England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
(Mrs. Justice Gloster DBE)
2005 Folio 341

		Royal Courts of Justice Strand, London, WC2A 2LL
		7th February 2007

Lord Justice Moore-Bick :

Background

1. This is an appeal from an order of Gloster J. made on the hearing of the defendant's application to set aside an order for service of the claim form out of the jurisdiction.
2. The claimant, Ravennavi S.p.A. ("the Buyer"), is an Italian shipowner; the defendant, New Century Shipbuilding Company Ltd ("the Yard") is a Chinese shipbuilder. By an Option Agreement dated 12^th December 2003 the Yard granted the Buyer an option, to be exercised by 31^st January 2004, to purchase two new crude and product tankers for delivery by 31^st October and 31^st December 2007 respectively. The option provided, in terms to which it will be necessary to refer more fully in a moment, that the Yard would make earlier delivery dates available to the Buyer, if it became possible to do so. On or about 28^th January 2004 the Buyer exercised its option to buy two new vessels for delivery in October and December 2007, but some months later it obtained reports that the Yard was offering to build vessels for delivery dates earlier than those set out in the option and so a dispute arose between them which eventually gave rise to these proceedings. The substance of the Buyer's claim is that the Yard failed to perform its obligation to make earlier delivery dates available when it became possible for it to do so.
3. In June 2005 the Buyer made an application to the Commercial Court for permission to serve the claim form on the Yard out of the jurisdiction and on 14^th June 2005 Cresswell J. made an order to that effect. The proceedings were subsequently served on the Yard in China pursuant to that order. However, as the parties later recognised in the course of the hearing before Gloster J., it was not necessary for the Buyer to obtain the court's permission to serve out of the jurisdiction because it is domiciled in Italy and the Option Agreement, on which its claim is based, contains an exclusive jurisdiction clause in favour of the High Court. Accordingly, the case falls within Article 23 of the Judgments Regulation (Council Regulation (EC) No 44/2001) and CPR rule 6.19(1A)(b)(iii). At the time, however, no one appreciated that that was the case and as a result on 19^th October 2005 the Yard issued an application to set aside the order for service out of the jurisdiction and the service made pursuant to it or, in the alternative, for the action to be stayed for the purposes of arbitration. (The latter application was made on the basis that as a result of the exercise of the option the relationship between the parties was governed by the terms of a shipbuilding contract which included an arbitration clause).
4. At the hearing of the Yard's application the parties' attention seems to have been directed primarily to the question whether the Buyer's case was strong enough to justify giving permission to serve out of the jurisdiction. The nub of the dispute in this respect was whether the Yard's obligation in the option to make available an earlier delivery date if it became possible to do so continued to exist after the option had been exercised despite the execution of a formal shipbuilding contract which made no mention of any such obligation and contained an "entire agreement" clause. There was some debate about the correct test to apply when considering the merits of the claimant's case for the purpose of an application of this kind and at the end of the hearing the judge gave the parties permission to serve further written submissions dealing with that question. It was in the course of its written submissions that the Buyer pointed out for the first time that it did not need the court's permission to serve out of the jurisdiction. On that basis it submitted that, unless the Yard was willing to have the dispute concerning the construction of the Option Agreement determined as a preliminary issue, the court should confine itself to deciding whether the construction which it put forward had a real, as opposed to a merely fanciful, prospect of success. The Yard was apparently content that the matter should be decided as a preliminary issue and formulated a question for the judge's consideration.
5. Having raised the prospect of a preliminary issue, however, the Buyer appears to have had second thoughts and sought to persuade the judge not to take that course. Two principal reasons were put forward: one was that all the argument at the hearing had been directed to the question whether the Buyer's construction was sustainable rather than whether it was correct; the other was that it had not had a sufficient opportunity to adduce all the background evidence that would be relevant to the question of construction. In relation to the latter point, however, the Buyer did not provide any indication of what additional evidence there might be that would affect the question and has not done so since. The judge took the view that it was in the interests of the parties and the efficient management of the proceedings for the court to determine the question of construction as a preliminary issue. She therefore formulated and proceeded to decide two questions based on the proposal submitted by the Yard. One of the Buyer's grounds of appeal is that it was unfair for the judge to take that course without giving it an opportunity to address her on it, but Mr. Schaff Q.C. who appeared for the Buyer did not pursue that complaint and I need say no more about it.

The contracts

6. At this stage it is necessary to refer in more detail to the terms of the option and the relevant shipbuilding contracts. The Option Agreement provided (so far as material) as follows:

"In consideration of the mutual covenants contained herein and payment of US$10 receipt of which is hereby acknowledged, the Seller [the Yard] agrees:

1. to grant the BUYER the option to require the SELLER to design, build, launch, equip and complete up to two (2) 73,400 DWT Crude and Product Oil Tankers (the OPTIONAL VESSELS) to the BUYER or its nominee on terms and conditions of the contracts dated February 13, 2003 and Addenda n^o 1 dated 15^th July 2003 and n^o 2 dated 12^th December 2003 (the "Shipbuilding Contracts") between SELLER and the BUYER as amended by the terms and conditions of this OPTION AGREEMENT:

. . . . . . . . . . . . . . . . . . . .

1.3 The SELLER has the option to select one of the following alternative methods of payment security:

(a) The BUYER to supply the SELLER upon Signing Contract an irrevocable Bank Guarantee . . . . . .

(b) The SELLER to supply to supply before due date of each instalment to the BUYER separate Refund Guarantee . . . . . .

. . . . . . . . . . . . . . . . . . .

4. Delivery of the first vessel of OPTIONAL VESSELS shall be on or before 31^st October, 2007. Delivery of the second vessel of OPTIONAL VESSELS shall be on or before 31^st December, 2007.

Should the Sellers could find any possibility to anticipate delivery of the optional vessel(s) (for instance a previously booked berth becomes free), then the SELLER will grant the BUYER or its nominee the earlier delivery position for the optional vessel(s).

5. On receipt of BUYER'S notice referred to in Clause 3, a Shipbuilding Contract . . . . . shall be deemed signed and automatically in effect for the OPTIONAL VESSEL between the SELLER and the BUYER or its nominee as aforesaid on the terms of the Shipbuilding Contract dated 13^th February 2003 [and its addenda] duly amended as per Clause 1.3 here above. After declaring the OPTION and on or before 1 (one) month after such declaration, the BUYER shall procure that . . . . . itself executes formally the Option Shipbuilding Contract(s) as BUYER, for the construction and delivery of the OPTIONAL VESSEL(S) substantially in the form of the Shipbuilding Contracts dated 13^th February 2003 [and its addenda] duly amended as per Clause 1.3 here above."

7. For convenience the parties and the judge referred to the two paragraphs of clause 4 as clauses 4(i) and 4(ii) and I shall do the same. The agreement also included in clause 7 an express choice of English law and a High Court exclusive jurisdiction clause.
8. The Shipbuilding Contract dated 13^th February 2003 to which the Option Agreement referred was a contract between the Buyer and two Chinese companies, China National Machinery Import & Export Corporation and the Yard together acting as seller, for the design, building and delivery of a 73,400 DWT crude and product tanker. It was a lengthy document couched in formal terms and as such was generally typical of such contracts. It contained nineteen separate articles dealing with (among other things) the description and Class of the vessel, price and terms of payment, supervision and inspection of construction, trials, delivery date and warranties of quality. Article XIX contained the following provision:

"4. ENTIRE AGREEMENT

This Contract contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, undertakings and agreements on any subject matter of this Contract prior to signing of the Contract."

9. Following the exercise of the option by the Buyer the parties entered into two shipbuilding contracts, each dated 28^th February 2004, for the construction and delivery of the vessels in question. In each case the terms of the contract were in all material respects the same as those of the contract of 13^th February 2003, except as regards price, delivery dates and matters of that kind and the specific amendments provided for in clause 1.3 of the Option Agreement to which clause 5 of that agreement referred. Neither contract contained any provision corresponding to clause 4(ii) of the Option Agreement. Article XIX.4 of the contract of 13^th February 2003 reappeared as Article XIX.4 in each of the new contracts.

The preliminary issues

10. The judge considered that the single preliminary issue suggested by the Yard could more helpfully be broken down into the following two questions:

(i) On the true interpretation of the Option Agreement, taken on its own, without reference to the later Shipbuilding Contracts actually entered into, is the Yard obliged to offer the Buyer an earlier delivery date, if the contingency "… should the Sellers find any possibility to anticipate delivery of the Optional Vessels …" is satisfied, after exercise/expiry of the option?

(ii) If the answer to sub-issue (i) is "Yes", does the entire agreement clause and the other provisions of the Shipbuilding Contracts vary the parties' contractual rights and obligations under the Option Agreement, so as to preclude any reliance upon clause 4(ii) of the Option Agreement?

11. In my view the judge was right to break the question down broadly in that way, both because the Option Agreement itself gave rise to identifiable rights and obligations which have to be ascertained and because the Option Agreement forms an essential part of the context in which the subsequent shipbuilding contracts have to be construed. She answered the questions by holding that on the true construction of the Option Agreement clause 4(ii) did give rise to a continuing obligation, but that it was extinguished upon the parties' entering into the shipbuilding contracts by virtue of the operation of clause XIX.4. The Buyer says that the judge's answer to the first question was right but that her answer to the second question was wrong. The Yard says that the judge's answer to the first question was wrong and that as a result the second question does not arise.
12. As will already have become apparent, this case raises no more than two short points of construction, one of which relates to what might be described as a "one off" clause in a "one off" commercial document. Such questions of construction are often far from easy to decide, but when that is the case it is usually because of the inherent difficulty of ascertaining with confidence the meaning which the parties intended the document to bear rather than a need to analyse complex written provisions. In my view this is a case which has suffered from over-elaboration and an over-analytical approach on the part of the parties. The result has been skeleton arguments of considerable complexity running to a total of 101 paragraphs (in the case of the Buyer) and 112 paragraphs (in the case of the Yard) respectively, although it is right to say that the oral argument on behalf of the Buyer (the court did not find it necessary to hear argument on behalf of the Yard) was presented by Mr. Schaff with all the economy and skill that any court could wish for. Unless the dispute concerns a detailed document of a complex nature that can properly be assumed to have been carefully drafted to ensure that its provisions dovetail neatly, detailed linguistic analysis is unlikely to yield a reliable answer. It is far preferable, in my view, to read the words in question fairly as a whole in the context of the document as a whole and in the light of the commercial and factual background known to both parties in order to ascertain what they were intending to achieve.

The construction of clause 4(ii)

13. The starting point must be the Option Agreement. In paragraph 27 of her judgment the judge noted that the agreement appeared to have been written (or at least executed) by persons whose first language was not English and commented on the fact that (in contrast to the shipbuilding contracts) it was not couched in very formal language. She expressed the view that it was not susceptible to over-analytical semantic examination and analysis, a conclusion with which I entirely agree. She considered that the natural and ordinary meaning of the words did not limit the duration of the Yard's obligation under clause 4(ii) to the period of the option and did not consider that any other provisions of the agreement made it necessary to imply any such limitation. It appears that in reaching that conclusion the judge construed the language of the agreement as it stood without particular reference to the terms of the shipbuilding contract of 13^th February 2003 or the wider commercial background to the transaction.
14. Mr. Schaff's principal argument in support of the judge's conclusion was that clause 4(ii) was an important part of the commercial bargain and contains no temporal limitation. On its face, therefore, he submitted, it gave rise to a continuing obligation which did not come to an end when the option was exercised. There is nothing in the rest of the agreement from which such a limitation is to be implied and therefore the clause must be understood as giving rise to an obligation on the part of the Yard which persists until the time when work on the vessel actually begins, either in the form of steel cutting or the laying of the keel. He accepted that, if that is right, it follows as a matter of logic that the parties must have intended that all the terms of their agreement should be embodied in the formal shipbuilding contracts apart from the term providing for acceleration of the delivery date for which they decided to rely on the Option Agreement.
15. If one were to construe clause 4(ii) in isolation from the rest of the Option Agreement there might be something to be said for that view, although the commercial implications of a continuing obligation on the part of the Yard to offer the Buyer any earlier slot that might become available during the two and a half years prior to the commencement of construction might themselves cast some doubt on whether it was correct. However, it is essential in my view to construe clause 4(ii) in the context of the Option Agreement as a whole, as well as in the light of the previous course of dealing between the parties and established shipbuilding practices of which both may be taken to have been aware. The vessels in respect of which the option was granted were the last two in a series of eight, all of the same type, which the Buyer ordered from the Yard between 13^th February 2003 and 28^th February 2004. The first contract between the parties was that dated 13^th February 2003, to which the Option Agreement refers, for the construction of Hull No. 0307309 to be delivered on 20^th December 2005. This appears to have been the first of a pair of vessels ordered at about the same time, the second being Hull No. 0307310 which was due to be delivered a month or so later. On 28^th August 2003 the Buyer entered into a further contract for the purchase of the third vessel (Hull No. 0307312) for delivery on 30^th January 2007 and on 12^th December 2003 (that is, on the same date as the Option Agreement was signed) the Buyer entered into a contract for the purchase of the fourth vessel (Hull No. 0307314) for delivery on 28^th February 2007. On 23^rd January 2004, shortly before it decided to exercise the option, the Buyer entered into a contract to purchase the fifth and sixth vessels (Hulls Nos 0307329 and 0307330) for delivery on 15^th July and 15^th August 2007 respectively. At the time the Option Agreement was signed, therefore, there had been a significant course of dealing between the parties for the purchase by the Buyer of newbuildings from the Yard, all of which, as far as one can see, had been conducted on substantially the same terms. The fact that the Option Agreement refers specifically to the terms of the shipbuilding contract of 13^th February 2003 indicates that the parties were content to continue doing business on the same terms, subject to any specific amendments agreed in individual cases. That is a matter to which I shall return in a moment.
16. As Mr. Rainey Q.C. pointed out, it is well-known that shipbuilders plan their production programmes by reference to the periods during which their berths will be occupied by vessels under construction. These are generally known as construction 'slots'. The date on which the builder will undertake to deliver the vessel is largely dictated by when construction can begin, which in turn depends on when a slot is available in the building programme. Shipbuilding contracts invariably provide for delivery of the vessel to be made by a stipulated date. They do not normally refer to the time at which a slot in the builder's programme is to become available because that is a matter for the yard to determine (and perhaps to discuss with the buyer) before agreeing to the delivery date set out in the contract. However, everyone is well aware that in order to deliver the vessel on the agreed delivery date the yard will have to have a slot in its programme available to enable construction to begin at the appropriate time. Moreover, the efficient operation of a modern shipbuilding yard makes it essential that the use of construction berths is carefully planned to ensure that they are occupied as fully as possible. That in turn requires the careful planning of the construction programme and the identification of available slots. All this is little more than a matter of commonsense and must have been well understood by the Buyer by the time it entered into the Option Agreement.
17. In most cases a buyer simply enters into a contract for the purchase of a newbuilding after negotiations with the yard without the benefit of a period for reflection of the kind provided by the Option Agreement in this case. An option of this kind which entitles the buyer to place an order for a vessel at a predetermined fixed price obviously represents a commercial risk for the yard if it is open for any length of time. It is not surprising, therefore, that the option should remain open for a limited period, in this case a little over six weeks.
18. Clause 5 of the Option Agreement expressly provided that, if the Buyer gave notice of its exercise of the option, a shipbuilding contract should automatically come into effect between the Buyer and the Yard on the terms of the shipbuilding contract dated 13^th February 2003 and its addenda as amended by the terms of clause 1.3 of the Option Agreement. That informal contract was to be superseded within a month by one or two (as the case might be) formal shipbuilding contracts in the same terms. The judge appears to have approached the construction of clause 4(ii) in isolation from clause 5, but in my view clause 5 is itself an integral part of the option. The Buyer was not given an option to order one or two vessels on terms to be agreed, but to place an order for one or two vessels for delivery on agreed dates, on agreed terms and at an agreed price. The terms of the shipbuilding contract of 13^th February 2003, as varied by clause 1.3 of the Option Agreement, identify the terms in which the Yard was willing to become bound at the option of the Buyer. It follows that the terms of that contract form part of the context in which clause 4(ii) of the Option Agreement falls to be construed.
19. The shipbuilding contract dated 13^th February 2003 provided by Article VII.1 that delivery of the vessel should take place on 20^th December 2005, subject to any extension of time permitted under the contract. In other words, there was a fixed date for delivery and indeed the Yard was entitled to deliver at an earlier date only with the prior written consent of the Buyer. The contract did not oblige the Yard to offer any earlier delivery date, should it become possible for it to do so, but, as I have already observed, it did contain an entire agreement clause in the terms mentioned earlier. When entering into the Option Agreement, therefore, the parties were clearly contemplating that, if it resulted in the formation of a shipbuilding contract and the subsequent execution of a formal written contract, that contract would, unless amended, provide for a fixed delivery date and would contain an entire agreement clause purporting to ensure that its terms alone governed the parties' relationship.
20. In those circumstances I do not think that the parties can have failed to appreciate that, if and insofar as they intended any resulting shipbuilding contract to depart from the terms of the contract dated 13^th February 2003, that departure had to be clearly provided for in the Option Agreement. It comes as no surprise, therefore, to find that clause 1 refers to amendments made by the Option Agreement and that clause 5 expressly provides that the terms of the shipbuilding contract of 13^th February 2003 are to be amended as provided in clause 1.3, both as regards the initial informal shipbuilding contract and the subsequent formal contracts.
21. In that context it is significant in my view that no corresponding reference is made to 4(ii). However, it cannot have escaped the parties' attention that the contract terms contemplated by clause 5 contained no provision corresponding to clause 4(ii) and therefore that if the Yard were to be under a continuing obligation to offer the Buyer an earlier slot and an earlier date for delivery (if it became possible to do so), it was necessary to amend the previous contract terms in some way to provide for that. Such an obligation would have been important for both parties and since they contemplated the execution of a formal contract it would have made no legal or commercial sense to leave a matter of that kind to be dealt with by the Option Agreement. Mr. Schaff's suggestion that they may have preferred not to encumber the formal contract document with an amendment designed to deal with a contingency that might never arise is in my view hopelessly implausible. The parties were clearly alive to the need to provide for appropriate amendments to be made to the previous terms where necessary and to leave such an important obligation to be enforced through the Option Agreement posed an obvious risk of producing the very uncertainty that has led to the present proceedings. Moreover, if that had been the parties' intention, unlikely as it may seem, they would surely have appreciated the need to make some amendment to the entire agreement clause. Any suggestion that it was simply overlooked merely highlights the implausibility of the argument.
22. These considerations, without the benefit of detailed linguistic or syntactical analysis of the Option Agreement and the shipbuilding contracts, lead me to the conclusion that it was the parties' intention that the Yard should offer the Buyer an earlier date for delivery if one became available prior to the exercise of the option, but that once the option had been exercised the delivery date would be fixed once and for all (subject, of course, to any subsequent renegotiation) and would appear as such in Article VII.1 of the formal contract. This involves reading the reference to "the earlier delivery position" in clause 4(ii) as referring back to the dates mentioned in clause 4(i), but that does not seem to me to present any difficulty. Clause 4(i) deals with one of the most important terms of any shipbuilding contract, the date of delivery, and provides the immediate context in which clause 4(ii) has to be understood. In my view it is the date for delivery, which will in due course form part of the contract terms, to which clause 4(ii) is naturally directed. The words "on or before" in clause 4(i) are in my view clearly intended to reflect the fact that the date for delivery in the shipbuilding contract that is to come into existence as result of the exercise of the option may be different from that stated in clause 4(i) if an earlier slot has by that time been offered to and accepted by the Buyer.
23. Mr. Schaff submitted that the chance of obtaining earlier delivery was a valuable incentive to the Buyer to exercise the option if the Yard was under an obligation that continued right up to the date when construction began, but a much less valuable incentive if the obligation lasted only while the option remained open. That may be true, but I do not think it provides any assistance in the construction of clause 4(ii) since it begs the question by assuming that the parties intended the Option Agreement to provide the Buyer with a more valuable rather than a less valuable incentive. There is no evidence to suggest that that is what they intended, however. Moreover, it should be borne in mind that the option was of value to the Buyer in any event because it provided a period for reflection during which the terms of the contract (and particularly the price and delivery dates) were preserved, while offering the added possibility of obtaining an earlier delivery date should one become available in the meantime. The brevity of the period during which the incentive operated simply reflects the brevity of the option period itself. Likewise, the reference to the Buyer's nominee merely reflects the fact that the Buyer had a right to nominate a company to enter into the formal shipbuilding contract. In my view neither points to the conclusion that clause 4(ii) was intended to give rise to a continuing obligation of the kind suggested by the Buyer. Mr. Schaff sought to gain some assistance from the fact that the delivery date for these vessels was nearly four years away, although the period required for their construction was no more than about eighteen months, but I do not find that significant in resolving the question of construction. The plain fact is that those were the earliest dates the Yard could offer at the time. It would, of course, have been advantageous to the Buyer for the contracts to include an obligation on the Yard to make any earlier slots available to it for these vessels, but it could have been commercially very disadvantageous to the Yard and there is nothing either in the Option Agreement itself or in the background circumstances to suggest that the parties intended to give the Buyer a benefit of that kind.
24. For all these reasons I am satisfied that clause 4(ii) is to be construed as obliging the Yard to offer the Buyer any earlier date for delivery that might become available prior to the exercise of the option with a view to incorporating that earlier date, first, into the informal shipbuilding contract that was to come into effect on the exercise of the option itself, and subsequently, into the formal contract that was to be executed thereafter.

The construction of the shipbuilding contract

25. This makes it unnecessary to consider the second of the two preliminary issues, about which I wish to say very little. The effect of an entire agreement clause of the kind to be found in Article XIX.4 of the two formal shipbuilding contracts executed in this case must depend primarily on its terms, since it is the language chosen by the parties to express their agreement (wherever it appears) which, construed in its proper context, provides the primary source of their intentions. It is for that reason that I am unable to accept the suggestion in the Buyer's skeleton argument that clauses of this kind can be construed by reference to their supposed purpose or that their significance is diminished if they are found among what are sometimes called the "boilerplate" provisions of a formal contract of this kind. There may be circumstances, of course, in which the court can be satisfied that a clause of that kind, although apparently couched in language wide enough to encompass the particular matter on which one or other party seeks to rely, was not intended by the parties to operate in the way in which its terms would suggest, but any such conclusion must be borne out by the particular circumstances of the case. That was the substance of the Buyer's submission in this case. However, since we found it unnecessary to hear argument on that question, I prefer to say nothing further about it.
26. For these reasons I would set aside paragraph 3 of the judge's order and answer the questions raised by the two preliminary issues as follows:

(i) 'No';

(ii) 'Does not arise'.

The consequence is that the appeal must in substance be dismissed on the grounds set out in the respondent's notice.

Lord Justice Jacob:

27. I agree.

Lord Justice Tuckey:

28. I also agree.