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EXERCISING YOUR CONTRACTUAL RIGHTS – DO YOU LOSE YOUR ‘COMMON LAW’ RIGHTS?

Published: 27th March 2009

The Court of Appeal have recently held that a purchaser under a contract who exercised a contractual right to terminate the agreement when the seller defaulted was not prevented from treating the contract as repudiated at common law, as a result of which he could recover damages for loss of bargain.

In STOCZNIA GDYNIA SA v GEARBULK HOLDINGS LTD (2009) the purchaser (P) entered into 3 contracts with a shipyard (S) for the construction of 3 ships. The contracts provided that the price would be reduced, (by way of 'liquidated damages'), if there was any delay in delivery, and also provided P with a right to terminate the contracts if there was a major breach by S of its obligation to build the ships. If P terminated the contracts in this way, then S had to repay any sums that P had previously paid, with interest. No ships were delivered.

P wrote to S terminating the 3 contracts and exercised its right to recover the instalment of the price that it had paid, and then also claimed that it was entitled to recover damages for the loss of its bargain. S said that because P had exercised its contractual right to terminate the contracts, its remedies were limited to recovery of the instalments in accordance with the contract.

In an Arbitration, the Arbitrator held that S had repudiated the contracts and the contract terms did not exclude P's 'common law' rights. The Arbitrator also held that P had not affirmed the contracts, (i.e. agreed that the contracts were still in force).

On appeal to a single judge it was held that the contract terms were not an exclusive code preventing a claim for damages, but that P could not claim damages at 'common law' for the repudiation of the contracts because it had affirmed the contracts and then recovered the moneys from a guarantor under the terms of the contracts.

S argued that the contracts contained a complete "contractual code" which superseded any right to treat the contracts as repudiated at 'common law', and so P was left only with any remedies that were provided for in the contracts. Alternatively, S argued that the relevant provisions of the contracts provided for an alternative means by which the contracts could be brought to an end, and so, having elected to exercise these contractual rights, P could not now claim 'common law' damages for loss of bargain as well.

The Court of Appeal held that the contractual term that gave P the right to terminate the contracts did not displace P's right to treat the contracts as repudiated at 'common law'. The main purpose of the contractual term was to provide an agreed measure for the compensation payable if there was a breach due to delay in delivery of the ships, and any deficiencies in capacity and performance by S, whilst important, did not go to the root of the contracts.

However, the parties had also agreed that there was a point at which the delay or deficiency was so serious that it would entitle P to terminate the contracts, and so the parties must have agreed that at that point the breach was so serious that it went to the root of the contract.

In those circumstances, the right to terminate the contracts must sensibly be understood as embodying the parties' agreement that P had the right to treat the contract as repudiated, with the usual consequences. It was wrong to treat P's right to terminate in accordance with the contract terms as different in substance from the right to treat the contract as discharged by reason of repudiation at 'common law'.

Further, the contractual terms did not exclude the right to recover damages for 'loss of bargain' if P terminated. The term that S relied on formed part of an introductory section to the clause as a whole, which provided in general terms for the payment of 'liquidated damages' for various breaches of the contract later described in more detail. Those introductory paragraphs were directed only to those parts of the term that provided for the payment of 'liquidated damages' and had no application to the situation that would arise on a termination of the contract.

By choosing to terminate the contract pursuant to the contractual term, P did not lose its rights to treat the contract as repudiated and to recover damages for repudiation. P's actions in treating the contracts as terminated under the relevant contract terms was intended to, and did, discharge the contracts with the same consequences as if they had been discharged by repudiation in accordance with 'common law'. A person who exercised a contractual right to terminate which arose on the other party's breach was not inevitably prevented from treating the contract as discharged and recovering damages for the loss of his bargain. The exercise by P of its right to recover instalments of the contract prices under the terms of the contracts did not involve an 'election' on P's part to affirm the contracts. There was no inconsistency in recovering instalments of the price under the contract and also recovering damages for 'loss of bargain' at 'common law'. S had repudiated the contracts by the time P sent its letters of termination and those letters were sufficient to amount to an acceptance by P of S's repudiation.

If this decision raises any questions for your organisation please contact Craig Blakemore or Duncan McAllister at our Liverpool office on 0151 236 8989 or Graeme Jump or Josh Conroy at our Manchester office on 0161 214 0500.