums were to be retained that itself would be a penalty which the court would relieve by ordering their return, giving rise to a circuity of action.)

[32]Again, although these arguments were advanced by Mr Bools QC most persuasively, I am unable to accept them broadly for the reasons advanced by Mr Stanley QC. In particular, as Mr Stanley QC submitted, the essence of a penalty is that it is a provision with the predominant purpose of deterring breaches of contract; and therefore the penalty principle applies only to provisions which take effect on breach. The rule does not apply to sums which become payable on events other than breach: McGhee et al (eds), Snell’s Equity (32nd ed, 2010) at 13-002; Export Credits Guarantee v Universal Oil Products Co

[1983] 1 Lloyd’s Rep 448

, 458 per Slade LJ; approved by the House of Lords

[1983] 1 WLR 399

[33]Here, the obligation to pay the instalments was not triggered by breach in any way. It preceded and was quite independent of any breach. Accordingly, in my judgment, it is not capable of being a penalty. GPS’s true complaint is not and cannot be that the obligation to pay that sum was imposed to deter breach, but that no right was given to obtain absolution from compliance with the accrued obligation to pay it when the contract was rescinded. The absence of such a right is not capable of converting a sum due in debt for reasons unrelated to any breach into a sum payable to deter breach.

[34]I recognise that some at least of the passages cited above from Workers Trust suggest that the penalty principle is not as limited as I have stated and potentially applies even to a contractual provision requiring payment of a sum of money not dependent on any breach but which (after it becomes payable and/or is paid) is subsequently liable to forfeiture by reason of some later breach i.e. typically a “deposit”. The difficulty is specifically addressed by the editors of Chitty on Contracts, 32nd Edition, Vol 1, para 26-193 where, after quoting from the speech of Lord Browne-Wilkinson in Workers Trust at p578, it is stated:

“However, the rules applied in that case differ from the penalty rules; and modern English courts do not appear to apply the penalty rules to deposits or clauses providing for forfeiture of sums paid.”

I agree. In particular, it is, in my view, important to read the passages in the speech of Lord Browne-Wilkinson in the context of the particular facts of that case and the specific relief sought viz. specific performance alternatively relief against forfeiture: see, for example,

[1993] AC 573

, 578A. The terms of the order made (see p583B-D) are also of interest. Moreover, although there is no doubt that the penalty principle and the court’s power to grant relief against forfeiture are often closely aligned, they are distinct and operate very differently. In particular, whether or not a contractual provision is liable to be struck down as a penalty is to be determined as a matter of construction viewed as at the date of the contract. By contrast, the court’s power to grant relief against forfeiture depends upon the exercise of the court’s equitable jurisdiction having regard to the conditions existing when that relief is sought.

[35]For these reasons, I remain of the view that the penalty principle has no application to the obligations on GPS to make the prepayments.

[36]I should mention that Mr Stanley QC advanced a further alternative argument. In particular, he submitted that even if the penalty principle potentially applied, nevertheless the pre-payments here were not a penalty. In particular, he submitted that the classic approach to that question, as set out in Dunlop Pneumatic Tyre Co v New Garage Motor Co Ltd

[1915] AC 79

, and re-stated in modern terms in Murray v Leisureplay plc

[2005] EWCA Civ 963

, requires one to ask (the burden being upon the party seeking to set the clause aside) whether the provision was (objectively) ‘in terrorem’ or, in modern terms, whether it was objectively intended to have a deterrent or a compensatory function. On this basis, Mr Stanley QC submitted that GPS’s argument assumes that the parties must have contemplated that the Gas Plants had a substantial value, so that payment of the sum due would be practically bound to exceed Cadogan’s loss. However, Mr Stanley QC submitted that that begs the question. In particular, he submitted that the obligation to pay instalments arose only after GPS had marketed the Gas Plants for at least 10 months and failed to secure a buyer for them; that the plants were not required for Cadogan’s own purposes; that Cadogan was in a worse position to market the plants than GPS was; that it would incur expenses in doing so; that the value was very uncertain; that in those circumstances payment of the outstanding instalments in full was likely to be justifiable; and that within the ‘generous margin’ allowed to parties before a provision is treated as penal (see Murray v Leisureplay plc

[2005] EWCA Civ 963

, at [43] (Arden LJ) and [114] (Buxton LJ)), the provisions in question cannot be regarded as penal rather than compensatory. There is, in my view, much force in these submissions. However, it is unnecessary to express any concluded view on this point because, for the reasons stated above, it is my view that the penalty principle has no application to the relevant prepayments in this case.

Relief against Forfeiture

[37]In considering this part of the case, I propose to assume that Cadogan is, as a matter of construction, entitled to retain the sum of (say) US$7.5m and to recover in debt the further sum of US$20m, those two sums totalling (say) US$27.5m. Ignoring all questions of interest etc., this would leave a balance outstanding of (say) US$10m (i.e. US$37.5m – US$27.5m) which Cadogan would have been entitled to receive by way of the contract price. It is in these circumstances that it is necessary to consider whether or not GPS is entitled to relief against forfeiture.

[38]As stated in Snell’s Equity, 32nd Edition, para 13-015, it is likely to be very difficult to establish a case for relief against forfeiture in a commercial context involving a freely negotiated contract; and there is a strong view that the form of any such relief should generally be limited to giving the contract-breaker more time in which to pay the sum he had failed to pay on time. This depends in part on the debate between Denning LJ and Romer LJ in Stockloser v Johnson. In the event, it is unnecessary to resolve that debate because Mr Stanley QC accepted that in the circumstances of the present case and given Cadogan’s rescission pursuant to Clause 22, the court did have jurisdiction to grant relief against forfeiture and that such jurisdiction went beyond simply giving GPS more time to pay; and I am prepared to proceed on that basis.

[39]However, this gave rise to an important dispute between the parties. In particular, the questions arose:

“What forfeiture ?” and “What relief ?”

Mr Bools QC answered these questions by saying that Cadogan were, in effect, seeking to forfeit the sum of US$27.5m; and that the court should grant relief against such forfeiture pending the sale of the Gas Plants by ordering the return of the sum of US$7.5m to GPS and refusing to allow Cadogan to recover the further sum of US$20m in debt.

[40]In my judgment, that is not the correct approach. As stated above, I am content to proceed on the basis that the court has jurisdiction to grant relief against forfeiture. However, that jurisdiction rests on equitable principles and, as stated by Denning LJ in Stockloser v Johnson, such relief will be granted “…on such terms as may be just….”. Here, it seems to me that it would be contrary to justice to adopt the course urged by Mr Bools QC in particular because(i) the premise upon which I am proceeding is that Cadogan are prima facie entitled to the sum of US$27.5m;

(ii) unlike the example of the necklace in Stockloser v Johnson and notwithstanding the efforts made over more than 3 years, the Gas Plants in the present case have not been sold; and

(iii) the present value of the Gas Plants and the price that might be achieved in any sale whether by private sale or auction is uncertain. I accept that the position might have been otherwise if the Gas Plants had previously been sold to a third party at a price “out of all proportion” to the damage suffered by Cadogan; or if I had concluded that the Gas Plants had a certain value which was similarly “out of all proportion” to such damage. But that is not so i.e. the Gas Plants have not yet been sold; and the parties have now expressly agreed (no doubt for their own respective good reasons) that I should not determine their value.

[41]In such circumstances, it seems to me that any demands of equity and justice are fully satisfied by maintaining the contractual scheme i.e. upholding Cadogan’s rights to retain the sum paid of (say) US$7.5m and to recover the further sum of US$20m in debt and ordering that any further net sums that might be recovered by way of sale of the Gas Plants up to a maximum of US$10m (plus any interest to which Cadogan would be entitled) be paid to Cadogan with the balance (if any) paid into court or otherwise secured pending further order (or agreement) as to the proper disposal of such monies. In addition, I will grant both parties liberty to apply to vary such order in the light of any change of circumstances that may arise in the future. As already stated, I will also adjourn Cadogan’s claim for damages, again with liberty to apply.

[42]Counsel are accordingly requested to agree a draft order to reflect the terms of this Judgment for my approval. I will, of course, deal with any remaining outstanding issues.