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Cite as: [2002] 2 All ER (Comm) 768, [2002] 2 Lloyd's Rep 436, [2002] EWCA Civ 889, [2002] 2 LLR 436

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		Neutral Citation Number: [2002] EWCA Civ 889
		Case No: A3/2001/1120/1120A

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN’S BENCH DIVISION
COMMERCIAL COURT
(Mr Justice Thomas)

Royal Courts of Justice
Strand,
London, WC2A 2LL

21 June 2002

B e f o r e :

LORD JUSTICE ALDOUS
LORD JUSTICE TUCKEY
and
LORD JUSTICE RIX
____________________

Between:

	STOCZNIA GDANSKA SA	Respondent
	- and -
	LATVIAN SHIPPING COMPANY & OTHERS	Appellants

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

Angus Glennie QC and Lawrence Akka (instructed by Messrs Lawrence Graham ) for the Appellants
Roderick Cordara QC and Vernon Flynn (instructed by Messrs Ince & Co) for the Respondent
____________________

HTML VERSION OF JUDGMENT
AS APPROVED BY THE COURT
____________________

Lord Justice Rix:

In September 1993 and January 1994 Latreefers Inc (“Latreefers”) ordered the construction of six reefer vessels from Stocznia Gdanska SA (the “yard”). Each vessel was covered by a separate contract. The contracts were never performed, save that Latreefers paid the 5% instalment payable on contracting. The yard got as far as laying the keels for the first two vessels, but when the keel laying instalments went unpaid, it exercised its contractual rights of “rescission” to terminate the first two contracts. It then purported to appropriate the same keels to contracts 3 and 4 and to terminate those contracts as well for non-payment of the keel laying instalments. After that, it did the same with contracts 5 and 6. In due course the House of Lords held that the yard was not entitled to appropriate the keels of vessels 1 and 2 to contracts 3, 4, 5 and 6 and therefore there had been no failure by Latreefers to pay the respective keel laying instalments under those four contracts: Stocznia Gdanska SA v. Latvian Shipping Co [1998] 1 WLR 574. The question therefore arose whether those four contracts had been repudiated by Latreefers’ merely anticipatory repudiatory breach in evincing an intention not to perform, in which case such a breach might have been accepted by the yard’s notices of rescission albeit they were uncontractual in their own terms, or whether they were repudiated by the yard’s uncontractual notices, thereby permitting Latreefers to say that it had accepted the yard’s repudiations. In his judgment below Thomas J held that it was Latreefers which had repudiated and the yard which had accepted that repudiation: [2001] 1 Lloyd’s Rep 537.

It follows that there is an important distinction to be made between contracts 1-2 and contracts 3-6. It is common ground that contracts 1-2 came to an end following Latreefers’ breach of contract and that Latreefers is therefore liable both in debt for the unpaid keel laying instalments (as to that there is already an unchallenged judgment) and in damages pursuant to the provisions of the rescission clause. As to contracts 3-6, on the other hand, it is in issue as to which party repudiated, but it is common ground that nothing is or was at any time due in debt for non-payment of the mistaken keel laying instalment notices. There are also issues arising out of the yard’s mistaken invocation of the rescission clause. Latreefers says that that amounted to an affirmation of the contracts, and that, whatever the position may have been before such affirmation, there was no further repudiatory conduct afterwards.

As for the first two contracts, however, the issues are limited to those bearing on quantum. The yard says that the breach consisting in non-payment of the keel laying instalments was a repudiatory breach, and gave rise to damages at common law on a repudiation basis. Latreefers on the other hand says that there was no repudiation, only a contractual termination, at any rate in respect of contract 1, and that damages for the breach of non-payment are limited by the express terms of the rescission clause.

So much for the position in contract, which concerns Latreefers alone.

There is also a claim by the yard in tort against Latreefers’ parent company, Latvian Shipping Company (“Latco”), for inducing Latreefers’ breaches of contract. There was no guarantee by Latco of Latreefers’ obligations to the yard. Nevertheless, in his judgment below Thomas J found that Latco was liable to the yard for the indirect inducement by unlawful means of breach of Latreefers’ contracts with the yard of, those unlawful means consisting in failing, in breach of Latco’s own contract with a service company, Capco, to keep Latreefers in funds to meet its responsibilities, viz to the yard. Thomas J also held, however, that Latco was not liable on the basis of the direct inducement of Latreefers to break its contracts with the yard, since it had not directed Latreefers to do so, nor was it liable in the tort of conspiracy, nor in other ways suggested by the yard.

In sum, Thomas J held that Latreefers was liable for the repudiation of all six contracts, and liable for damages available at common law on a repudiation basis. However, Latreefers is in winding up, and the real prospect of the yard obtaining any real remedy lies in the area of tort against Latco, whom he found to be liable for inducing the repudiations in all six contracts.

All these matters are in dispute on Latreefers’ and Latco’s appeals. In addition the yard cross-appeals in order to widen the basis of Latco’s liability in tort, eg to the case of direct inducement and to other forms of indirect inducement and to conspiracy.

With that brief introduction I will turn to the facts of the case relevant to these appeals.

The shipbuilding contracts

Latco is a company owned by the State of Latvia and controls Latvia’s shipping fleet. When in 1989 Latvia became fully independent of the USSR, Latco’s fleet was highly profitable and substantially free of mortgage debt. In the same year the yard, which had been the birthplace of “Solidarity”, itself moved out from Polish state control into a market economy. During the previous Soviet hegemony over Latvia and Poland the yard had built many vessels for Latco, whose fleet at that time operated as part of the Soviet fleet.

In April 1992 Latco began to negotiate the purchase from the yard of first four, and then six reefer vessels. On 14 May 1992 Latco and the yard reached outline terms of agreement for three vessels at a cost of US$25.8 million each and an option for a further three vessels at $27 million each. The agreement stated that the ultimate buyer was to be a company nominated by Latco’s direct subsidiary, Latmar Holdings Corporation, a Liberian company (“Latmar Holdings”).

By early September 1992 detailed negotiations had reached a final stage. The Latvian negotiators were advised by their London solicitors. The yard had no legal advice. The yard was told that the purchasing company would be Latreefers, which was then incorporated in Liberia as a direct subsidiary of Latmar Holdings. The yard did not request a guarantee from Latco. It proceeded on the assumption that Latreefers would be funded by Latco or that Latco would arrange for the funding of Latreefers. There was evidence from a director of Latco, accepted by the judge, of his understanding that if the yard had insisted on a guarantee, Latco would have provided it. In effect, the yard was still operating in a mind-set where all such decisions were those of state planning within the Soviet empire.

The contracts were signed on 11 September 1992. There were three identical contracts, with options for three further vessels. Those options were exercised in January 1993. The final prices were $27.6 million each for vessels 1-3 and $29.1 million for vessels 4-6. So there were six contracts for six vessels. The contracts are governed by English law. They required payment to be made in instalments, 5% on signing, 20% on laying of the keel, 25% on launching and 50% on delivery. The initial 5% instalments were all paid. The only clause which it is necessary to refer to is article 5, headed “Terms of payment”, which sets out the four instalments of the contract price, states that (for instance) the keel laying instalment is due within 5 banking days after notice of the vessel’s keel laying and continues with a default provision in clause 5.05 permitting the Seller to rescind the contract if the Purchaser defaults in the payment due in respect of the keel laying and subsequent instalments for 21 days after the due date. The full text of clause 5.05 is set out in para 58 below.

The incorporation of Latreefers

Latreefers was incorporated a few days earlier on 8 September 1992. Its bearer shares were held by Latmar Holdings. Its directors were employees of a service company, connected with a firm of Isle of Man solicitors, called Capco Trust (Isle of Man) Limited (“Capco”). On 9 September these directors formally resolved to enter into the reefer contracts. The contract between Capco and its clients (there is an issue whether that was Latmar Holdings only or also Latco, although the judge held that it was the latter) stipulated by clause 5.9 that “the Managed Entity will be kept in sufficient funds by the Client to honour its liabilities as and when they become due…” I shall need to revert to that clause and its context when I come to deal with the issues in tort.

The reefer market

The market for reefers had been very strong in 1992, hitting a peak of $0.80 per cu ft per 30 days (time charter rates). By the end of 1982, however, it had dipped to $0.75, and as 1993 wore on the outlook became pessimistic. The judge found that by September 1993 the market was poor and the outlook generally pessimistic. In 1994 rates collapsed to $0.55.

Latco’s renegotiations with the yard

By the summer of 1993 Latco was becoming concerned that the reefer contracts were no longer financially viable. In September it appointed Mr Erik Henriksen, an international shipping consultant with whom it had had prior dealings, to negotiate a reduced price for the vessels with the yard. His consultancy agreement was to renegotiate “improved financial terms”, and he was to receive 5% of any direct financial saving. He investigated, but did not pursue, financing prospects. Banking experts at trial were agreed that, without Latco’s support, Latreefers would be unable in the current depressed conditions to finance more than 50% of the then market value of the vessels. Mr Henriksen’s enquiries suggested that their value was no more than $20 million each, and that the contracts had become economically unrealistic. He reported that legal advice had been obtained that Latco had no legal responsibility if Latreefers were to breach its contracts. There was evidence that Latco made calculations which led it to decide that it would not advance any money to Latreefers or try to take out loans on its behalf.

On 30 September Mr Henriksen advised Latco to seek a 20% reduction in the price of the vessels and an extension of their delivery schedule. He seems to have spent the next month in preparing a proposal to put to the yard. On 29 October he visited the yard, unaccompanied by anyone from Latco. He told the yard’s representatives that Latco was in financial difficulties and had been unable to arrange finance for the vessels. He proposed a very substantial price reduction, in effect one of about 30%, and a delay in the delivery of the vessels. He left the yard with a letter outlining his proposals, written on his own firm’s notepaper but purporting to have been drawn up on behalf of Latreefers.

The judge found that Mr Henriksen’s proposals were “wholly unrealistic”, a view formed at that time by the yard. It regarded them as but a softening up exercise, in advance of further serious negotiations. Nevertheless, it was quite prepared to be flexible, for instance to build other ships in place of the reefers. However, it wanted to conduct any negotiations directly with Latco.

On the same day, possibly in response to the yard’s questioning of Mr Henriksen’s authority, the (Capco) directors of Latreefers approved a grant of powers of attorney to Mr Henriksen and other Latco managers. The formal minutes recorded:

“It was noted that, because of the changes in the economic climate, [Latreefers] was concerned about its ability to meet its obligations to the Yard under the contracts. It was proposed that the attorneys would negotiate with the Yard in an attempt to reach a mutually acceptable compromise.”

Mr Henriksen returned to the yard on 22 and 23 November, on this occasion accompanied by a representative of Latco. Agreed minutes of the meeting were drawn up. The judge made the following findings (at para 64 of his judgment):

“…Mr Henriksen made it clear that, although Latreefers intended to take delivery of all six vessels, there was no possibility of Latreefers fulfilling their contractual obligations by paying the full contract price for the vessels and taking delivery on the scheduled dates. Mr Henriksen attributed this to the low freight rates, the lack of viable long-term time charters and low market value of the vessels for financing purposes. Mr Henriksen provided to the Yard the power of attorney given to him by Latreefers. The Yard made it clear that it was not interested in negotiation on the terms proposed by Mr Henriksen in his letter of 25 October 1993. They were prepared to negotiate by extending the delivery dates or changing the last three ships to another type; I am satisfied that these were substantial concessions. However Mr Henriksen was only prepared to consider the very substantial reduction in the price he was demanding and a postponement of delivery.”

After the meeting, on 24 November Mr Henriksen sent a memorandum to the president of Latco, Mr Avotins. It concluded:

“It is quite clear that further discussions at this point will not lead to any solution. It is my opinion that we will only know if a commercial solution is possible after Latreefers have failed to pay the next instalment due 3.12.93. The Yard is dependent on this cash and if they don’t receive same they could get into serious difficulties (read cash flow problems).”

On 25 November the yard sent a fax to Mr Avotins offering to have negotiations, but stating that in the meantime it was going to carry on with the contracts. On 3 December Mr Henriksen replied that although Latreefers wanted to take delivery of all six vessels, this might be impossible unless the yard responded more helpfully. He ended:

“As already mentioned, this proposal is only a basis for continuing discussions in our joint attempt to find a solution and prevent a total collapse of the entire project…”

On 3 December the keel laying notice on the first vessel was anticipated. On the previous day deposits of over $13.2 million which Latreefers had placed with Mr Henriksen’s firm were assigned to Latmar Holdings. There was documentation which evidenced the fact that these funds were not Latreefers’ but were owed to other companies within the Latco group. In the event, however, the judge was unable, without a substantial adjournment, to determine the question of who was beneficially entitled to these funds; and did not.

On 3 December the keel laying notice was given and in accordance with clause 5.02(b) the instalment was due within 5 banking days, ie on 10 December 1993. Latreefers did not pay. There are no documents and there was no direct evidence at trial to explain how Latreefers’ directors made that decision.

On 22 December the yard wrote to Mr Avotins asking for payment, stating that it was prepared to negotiate on a limited basis, indeed inviting him to visit the yard, but making it clear that it wanted to deal with him and not with Mr Henriksen. It was Mr Henriksen however who responded, to point out that the yard’s contract was with Latreefers, and that Latco had given no guarantee.

There were no further negotiations. The yard awaited a serious and realistic proposal, but none was forthcoming. On 7 January 1994 the yard issued a writ against, among others, Latco and Latreefers, claiming that they were in repudiatory breach of all six contracts. Latco was sued as Latreefers’ principal under the contracts, but Latreefers was sued in the alternative. The yard commenced another action later, and so this January action is called the “first action”. At the end of January or the beginning of February 1994 the technical supervisors who had been resident at the yard on behalf of Latreefers withdrew, and never returned. At the hearing of the appeal, Mr Angus Glennie QC, who appeared with Mr Akka on behalf of Latco and Latreefers, accepted that there came a time, certainly by March 1994, when it could be said that Latreefers had repudiated the contracts. The judge found that Latreefers had made it clear by March or at latest early April 1994 that it was not going to perform any of the contracts (para 158 of his judgment). Indeed, as I understood Mr Glennie, he was prepared to accept that such a repudiation could be inferred, even in advance of the time identified by the judge, by the time that Latreefers’ supervision team had withdrawn from the yard, by at latest the beginning of February 1994. However, he submitted that the first contract was in a special position, and had not been repudiated, but had ended under the provisions for rescission contained in article 5. I shall revert to that submission below.

As of that time in February 1994, however, the contracts were still alive, repudiated or not, and the yard carried on building the first two vessels. I shall next relate, therefore, the findings of the judge about how the six contracts came to an end.

The ending of the six contracts

In the continued absence of payment of the keel laying instalment of the first vessel, the yard gave notice on 3 March 1994 pursuant to clause 5.05 that it was rescinding the first contract as of that date. Thus the first contract came to an end, against the background of the yard’s assertion, in its action, that Latreefers was in repudiation of all its contracts. Mr Glennie submits, however, that in this case, uniquely, Latreefers was not in repudiation of its contract, even if the yard was entitled, under the terms of clause 5.05, to bring it to an end for non-payment of the keel laying instalment. The submission will be examined below. It remains to be seen whether there is anything peculiar about the circumstances in which the first contract came to an end that excludes a case of repudiatory breach.

On 9 March 1994 the yard gave notice of the keel laying of the second vessel, but the instalment under the second contract also went unpaid. The judge found (para 76):

“As Latco clearly knew, the Yard was dependent on payment; the time came when it became clear to the Yard that Latco was not going to pay and, as Latco clearly by this time intended, the Yard was put in a position that they had no alternative but to stop work on the project. They did this sometime in March 1994 and they told their suppliers to do the same; the evidence before me did not enable me to provide a more precise date.”

On 12 April the yard gave notice of rescission of the second contract, and so the second contract came to an end. Mr Glennie accepts that by this time Latreefers was in anticipatory repudiatory breach of that contract, and that the yard was entitled to bring that contract to an end not only under the terms of clause 5.05 but also at common law by accepting that repudiation.

The yard then purported to appropriate the keels of vessels 1 and 2 to contracts 3 and 4, and on 14 and 15 April gave keel laying notices in respect of those contracts. Nothing was paid, and on 16 May the yard gave notice rescinding contracts 3 and 4. It then proceeded to purport to appropriate the existing keels to contracts 5 and 6, and on 13 and 17 June 1994 gave keel laying notices in respect of those contracts too. Again nothing was paid, and the yard’s notices of rescission were sent on 12 and 18 July 1994. The notices under the last four contracts were subsequently held to be invalid, on the basis that the yard was not entitled to appropriate the keels of vessels 1 and 2 to the succeeding contracts. As the judge commented, there was therefore no actual breach in respect of the failure to pay the keel laying instalments on those vessels and no contractual right to rescind.

Thus in the case of contracts 3-6, they did not come to an end pursuant to clause 5.05 by reason of the yard’s notices of rescission, even if those notices may have acted at common law as marking an acceptance of Latreefers’ repudiation of those contracts by way of anticipatory breach. The judge indeed found that that was what had happened. He said (at para 179):

“It is clear that no particular form or formality is required for the acceptance of a repudiation. Although the letters referred to the termination under clause 5 of the contract, they made it clear that the Yard considered the contract at an end and neither party was under an obligation of any further performance. If the Yard had a right to terminate for repudiation, the fact that they did not set that out does not in my view make any difference, as it is well established that a party terminating a contract can rely on grounds other than those he gives. The important matter is that the letters unequivocally stated that the contractual obligations were at an end. I therefore conclude that there was an acceptance by the Yard.”

It is established law that, where one party to a contract has repudiated it, the other may validly accept that repudiation by bringing the contract to an end, even if he gives a wrong reason for doing so or no reason at all. Mr Glennie did not dispute that principle. What he submitted was that in between Latreefers’ anticipatory repudiation of contracts 3-6 earlier in the year and the yard’s rescission notices of June and July 1994 in respect of those contracts there intervened an act or acts or affirmation on the part of the yard which prevented it thereafter from relying on Latreefers’ earlier repudiations. He also submitted that there was nothing thereafter which constituted new repudiations.

The judge rejected the submission that there had been any affirmation. He also found that even if there had been an affirmation, there was nevertheless a continuing repudiation by Latreefers of contracts 3-6 which justified his treatment of the yard’s rescission notices as acceptances of that repudiation. It is necessary therefore to refer to the events relied on by Latreefers for its case of affirmation and to record the judge’s findings on these submissions.

If the judge was right, contracts 3-6 came to an end on the respective dates in June and July 1994 when the purported notices of rescission were served. If Mr Glennie is right, then those notices were themselves repudiations of the contracts on the part of the yard, and the contracts came to an end at some time thereafter.

The alleged affirmations of contracts 3-6, and thereafter

Mr Glennie relied principally on the keel laying notices of 14 and 15 April (contracts 3 and 4) and 13 and 17 June 1994 (contracts 5 and 6) as affirmations of the respective contracts. He also relied on the first action which the yard had commenced on 7 January 1994 (see para 25 above). That pleaded by its points of claim that Latreefers was in anticipatory repudiatory breach of all six contracts and in actual breach of contract 1. Complaint was made inter alia that Latco had informed the yard orally at their meeting and in correspondence that the six contracts would no longer be performed. But the yard did not plead acceptance of any such repudiations. On the contrary, it said that it “expects to lay the keels” of vessels 2-6 in due course whereupon further instalments would become due after each keel laying would be notified. Thus the pleading anticipated the service of keel laying notices under contracts 2-6. In November 1995 the yard sought summary judgment from Waller J in respect of the keel laying instalments under contracts 3-6. On that occasion Mr Glennie argued that such instalments were not due as the January writ had accepted repudiations of those contracts, but his argument was not accepted and Waller J ruled that there was no acceptance at that time.

Later, in March 1997, the parties were before Colman J on the yard’s application to amend its claim in the first action to plead an acceptance of the alleged repudiations. He refused leave to amend at a time prior to the House of Lords judgment as to the effect of clause 5.05, and was reversed on that decision in the Lords. However, in the course of his judgment reported at [1997] 2 Lloyd’s Rep 228 at 234/5, he held that the yard’s service of its keel laying notices in the face of Latreefers’ anticipatory repudiatory breach was a once and for all affirmation of the contracts, an unequivocal and irrevocable election which prevented the yard from thereafter reverting to treat the contracts as terminated "on the grounds of the same pre-existing anticipatory breach". Mr Glennie now relies on that analysis.

Mr Glennie submits moreover that there was nothing following the affirmations constituted by the keel laying notices given in April and June 1994 to reactivate Latreefers’ earlier repudiations of contracts 3-6. Therefore, when the yard wrongly sought to use those notices as the basis for subsequent rescissions of the contracts under clause 5.05, there was nothing which could have counted on Latreefers’ side as a fresh repudiation. There was, said Mr Glennie, only a “narrow window of opportunity” in which to find some fresh repudiation, namely the period between each keel laying notice and the subsequent rescission notice: namely from 14/15 April to 16 May 1994 in the case of contracts 3-4 and from 13 and 17 June to 12 and 18 July 1994 in the case of contracts 5-6.

The judge found the following facts relating to the period after delivery of the keel laying notices for contracts 3-6. On 19 April 1994 the yard wrote to the Latvian ambassador to Poland to say that it could not wait indefinitely to receive sensible proposals from Latco, and that if none were received it would rescind. On 4 May 1994 the yard wrote to the president of Latco, Mr Avotins, referring to a meeting with the Latvian ambassador on 19 April and saying that the yard was still interested in building “six magnificent vessels”: but that unless the yard was paid what it was owed, then the route would be that of legal process. There was no response, and the rescission notices on vessels 3-4, and the keel laying and rescission notices on vessels 5-6 followed. Latreefers was saying that there was no further repudiation, but the judge found that there was.

However, he also held that there was no affirmation by the yard. He put it in this way (at para 162 of his judgment):

“When the yard served the keel laying notices in respect of vessels 3 and 4, in my view on the evidence I have heard, the Yard were not making an unconditional affirmation nor, in my view, was their position so understood by Latreefers. At the time of service of those keel laying notices in April 1994, the Yard’s position was clear; they still had some hope that Latreefers might still perform and served the keel laying notices for that purpose, but if Latreefers did not perform, the Yard would bring the contracts to an end.”

The judge went on, however, to consider the position on the hypothesis that the yard had affirmed. On that basis, he adopted the following analysis (at paras 169/176). He agreed with the reasoning of Mr Sumption QC (sitting as a deputy high court judge) in Safehaven v. Springbok [1996] 71 P&CR 59 at 66 as follows:

“It does not follow from this analysis that the innocent party may in all cases change his mind after affirming the contract. If, after he had affirmed it, the repudiating party’s conduct suggested that he proposed to perform after all, then the previous party’s repudiation is spent. It has no further legal significance. If on the other hand, the repudiating party persists in his refusal to perform, the innocent party may later treat the contract as being at an end. The correct analysis in this case is not that the innocent party is terminating on account of the original repudiation and going back on his election to affirm. It is that he is treating the contract as being at an end on account of the continuing repudiation reflected in the other party’s behaviour after the affirmation.”

The judge himself then reasoned (at para 172) as follows:

“Once the innocent party has affirmed, he must go on performing. He must then be able to point to behaviour that amounts to a repudiation after the affirmation either by way of some fresh conduct amounting to repudiation or by way of the continuing refusal to perform amounting to repudiation. I cannot see any reason why the innocent party must wait until there is an actual repudiatory breach; in this respect I regret I have reached a different conclusion to that reached by Colman J (see p 236 of [1997] 2 Lloyd’s Rep).”

He then recorded the yard’s acceptance that, “if the breach in this case was not a continuing repudiatory breach, then the election made by the Yard was final…” (at para 174). His conclusion on the facts is put (at para 175/6) as follows:

“The question therefore is whether the breach was a continuing one and amounted to repudiatory conduct. In my view it was. As I have set out, the Yard pressed for performance on 19 April 1994 and 4 May 1994; there was no response. It does not seem to me that the failure to respond can make a difference; if, for example, Latreefers had replied and said that they were not going to perform, then there would clearly have been a new repudiatory act. Can it make a difference that they were silent in the face of a demand for performance, if the inference from silence was their continuing refusal to perform? As that is the inference I draw, I do not think it can make a difference, as by not responding in the circumstances of this case they were making clear that they were not going to perform. The matter can be tested by asking whether in such circumstances, the Yard were meant to proceed to start to build the vessels and wait until such time as there was some act of Latreefers that amounted to a fresh actual breach. Had they done so, I am sure that it would be said rightly that they had failed to mitigate in circumstances where it was obvious that Latreefers were not going to take the vessels.

“I have reached my decision on the basis that there can be inferred in this case a continued refusal to perform which amounted to continuing repudiatory conduct and that there is no distinction in this respect between a continuing actual breach and a continuing anticipatory breach.”

Mr Glennie submits that the judge was wrong to find no affirmation, and wrong to find also that, on the hypothesis that there was an affirmation, there was a continuing repudiation.

Inducement of breach of contract

The judge rejected the yard’s claim that Latco was responsible for directly inducing Latreefers’ breach of contract, but accepted its case on indirect inducement. The judge was handicapped in making findings in this area of the case by the fact that neither Mr Avotins nor Mr Henriksen attended the trial for cross-examination, although their witness statements were in evidence. Their non-attendance was, however, taken into account. There was no evidence at all from the Isle of Man directors of Latreefers who were provided by Capco.

The principal issue was whether Latco had instructed Latreefers, ie its directors, that the contracts be cancelled. Latco’s evidence was that Latreefers was simply unable to pay the keel laying instalments as they fell due and this led to the yard’s cancellations. There was no need for Latco to induce Latreefers to do anything. Latco was not prepared to help Latreefers to obtain finance or to raise funds by selling its own ships.

The judge was satisfied that raising the finance was the task of Latco not Latreefers. He accepted that Mr Avotins genuinely wanted to take delivery of the vessels on renegotiated terms, but that it was Mr Henriksen who devised the negotiating strategy. Mr Henriksen, however, was not acting in good faith, for he wanted the negotiations to fail so that he could profit personally from a switch by Latco into investing in tankers. The non-payment of the keel laying instalment on vessel 1 was intended to make it clear to the yard that Latco was only interested in performance if the terms proposed by Mr Henriksen were accepted in substance.

The management of Latreefers was intended to be properly conducted by its directors, as evidenced by the detailed terms of Capco’s contract for that management. Although the directors were outside the hierarchy of a normal group, they knew about Latreefers’ obligations.

When in December 1993 the yard’s keel laying notice for vessel 1 was received, the judge considered there were in theory three possibilities. One was that the Latreefers directors were directly told by Latco that the instalment should not be paid. A second was that they were told nothing and did nothing simply because they had no funds with which to pay. The third was that they were told that funds would not be provided “at that time for the instalment” and that they were requested to do nothing in response to the notice. As I understand it, the third possibility lay between the extremes of the first two. The judge found that the third possibility was the most likely. He rejected the first possibility because he felt that if a direct request had been made to break the contract, then Latreefers’ directors would have made a formal board decision to that effect, of which there was no evidence. He rejected the second possibility, because the directors, as experienced solicitors, must have spoken to Latco about the possibility of finance. He explained his acceptance of the third possibility as follows:

“222. ... it is inconceivable that there was no communication between Latco and the directors of Latreefers. I am satisfied that they were told that funds would not be provided to pay the instalment and they were requested to do nothing in answer to the keel laying notice. Once the decision had been made by Latco not to provide the funds, they had no alternative and there was nothing for them to do in response to the notice.”

However, in response to the non-payment of the instalment under contract 1, the yard did not cave in to Latco’s and Mr Henriksen’s negotiating stance. The judge was satisfied that Latco then decided that, save on its terms, it would not proceed at all and so decided not to make any funds available to Latreefers to pay the further instalments on any of the other vessels. The judge inferred that the directors of Latreefers would have been informed of this decision in respect of the subsequent vessels in the same way as they were informed of the decision in respect of the keel laying instalment on vessel 1. The judge thought that this decision was taken sometime in February 1994, although it did not become clear to the yard until sometime in March or at the latest in April 1994, when it would have dawned on the yard that the withdrawn supervisors were never going to return.

On the basis of these findings the judge was satisfied that there had been no direct inducement. Subject to the terms on which Capco had provided the Isle of Man solicitors as Latreefers’ directors, it was simply a straightforward case of a parent company who had no liability to fund its subsidiary and who had not guaranteed its subsidiary’s obligations. Although Latco’s decision not to fund Latreefers had been a deliberate decision, intended first to put pressure on the yard to renegotiate and ultimately to prevent Latreefers from performing its contracts, there was nothing further which amounted to direct inducement.

However, the judge found that Latco was responsible for indirectly inducing Latreefers by unlawful means to break its contracts, viz by failing in breach of Latco’s contract with Capco to keep Latreefers in sufficient funds to honour its liabilities as and when they became due. The Capco contract terms provided by clause 5 as follows:

“5.9 the Managed Entity will be kept in sufficient funds by the Client to honour its liabilities as and when they become due...”

It was common ground that the “Managed Entity” was Latreefers. There was dispute as to whether “the Client” was Latco or Latmar Holdings, which was interposed in the chain of subsidiaries between Latco and Latreefers. The judge found that Latco was the client. Capco had formed Latreefers for Latco and invoiced its fees to Latco. The invoice read “To our charges for professional services rendered pursuant to our standard terms and conditions…” and the narrative included fees “for the provision of directors and officers” etc. As the judge remarked, Capco would have wanted the covenant of Latco, which was the ultimate parent and the company with solid assets, rather than that of another “paper” Liberian company like Latmar Holdings. Although the point was still disputed on appeal, I can see no good reason for departing from the judge’s finding on this point.

The judge found that clause 5.9 of the Capco terms was broken by Latco. He did not specify in exactly what respect the clause was broken, but on the facts it can only have been broken in the case of the instalments on vessels 1 and 2 and not, as it emerged, in respect of vessels 3-6. In relation to vessels 1 and 2 it was not disputed that there had been a breach. It was not submitted that clause 5.9 did not extend to financing an insolvent company, if indeed Latreefers was insolvent. I can well imagine that a stage might come in the life of a company such as Latreefers when its directors might determine that it could not proceed and did not wish to proceed with a project in circumstances where it would have to undertake financial commitments (eg to a parent company, or to a bank with the support of a parent company) which it could not see its way to meeting. In such circumstances, at any rate if they were formally acknowledged, it may well be that clause 5.9 would no longer bite. But no such point was taken either before the judge or on appeal.

The judge also found that Latco’s breach of clause 5.9 was deliberate: it was “directed at Latreefers as failing to put Latreefers in funds to pay the instalment was intended by Latco to prevent them performing the contracts with the yard. In that sense it was directed at them and it was the primary objective of the decision not to fund” (at para 265). The judge went on to say:

“266. I therefore conclude that Latco did use unlawful means by breaking its contract with Capco and those unlawful means were directed at the Yard.”

The judge went on to find (in considering a submission by the yard that Latco was also guilty of the tort of conspiracy to injure) that Latco intended to injure the yard, even if that was not its predominant intention. Thus at para 310 he said –

“For the tort of conspiracy where unlawful means are proved, it is only necessary to show an intention to injure…In my view, it was intended that the Yard be injured by the non payment on the first contract, as it was hoped that…the financial effect of the non payment would bring pressure to bear on them…Furthermore it was obvious a reduction in the price or an extended delivery date would injure the yard and, although Latco was acting predominately in its own interests, it must by its actions have intended to injure the Yard.”

The judge however rejected the claim in conspiracy on the ground that Latco’s alleged co-conspirators, namely Latmar Services and Mr Henriksen, had no knowledge of the Capco terms and therefore were ignorant of the unlawful means. He also rejected other ways of putting Latco’s claim, finding that there had been no unlawful threats and no deception. The judge allowed a late amendment to plead the innominate tort of unlawful interference with the yard’s contractual relations with Latreefers, but declined (at para 313) to investigate further the “separate and difficult issues of law raised by this claim which arise out of the decision in Lonhro v. Fayed” [1992] 1 AC 448.

Finally, on the subject of causation, the judge rejected (at para 269) Latco’s submission that the contracts failed not because of any wrong on the part of Latco but because Latreefers “did not have the money”:

“If I am right in the view to which I have come in relation to the breach of the obligation to fund, it is in my view clear that this caused the breach of the shipbuilding contracts. The instalment on the first contract was not paid because Latco decided not to provide the funds to meet the obligation when it became due. It made the same decision not to provide funds for the other shipbuilding contracts, as this was the way in which Latco thought that Latreefers would be disabled from further performance of those shipbuilding contracts.”

Clause 5.05

I shall deal first with the issues which arise on Latreefers’ appeal relating to contract. The first of those issues is concerned with clause 5.05 and vessels 1 and 2. It will be recalled that the first two contracts were ended by rescission notices for non-payment of the keel laying instalments. As stated above, article 5 is headed “Terms of payment”, sets out the four instalments of the contract price, provides for payment of the keel laying instalment within 5 banking days of notice of keel laying, and continues with a default provision in clause 5.05 as follows (I have numbered the clause’s paragraphs for ease of reference):

“5.05.(1) If the Purchaser defaults in the payment of any amount due to the Seller under sub-clauses (b) or (c) or (d) of Clause 5.02 for twenty-one (21) days after the date when such payment has fallen due the Seller shall be entitled to rescind 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 and at the same time the Seller shall have the full right and power either to complete or not to complete the Vessel and to sell the Vessel at a public or private sale on such terms and conditions as the Seller deems reasonable provided that the Seller is also obliged to mitigate all losses and damages due to any such Purchaser’s default.

(3) The proceeds received by the Seller from the sale and the instalments already paid and retained shall be applied by the Seller as mentioned hereinabove as follows:

First, in payment of all reasonable costs and expenses of the sale of the Vessel.

Second, if the Vessel has been completed, in or towards satisfaction of the unpaid balance of the Contract Price, or if the Vessel has not been completed in or towards satisfaction of the unpaid amount of the cost incurred by the Seller prior to the date of sale on account of construction of the Vessel, including work, labour and materials which the Seller would have been entitled to receive if the Vessel had been completed and delivered.

Third, the balance of the proceeds, if any, shall belong to the Purchaser and shall forthwith be paid over to the Purchaser by the Seller.

(4) In the event of the proceeds from the sale together with payments retained by the Seller being insufficient to pay the Seller, the Purchaser shall be liable for the deficiency and shall pay the same to the Seller upon its demand.”

It will be observed that paragraph 2 permits the yard to complete the vessel or not and to sell the vessel, and that paragraph 3 states what is to happen if the vessel is sold. Following the collapse of all six contracts, the yard contracted to build two reefer vessels for another purchaser called L’Orient Maritime under a contract dated 20 September 1994. The new contract was identical to the Latreefers contracts save as to price and specification, but the judge was asked to assume that the differences in specification did not affect the price by more than plus or minus 5%. The yard used the assembly work (ie the keels and pre-fabricated steel) and machinery ordered for vessels 1 and 2 on the new contract. There was a dispute before the judge as to whether those vessels had been completed and sold. The yard, which was concerned that Latreefers’ argument that the yard’s rights under clause 5.05 were more limited than they would be at common law in damages for repudiation, contended that the vestiges of what are called vessels 1 and 2 could not amount to what the clause describes as “the vessel”. The yard had merely incorporated the materials and machinery into the building of different vessels and thus had neither completed nor sold the vessels.

The judge rejected that argument. The evidence before him had been that the new contract had been described as a sale (“we finally managed to sell the two vessels…”). In substance, the vessels built for L’Orient Maritime were the same as the vessels to be built for Latreefers, as the variations were minor. Clause 5.05 must have anticipated minor variations in any completion and sale for a new buyer. Nor did it matter that the sale was contracted in advance of the completion, for that was a mere matter of form; as was the yard’s decision to renumber the keels.

The yard had a cross-appeal on this issue. Mr Roderick Cordara QC, who appeared on behalf of the yard with Mr Flynn, repeated the argument below, stressing that there was nothing at the time of the new contract which could be called “the vessel”. Mere work in progress had been incorporated into the building of two new vessels. The clause contemplated a situation where the vessels had been largely completed and thus at least half paid for by Latreefers: it was only in such a situation that the purchaser could be regarded as having earned, under paragraph 3 of the clause, any positive balance derived from the proceeds of sale.

In my judgment the judge was right about this point. To the extent that it turns on the facts, this court is not well placed to differ. To the extent that it turns on matters of construction the points fall in favour of Latreefers. Thus it may be observed that clause 5.02(b), in providing for the payment of the keel laying instalment, speaks about “keel laying of the Vessel”. Moreover, the right of rescission expressly applies for non-payment of any instalment beginning with the keel laying instalment. If, therefore, Mr Cordara’s argument were correct, the clause would have been differently written.

For good measure, although Lord Goff of Chieveley was more cautious (see at 586H), that was also the opinion of Lord Lloyd of Berwick when this case went to the House of Lords: see [1998] 1 WLR 574 at 598A, where he said:

“The fact that the specifications were not identical is irrelevant. In practical terms the hulls were completed and sold within the meaning of clause 5.05(2). If vessels 1 and 2 had already been launched before rescission, there could have been no doubt as to the application of 5.05(2). It would be absurd to require the yard to complete the vessels as a speculation before selling to a third party. The fact that these particular contracts were rescinded at an earlier rather than a later stage cannot affect the construction of the clause.”

It follows that clause 5.05 applies, and the question is: what is its effect? On behalf of Latreefers, Mr Glennie submits that it is a self-contained code and supersedes any common law remedies. Mr Cordara submits to the contrary. The parties are at issue on this point because the yard claims to have suffered consequential costs arising from the delay and ultimate failure of the first two contracts which would not be fully compensated on a straight comparison between the proceeds of sale plus the initial instalment less the costs and expenses provided for under the third paragraph of the clause.

Both parties have sought to extract assistance from the previous dicta of this court and of the House of Lords in this case. The court of appeal [1996] 2 Lloyd’s Rep 132 said that “The common law rights of the yard are displaced by the regime of cl. 5.05” (per Staughton LJ at 138). The actual decision in the House of Lords, reversing the court of appeal, was that clause 5.05 did not exclude recovery in debt of instalments already due. Lord Goff referred (at 585C) in this context to the

“familiar principle of construction that clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law: see, e.g., Modern Engineering (Bristol) Ltd. v. Gilbert-Ash (Northern) Ltd. [1974] A.C. 689, 717, per Lord Diplock.”

Mr Cordara relied on that to indicate that the remedy of damages for repudiatory breach was left open by clause 5.05. However, both parties have sought to derive assistance from another passage in Lord Goff’s speech (at 591D/H) as follows:

“Furthermore, since the yard was entitled to, and did, rescind the contracts for these two vessels under clause 5.05 the Court of Appeal was right to order (as they did) damages in respect of these two contracts to be assessed under that article, and indeed (your Lordships were informed) the yard asked for such an order to be made. However, Longmore J., in striking out the yard’s particulars of damage in respect of these contracts, proceeded on the basis of certain observations made by Staughton L.J. [1996] 2 Lloyd’s Rep. 132, 138, when he said:

“...I think that on a true interpretation of [clause 5.05] a sale is mandatory; and it certainly is when mitigation requires there to be a sale. The owners then obtain an indefeasible right to such share of the proceeds as the clause confers upon them. The common law rights of the yard are displaced by the regime in clause 5.05.”

“It was on the basis of Staughton L.J.’s statement that the regime in clause 5.05 displaced the common law rights of the yard that Longmore J. struck out the yard’s particulars of damage. I have to say however that, in my opinion, this statement of Staughton L.J. is too sweeping. In the first place, as I have already indicated, clause 5.05 did not have the effect of divesting the yard of its right to recover instalments of the price which had already accrued due. But in addition it was, in my opinion, open to the yard to argue that, on a true construction of clause 5.05, the yard’s right to recover damages (recognised in clause 5.05(2)) may in certain circumstances refer to damages on the measure recoverable at common law. Such an argument could, for example, be advanced on the basis that (a) the yard’s “full right and power” to sell the vessel under clause 5.05(2) was (contrary to the opinion expressed by Staughton L.J.) no more than a power of sale and as such not mandatory; and (b) on the facts of the case the appropriation of the two keels from vessels 1 and 2 to the two vessels subsequently constructed by the yard for Lorient Maritime did not constitute a sale of vessels 1 and 2, uncompleted, to Lorient Maritime within the meaning of clause 5.05(3)(ii). On this basis, the yard can argue that clause 5.05(3) and (4) have no application, and that it can simply fall back on clause 5.05(2) to claim damages measured on a common law basis.”

That passage has led Mr Glennie to submit that, where as here the vessels have been sold, common law rights are displaced by the clause’s regime; and Mr Cordara to submit that if, as Lord Goff contemplated, common law remedies were left open where the vessels were not sold, that may also be the case even where the vessels are sold. That Lord Goff did not intend, however, to determine any arguments not directly before the House, is indicated by a further passage from his speech at 594E/F where he said:

“Obviously, there are substantial arguments which the buyers would wish to advance against such a claim [for damages for anticipatory repudiation] which may be fatal to it, in particular that clause 5.05, if applicable, provides an exhaustive code which excludes any claim for anticipatory breach…”

Lord Lloyd at 598A said that the only respect in which he disagreed with the court of appeal was that clause 5.05 did not interfere with a vested right in debt. Otherwise he thought that damages ought to be assessed in accordance with that clause (at 602D). However, Lord Hoffmann, Lord Hope of Craighead and Lord Hutton agreed with Lord Goff rather than Lord Lloyd (at 603).

At the end of the day, I think it is dangerous to seek to derive too much from these dicta on an issue which was not before the courts in that previous round of litigation between these parties. It is plain that if the vessel is sold, there is at any rate some change in the ordinary remedies of the common law, for Latreefers may, where a good price is obtained for the completed vessel, keep any net surplus for itself (see paragraph 3). That is perhaps not unreasonable in circumstances where, if there is a rescission after 50% of the price has been paid or become due, the vessel may have been largely built at Latreefers’ expense.

The question, however, is whether there are any further departures from the common law. Paragraph 2 speaks of “the recovery of the Seller’s loss and damage” and of the Seller being “always obliged to mitigate all losses and damages due to any such Purchaser’s default”. That language hardly suggests a code in which repudiation damages are not available. Paragraph 4 speaks of a “deficiency” which is for the buyer to pay in the case of a sale. Mr Glennie submits that such deficiency must be a straightforward result of the calculation to be made under the third paragraph of the clause, and is inconsistent with common law damages being available. However, I do not agree that the calculation under the third paragraph is necessarily simple. Thus, where the vessel is completed and sold, but the sale price is affected by some changes to specification, which is very likely, “the deficiency” cannot be fairly calculated without taking into account such changes. An improved specification will, other things being equal, lead to a higher sales price, and a cheaper specification will lead to a lower sales price pro tanto. The “deficiency” cannot be arrived at without taking such factors into account. Otherwise, the buyer would benefit from a higher price for a better specification, even though that higher price has been bought by the greater costs to the yard of the better specification; and vice versa. This suggests that underlying the whole clause, rather than excluded from it, there is the structure of a common law regime for the calculation of damages. Moreover, where the vessel is not completed but nevertheless sold, as is contemplated under the second indent of paragraph 3, the deficiency has to take into account the yard’s “cost incurred”, which itself may not be easy to arrive at, even under the guidance of the language “which the seller would have been entitled to receive if the vessel had been completed and delivered”, without the assistance of the underlying concept of a common law regime.

Mr Glennie accepts that the third and fourth paragraphs of the clause only apply where the vessel is sold, and that, contrary to the view expressed by the court of appeal but doubted by Lord Goff (see at 586D and 591G), sale is not mandatory. It follows, therefore, that clause 5.05 has to be able to work also in the situation where there is no sale. In such a situation Lord Goff appreciated the possible force of the argument that the yard “can simply fall back on clause 5.05(2) to claim damages measured on the common law basis” (at 591H). If that is so, and Mr Glennie accepted that it was, it follows that the clause contemplates the common law regime, but goes on to make special provision for the case where the vessel is sold. I recognise that that special provision is different from the common law regime to the extent at any rate of Latreefers’ right to the benefit of any net surplus deriving from the proceeds of sale. However, in my judgment, the calculation of that net surplus still requires the underpinning of the common law regime. In sum, in this context as well as in the context of accrued but unpaid instalments the rationale of Lord Diplock’s dictum from Modern Engineering v. Gilbert Ash prevails.

For these reasons, and in accordance with the judge below, I would hold that clause 5.05 is not a self-contained code, but is itself built on the underpinnings of the common law remedies for breach of contract.

Was there a repudiation of the first contract?

The third issue raised by reference to clause 5.05, although in some ways logically the first, stems from Latreefers’ submission that a failure to meet the payment of an instalment entitling the yard to rescind the contract, although a breach, is not a repudiatory breach such as to give rise to damages for repudiation in any event. Therefore there only remain the specific provisions of clause 5 to regulate the consequences of rescission. Mr Glennie submits that in this respect there is a difference between the first and second contracts. He accepts that by the time of the rescission of the second contract on 12 April 1994, Latreefers was in anticipatory breach of that contract (as well as being in actual non-repudiatory breach of it) and that the yard was therefore entitled to claim damages for repudiation of that contract, if he is wrong about clause 5.05 excluding such common law remedies. However, he submits that in the case of the first contract, which ended with the yard’s rescission notice of 3 March 1994, there was no repudiation at all.

In this respect Mr Glennie’s submission was illogical, as between vessels 1 and 2, for he was prepared to accept in the course of argument that, for the purposes of anticipatory breach in relation to performance of the first contract as a whole, 3 March 1994 was late enough to bring contract 1 into the same relation with events in general as the case of contract 2 – and of contracts 3-6 as well subject in those cases to the argument that their repudiation had been overtaken by affirmation. He nevertheless maintained this narrow point of distinction between vessels 1 and 2: that the breach constituted by non-payment of the keel laying instalment in the case of contract 1 first occurred on 10 December 1993 (five banking days after the notice of 3 December), whereas the same breach in the case of vessel 2 only occurred on 16 March (five banking days after the notice of 9 March). Thus he submitted that the breach of non-payment in the context of events in early December was not a repudiation, even if a similar breach in the context of events in mid March was.

I confess I do not understand that distinction. If by 3 March 1994, as Mr Glennie was prepared to accept, an actual (he submits non-repudiatory) breach by way of non-payment of an instalment due in December 1993 had been joined by an anticipatory repudiatory breach of the contract as a whole, then the rescission of 3 March 1994 could stand as much for an acceptance of the anticipatory repudiation as for the contractual remedy of rescission for non-payment. Perhaps inherent in his submission was a conflict with the proposition just stated. If so, the matter was not elucidated in argument. I would in any event reject another thought perhaps inherent in his submission, viz that a non-repudiatory failure to pay cannot itself become repudiatory in time and in the context of an evinced intention not to perform a contract.

I would therefore reject Mr Glennie’s distinction between contracts 1 and 2 and hold that both were repudiated by Latreefers by the time of their respective rescissions. However, it seems to me that Mr Glennie’s submission is flawed for another reason and in its very origin, because in my judgment non-payment of the keel laying instalment leading to a notice of rescission under clause 5.05 constitutes breach of a condition of the contract, thus amounting in itself to an actual repudiatory breach.

Mr Glennie pointed out that time for payment under a commercial contract is not normally of the essence, ie that time for payment is not normally a condition of such a contract: see for instance section 10 of the Sale of Goods Act 1979. That is true as far as it goes: see Bunge Corporation v. Tradax Export SA [1981] 1 WLR 711. Mr Glennie placed particular reliance on certain dicta in Empresa Cubana de Fletes v. Lagonisi Shipping Company Ltd (The Georgios C) [1971] 1 Lloyd’s Rep 7 (Donaldson J and CA). There a time charter withdrawal clause provided the shipowner with a right of withdrawal “in default of payment”. The charterer paid on a Monday hire that had become due on the previous Saturday, when payment had not been possible. The hire when it arrived at the shipowner’s bank was first accepted, in breach of the shipowner’s instructions to its bank, and then rejected. It was held that there was no right to withdraw once the charterer had paid or tendered hire, since “in default of payment” meant “and for so long as default continues”. The decision does not assist Latreefers, for it never paid or tendered the instalment due under the first contract. Nevertheless Mr Glennie relied on the following dicta. At first instance Donaldson J said (at 11):

“It is important to remember that in relation to the payment of hire under a time charter-party, time is of the essence of the contract only in the sense that there is a breach of contract if payment is a moment late. It is not of the essence of the contract in the sense that late payment goes to the root of the contract and is a repudiating breach giving rise to a common-law right in the owners to treat the contract as at an end. The right to withdraw the vessel and thus bring the charter-party to an end is contractual and the situations in which this right is exercisable depend upon the true construction of the contract.”

And in this court Lord Denning MR (at 13/14) said this:

“The effect of a stipulation as to time always depends on the true construction of the contract. A default in payment does not automatically give the other a right to determine it. Usually it does not do so. It only does so if there is an express provision giving the right to determine, or if the non-payment is such as to amount to a repudiation of the contract. That is shown by Martindale v. Smith, (1841) 1 Q.B. 389; and by the well-known judgment of Lord Blackburn in Mersey Steel and Iron Company (Ltd.) v. Naylor, Benzon & Co., (1884) 9 App. Cas. 434, at p.444. In the present case the non-payment was clearly not such as to amount to a repudiation. It was obviously a mistake. The charterers thought, as the bank were closed on Saturday and Sunday, Monday would do. They were wrong in so thinking. But they were not repudiating the contract.”

Mr Glennie submitted that Latreefers’ non-payment of the instalment on vessel 1 in December 1993 was not, on the evidence and on the judge’s findings, either intended or seen as a repudiation of the first contract, but rather as an attempt to “soften up” the yard for serious negotiations. I would be prepared to assume that that was so, as of the first time of non-payment. However, the position did not stop there, and of course deteriorated down to the time of rescission.

Moreover, the Georgios C is in my judgment of little assistance. It may be the case that in a withdrawal clause construed to mean “and for so long as default continues” the clause itself does not amount to a condition and thus the breach of non-payment does not ipso facto amount to a repudiation. Since the clause only permitted withdrawal if the default was still continuing at the time of withdrawal, any remarks on the subject were in any event necessarily obiter. Our clause, however, is different from that in The Georgios C, not because it did not permit late payment as a remedy preventing rescission, for it allowed a period of grace of 21 days (clause 5.05 first paragraph), but because it stated that those 21 days were the limit of such period of grace. There was in fact no right of rescission immediately Latreefers failed to pay by the due date, but only upon default 21 days after the due date of payment. In a contract where a vessel is to be built with funds provided by the purchaser in stages, an instalment notice is to be given requiring payment within 5 banking days, and a further 21 days of grace are then allowed, I do not see why provision for what is then called default entitling rescission should not be regarded as setting a condition of the contract.

In any event, the jurisprudence regarding time charter withdrawal clauses does not end with The Georgios C, which was itself overruled in Mardorf Peach & Co Ltd v. Attica Sea Carriers Corporation of Liberia (The Laconia) [1977] AC 850. In Antaios Compania Naviera SA v. Salen Rederierna AB (The Antaios) [1985] AC 191 the withdrawal clause under consideration operated “failing the punctual and regular payment of the hire or on any breach of this charter party”. The House of Lords held that “any breach” meant any repudiatory breach – “that is to say: a fundamental breach of an innominate term or a breach expressly stated to be a condition, such as would entitle the shipowners to elect to treat the contract as wrongly repudiated by the charterers” (per Lord Diplock at 200F). Although the point has not been decided and is perhaps controversial, there must be a good argument that it follows that the express right to withdraw in the case of unpunctual payment under such a clause is a condition of the contract, breach of which is in itself repudiatory.

In any event, it seems to me that the provisions of clause 5.05 make payment of an instalment by the time of expiry of the 21 days of grace a condition of the contract or a breach otherwise consensually regarded as a repudiatory breach. Mr Glennie submitted that there is only one breach, on the fifth day after the notice for payment, and that such a breach is not at its time a repudiatory breach (or breach of a condition) and can never become so. In my judgment, however, while I accept there is a breach on the fifth day, which I would also accept is at that time non-repudiatory, for the contract expressly allows a further 21 days before the yard can rescind, there is either a further breach, called under the clause a “default”, when payment remains unpaid after another 21 days or else the parties have expressly agreed to regard such continued non-payment as turning the original breach into a repudiatory one. Colman J expressed a similar view of the effect of clause 5.05 at an earlier stage of these proceedings, in his judgment reported at [1997] 2 Lloyd’s Rep 228, when he said (at 234/5):

“Upon receipt of those certificates the buyers could be in no doubt that, if the certificates were valid, they were under an obligation to pay the second instalment and, if they failed to do so, they would be in actual breach of a condition of the contract. I use that term because art. 5.05 provides the yard with an express right to rescind for non-payment.”

In any event, as stated above, I consider that Mr Glennie’s acknowledgement that Latreefers was in repudiation of the last five contracts by 3 March 1994 as applicable also to the first contract which was rescinded on that day.

Therefore the yard is entitled to claim damages in repudiation under the first and second contracts, subject to the specific provisions of clause 5.05 in so far as they relate to the proceeds of the sale of vessels 1 and 2 to L’Orient Maritime.

Was there an affirmation of contracts 3-6?

Mr Glennie submits that the keel laying notices, invalid as they were, against the background of the claims in the first action, amounted to an affirmation of the last four contracts. The factual basis of this submission, and the judge’s rejection of it, have already been set out at paras 35/39 above. The judge considered that the yard was “not making an unconditional affirmation”. Mr Glennie submits that the judge was in error, pointing to classic doctrine that repudiatory conduct gives the innocent party a right of election, to accept or to affirm the contract, and that there is no middle path: see Bentsen v. Taylor [1893] 2 QB 274 at 279, Fercometal SARL v. Mediterranean Shipping Co SA [1989] 1 AC 788 at 799/801, The Kanchenjunga [1990] 1 Lloyd’s Rep 391 at 398. He submitted that Colman J had analysed the matter correctly at [1997] 2 Lloyd’s Rep 228 at 234, where he said:

“When the buyers’ anticipatory repudiatory breaches occurred in September-December, 1993 it was at once open to the yard to treat each of the contracts as terminated and to sue for damages for breach. In no case did the yard take this course. Instead, it proceeded to operate the contractual machinery necessary for putting the buyers under an accrued liability to pay the keel-laying instalment of 20 per cent. It thus served keel-laying notices for all six contracts, beginning with hull 1 on Dec. 3, 1993 and ending with hull 6 on June 17, 1994. Such a course, I have no doubt, was entirely inconsistent with an intention to treat the contracts as at an end by reason of the prior anticipatory breach. Service of those notices was an unequivocal assertion of the continuing operation of the contract.”

Mr Cordara, on the other hand, submits that when the judge said that there was no “unconditional affirmation”, he meant that in the sense of no unequivocal affirmation. The judge was right to regard the acts relied on as affirmation as merely equivocal. They were an attempt to get Latreefers to perform their contracts, but in no way an unequivocal representation that if that attempt failed the yard would not continue to rely on the previous (and continuing) repudiation. The rescission notices sent in due course should be regarded with them as a unit, which overall conveyed an intention to terminate and not the reverse. In any event the keel laying notices were in fact invalid and were always in dispute. Thus Latreefers’ London solicitors replied to the keel laying notices dated 14 and 15 April 1994 in respect of vessels 3 and 4 to say that it was understood that no new keels had been laid and to suggest therefore that the notices were “a sham”. When on 4 May 1994 the yard wrote to Latco, its letter stated that if payment was not received “we reserve the right to rescind these contracts”. And as for Colman J’s analysis, he had given his judgment at a time when the House of Lords had not yet ruled on the invalidity of the keel laying notices, and his judgment was set aside “in toto” (per Lord Goff at [1998] 1 WLR 574 at 594).

This area of dispute has been argued in this way because it is the prelude to the next issue for discussion below, relating to whether the yard was entitled to accept Latreefers’ conduct of continuing non-payment as a repudiation of the contracts, even if there had been previous acts of affirmation by the yard. Thus Latreefers is anxious to present the keel laying notices not only as acts of affirmation for the past, but also for the future; whereas the yard is keen for the notices to be seen in their overall context as a means by which the yard put a recalcitrant contractor to proof in anticipation of continuing obduracy.

In my judgment, there is of course a middle ground between acceptance of repudiation and affirmation of the contract, and that is the period when the innocent party is making up his mind what to do. If he does nothing for too long, there may come a time when the law will treat him as having affirmed. If he maintains the contract in being for the moment, while reserving his right to treat it as repudiated if his contract partner persists in his repudiation, then he has not yet elected. As long as the contract remains alive, the innocent party runs the risk that a merely anticipatory repudiatory breach, a thing “writ in water” until acceptance, can be overtaken by another event which prejudices the innocent party’s rights under the contract – such as frustration or even his own breach. He also runs the risk, if that is the right word, that the party in repudiation will resume performance of the contract and thus end any continuing right in the innocent party to elect to accept the former repudiation as terminating the contract.

It is clear therefore that during the period when the yard was serving its notices up to the time of purporting to exercise its contractual rights of rescission the respective contracts remained alive. The question is whether the keel laying notices were an unequivocal affirmation of them. If they had been served under cover of a letter which had expressly warned Latreefers that it was being given a last chance to perform, and that failing due payment the yard would exercise its rights of rescission, I do not think that the use of a contractual mechanism for terminating the contracts is inconsistent with reliance on repudiatory conduct for effecting a common law acceptance of an anticipatory breach. Where contractual and common law rights overlap, it would be too harsh a doctrine to regard the use of a contractual mechanism of termination as unequivocally ousting the common law mechanism, at any rate against the background of an express reservation of rights.

In the present case, however, there was no express reservation of rights. On the contrary, the keel laying notices were served against the background of the claims for performance in the first action. That is what gives force to Latreefers’ argument. On the other hand, the notices were also served against the background of Latreefers’ prior recalcitrance. Mr Cordara submitted that in these circumstances, where payment of the instalments was needed to finance future construction, the service of the notices amounted at most to a statement by the yard that it would perform if Latreefers performed, and was otherwise a clear warning to Latreefers that, if it did not pay within 21 days of the time for payment, the yard would bring the contracts to an end. That is in effect what the yard said in its letter of 19 April 1994 handed to the Latvian ambassador at its meeting with him that day, viz –

“If necessary, we will, albeit reluctantly, rescind all six contracts following default...”

Such a statement meant that the yard was committed to allowing Latreefers the full time allowed under the contractual machinery, but otherwise was tantamount or analogous to the classic means by which time is remade of the essence of a contract (see Charles Rickards Ld. v. Oppenhaim [1950] 1 KB 616).

The judge found that at the relevant time, not only was the yard not making an “unconditional affirmation” but neither “was their position so understood by Latreefers”. The judge explained (at para 162): “the Yard’s position was clear; they still had some hope that Latreefers might still perform and served the keel laying notices for that purpose, but if Latreefers did not perform, the yard would bring the contracts to an end.” The judge said that he came to this conclusion “on the evidence that I have heard” (ibid). I have hesitated on this question; but in the end I do not think that I am justified in rejecting the views of the judge. If Latreefers did not understand the invocation of the contractual machinery as an unequivocal affirmation of the contract, I do not see why this court should insist that that was how the yard’s actions should be regarded. Moreover, Latreefers was quite alive to the issue that the yard’s purported appropriation of the keels of vessels 1 and 2 to the later contracts was uncontractual (see Latreefers’ solicitors’ letter of 20 April), and it was Latreefers’ point of view which prevailed. Where, therefore, Latreefers always disputed the validity of the notices in question, it seems particularly harsh, in the light of the judge’s evaluation of the evidence, to stigmatise the yard’s conduct as unequivocal affirmation.

Mr Glennie submits that the yard’s invocation of the contractual machinery should be regarded as a binding election to affirm because, if it had been validly invoked, it would have earned the yard the right to claim in debt, and not merely as part of a general claim in damages, the amount of the keel laying instalment. He therefore asks the court to regard the serving of the keel laying notices followed by purported common law termination of the contracts as an example of approbation and reprobation. That approbation is, he says, an affirmation. I do not agree. The fact that further contractual payments become due during the time when an innocent party is making up his mind whether or not to accept repudiatory non-performance as bringing a contract to an end does not mean that it is not open to the innocent party to exercise his common law rights. The question still remains whether any allegedly affirmatory acts were unequivocally so.

On balance, therefore, I conclude that the judge was right to say that there was no affirmation of the contracts on the part of the yard. I go on to consider the position on the hypothesis that the judge and I are wrong in that conclusion.

Acceptance of anticipatory breach as a repudiation following an affirmation

Was the yard entitled to say that Latreefers was still in repudiation of contracts 3-6 following the (assumed) affirmation of those contracts at the time of serving the keel laying notices? That is the question which arises on the hypothesis of affirmation.

Mr Glennie makes two submissions in this context. First, he says that nothing that happened after the affirmation amounted to a further repudiation of the contracts. Nothing can be inferred from mere silence, especially where the notices were invalid and therefore did not call for a response. Secondly, he says that an affirmation of one kind of conduct in the past is also an affirmation for the future of conduct of the same kind. There must be a qualitative difference in the conduct after affirmation to entitle the affirming party to claim a valid right to terminate. Therefore, the doctrine of Safehaven v. Springbok (see at para 40 above) needs on any view to be qualified to this extent. Again, he relies on the analysis of Colman J at [1997] 2 Lloyd’s Rep 228 at 235:

“The one course that the yard could not take following its service of the keel-laying notices was to revert to the right which it did have in the face of the prior anticipatory breach to bring the contract to an end. The reason for this is very clear. The facility which the law provides to the innocent party in the face of an anticipatory repudiatory breach is to elect to terminate the contract or to keep it alive for the benefit of both parties: see Fercometal S.A.R.L. v. Mediterranean Shipping Co. S.A., [1988] 2 Lloyd’s Rep. 199 at pp. 203-204; [1989] A.C. 788 at pp. 799-802 per Lord Ackner. If, with full knowledge of the facts, the innocent party affirms the contract by words, conduct or in some cases inactivity, he cannot subsequently treat the contract as terminated on the grounds of the same anticipatory breach in relation to which he has made his election to affirm. The irrevocability of an election to affirm once made has long been recognized: see, for example, Benson v. Taylor & Sons Co., [1893] 2 QB 274, and had been repeatedly stated: see, for example, The Kanchenjunga, [1990] 1 Lloyd’s Rep. 391, per Lord Goff of Chieveley at pp. 398-399. In the area of anticipatory breach the guilty party needs to know with certainty whether the contract which he has repudiated has been terminated or kept alive, for, if it is still alive, he will yet have the opportunity of performance. For this reason the innocent party who has affirmed the contract cannot revert to his right to treat the contract as terminated on the grounds of the same pre-existing anticipatory breach. As it is often said, he cannot reprobate having already approbated.”

The facts found by the judge and his answer to these questions are set out in paras 37/42 above. Mr Cordara submits that the judge was right for the reasons he gave. There was a continuing repudiation and the judge was entitled to evaluate the nature of Latreefers’ post-affirmation conduct against the background of its pre-affirmation conduct. In such circumstances, Latreefers’ silence was not mere silence but what has sometimes been called a pregnant silence, a silence that speaks of maintained recalcitrance. Moreover the silence continued in circumstances where there was a duty to speak, a duty on Latreefers to make clear that it was no longer continuing with its previous repudiatory attitude to the effect that it was unwilling to proceed unless the contracts were renegotiated on a take it or leave it basis.

In my judgment the judge was right to adopt and apply Mr Sumption’s ratio in Safehaven v. Springbok and right to conclude on the facts that there was a continuing repudiation after affirmation. I would also accept Mr Cordara’s submissions about Latreefers’ silence to the extent that they may go beyond the judge’s analysis. The silence was not mere silence, it was overlaid with all that had gone before. It was a speaking silence. The difficulty with silence is that it is normally equivocal. Where, however, it is part of a course of consistent conduct it may be a silence which not only speaks but does so unequivocally. Where silence speaks, there may be a duty on the silent party in turn to speak to rectify the significance of his silence. The circumstances of this case demonstrate the importance of these principles. This was not a case where a party seeks to derive assent out of mere silence. These parties were in contractual relations, and the question was whether the yard should continue to perform in circumstances where Latreefers had made it clear that it did not want performance on the terms of the existing contracts. The yard needed to know where it stood. Whether the notices were valid or not, if Latreefers wished the yard to proceed with building the vessels in circumstances where it had previously made clear that it did not, then it had an obligation to clarify its new intentions. If its position, paradoxical as it might be, was that, if only the yard would get itself where it could serve valid keel laying notices, Latreefers would pay, even though it had refused to pay in response to the valid keel laying notices on vessels 1 and 2, then it should have made that position clear. In the commercial context no other response makes any sense at all, and the law should not adopt a position where it cannot respond adequately to such a situation. I am satisfied that legal principle is well able to derive the right answer from the facts of this case, and that the answer is that given by the judge.

That means that it is unnecessary to rule on a further submission based on an article written by Professor Sir Guenter Treitel QC (Affirmation after repudiatory breach (1998) 114 LQR 22) in response to the facts of this very case, to the effect that affirmation should not necessarily be regarded as irrevocable. In the House of Lords at [1998] 1 WLR 574 at 594 Lord Goff thought it right that Colman J’s judgment should be set aside “in toto” so that full consideration could be given at trial to the yard’s argument on continuing repudiation. Lord Goff continued (at 594D):

“That this argument is of a substantial nature is fortified by Sir Gunther Treitel’s Note on the present case in (1998) 114 L.Q.R. 22; I wish to add that the point in question did not arise for consideration in Motor Oil Hellas (Corinth) Refineries S.A. v. Shipping Corporation of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep. 391, a case relied upon by Colman J. In his judgment.”

Lord Goff had in mind a sentence in his own speech in The Kanchenjunga at 398 that “Once an election is made, however, it is final”. Professor Treitel argues powerfully that such an election, if indeed the concept of election is the correct concept at all in this context, should not be final or binding, in the sense of irrevocable, in the face of a continuing anticipatory repudiation.

It seems to me that an affirmation of a repudiatory actual breach may differ from an affirmation of a merely anticipatory repudiatory breach in that the former breach is complete at the time it occurs whereas the latter breach looks to the future. An affirmation of an actual breach may therefore be said to leave nothing outstanding for the future, in that the worst has already occurred, whereas an affirmation of an anticipatory breach still leaves the future open. Prima facie an election or waiver looks to the past, even if it is possible, in a very clear case, to waive one’s rights for the future too. Two views might therefore be taken as to the effect of an affirmation of an anticipatory breach. One is that it is a waiver for the future as well: that was what Colman J decided and Mr Glennie submitted. The other is that the affirmation prima facie relates only to the past, leaving open the question of a continuing or renewed anticipatory breach. It seems to me that the latter view is to be preferred, and is inherent in the decision in Safehaven v. Spingbok and in the decision already taken in relation to this case. That would still leave open of course the question of how one tells whether an anticipatory breach is a continuing one, and the correct way of viewing silence. Professor Treitel highlights the undesirability of subverting considerations of substance or policy to the accidents of negotiation (at 26). I wonder whether each case does not in truth have to be decided on its own facts. However, substance and principle suggest that silence should not in this context be too readily regarded as equivocal; and that against the background of an earlier anticipatory repudiation it should not take much further to prove continuing repudiatory conduct.

It also occurs to me that even in the case of an actual repudiatory breach, where the breach is of a continuing nature, such as a failure to pay or to deliver, an affirmation at one stage is not necessarily an irrevocable affirmation for all time in the future. If it were otherwise, the law could not have developed the doctrine of Rickards v. Oppenhaim.

I express these thoughts in response to the interesting arguments deployed in this case, but it is not necessary to decide the issue and I refrain from doing so.

Conclusion on Latreefers’ appeal in contract

It follows that in my judgment Latreefers’ appeal against its liability in contract fails on all points.

Latco’s liability in tort: direct inducement

I turn therefore to the question of Latco’s liability in tort. It is logical to begin, however, with the yard’s respondent’s notice, for it is concerned with the issue of direct inducement of breach of contract. The judge found that there was no direct inducement, because he concluded that, had that happened, Latreefers’ board would have passed a formal resolution not to perform its contracts with the yard (see paras 44/50 above).

Mr Cordara submitted that the judge ought to have inferred that Latco instructed the directors of Latreefers not to pay the keel laying instalments, in essence because (1) Latco made all the commercial decisions and (2) the absence of evidence or disclosure regarding the relations of Latco and Latreefers shows that they had something to hide. However the judge was not prepared to make that inference. The judge was not prepared to conclude that Latreefers was a sham company. It had separate legal personality and its own board of directors, and the judge regarded that board, filled by experienced and independent Isle of Man solicitors, as a responsible one (at paras 235/6 of his judgment). Therefore, if it had been instructed to break its contracts with the yard, the board would have passed a resolution to that effect. As for the alternative submission that Latreefers had been requested, rather than instructed, to do so, the judge inferred, for the same reason, that the directors would have made their own independent decision, and would only have carried out the requests of Latreefers’ beneficial owner “provided it was proper to do so” (ibid).

There are aspects of this decision by the judge which I find puzzling. The judge appears to have made a distinction between Latreefers being requested to break its contract, which the judge found did not occur, and it being requested “to do nothing” on the basis that it would not be receiving funds with which to pay, which did occur. That is a narrow line, but would make sense if Latreefers could not pay without being provided with funds. As to that, the judge said (at para 237): “Once they were told that funds were not going to be provided for that instalment [viz the keel laying instalment for vessel 1], they had no alternative but to do nothing.” He had previously found (at para 222): “Once the decision had been made by Latco not to provide the funds, they had no alternative and there was nothing for them to do in response to the notice.” That is consistent with my understanding that Latreefers had no funds of its own, and certainly could not have performed the contracts without being financed by or with the assistance of Latco. On the other hand, the judge also dealt with a submission from Latco that since “Latreefers simply had no money to pay”, it was impossible in any event to infer anything against Latco, since Latreefers’ failure to respond to the yard’s demands was amply explained by its inability to do so. The same submission, that Latreefers simply had no money to pay, was repeated by Latco as a defence on causation of loss, on the basis that since Latreefers had no money anyway, the yard had suffered no loss. As to that submission, however, the judge concluded (see at paras 238 and 314/319) that, due to the deficiencies of both parties’ pleadings, the only point which he was prepared to adjudicate was Latco’s submission that Latreefers did not have the funds to pay the keel laying instalment on vessel 1 as of 10 December 1993. (It may be recalled that up to 2 December Latreefers held deposits to its credit of over $13.2 million: see para 22 above.) That narrow point, however, as I understand it, was decided in Latco’s favour at para 237. At paras 314/319, however, the judge appears to conclude differently. He said (at para 317): “I consider that there is no evidence to show that [Latreefers] could not have funded the payment of the keel laying instalment due on 10 December 1993 had the directors decided that they wanted to pay.” In the circumstances, the judge held that it was not necessary for him to decide the wider issue concerning causation of loss “which has such far reaching implications” and that therefore he should not do so (at para 319).

I do not think these difficulties were resolved on this appeal. It may be that the judge regarded the matter as turning on the burden of proof and the width of argument open on the pleadings. I am not confident, however, that this is the correct analysis.

At the end of the day, however, I do not think these difficulties assist the yard to show that there was a direct inducement. The judge found that there was no instruction by Latco to Latreefers to break its contract. There was at most a request to do nothing in circumstances where the decision was for an independent board and where, whatever might have been Latreefers’ immediate financial situation, it appears to have been common ground that it could not undertake the contracts without loan finance procured with the assistance of Latco. Mr Cordara submits that for the purposes of direct inducement a request is as good as an instruction: see the judgment of Jenkins LJ in D C Thomson & Co Ltd v. Deakin [1952] Ch 646 at 694, cited by Neill LJ in Middlebrook Mushrooms Ltd v. TGWU [1993] ICR 612 at 618F where reference is made to:

“Direct persuasion or procurement or inducement applied by the third party to the contract breaker…”

Mr Cordara relies on the expression “Direct persuasion”.

Nevertheless, the yard’s primary case had been that there had been an instruction (at para 188). There appears to have been no submission that a mere request amounted to the requisite persuasion or inducement. No authority other than the general statement cited above has been relied upon by Mr Cordara. The discussion at Clerk & Lindsell on Torts, 18^th ed, 2000, at paras 24-44/48 indicates the delicacy of the issues which can arise as to whether some action does or does not amount to the required status of persuasion or inducement. I do not think that this court should differ from the view of the trial judge on such a question.

Mr Cordara nevertheless submitted that the judge should have found that Latco did indeed instruct the board of Latreefers to break its contracts with the yard, emphasising the facts within the judgment regarding Latco’s campaign to force a renegotiation on the yard. Where it was, as found, a necessary part of that campaign that at any rate the instalment on the first of the vessels should not be paid when due (see para 46 above), it should have been inferred that Latreefers was a necessary part of that strategy and under the instructions of its ultimate parent. That is a powerful argument. However, the judge was fully alive to this aspect of the history, and was unwilling to make the inference requested. Whatever the position in relation to the prompt payment of the instalment on vessel 1, it seems to me that the judge’s preferred solution gains increasing strength with regard to the ultimate question of the repudiation of the first and successive contracts. Again, I do not think that it would be right for this court to differ on such a matter from the view of the trial judge.

I therefore turn to the question of indirect inducement, where the judge was in the yard’s favour.

Indirect inducement by unlawful means

he judge’s findings and conclusions on indirect inducement have been summarised in paras 51/55 above.

A convenient statement of the law in relation to indirect inducement is contained in the judgment of Lord Evershed MR in Thomson v. Deakin:

“…it seems to me that the intervener, assuming in all cases that he knows of the contract and acts with the aim and object of procuring its breach to the damage of B, one of the contracting parties, will be liable not only (1) if he directly intervenes in persuading A to break it, but also (2) if he intervenes by the commission of some act wrongful in itself so as to prevent A from in fact performing his contract; and also (3) if he persuades a third party, for example a servant of A, to do an act in itself wrongful or not legitimate (as committing a breach of contract of service with A) so as to render, as was intended, impossible A’s performance of his contract with B.”

On behalf of Latco Mr Glennie had four principal submissions. The first was that there had been no unlawful means. Latco had not been “the Client” under the contract with Capco, so that Latco had not been in breach of contract with Capco by failing to finance Latreefers’ contracts with the yard. Without such breach of contract with Capco, the judge’s only finding of unlawful means disappeared. I have already rejected that submission in para 52 above: Latco was Capco’s client.

Mr Glennie’s second submission was that Latco’s failure to fund Latreefers was not an “inducement” of Latreefers’ breach of its contracts with the yard. In as much as this submission was separate from the submission considered below relating to Latco’s intention, it appears to be no more than that Latco’s failure to fund was not a direct inducement of Latreefers’ breach. However, that will typically be so in cases of indirect inducement. Where, however, a defendant wrongly, that is to say, by unlawful means, withholds that which is necessary to another party to fulfil his contract with a claimant, and does so with the requisite knowledge of that contract and with the requisite intention, I do not see why the ingredients of the tort have not been fulfilled. In the present case, there is no dispute that Latco had the requisite knowledge of Latreefers’ contracts with the yard. As for the requisite intention, that is the subject matter of Mr Glennie’s third, and most substantial, submission.

That third submission was of a general and far-reaching nature. Mr Glennie pointed out that where the unlawful means relied on as an ingredient of the tort is a breach of contract, there is a danger of making illegitimate inroads on the principle of privity of contract: which suggests an error of legal analysis. Moreover, particularly in a case like the present, the avoidance of the unlawful means in question can lead to the inefficient use of resources, viz in building ships unwanted by the market, instead of the defaulting party being simply left to the consequences of his breach of contract: which suggests an error of legal policy. In this connection Mr Glennie cited Barretts & Baird (Wholesale) Ltd v. Institution of Professional Civil Servants [1987] IRLR 3 at paras 52/54 and Professor Perlman’s Interference with Contract and Other Economic Expectancies: A Clash of Tort and Contract Doctrine (1982) 49 Univ Chicago Law Review 61.

Mr Glennie’s prescription for these difficulties is a firm insistence on the requirement of an intention to procure the breach of contract in question by means of the unlawful means involved. Incidental unlawful means, in the absence of an “actuating intent” to injure, should involve no liability.

There is no doubt that intention is an essential ingredient of the tort of inducing breach of contract (see Thomson v. Deakin cited above, and a more general discussion at Clerk & Lindsell at para 24-18). Mr Glennie seeks to use that ingredient as a limiting factor to exclude Latco’s liability on the facts of this case. He cites Allen v. Flood [1898] AC 1 at 96 per Lord Watson to the effect that an inducer –

“may be held liable if he can be shewn to have procured his object by the use of illegal means directed against that third party”

and submits that in this case Latco’s acts were not “directed against” the yard. He poses a question as to the requisite intent. He accepts that, unlike the case of conspiracy in the absence of unlawful means, there is no need of a predominant intention to injure (cf Lonhro Ltd v. Shell Petroleum Co Ltd (No 2) [1982] AC 173 as interpreted in Metall und Rohstoff AG v. Donaldson Lufkin & Jenrette Inc [1990 1 QB 391), but submits that the requisite intent must be the actuating intent of the unlawful means employed. In this connection he refers to the following authorities.

In Lonhro Plc v. Fayed [1990] 2 QB 479 at 489 Dillon LJ said:

“It also has to be proved by a plaintiff who seeks to rely on this tort, as Mr Beveridge conceded for Lonhro, that the unlawful act was in some sense directed against the plaintiff or intended to harm the plaintiff. The origin of those phrases is the oft quoted passage in the speech of Lord Watson in Allen v. Flood [1898] AC 1, 96, which was applied by the majority of this court (Buckley and Kennedy L.JJ.) in National Phonograph Co. Ltd. v. Edison-Bell Consolidated Phonograph Co. Ltd. [1908] 1 Ch 335. In that case the fraud was clearly directed against the plaintiff.”

Ralph Gibson LJ agreed with the reasons given by Dillon LJ, even if Woolf LJ expressed a broader philosophy more concerned with the choice of a deliberate course of conduct and its probable consequences than with the defendant’s intentions (at 494). That case, however, was only at the stage of an interlocutory attempt to strike out the claim, an attempt which failed, so that it throws no light on the application of the principle.

Millar v. Bassey [1994] EMLR 44 was another case which survived an attempt at a summary strike out. The plaintiffs were a record producer and musicians who had made an agreement with a record production company to make an album to be sung by Shirley Bassey, and she had made a like agreement with the production company. The plaintiffs complained that Miss Bassey had then refused to perform her agreement with the production company which had therefore breached its agreements with the plaintiffs. The majority of Ralph Gibson and Beldam LJJ thought that there had to be a trial. Peter Gibson LJ, however, thought that the law and the pleaded facts of the case were clear enough for the claim to be stopped at that point. In terms of principle, however, Ralph Gibson and Peter Gibson LJJ may be said to have been in or close to agreement. Thus Peter Gibson LJ contrasted deliberate interference with a claimant’s contract “with a view to bringing about its breach”, being “aimed at” or “directed against” the claimant, and “interference which is merely the incidental consequence” of the claimant’s conduct (at 62). He continued (at 63/64):

“Thus in Van Camp Chocolates Ltd v Aulsebrooks Ltd [1984] 1 NZLR 354 at page 360 Cooke J, giving the judgment of the New Zealand Court of Appeal, said:

“The essence of the tort is deliberate interference with the plaintiff’s interests by unlawful means. If the reasons which actuate the defendant to use unlawful means are wholly independent of a wish to interfere with the plaintiff’s business, such interference being no more than an incidental consequence foreseen by and gratifying to the defendant, we think that to impose liability would be to stretch the tort too far.”…

“There are strong policy reasons why the law should restrict the ambit of the tort in this way. The tort gives the plaintiff a right of action in respect of a failure to comply with the terms of a contract against a person who is not a party to the contract. This is inconsistent with contractual principles, in particular in breaching the privity rule (see Cane: Tort Law and Economic Interests (1991) pages 122-5). As Hobhouse J said in Rickless v United Artists Corp. [1986] FSR 502 at page 524 of the tort of wrongful interference with contractual relations:

“Unless the tort is to become virtually equivalent to the enforcement of contracts against third parties, it must remain an essential element of the tort that the interference occurs with the requisite actual interest [sc. To cause a breach of the plaintiff’s contract].”

Further, without the limiting of the scope of the tort by the requirement of actual intention, freedom of action would be unduly restricted by liability for incidental consequences (see Fleming: The Law of Torts 7^th edn (1987) 656). Interference with contracts may flow from competition and is the normal and expected consequence of industrial action. It would not be right for the law to discourage competition by encouraging actions by unsuccessful competitors or to allow tort actions by those who suffer only incidentally from another person’s activities.

In my judgment therefore it is a requirement of the tort that it should be established that the defendant by his conduct intended to break or otherwise interfere with and, with that intention, did break or otherwise interfere with a contract to which the plaintiff was a party.”

Ralph Gibson LJ (at 72) agreed that the law ought to be settled in accordance with the ruling of Cooke J in Van Camp Chocolates and that the policy reasons referred to by Peter Gibson LJ were “compelling”, but thought that the facts were not clear enough for summary conclusion.

In my judgment, however, the principled limitation on the scope of the tort relied on by Mr Glennie does not, on the facts found by the judge, take Latco to safety. This is not a case where Latco has merely acted deliberately and with knowledge of Latreefers’ contracts with the yard but without any intention in relation to the probable consequences of its actions and without it being possible to say that its actions were directed at the yard. On the contrary, the judge found (see paras 54/55 above) that Latco’s breach of clause 5.9 of its contract with Capco was “intended by Latco to prevent [Latreefers] performing the contracts with the yard”, that that was “the primary objective of the decision not to fund”, and that Latco “must by its actions have intended to injure the Yard” even if that, as distinct from the pursuit of its own interests, was not its predominant intent. The judge also found that its actions were “directed at Latreefers” with that intent. One expression of the test of intentional conduct required by the tort is that the conduct be directed at the claimant. Although the judge has said in terms that the conduct was “directed at Latreefers”, it is impossible to read his findings as a whole as amounting to other than a conclusion that Latco’s conduct was also directed at the yard. Indeed, he makes it clear that Latco had in mind Latreefers’ contracts with the yard and that Latco intended to injure the yard. As the judge found (at para 215 of his judgment):

“The probability is that it was Mr Henriksen who then advised that the keel laying instalment on the first vessel should not be paid and Mr Avotins assented to that course. They both knew that this would be a breach of that contract and it was intended by them to force the Yard either to capitulate or cancel the contracts…I am satisfied that the final decision that Latreefers should not pay was made, so far as Latco was concerned, by Mr Avotins, though he would have followed Mr Henriksen’s advice.”

The judge continued (at para 223 of his judgment):

“However when the Yard did not change their stance on negotiations, I am satisfied that Latco then decided that Latreefers would not carry out any further act of performance of any of the contracts, unless and until the Yard agreed to negotiate on their terms and therefore decided to make no funds available to Latreefers to pay the further instalments.”

It seems to me to follow from these findings and from the judge’s further findings on repudiation which have been reviewed earlier in this judgment that Latco intended its conduct to result in Latreefers’ repudiation of the six contracts. It was more than just that Latco did not want Latreefers to pay the keel laying instalment on the first contract in order to put pressure on the yard in the negotiations, barren as they were, which had taken place in the last quarter of 1993. Latco did not want Latreefers to fulfil the contracts at all (save in the circumstances that the yard had capitulated to Mr Henriksen’s demands). In these circumstances it became irrelevant to Latco’s purposes that no valid keel laying instalments were ever served in respect of vessels 3 to 6. In terms of intention, however the need for it has been expressed, the requirement, as it seems to me, was fulfilled.

In this connection I have asked myself whether the unlawful means in question, the failure to fund under clause 5.9 of the Capco terms, was a merely incidental or collateral failure, and not such as to visit liability upon Latco. The issue might be put in terms of the importance and relevance of the causative nexus between the unlawful means in question and the intention to procure the breach of the contracts with the yard. Mr Cordara himself recognised that, given the absence of any guarantee from Latco, it would have been legitimate for the directors of Latreefers and of Latco, had the Capco connection not have been interposed, to have left the financing of the contracts to an informal arrangement or understanding; that Latco’s views about such an understanding might have changed as the market changed and Latco’s personal interests changed; and that in the absence of any intention to injure the yard, Latco would have been able to withdraw its support for Latreefers without being liable for any unlawful act or any tort of procuring a breach of contract. Indeed, I understood Mr Cordara to accept that Latco would not be liable in tort, even where it had contractually obliged itself to finance Latreefers and then resiled from that commitment, if it did so merely out of consideration of its own business interests and in the absence of any intention to injure the yard. In such circumstances, it might perhaps have been argued that the Capco terms, including their clause 5.9, were simply overlooked, so that the breach of that clause was a matter of mere oversight or negligence, to be regarded as purely incidental or collateral, even if Latco’s acts did go beyond mere self interest and amounted to conduct directed at and intended to injure the yard.

However, I would not on reflection so regard the matter. The financing of Latreefers was of the greatest importance to the transaction, and was investigated by Mr Henriksen (albeit superficially) as part of his necessary preparations for Latco’s attempt at renegotiation. Moreover the judge finds that the London solicitors who arranged for the formation of Latreefers for Latco “were well aware of [Capco’s] terms and conditions” (at para 218); that the management of Latreefers was intended to be properly conducted by the (Capco) directors of Latreefers, and that those directors, as independent contractors outside the hierarchy of a normal company group, made express stipulation with Latco, the beneficial owner, for funding and for the proper conduct of the company’s business; and that, when the notice of the keel laying instalments were served on them, the directors were aware of the obligations of Latco under the Capco terms (at para 219). In these circumstances I regard it as impossible to think of the proper financing of Latreefers under the Capco terms as an incidental matter, or insufficiently connected with Latco’s intentions towards Latreefers and its contracts with the yard. Moreover, when it came to Latco’s strategy for dealing with those contracts, it did not merely decide to withdraw its financial support for Latreefers: it deliberately used the withdrawal of its financial support as the means to bring about the destruction of those contracts (see para 57 above).

Finally, there is Mr Glennie’s important fourth submission. That is of a fall-back nature, to the effect that, whatever may be the position with respect to vessels 1 and 2 where valid keel laying notices had been served, no illegal means had been used by Latco in respect of vessels 3-6. Since in their case there had been no valid keel laying and no valid keel laying notice, no further instalment had been due to the yard prior to the termination of the contracts in respect of those vessels. It followed that in their case Latco could not have been in breach of its contract with Capco.

It is true that Latco was only in actual breach of its contract with Capco in relation to vessels and contracts 1 and 2. However, the consequences of Latco’s conduct did not stop there. In the first place, Latco’s conduct demonstrated that it would have continued to disregard its obligations under clause 5.9 as and when they would have arisen in respect of the other vessels as well. That raises the question whether an anticipatory breach of that kind can amount to unlawful means for the purposes of the tort of inducing breach of contract. I am inclined to say that I do not see why it may not, since, subject to the necessary findings of fact relating to the future rather than the past, the unlawfulness of the conduct and the practical pressure are the same. But I do not rely on that answer, for I do not think it was a clearly articulated part of Mr Cordara’s submissions. Secondly, however, there is the matter of the causative effect of the unlawful means used in respect of vessels 1 and 2 upon the remaining contracts. This was the focus of Mr Cordara’s answer to Mr Glennie’s fourth point. In my judgment it is a valid answer. The indirect procurement of Latreefers’ breach of its contracts in respect of vessels 1 and 2 were part and parcel of the means used to destroy all six contracts. One can see that in the judge’s findings that all six contracts had been repudiated by Latreefers even before the second contract came to an end with the yard’s notice of rescission in relation to that contract on 12 April 1994. The non-payment of those instalments, and particularly that of the first one, was intended to demonstrate to the yard that it had either to renegotiate on the terms proposed or else see the contracts unperformed. In the event, the intention was that the contracts would remain unperformed.

I therefore agree with the judge that Latco is responsible in tort for the indirect inducement by unlawful means of Latreefers’ breaches of its contracts with the yard. In the circumstances, it is unnecessary to go into any detail about the yard’s cross-appeals. Like the judge, I do not think that a claim by reference to a tort of unlawful interference with the yard’s contractual relations with Latreefers adds anything. As for the claim in conspiracy, I agree with the judge that it fails on the facts. I agree with the judge that there was no further breach of other terms of the Capco contract. The only unlawful means employed was the breach of Capco clause 5.9, and in that respect Latco acted alone and not in conspiracy with any others. In any respects in which it may have been a party to a common design with, for instance, Mr Henriksen, no unlawful means were used and there was no predominant intention to injure the yard.

Finally, there was some discussion in the course of the submissions of both Mr Glennie and Mr Cordara as to the policy considerations of the tort of inducing breach of contract. It seems to me to be difficult to state such considerations as relevant to this case other than in the most general way. I hesitate to express any views, but am nevertheless concerned to see this case in some wider setting. The tort is an economic tort designed to place limits on the self-interested rough and tumble of the business world. Its philosophical basis appears to be that contracts should be kept rather than broken. Where, as here, A (Latco) procures B’s (Latreefers’) breach of his contract with C (the yard), adopting it as his own because he is interested to do so, seeking a benefit for himself or a fortiori a detriment for C, and does so deliberately, knowingly and intending the breach to take place, then A puts himself in the way of incurring a liability, even though not himself a party to the contract, unless (i) he does not directly procure the breach, and (ii) he uses no (relevant) unlawful means, or (iii) he can claim some justification. The significance of (i) is that where A directly procures a breach of contract he makes himself as it were directly privy to the breach. The significance of (ii) is that in the absence of making himself privy to the breach, he cannot be faulted as long as he acts as he is entitled to act, but if (deliberately, knowingly and intending the breach to take place) he commits an unlawful act, by which I have in mind an unlawful act of sufficient causative relevance, then he renders himself liable. It may be that unlawful means ought to be necessary even where there is direct procurement (see the wide-ranging work by Hazel Carty, An Analysis of the Economic Torts, 2001, at 82). The significance of (iii), an area which has not been clearly worked out in the cases, appears to be that there may be moral or perhaps economic factors which may mitigate even to the point of justifying conduct otherwise incurring a prima facie liability. In the present case there was no claim to justification.

These considerations are designed to keep a wide ranging tort within bounds. It is therefore important that they are not applied mechanically and that regard is had to the balancing demands of moral constraint and economic freedom. For these purposes the concepts of knowledge and intention, direct participation, the causative relevance of unlawful means, and the possibilities of justification, are presumably sufficiently flexible to enable the principles of the tort to produce the right result. Where in specific areas policy makes its own specific demands, statute law is present to lend a hand.

In the present case, it was conceded by the yard that Latco would have committed no tort if it had merely decided without more that its own interests did not recommend the commitment of its resources to Latreefers’ contracts; or if Latco had taken a formal decision as Latreefers’ shareholders that Latreefers should not perform its contracts. Similarly, I do not suppose that Latco would necessarily have been involved in any tortious conduct if Latreefers had formally decided that it simply could not, in the absence of financial support from Latco, avoid insolvency in the face of its contractual commitments. Nor do I think that clause 5.9 of the Capco terms would necessarily as a matter of construction cover every situation: for instance whether it would continue to bind in a situation where Latreefers formally decided not to continue with obligations it could not meet or entered formal insolvency must remain an open question, not debated on this appeal: see para 53 above.

However, none of these situations prevailed on the facts of this case. Instead, Latco decided to become closely involved in the renegotiation of Latreefers’contracts with the yard. Its participation was not so immediate as to enable the judge to infer a direct procurement of Latreefers’ breach of contract, but it could not have been far from that. Instead, with knowledge of course of the contracts in question, and conscious of the dependence of Latreefers on its financial support and, as may be inferred, of its own obligations under the Capco terms, it deliberately chose to remove that financial support, in breach of its own contract with Capco, with the intention of either breaking the yard’s will in renegotiations or of breaking the contracts in question.

In conclusion, I see nothing ill-fitting in the judge’s decision with the philosophy of the tort or with its limitations or the need for balance in its application. In my judgment Latco’s appeal in tort, as well as Latreefers’ appeal in contract, should be dismissed.

Having said that, I am not concerned in this appeal with any question of the quantum of the yard’s loss based upon its claim in tort against Latco. It may be that quantum will depend inter alia on the issue which the judge declined to adjudicate, namely whether Latreefers could have financed the contracts itself. That, however, is for another day.

Lord Justice Tuckey:

I agree.

Lord Justice Aldous:

I also agree.

Order: Appeal and cross-appeal dismissed; the appellants should pay the respondents’ costs of the appeal; the respondents should pay the appellants’ costs of the cross-appeal; application for permission to appeal to the House of Lords to be considered by the court in writing; order not to be drawn up until a decision has been made upon that application; appellants to supply their written submissions on their application for permission to appeal by 4.00pm on 28^th June; the respondents’ reply to be supplied by 4.00pm on 3^rd July; any further submissions by the appellants to be supplied by 4.00pm on 5^th July.

(Order does not form part of the approved judgment)