Mr Justice Thomas:
Introduction
- This litigation arises out of events not unfamiliar in shipbuilding. After lengthy negotiations between the first defendants, a shipowning company owned by the State of Latvia (Latco), and the claimants, a shipyard in Poland (the Yard), Latco arranged for reefer vessels to be built for a specially incorporated Liberian subsidiary, the second defendants (Latreefers) with directors provided by an independent Isle of Man service company. Contracts for three vessels were signed in September 1992 with an option for a further three. The price was payable by instalments due at certain stages of construction; these were to be used to finance the building. No guarantee of the performance of Latreefers’ obligations was sought by the Yard. The option was then exercised in January 1993 and contracts for 3 further vessels signed. The market declined and an attempt was made by Latco and Latreefers, as is not unusual, to renegotiate the contracts; Latco employed the services of the third defendant, a broker (Mr Henriksen). The negotiations did not succeed. The instalment due on keel laying of the first vessel was not paid in December 1993. These proceedings were commenced in January 1994 by the Yard against Latreefers for breach of the contracts and, as they anticipated that Latreefers might not honour any judgment obtained, against Latco, Mr Henriksen and others for inducing the breach of contracts and similar tortious conduct. In March 1994, the Yard cancelled the first contract; ultimately none of the six contracts was performed. The litigation continued. It has been very protracted involving so far a number of decisions (including one in the House of Lords) and parallel proceedings in the Companies Court. Despite the fact that the ultimate shareholder of Latreefers is the State of Latvia, a substantial money judgment already obtained in these proceedings against Latreefers has not been honoured.
- It is convenient first to describe the factual background before turning to the many issues that arise in the claims under the contracts and in tort.
Factual background
Latco
- Latco is a company owned by the State of Latvia. Prior to the break up of the Soviet Union, the ships owned by Latco were effectively operated as part of the Soviet Fleet and most significant commercial decisions were taken in Moscow. When Latvia became fully independent in 1989, Latco had to operate independently of the Soviet Fleet. At that time, it had approximately a fleet of 90 vessels comprising various types, including tankers, reefers and dry cargo vessels; the approximate value of the fleet in 1993 was US$ 500 million; only about 10 of the vessels were mortgaged. The fleet was highly profitable. In August 1991, Mr Peteris Avotins became the President; a statement of his evidence was served by way of a hearsay notice and he did not give evidence in person. There was little evidence about his commercial experience, but he was a deck officer by profession who had fought for the rights of the employees and had been dismissed in 1989 for this. He had then worked for a private shipping company before being re-employed and promoted to the management of Latco. He ceased to be President in January 1997.
- In order to modernise its fleet and replace its vessels, Latco undertook a restructuring programme; one of the objectives of this programme was to use its current assets to finance the buying of ships and placing orders for new buildings. It therefore established a Liberian company Latmar Holdings Corporation (Latmar Holdings) and in early 1992 the fifth defendants (Latmar Services), a company based in London. Ninety nine per cent of Latmar Services’ capital was owned by Latmar Holdings; the bearer shares in Latmar Holdings were held by Watson Farley & Williams for Latco as the beneficial owners. Two of the directors of Latmar Services gave evidence before me - Mr Sergei Degtiarev (who has changed his surname to his wife’s name of Foster), and Mr Serguei Kisselev. Mr Foster was an economist who had worked for Sovfract, the Soviet state chartering organisation and began working for Latco in 1991 and thereafter for Latmar Services; his area of expertise was ship finance. He was called by the Yard. Mr Kisselev was an old and close friend of Mr Avotins from the time they had served on a ship together when Mr Avotins was the second officer and he was the radio officer; in September 1991, whilst a radio officer, he was asked by Mr Avotins to work at head office and was sent to London in early 1992 as an employee of Latco. He became the managing director of Latmar Services later in 1992 and was still a director at the time of the trial, though he had had no executive functions since 1998. In the period 1992 –1994 he took his instructions from Mr Avotins.
- The purpose of establishing Latmar Holdings as a Liberian company was to enable it to own the shares in the ship owning companies. According to the evidence of Mr Foster, a mortgage on a Latvian flag vessel was not acceptable to western bankers because there was no legislation in Latvia protecting creditors; a Liberian flag vessel was well understood and could provide the necessary security. Another purpose, according to Mr Kisselev was to enable Latco to earn funds without state interference by way of taxation or conversion of the funds into Latvian currency.
The Yard
- Prior to 1989 the Yard had been owned by the state of Poland; the sales of all its new buildings were arranged through Centromar a foreign trade company controlled by the Polish Ministry of Foreign Trade. Between about 1970 and 1990, the Yard built 33 refrigerated vessels for the Soviet State trading company Sudoimport, most of which were for delivery to Latco. The Yard therefore had a long standing relationship with Latco, though it involved principally the technical rather than the commercial side of shipbuilding, as all financial matters were dealt with centrally by others in the state planned communist economies. It was during this period that Mr Nawrocki, an engineer at the Yard who became in 1990 the design officer and technical manager of the Yard, and other colleagues got to know their technical counterparts at Latco including Mr Agofonov.
- As a result of what is known as the “transformation” (in which the Yard played its part as the birth place of “Solidarity”), Poland moved in 1989 from a state controlled economy to a market economy.
- During this period, the Yard encountered difficulties with a Polish purchaser of reefer vessels and it decided to try and market two of the vessels. One of those who was approached by the Yard was, a shipbroker specialising in new buildings, Mr Christian Larsson. He was a director of Larsson Shipping (UK) Limited, a subsidiary of Larsson Shipping Limited of Bermuda; he gave oral evidence at the trial. He, in turn, approached Seawave Agencies Limited (Seawave) in London, a company which had acted prior to the break up of the Soviet Union for the state owned shipping companies. Mr Foster had been a principal employee of this company and remained so during much of 1992 until he was formally employed by Latmar Services. After the break up of the Soviet Union, Seawave continued to act for many of the newly formed independent ship owning companies, including Latco. As a result the two reefer vessels were purchased by the Latco group through Scanreefers, another subsidiary of Latmar Holdings. The two vessels, named Chiquita Amata and Chiquita Abava, were delivered in 1991 and July 1992 with financing from the Hamburgische Landesbank.
The initial negotiations for the building of six reefer vessels
- In April 1992, Mr Larsson was approached by Seawave; they told him they had been appointed as agents for Latmar Holdings and were interested in ordering four reefer vessels of 480,000 cu ft each for delivery starting in early 1994; he had been told earlier that Latco was keen to renew its reefer fleet. On 8 April 1992 details of the proposal were put to the Yard by Mr Larsson. The Yard responded on 10 April with outline terms. The cost quoted was US$25.8 million for the first two vessels and US$26.9 million for the next two. The payment terms were to be 5 per cent on contract signing, 20 per cent on keel laying, 25 per cent on launching and 50 per cent on delivery.
- On 14 May 1992 the Yard and Latco reached outline terms of agreement set out in an exchange of telexes; three vessels were to be purchased for US$ 25.8 million each with an option for a further three at US$ 27 million each; these were, it appears, very keen prices. The payment terms were as initially proposed by the Yard. The telexes made clear that the buyers were to be a company nominated by Latmar Holdings; Mr Engel, an engineer and the commercial manager of the Yard, accepted that it was normal practice for a subsidiary company to be specially formed to own the vessels.
- During the summer of 1992, negotiations proceeded on the detailed technical specification; during the course of those negotiations there were adjustments to the price to take into account changes requested by Latco representatives. Arrangements were then made for the contract to be signed in London.
The signing of the shipbuilding contracts
- Between the 8 and 11 September 1992 there were detailed final negotiations on the contract terms. Mr Foster, Mr Kisselev, Mr Agofonov and Mr Vikman (advised by Watson Farley Williams) represented the Latco group of companies. Mr Nawrocki (by then commercial and technical manager and one of three main board directors) and Mr Engel represented the Yard; the Yard had no legal advisers. It is not necessary to set out the detail of those negotiations, as the Yard no longer pursued claims for misrepresentation and breach of collateral warranty which had been a part of their claim at the outset of the trial. It is sufficient to say that adjustments of the price were agreed and the Yard was told by Mr Alistair Farley of Watson Farley & Williams that the purchasing company would be Latreefers; it was explained that this was for financing reasons. The Yard did not request a guarantee from Latco as it was not, at that time, the Yard’s practice to insist upon a guarantee. I accept the evidence of Mr Engel and Mr Nawrocki that they proceeded on the assumption that Latreefers would be funded by Latco or Latco would arrange for the funding of Latreefers; they believed that they were dealing with the Latco group who as a company owned by the State of Latvia would perform the contracts. I also accept the evidence of Mr Foster that had the Yard insisted on a guarantee, he believed that Latco would have provided it.
- On 11 September 1992 three identical contracts were signed by the Yard and Latreefers for the building of a reefer vessel. The contract was a typical standard shipbuilding contract. Although it will be necessary to refer later to the terms of the contract in more detail, it is only necessary at this stage to state that
• the contract was governed by English law;
• clause 5.02 provided the contract price was to be paid as follows: 5 per cent on signing, 20 per cent (US$5,527,800) within five banking days after the Yard’s notice to Latreefers of the keel laying of the vessel as confirmed by the classification society, 25 per cent on launching and the balance on delivery;
• clause 5.05 gave the Yard a right to rescind if there was default in the payment of the keel laying and subsequent instalments.
Options were also signed for the building of three further vessels.
- I accept the evidence of Mr Foster that it was Latco’s intention that the vessels, when built, would be demise chartered to Latco as a means of providing the necessary security for long term financing; such a charter would mean that the bank had the security of a covenant from Latco to pay hire under the demise charter which could be assigned to the bank.
The incorporation of Latreefers
- On 8 September 1992 Watson Farley & Williams had given instructions to Liberian Corporation Services to incorporate Latreefers as a Liberian corporation with a 100 bearer shares. The initial directors of the company were to be employees of Capco Trust (Isle of Man) Limited (Capco) a company connected with Isle of Man accountants, David Capps & Co, which provided corporate services at Douglas, Isle of Man. At the same time Watson Farley & Williams sent to Ms Alexandra Potts of Capco a request that a meeting of Latreefers be held and powers of attorney executed and sent to them as soon as possible. Latreefers was incorporated. Ms Alexandra Potts, Mr Philip Hobson and Mr Haydn Brickell, all employees of Capco, were appointed directors of Latreefers. Mr Hobson was the managing director of Capco and a solicitor who had been in private practice and head of the legal departments of public companies; Ms Potts and Mr Brickell were also solicitors who had been in private practice before joining Capco. On 9 September 1992 they held a board meeting at Douglas, Isle of Man during which they formally resolved to enter into the contracts and execute the necessary powers of attorney. None of the directors of Latreefers provided any oral or written evidence at the trial. However, after the conclusion of the trial, as I will explain further, documentation did become available about the way in which Capco did its business and dealt with the beneficial owners of the companies for which it provided directors. It will be necessary to refer to this documentation in more detail.
- The bearer shares were held by or on behalf of Latmar Holdings which, as set out above, was wholly owned by Latco.
The exercise of the option
- On 11 January 1993, Mr Avotins of Latco notified the Yard that the option would be exercised; on 28 January 1993 the directors of Latreefers held a further meeting at Douglas in the Isle of Man to approve the exercise of the option and to grant powers of attorney to sign further contracts. On 29 January 1993 the options were exercised and three further contracts executed between the Yard and Latreefers. Further sums were paid to the Yard bringing the total paid by Latreefers to about $8.5m. At the same time Latreefers established a retention account at Hambros.
The attempts made by Latco to obtain financing after the contract had been signed
- After the contracts had been signed in 1992, Latco made various approaches to banks to obtain financing. The banks included the European Bank for Reconstruction and Development. This was done largely through Latmar Services and principally involved Mr Foster. His evidence was that before September 1993 he had discussions with various banks including Christiania Bank and the Royal Bank of Scotland who were interest in providing finance. He had also produced proposals which demonstrated that the vessels could be financed from Latco’s own current revenues. His evidence was that the financing was not immediately required as the initial instalment and the instalment due on keel laying could be financed by Latco itself; that the likely structure of the financing for the vessels was to be part cash and part loan which would be secured by mortgages. Although it had not been decided what the proportion would be between cash and loans, in negotiations with the banks, his approach was to ask for 60-70 per cent financing. His view was it was not necessary to obtain a formal commitment from banks at that stage (as they required commitment fees) but to rely on verbal confirmation; his evidence was that he had, before September 1993, a verbal commitment from Hamburgische Landesbank to participate in the financing for these contracts. I accept all of this evidence. Mr Kisselev’s evidence confirmed that in 1993 Mr Foster was in negotiations for finance with banks. Although he could not recall what terms were being offered by Hamburgische Landesbank, they were ready to work with Latco on finance.
The market
- The reefer market is very seasonal. High season generally runs from about mid February to mid May. The difference in the freights which can be earned in the high season and during the bottom of the low season in August/September can be quite considerable. By the end of 1991, reefer owners had enjoyed three years of comparatively good markets. The evidence of Mr Needham, who had long experience as a senior executive in reefer owning companies, in a report served on behalf of the defendants which was not challenged, was that the rates were US$0.75 per cu.ft. per 30 days. By the end of 1991, time charter rates reached about US$0.80. It was the evidence of Mr Larsson, which I accept, that at the time agreement in principle was reached between Latco and the Yard in May 1992, the market was strong and there was considerable optimism.
- During the course of the summer of 1992 there were deliveries of new reefer vessels without the scrapping of old vessels; this increased the net capacity of the reefer fleet. In November 1992, as Mr Larsson advised Latmar Services in a telex dated 10 November 1992, the market feared a tonnage surplus and this had a negative short term influence on rates, though he was hopeful that this might lead to scrapping of older tonnage which would have, in the longer term, a positive influence on the market. According to Mr Needham, charter rates fixed at the end of 1992 for 1993 fell to about US$0.75.
- By mid 1993, according to the evidence of Mr Needham, the position was worse; that opinion was shared by others. Among the factors that were significant were (1) the fact that the multinational banana companies had had built or had on order a large number of ships for their own account thus reducing their need to use the freight market, (2) the increasing use of containers in the reefer trade and (3) the ability of the former Soviet fleet to trade world wide. The available tonnage had increased and a considerable number of ships were on order. Although there was an expectation that tonnage might be scrapped, it was not likely that this would be of a sufficient magnitude to offset the growth in tonnage brought about by the new deliveries. The time charter market for 1994 collapsed to about US$0.55. Mr Needham’s view was that by September of 1993 the outlook was somewhat pessimistic. I accept that evidence.
- The Yard did not dispute the fact that the market had declined, but pointed to the fact that markets always recover and views do differ. I am satisfied that by September 1993 the market was poor and the outlook generally pessimistic, though as some shipowners take counter cyclical views, some may have been optimistic.
The position taken by Latco and their retention of Mr Henriksen as their agent in September 1993
- Sometime in the summer of 1993, Latco reviewed its position on these contracts. In July 1993, Latco raised with Mr Larsson the question of the price of the vessels by reference to reefers built for Reksten, another owner. In a letter sent on 30 July 1993, Mr Larsson enclosed a detailed comparison that showed that they were not over priced.
- Mr Avotins’s evidence was that although he could not recall the figures, he recalled that by the summer of 1993 the project for the building of the six vessels was not financially viable at the contract price.
- In early September 1993 Mr Avotins appointed Mr Henriksen to act on behalf of Latco in connection with the shipbuilding contracts. Mr Henriksen did not give oral evidence before me, but a statement of his evidence was served and relied on subsequently by way of hearsay notice. His involvement came about, according to his evidence in the following way.
- In 1993, Mr Henriksen was 36. He had had a career in shipbroking with F.H Lorentzen, R.S. Platou and Ugland, before running Trader Navigation Company, a company in which I am satisfied he had a substantial interest. In the later 1980s he became involved in arranging charterparties for the Soviet fleet and, when Latvia became independent, he arranged charterparties for Latco; some were chartered to his Trader Navigation Company and he used them to operate a tanker pool with Latco. His evidence was that his reputation in Latvia became established through these charterparties which earned Latvia foreign currency. He also had recommended that they place some of their funds held outside Latvia with CFM Finance Limited of Bermuda (the fourth defendants) (CFM Finance), as they offered highly competitive rates of interest; they placed funds with CFM Finance, including, on Mr Foster’s evidence, which I accept, funds earmarked for the reefer vessels to be built at the Yard.
- Mr Avotins was impressed with Mr Henriksen and saw him as a dynamic businessman; according to Mr Kisselev, Mr Avotins hoped that Mr Henriksen would be able to explain to the Yard the problems faced by Latreefers. In his statement, Mr Henriksen said that he was told by Mr Kisselev that Mr Avotins wanted to retain him as a consultant to “open up a dialogue with” the Yard; according to his evidence he was subsequently told by Mr Avotins that he had a difficult problem with the Yard and wanted his help in resolving it. The Yard were being difficult with the changes in specification which Latco wanted, that he had little idea what the final price would be and he thought the vessels would be overpriced in the then market. According to Mr Henriksen Mr Avotins wanted him to try and find out the current costings and to see if he could persuade the Yard to agree to vary the price and payment terms. He also wanted him to see if he could raise finance from his own contacts, as Hamburgische Landesbank, which had given the impression they would lend, had then indicated they would not do so. According to Mr Henriksen, he told him that Latco had not decided what to do, if the Yard would not renegotiate.
- A very different account was given by Mr Foster; his evidence was that Mr Henriksen persuaded Mr Avotins that Latco would be better spending its money on tankers rather than the reefer vessels and that in fact, as I have said, Hamburgische Landesbank had made an oral commitment to participate in the financing. It was Mr Kisselev’s evidence that it was Latco’s own view that the money would be better spent on tankers and they did not need Mr Henriksen to tell them that.
- It is clear that when Mr Henriksen was retained, he did not, on his own evidence, act for Latreefers; he did not recall being aware of their identity and looked to Latco for instructions. On 8 September 1993 Mr Henriksen sent to Latco a draft consultancy agreement between Latco and CFM Finance under which Mr Henriksen was to be appointed a consultant by Latco “to improve the previously concluded contracts”. He was to be paid an hourly or daily rate and 5 per cent of any direct financial saving by Latco and to receive an indemnity from Latco. He negotiated these charges after taking advice from a well known London maritime solicitor about charging rates.
- On 20 and 24 September 1993, Mr Avotins and Mr Henriksen respectively signed the contract between CFM Finance and Latco under which Mr Henriksen was appointed Latco’s representative “to improve the previously concluded contract”. Clause 3 of that contract provided:
[Latco] appoints Erik Henriksen to act as its agent and consultant in renegotiating, as directed, improved financial terms. At all times Erik Henriksen will be indemnified and held harmless as a representative and agent of [Latco] in dealing with [the Yard].
- It was not until 29 October 1993, as set out at paragraph 62 below, that Mr Henriksen obtained authority from Latreefers.
- Mr Henriken’s evidence was that he first spent some time in mid September 1993 at Latmar Services’ office in London examining the files. Mr Kisselev’s evidence was that he was instructed by Mr Avotins to help him.
Mr Henriksen’s visit to Mr Larsson
- On 17 September 1993 Mr Henriksen went to see Mr Larsson. Mr Henriksen’s evidence was that Mr Avotins suggested the visit so he could go through his files relating to the negotiation of the contracts. He telephoned Mr Larsson and told him he wanted to discuss something important with him; Mr Larsson agreed he could visit his office. Mr Larsson described Mr Henriksen as being agitated and excited on arrival; he told Mr Larsson that he wanted to talk about the contracts with the Yard and how they were all based on bribes. He told Mr Larsson that he needed his co-operation in re-negotiating the contract. Mr Henriksen’s manner was such that Mr Larsson asked him to leave his office. Mr Henriksen’s evidence was that Mr Larsson was hostile, resented his involvement and refused to assist.
- After that visit, Mr Larsson sent a fax to Mr Avotins setting out his astonishment at Mr Henriksen’s visit. He stated that if there were problems with the contracts, then they should be dealt with directly with the Yard and preferably by those whom the Yard knew as previously connected with the contracts.
- On 21 September 1993, Mr Henriksen wrote to Mr Larsson the following letter:
“After thoroughly going through the files I find a big discrepancy between the original contract prices and the final ones. I take it this is due to extras being added. Could you please provide me with a run down of these extras...
For sake of good order I enclose the confirmation of my appointment as [Latco] representative and agent”.
- The letter enclosed an authority signed by Mr Avotins on 18 September 1993 on Latco notepaper which stated:
“we hereby confirm that Erik Henriksen... is appointed our representative and agent and has full authority to conduct negotiations with yourselves in connection with [the vessels being built at the Yard].”
- Mr Larsson replied on 27 September 1993 saying he did not know, but the prices had been negotiated between the companies and he should refer to his in house sources.
Mr Henriksen’s enquiry of banks
- As I have set out above, Latco had previously itself sought to make arrangements for the financing of the vessels through Latmar Services; they had relied upon the advice of Mr Foster and he had obtained a verbal commitment from Hamburgische Landesbank to participate in the financing. As I have also set out, Mr Henriksen’s evidence was that he was also asked to use his own contacts to arrange finance. The Yard did not accept that he had any genuine desire to secure finance.
- His activities in relation to banks can be summarised as follows:
(1) On 21 September 1993, Mr Henriksen sent a fax to Mr J-P Vernier of Banque Internationale à Luxembourg asking the bank to send to him a fax in the terms which Mr Henriksen set out. Those terms included the view to be expressed by the bank that, although they were in principle interested in financing the project, they were concerned about the poor state of the market and, in the circumstances, would not be prepared to finance more than 50 per cent of the market value of the ships. The bank sent a letter in the very terms requested on 22 September 1993. Mr Henriksen’s evidence was that he had spoken to Mr Vernier and Mr Vernier had indicated a proposal that the bank might make; when Mr Henriksen had asked for confirmation in writing, Mr Vernier had said it would expedite matters if Mr Henriksen would let him have a text.
(2) Mr Henriksen approached Mr Chris R Lloyd, a Vice President of Bankers Trust Company. No copy of any letter to Mr Lloyd nor any note of a meeting between Mr Henriksen and Mr Lloyd was provided by any of the defendants. Mr Lloyd wrote to Mr Henriksen on 21 September 1993 referring to a letter from Mr Henriksen dated 17 September 1993 and saying that the bank was unable to assist with the financing as presently structured. The letter pointed out that the new building cost was expensive compared with the current market as similar tonnage was available at US$2-3m less.
(3) Mr Henriksen telephoned the London branch of the Christiania Bank on 20 September 1993 and wrote to them on 21 September 1993 setting out terms for the financing required - 60 per cent of the contract price (a total of US$102m) for a term of 15 years with a US$8m balloon per vessel. The Bank replied on 28 September 1993 setting out what they required, but saying that, dependent on the structure of the set up and recourse to holding companies with other assets, the degree of financing could be “ok”.
(4) On 17 September 1993 Mr Henriksen wrote to Hamburgische Landesbank; a copy of that letter was not produced by any of the defendants. Some further information was sent on 22 September 1993 by Latmar Services, though this may have been a separate attempt to raise finance in which Mr Kisselev was involved as he may also have sent a letter on 17 September 1993. On 1 October 1993 this bank replied to Mr Kisselev stating that because of the depressed state of the reefer market, they could not finance 60 per cent of the contract price over 15 years with the balloon of US$8m. However they added that if more detailed information could be provided (as had been done in the past) and the terms changed, they would consider the matter. No further documents or information was available from the defendants, though Mr Kisselev said there had been a whole file on financing.
(5) On 17 September 1993, Mr Henriksen spoke to Christopher Williams of Mees Pierson and wrote on 20 September with a similar proposal; they replied on 4 October stating that a 15 year term was too long and that low current charter rates would undermine the whole project.
- Mr Kisselev’s evidence was that he regarded these responses as a starting point for discussions, but he did not know why they were never pursued.
- At about this time, according to the evidence of Mr Kisselev, calculations of the future profitability of the six vessels were made; the calculations, with no foreseeable upturn in the market, led Latco to decide that they would not advance any money to Latreefers or try and take out loans on their behalf.
- The Yard and Mr Henriksen each served expert evidence of banking practice.
• Mr Alan Brauner provided a report for Mr Henriksen. He had joined Chase Manhattan Bank in 1955 and was with them until 1981; from 1969 he was in its European Shipping Division, rising to the position of Vice-President. In 1981 he joined the Midland Bank and continued to work in ship finance; he became head of shipping world-wide. He retired in November 1993 and became a consultant in ship finance matters to various people, including a leading firm of shipping solicitors.
• In response to that report, Mr John Simpson provided a report for the Yard; he had been employed in banking since 1971 by the Royal Bank of Scotland and Den norske Bank Group retiring in April 2000; he had been in charge of the London office of Den Norske Bank from 1992 where ship finance had formed a substantial part of their business. Mr Simpson had been involved in ship finance since 1973.
- Ship finance is within many banks regarded as a specialist activity because of the volatile and cyclical nature of the shipping market; it can be profitable, but it is also risky. Banks tend to lend in rising markets and cut back severely during a down turn, as in poor market conditions there are always questions as to whether freight rates will provide sufficient cash flow to the owner to enable him to service the financing provided. Key factors for a bank are the extent to which the owner and the vessels are subject to market fluctuations and the size and operation of the particular market in which the vessels trade. Another factor relevant to the financing of these vessels was the fact that Latco was a state owned company in a former Soviet state; banks took this into account.
- The banking experts were agreed that, because of market conditions, by 1992 there was a sizeable reduction in lending by banks on ships and in 1993, the availability of ship finance was relatively tight. Finance was available for higher credit rated shipping companies or established bank clients, whilst finance to lower or middle rated owners for new projects was more difficult to obtain. Loans for 10 to 12 years with balloon repayments were available for new buildings, though the size of the balloon would reflect the strength of the credit; several banks would have considered balloons reflecting 15 years finance for stronger credits. A bank considering lending for six reefer new buildings would carefully have considered the market where the prospects in 1993 were not good, as I have set out above; the low level of charter rates likely to be achievable on delivery would have led to a cautious approach. A bank would have considered the present market value of the vessel in assessing how much to lend and the security needed.
- The banking experts were also agreed that an owner would normally approach a number of banks with outline terms and then would, in the light of the interest shown, concentrate on two or three banks to whom more detailed information would be provided.
- They were also agreed that on a standalone basis, without support from Latco, the most that Latreefers would obtain by way of financing was 50 per cent of the then market value of the vessels. They were not agreed on what would have been available if Latco had provided the necessary financial backing nor were they agreed about the prospects of success in the approaches made by Mr Henriksen. Neither was called to give evidence and it was agreed that I should determine, in the light of my own experience of ship finance and the market, the narrow area of dispute between these two equally well qualified and clearly very experienced ship finance experts on the basis of their reports and the other evidence. Mr Simpson thought that financing could have been obtained with the backing of Latco in the form of a guarantee supported by mortgages on other vessels and specific assignments of charter hire on time charters having a period of two to three years. Mr Brauner was more cautious in his view. He thought only a small number of banks would have considered this; they would have needed more security from Latco and because of the scale of the financing needed, banks might have needed to use their country limit. It seems to me there was every reason for caution given the conditions then obtaining in the reefer market, the scale of the project and banks’ inexperience of dealing with this ex-Soviet company.
- Even though Mr Brauner was more cautious than Mr Simpson about the availability of finance, he thought that Mr Henriksen’s approach to the banks was more realistic and stood a greater chance of success than did Mr Simpson, though he thought that most banks would have found it difficult to agree a suitable structure. I find Mr Brauner’s view of Mr Henriksen’s conduct somewhat surprising and the opinion of Mr Simpson that the terms were wholly unrealistic and would have led banks to believe that the attempt was not serious, has the greater logical cogency; it seems to me that Mr Henriksen’s proposal for a 15 year loan with a balloon repayment was unrealistic and would probably have discouraged many banks from looking at the proposal.
Mr Henriksen’s enquiry into the market
- At the same time as Mr Henriksen approached the banks, he also sought advice from Mr Gustav Brun-Lie of R.S.Platou by asking how much the contracts were worth and how much it would cost to build similar ships at the current time. On 1 October they replied stating that the vessels were worth US$20 million each.
- He also spoke to Klaveness Chartering AS about future business and earnings. They obtained for him a copy of a 1992 report on the reefer market. His evidence was that Mr Kisselev obtained a view from New Charter who described the situation as desperate. He also spoke to Mr Jonathan Hudson Davies, a management consultant to Cool Carriers, on 29 and 30 September 1993; he was told that the reefer market was very depressed and likely to remain so for sometime, that the price of the ships being built at the Yard was very high and the contracts were unrealistic in the then market.
Mr Henriksen’s advice to Latco
- As a result of these activities, a decision was reached on a course of action. As I have set out above, neither Mr Avotins nor Mr Henriksen gave evidence in person. Mr Foster who did give evidence was excluded from the discussions and the decision making. Despite his previous role, Mr Foster was not involved in these discussions with the banks or in the issues relating to the Yard; Mr Kisselev accepted in his evidence that this was strange, given his involvement with financing and his relations with the Yard. In October 1993 Mr Foster was told that his services were no longer required and he resigned. Mr Kisselev, who also gave evidence, said he was not directly involved in the discussions and was not involved in the decisions.
- On 22 September 1993 Mr Henriksen sent a fax to Mr Avotins enclosing the responses from Bankers Trust and Banque Internationale à Luxembourg. He described these as “both interesting and very useful”. His letter concluded:
We have now received a legal opinion from Watson Farley Williams which is clear and there is basically no responsibility/liability on [Latco] in case Latreefers breach the contracts, i.e. the Yard should have no legal recourse to [Latco]. I think it is all progressing nicely at the moment so again we have to remain very firm and give no sign of retreating and hopefully be in a good position to do something.
- On 29 September 1999, Mr Kisselev and Mr Henriksen met to discuss a report to Latco. On 30 September Mr Henriksen sent the further report to Mr Avotins. He suggested that they ask for a 20 per cent reduction in the price and an extension of the delivery schedule. He reported that Mr Hudson Davies had advised that Latco should walk away from the contracts losing the deposit paid, but he had understood from Mr Avotins that he would like to try and keep the ships. He also suggested:
Another idea we discussed was the possibility of avoiding the USD 5 mill. loss and this could be done in the way that we find some buyers for the contracts, i.e. we would set up a paper transaction. So in other words this buyer would default towards Latreefer which again would make Latreefer default with the Poles but in your books you would have a claim against this buyer. You would obviously not be in a position to reclaim this money but at least it would be left on the books for sometime as a receivable.
I don’t know if you want to consider this. It would obviously have to be done in a legal way.
- Mr Henriksen’s evidence was that he then spent time preparing a proposal to put to the Yard and a draft letter which he passed to Mr Kisselev and R.S. Platou for their comments; he approached Cool Carriers for more information and then redrafted the proposal.
- No communication was made to the Yard until the end of October 1993. Mr Henriksen explained in his statement that he was gathering information in respect of the contracts as he had not been involved previously, had little previous experience of reefers and was preparing a proposal for the Yard.
The approach to the Yard at the end of October
- On 26 October 1993 Mr Kisselev sent a fax to Mr Nawrocki stating that he would be visiting Gdansk for a few days accompanied by Mr Henriksen who was the appointed representative of Latreefers. He requested a brief meeting with the Yard as a preamble to a fuller meeting on Friday 29 October 1993. The letter proposed an agenda for a meeting. It gave no clue to what the real purpose was. The Yard replied saying they were agreeable to a meeting and suggested a date later in November.
- Nonetheless Mr Henriksen went on with a plan for the meeting and went to Gdansk on 29 October 1993. Mr Kisselev did not accompany him; Mr Kisselev’s explanation to the Court was that he found he had forgotten his passport when he got to the airport.
- There was no note of this meeting. Mr Henriksen told the representatives of the Yard that Latco was in financial difficulties and unable to fulfil the contract; he told them that Latco had been unable to arrange financing for the vessels; the banks had shown a negative reaction to the approaches made to provide finance; this was due, he told them, to the downturn in the market which made revenue from the ships uncertain. This was the only reason ever suggested by Mr Henriksen to explain the position of Latreefers. He suggested a very substantial price reduction and delay in the delivery of the vessels. He left with them a letter dated 25 October 1993 on CFM notepaper purporting to be written on behalf of Latreefers which contained the proposals he had drafted for renegotiating the contracts. This stated that he had been appointed by Mr Avotins of Latco and enclosed a note to this effect signed by Mr Avotins. The letter explained that Latreefers felt obliged to seek a renegotiation of the contract and set out the reasons for this - the impossibility of concluding financing, the depressed reefer market, political and tax changes in Latvia and a lack of cash flow from Latco’s other business. It dealt with the way in which efforts had been made to obtain financing in these terms:
“Over the last nine months, Latreefers has spent a great deal of time and effort trying to find financing for these vessels. However, each time an answer has been found, the market has continued to fall, thus making it impossible to conclude the matter.
The generally depressed refer market means that the banking community as a whole, once only too eager to assist, is no longer willing to finance such projects in the same way, i.e. they are more reluctant, requiring more security and will only provide smaller loans in proportion to the value which they set at market levels and not at the contract price”
- It was the evidence of Mr Nawrocki that he did not take Mr Henriksen’s comments seriously but saw this as an attempt to soften up the Yard for further serious negotiations. His evidence was that the suggested price reduction (which in effect was about 30 per cent) and delayed delivery were wholly unrealistic. Mr Engel agreed. I accept that evidence. Mr Engel’s evidence was that the Yard was prepared to negotiate; for example as the market for reefers was not good, but the market for other vessels was better, they would have been prepared to build another type of vessel. Again I accept that evidence and am satisfied, as the evidence of Mr Nawrocki made clear, that the Yard was quite prepared to be flexible and build other ships in place of the reefers. They anticipated negotiations with Latco as they did not accept the position that finance could not be raised; they considered that Latco had other ships in its fleet that could be used for security. They also questioned Mr Henriksen’s authority.
- After that meeting, Mr Nawrocki sent on 3 November 1993 a fax to Mr Avotins stating that they were open to discussing problems with Latco but wanted to conduct any negotiations directly with Latco.
The authority given to Mr Henriksen by Latreefers
- Mr Henriksen’s evidence was that he reported the Yard’s questioning of his authority to Mr Kisselev who told him he would speak to Watson Farley & Williams and arrange for a formal authority from Latreefers to be issued.
- Accordingly, on 29 October 1993 the directors of Latreefers, Ms Alexandra Potts, Mr Philip Hobson and Mr Haydn Brickell approved the grant of powers of attorney to Mr Henriksen, Mr Avotins, Mr Kisselev and Mr Lugovkin. The formal minutes of the meeting record:
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.
- The power of attorney to Mr Henriksen and the others was granted the same day, forwarded to Latmar Services and then to Mr Henriksen on 3 November 1993. It gave Mr Henriksen and the others power to act:
“as may in the entire discretion of any of the attorneys…be appropriate or necessary in connection with the six shipbuilding contracts”
- Mr Avotins did not respond to the Yard’s fax of 3 November 1993. Instead, On 9 November 1993, Ms Alexandra Potts, as a director of Latreefers, wrote to the Yard in response to that fax; her letter stated that all correspondence should be directed to Latreefers in the Isle of Man. The letter attached Mr Henriksen’s power of attorney and made the point that he was Latreefer’s official negotiator and asked the Yard to meet with him. Following that letter, Mr Henriksen wrote to the Yard on 10 November 1993 asking them if he could make a further visit as it was in his view in everyone’s interest to try and find a solution to the issues he had raised. The Yard agreed, but at the same time wrote to Mr Avotins asking him to come.
Meeting at the Yard on 22 and 23 November 1993
- Mr Henriksen and Mr Kisselev visited the Yard on 22 and 23 November 1993. Mr Avotins did not accompany them. According to the joint note of the meeting 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 Mr Henriksen sent on Wednesday 24 November 1993 an internal memorandum to Mr Avotins of Latco which reported on the meeting and the views of the parties that cancellations would be extremely negative. It concluded as follows:
It is quite clear that further discussions at this point in time 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 some serious difficulties (read cash flow problems)
Sergei Kisselev and I will try to have a meeting with one of Frances Steel’s colleagues who know the contracts, hopefully on Thursday, and we can discuss matters and the legal implications.
IT IS ABSOLUTELY VITAL THAT YOU, SERGEI KISSELEV AND MYSELF GET TOGETHER ON FRIDAY TO DISCUSS THIS MATTER AND YOU MUST GIVE ME FURTHER INSTRUCTIONS.
Frances Steel was a lawyer at Watson Farley & Williams. Neither she nor anyone else from Watson, Farley & Williams gave evidence. No information was made available about the intended meeting with them. Mr Henriksen’s witness statement did not elaborate on his advice in the memorandum.
- On 25 November 1993 the Yard sent a fax to Mr Avotins offering to have negotiations, but stating that in the meantime they were going to carry on with the contract. On 3 December 1993 Mr Henriksen replied to the Yard in answer to that letter pointing out that Latreefers was the party to the contract and not Latco. The letter stated that although Latreefers wanted to take delivery of all six vessels, the current market position and Latreefers’ own financial position meant that this might be impossible unless the Yard responded more helpfully to the proposals made. Although Latreefers remained optimistic about employment and finance once the market improved, the market was such that they had not to date been able to find adequate finance. He asked the Yard to reconsider the proposals:
Latreefers appreciates that the loss of up to six contracts would have as serious effect on your business as on its own and is equally concerned to avoid such a situation.
A postponement of four of the contracts and amended terms for the payment of the various instalments due on the first two (as suggested by ourselves last week) would, we trust, both give the company time to secure finance for the entire project and give the market time to continue improving.
As already mentioned, this proposal is only a basis for continuing discussions in out joint attempt to find a solution and prevent a total collapse of the entire project. I look forward to hearing from you as soon as possible.
The keel laying instalment
- There is no record of any meeting between Mr Avotins and Mr Henriksen to decide on what should then happen. Although there were numerous communications between 30 November and 3 December 1993 about transferring very substantial funds from Latreefers involving Latreefers, Frances Steel of Watson Farley & Williams, Mr Henriksen, CFM Finance and Mr Kisselev, no evidence was given as to any communications between Mr Avotins, Mr Henriksen, Latreefers or Latco about the payment of the keel laying instalment. On 2 December 1993 deposits of over $13.2 million placed with CFM Finance by Latreefers were assigned to Latmar Holdings; there was documentation which evidenced the fact that these funds were not Latreefers’ funds, but funds owed to other companies within the Latco group. For the reasons set out at paragraph 315 below, I did not hear evidence as to whether they were in fact funds owed to other companies within the Latco Group or whether, as at one time was alleged by the Yard, they were in truth the funds of Latreefers.
- On 3 December 1993, the keel on the first vessel was laid and the Yard gave notice in accordance with the terms of the contract of that fact; DNV, the classification society, gave its confirmation. In accordance with clause 5.02(b) of the contract, an instalment of 20 per cent of the price became due within five banking days. The Yard sent a reminder on 10 December.
- Latreefers did not pay the instalment. There are no documents and no direct evidence which explain how the Isle of Man directors of Latreefers made that decision.
- On 22 December 1993 the Yard wrote to Mr Avotins asking for payment of the instalment and stating that they were prepared to renegotiate on a limited basis and asking him to visit the Yard; they made clear that they did not want to deal with Mr Henriksen. However, it was Mr Henriksen who responded on 29 December 1993 stating that he was the person who had been appointed both by Latco and Latreefers. He pointed out that the contracts were with Latreefers and not with Latco and Latco had not been requested to give any guarantee. He stated:
[Latco] remain willing, as interested outsiders to the contract, to try and bring the parties together in the event of any problems, but I would suggest that it is counter-productive to seek to argue that [Latco] are in some way bound by the contract and that it is counter-productive to try and bypass my own involvement.
- The non-payment was a serious matter for the Yard as the contracts were self-financing; at first, they nonetheless expected Latco to come and negotiate and to explain the position that they had taken.
The issue of proceedings by the Yard
- On 7 January 1994, the Yard issued a writ in action 1994 Folio 18 against Latco, Latreefers, Mr Henriksen and CFM alleging that the contracts had been made by Latreefers as agent for Latco and that Latco and Latreefers (if they were the contracting party) were in repudiatory breach of all six contracts. They claimed a declaration that the contracts were binding, payment of the keel laying instalment and damages. They also contended that Latco (if it was not a party to the contracts) Mr Henriksen and CFM had agreed and cooperated together in the wrongful inducement of breaches of each of the contracts; they claimed damages and an injunction against them. On 10 January 1994, the Yard’s solicitors sent a copy of the writ to Latco and on 11 January 1994 informed Mr Henriksen of the proceedings.
- At the end of January or beginning of February 1994, Mr Agafonov and the other technical supervisors from Latco who had been resident at the Yard as Latreefers’ technical team supervising the steel erection and the testing of equipment left the Yard. The Yard at first hoped that they would return; Mr Agafonov told them his absence would be temporary and he would return; the office was not transferred back to the Yard and the papers were left there.
The rescission of the first and second contract
- Although, as I have said, the Yard at first hoped that Latco would pay or explain its position, it did neither. The Yard carried on building the vessels. On 3 March 1994, the Yard gave notice under clause 5.02(b) of the contract rescinding it as of that date. The letter made clear that this brought to an end their obligation to build the vessel, but also that they were entitled to the keel laying instalment (together with interest) and damages
- On 9 March 1994 the second keel was laid and the Yard gave notice in accordance with the contract of that fact; DNV confirmed this and the keel laying instalment became due five banking days thereafter. It was not paid.
- 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 were 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 1994, the Yard gave notice of rescission of the second contract in similar terms to their letter of 3 March 1994 in respect of the first vessel.
The notices in respect of vessels 3-6
- The Yard then purported to appropriate the keels of vessels 1 and 2 to contracts 3 and 4; no new work was involved; they simply used the existing assembly for vessels 1 and 2. On 14 and 15 April 1994, the Yard gave keel laying notices in respect of those contracts. No instalments were paid. On 29 April 1994, the Yard issued a writ in a further action (1994 Folio 702) against Latco and Latreefers claiming the keel laying instalments on vessels 2, 3 and 4; it does not appear that this was served and no further steps were taken in that action. On 16 May 1994, the Yard gave notice under contracts 3 and 4 rescinding them; the notices were in similar form to those that had been given for the first vessel.
- The Yard then purported to appropriate the same keels to contracts 5 and 6 in the same way; on 13 and 17 June 1994 they gave keel laying notices in respect of those contracts. No instalments were paid and on 12 and 18 July 1994, the Yard gave notice under those contracts rescinding them.
- In the course of the proceedings in this action, to which I will shortly refer, these notices were held to be invalid on the basis that the Yard was not entitled to appropriate the vessels 1 and 2 to contracts 3-6. There was therefore no actual breach in respect of the failure to pay the keel laying instalments on these vessels and no contractual right to rescind.
- There was other correspondence at this time, but it is more convenient to refer to it when dealing with the claims made by the Yard against Latreefers under the contracts.
The payment to Mr Henriksen
- On 20 December 1993, CFM Finance submitted to Latco an account in respect of Mr Henriksen’s fees; they were based on the hours spent and totalled $15,050 together with expenses of just under $4000; there was no claim for the percentage due. These fees were paid by Latco. No further payments were made under the agreement, though Mr Henriksen may have indirectly benefited from other dealings between companies in which he was interested and Latco, particularly through the deposits of substantial funds with CFM Finance. He also stood to benefit if new investments were made in tankers, as he would have hoped that these would be chartered through him or put into the tanker pool.
The procedural history of the actions
- In April 1994, the Yard arrested two of Latco’s vessels in France as security for the claim; those proceedings have resulted in the Yard obtaining security, though the action is subject to appeal to the Cour de Cassation.
- Latco and Latreefers disputed the jurisdiction of this Court in the first action commenced in January 1994. They sought to set aside service; Latmar Services (who were joined in March 1994) and Mr Henriksen sought to strike out the writ as disclosing no reasonable cause of action. On 12 May 1994, Tuckey J held that there was no good arguable case that Latco was a party to the contracts, but held that there was a good arguable case that Latco and Mr Henriksen did induce breaches of the contracts which could be pursued in this Court.
- On 5 December 1994, Clarke J granted summary judgment to the Yard against Latreefers for the amount due for the keeling laying instalments of vessels 1 and 2 – a sum of just over $11m and interest; his judgment is reported at [1995] 2 Lloyd’s Rep 592.
- On 29 April 1995, the Yard began what was in effect treated as the second action claiming the amounts due on the keel laying instalments of vessels 3-6 (1995 Folio 1213); no claim was made for damages for repudiation. It is convenient to ignore the writ in 1994 Folio 702 issued in April 1994 and refer to action 1995 Folio 1213 as the second action. The Yard made an application for summary judgment in respect of these instalments, but it was rejected by Waller J on 23 November 1995 in an unreported judgment.
- Appeals were made against both judgments. On 28 May 1996, the Court of Appeal held that none of the keel laying instalments could be recovered; they held that as the Yard had rescinded under clause 5.05, their sole rights were governed by that clause 5.05 and their common law rights were displaced. They ordered that the Yard’s claim for damages be assessed under clause 5.05. The judgments of the Court of Appeal are reported at [1996] 2 Lloyd’s Rep 132. On 31 October 1996, the House of Lords granted leave to appeal.
- Before the appeal before the House of Lords was heard, there were two other applications. The first of these related to an application by Latreefers to strike out the claim made by the Yard for damages which had been put forward on the common law basis. Longmore J decided on 3 October 1996 that the application succeeded and he struck out the particulars of the damages claimed by the Yard on the basis that the particulars did not comply with the order of the Court of Appeal. In the second of these applications, Colman J decided on 6 March 1997 (reported at [1997] 2 Lloyd’s Rep 228) that the Yard should not have permission to amend to claim damages on the basis that Latreefers were in anticipatory repudiatory breach of all six contracts.
- Although the appeal to the House of Lords primarily concerned the decision of the Court of Appeal, the judgments of Longmore J and Colman J were also considered. The House of Lords held on 26 February 1998, [1998] 1 WLR 574, that, the Yard were entitled to judgment against Latreefers under the contracts for the amount of the keel laying instalments on vessels 1 and 2, but not on vessels 3-6. They also held that the Court of Appeal’s view of clause 5.05 was too wide and that the Yard should be entitled to plead a claim for damages on a common law basis in respect of vessels 1 and 2 (as well as vessels 3-6); they also held that the Yard should be entitled to amend to plead its claim for damages on the basis of anticipatory repudiatory breach in respect of all six vessels.
- On 3 August 1998, Mance J ordered that the pleadings in the actions be consolidated. Pleadings were then consolidated and a Case Management Conference held in July 1999. It will be necessary to refer in more detail later to the details of the procedural steps taken after consolidation in connection with the claim for damages for repudiation in respect of vessels 1 and 2.
- As Latreefers had not paid the sum due under the judgment for the keel laying instalments of vessels 1 and 2, the Yard sought the appointment of a provisional liquidator. This was resisted by Latco, but on 21 December 1998 Lloyd J held that Latreefers should be wound up and provisional liquidators appointed; his judgment is reported at [1999] BCLC 271. In April 1999, the provisional liquidators reported and in consequence in April 2000 misfeasance proceedings were commenced against a number of persons associated with Latreefers, including the Isle of Man directors.
- Finally an attempt was made by the defendants by a summons dated 10 February 1999 to stay these proceedings on the basis that they were being funded by Mr Larsson under a champertous agreement. That was dismissed by Toulson J on 10 June 1999; his judgment is reported at [1999] 3 All ER 822.
- The defendants appealed from the judgments of Lloyd J and Toulson J; these appeals were dismissed by the Court of Appeal on 9 February 2000.
The trial and the application to admit further evidence
- When the trial began on the first day of the spring term, 2 May 2000, there were a number of issues on the pleadings that had not been resolved and it was not clear how ready the parties were to deal with some of the issues on quantum at the trial. Some of these issues were dealt with by consent and during the course of the trial I made rulings on others. At the conclusion of the hearing late on the last day of that term, 25 May 2000, an issue that had been raised in closing submissions was left for written submissions. At the end of July 2000, the Yard made an application to admit further evidence in relation to the arrangements on which Capco did business and the Isle of Man directors of Latreefers were appointed. Directions were made by me in August for the exchange of submissions and, in a ruling handed down on 19 October 2000, I gave the Yard leave to admit some of that evidence. After a short hearing on 19 October 2000 conducted by video link as I was sitting at Cardiff, I afforded the parties time to adduce the evidence and make further written submissions; these were provided during November. I was thereafter provided with a bundle of 15 further authorities which were said to be relevant to the issues raised by this limited further evidence and the submissions made in relation to them.
The issues
- At the outset of the trial I refused the Yard leave to amend to plead a wider case of misrepresentation and collateral warranty. In the result they abandoned, in their concluding speech, their other claims for misrepresentation and breach of warranty. The remaining issues fell into two broad parts – the claims by the Yard in contract against Latreefers and the claims by the Yard in tort against Latco, Latmar Services and Mr Henriksen for inducing breach of contract and conspiracy. The claim against CFM was not pursued. Each of the two parts involved many different issues; I am very grateful for the considerable assistance I received from each team of lawyers and in particular for the care with which they marshalled the arguments and the materials in support. I will deal with the contractual claim first.
THE CLAIMS IN CONTRACT AGAINST LATREEFERS
The issues in the claims in contract
- As I have already set out, the Yard’s entitlement to judgment against Latreefers for the keel laying instalments on vessels 1 and 2 has been upheld by the House of Lords. However there remained a number of disputes between the Yard and Latreefers in relation to damages. Before the trial of the action commenced, although experts had been retained on both sides and a large amount of work done, there was a dispute as to whether the trial before me should be on liability alone or whether I would also deal with quantum. It was fairly clear that damages could not be dealt with in the time allowed for the trial, particularly as the issues of fact had not been sufficiently refined in discussions between the experts to make it a cost effective exercise. It was not, therefore, in the event necessary for me to resolve the issue, as the parties agreed that I should express a view on certain issues which, as the trial progressed, they agreed.
- There were in the end six issues for my decision. The first two issues concerned the construction of clause 5.05 and its effect on the claims made in respect of vessels 1 and 2 where the keels had been laid and much pre-fabrication work done. The remaining four issues related to the question as to whether the Yard could claim damages for repudiatory breach of the contracts for vessels 1 and 2 and whether it was the Yard or Latreefers that was in repudiatory breach of the contracts for vessels 3-6.
(1) Does clause 5.05 provide the entire remedy?
- The paragraphs of clause 5.05 were unnumbered, but I have adopted the additional numbering system for the clause used by the other courts which have considered this clause. Clause 5.05 of the contract provided:
“ [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 (d) 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 always 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”
- Latreefers’ original contention in respect of clause 5.05 was that it deprived the Yard of the right to recover its claim for instalments of the price; the House of Lords held this to be wrong and that the right to recover in debt subsisted. The House of Lords also held that the provision did not make a sale obligatory, as there might be circumstances where a buyer was not available or in which the Yard’s duty to mitigate might require a different course to be taken (see the speech of Lord Goff at 585 E-H of [1998] 1 WLR). At the trial, Latreefers contended that clause 5.05 was a complete code and provided the entire remedy; it therefore excluded a common law claim for damages.
- The Yard’s contention was that the Yard was entitled to recover the full measure of damages at common law, as the only effect of clause 5.05 was to make it clear that, if there was 21 days default in payment, then the Yard had a right to rescind; in other words it elevated the default provision to the status of a condition. Paragraph [2] of the clause was either a partial code in that the common law right to damages survived outside it (but the clause made it clear that credit had to be given for instalments paid) or, if the clause was a complete code, it acknowledged or created within the clause a right to damages at common law. The Yard relied on the speeches in the House of Lords which made it clear that the right to claim in debt subsisted, the commercial consideration that the parties were unlikely to have agreed that the limit of the Yard’s loss would be the claim in debt and the fact that under paragraph [4] of the clause, Latreefers was bound to remedy a deficiency.
- Latreefers contended that paragraph [2] of the clause entitled the Yard to retain and apply the instalments already paid against any loss or damage the Yard had suffered. The detailed provisions of paragraphs [3] and [4] (which applied in the event of a sale) were inconsistent with the existence of any further recovery at common law, as they provided for the precise application of the instalments and proceeds of sale. The clause provided for the possibility of repayment of sums to the buyer, Latreefers; that provision could not operate if the Yard were able to bring into account any sum not specified in the clause. The provisions of paragraphs [3] and [4] would always operate, as there would, in all realistic circumstances, be a sale.
- In my view the clause does not prevent the Yard maintaining a claim for damages. In the first place, paragraph [2] contemplates that the instalments will be applied to the recovery of the Yard’s loss and damage; the Yard is given the right to sell, but, as the House of Lords held, is not obliged to sell. The Yard, nonetheless, has to mitigate all loss and damage. The clause is entirely consistent with and points towards the existence of a right otherwise available to claim damages for breach of contract. There is nothing that takes that right away and clear words would be needed to do so; in his speech in the House of Lords, Lord Goff referred, at p 585 of [1998] 1 WLR, 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) Limited [1974] AC 689 at 717”
- Latreefers relied principally on paragraphs [3] and [4] which they said were clearly inconsistent with a right to claim damages. But these paragraphs only deal with the situation where there is a sale of the vessel. When I enquired what the position was, if there was no sale, I was told that that would never happen in reality. However, as Lord Goff observed at page 585, there could be circumstances where there was no sale, such as where there were no buyers or where the duty to mitigate required a different course to be taken.
- Thus it seems to me a right to damages can survive in principle, but whether in practice this makes a difference in the case of a sale may be academic. As Lord Goff said when dealing with the circumstances where the vessel was sold:
In such a case the seller is required to apply the proceeds received by him from the sale, and the instalments already paid and retained by him, in or towards the satisfaction of the unpaid balance of the contract price. However, as the Court of Appeal pointed out, the instalments already paid must first be taken into account in order to identify the amount of the unpaid balance of the contract price. Then the proceeds of the sale fall to be applied in or towards the satisfaction of the balance. Any balance of the proceeds goes to the purchaser, and any deficiency has to be made good by him on demand. This provision makes perfectly good sense, the intention being that the seller shall receive the full contract price; and, since the price reflects the element of profit, he will be indemnified against his loss of profit
- Where there is a sale, these provisions operate, and although a right to damages subsists, it will be then a question for detailed consideration to see whether there is any element in such a claim that is not covered by these paragraphs. It may well be that there is in fact none, but only detailed consideration of the facts can provide the answer. However, if there is no sale, then the subsisting right to claim damages may well be of importance.
(2) What was the effect of the Yard’s use of the assembly of vessels 1 and 2?
The factual assumption as to the use made of the assembly
- There was a dispute between the parties as to the operation of clause 5.05[2] as a result of the subsequent dealings by the Yard with the keels and other materials assembled for vessels 1 and 2. Latreefers contended that the Yard had completed and sold the vessels under paragraph [2] of clause 5.02. The Yard did not accept this.
- The Yard built two reefer vessels for L’Orient Maritime under a contract dated 20 September 1994; for this purpose they used the assembly work for vessels 1 and 2 and the machinery ordered. The contracts were materially the same save as to price and specification; there was a dispute between the experts as to whether the differences in specification meant that the ships built for L’Orient Maritime were the same as the ships that were to be built for Latreefers. I was asked to assume that the difference in specification between the ships which were to be built for Latreefers and those that were built for L’Orient Maritime was not more than +/- 5 per cent, but I was not given any details as to the differences.
Did the Yard complete and sell vessels 1 and 2?
- The possible arguments on this issue were recorded by Lord Goff in his speech at page 586, but he said that, as no argument had been advanced before the House of Lords, he was not going to express a view. However at page 597 Lord Lloyd of Berwick did express a view, although, as was accepted, it was not part of the decision:
The second half of clause 5.05[2] gives the yard the right to complete and sell the vessels on such terms as the plaintiffs deem reasonable. This is what the plaintiffs in fact did. Paragraph 39 of the agreed statement of facts reads:
`By two contracts of sale dated 20th September 1994 the Yard agreed to sell two hulls to Lorient Maritime for a total price of US$22.5m each. The Plaintiff appropriated the two keels to these contracts. Save for the price and certain aspects of the specification, the terms of the contracts between the Yard and Lorient were on substantially the same terms as the contracts between the Plaintiff and the Defendant.'
Thus the keels built for hulls 1 and 2 (there were no other keels) were `appropriated' to the two new contracts with Lorient Maritime, on substantially the same terms as the contracts which had just been rescinded. 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.
- The Yard contended that the provisions of clause 5.05[2] in relation to completion and sale of the vessel only operated when something that could be described as “a vessel” or “the vessel” had come into existence. At the time of termination there were only in existence two keel sections, pre-fabricated steel and the machinery purchased under sub-contracts; these could not be described as “the vessel”. What the Yard did was to incorporate the materials and machinery into the building of another vessel and not sell any existing vessel. Furthermore the incorporation into the L’Orient vessels was not a sale; they simply used the materials and machinery on the other vessel as part of that vessel’s construction and only later sold a completed vessel to L’Orient Maritime. There was never a sale of any parts in existence at the time of rescission.
- I do not accept the Yard’s argument. The Yard’s witnesses were quite clear in their evidence. Mr Nawrocki explained in his statement how the Yard had to try and find buyers for the two reefers so that they could salvage what they could from the work already done and that it was not possible to make any major changes to the specification because much of the steel cutting and hull assembly had already been done. He concluded by stating “we finally managed to sell the two vessels to…” Mr Engel referred to what happened as the distress sales to L’Orient Maritime of the vessels under construction.
- 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. It was obvious that each ship owner would have slightly different requirements as to the detail of the specification; these may be necessary to accommodate their method of trading. The parties must, therefore, have anticipated that, if the Yard exercised its right to complete and sell, what it sold to the new purchaser would not be identical to what it had agreed to build for Latreefers. As a matter of commercial practice, minor variations in the specification could not make a difference; in the case of the sale to L’Orient Maritime, the differences were minor. Nor does it make a difference that the hulls were re-numbered. Thus it is my view that what happened in this case was that the Yard completed and sold the vessels to L’Orient Maritime.
- Nor do I think timing matters. The Yard had the right to complete and sell; the fact that they acted prudently and entered into a contract with a purchaser under which they would complete the vessels in the knowledge that they had a purchaser cannot affect the enquiry under clause 5.05 [2] as to whether they in fact completed and sold the vessels. Shipbuilding contracts vary; some provide for the vessel to be built, completed and sold. The form of the contract or the precise arrangements made with the buyer cannot matter, as the parties to this shipbuilding contract cannot have intended the rights and obligations under this contract to be defeated by the form of the arrangements made for completion or sale.
- Nor can I accept the argument that the Yard’s decision to renumber affected the position; again that was a formality which cannot affect the rights and obligations under clause 5.05[2].
- Although I have concluded that Latreefers were correct on this issue and that the vessels had been completed and sold to L’Orient Maritime, I must briefly refer to their alternative contention that the Yard had sold the uncompleted hull by appropriating it to the L’Orient contract. I do not consider that is what happened in this case. It is, of course, possible for a yard to sell an uncompleted hull to a new purchaser, but the Yard did not do that. It entered into a new contract to build and sell the completed vessels to L’Orient Maritime. If, therefore, the view I have expressed that the vessels were completed and sold is wrong, then in my view Latreefers could not have succeeded on this alternative basis.
Would the Yard have had to give credit for the items used in the L’Orient vessels?
- If my view that the vessels were not completed and sold is wrong, then the Yard accepted that it had to give credit for any materials, such as the keel, used in the L’Orient vessels under the generality of clause 5.05.
Would the failure to sell have been a breach of the duty to mitigate?
- The Yard contended it had mitigated by using the materials and it did not matter whether it had done this under the provisions of clause 5.05 or not. Latreefers contended that they had not and were in breach of their contractual duty to mitigate. On the evidence before me, I cannot determine this issue. It does not arise on the view I have taken in respect of the sale, but if that view is wrong, then this issue will have to form one of the outstanding issues on quantum.
(3) Are the Yard entitled to maintain a claim for damages for repudiatory breach against Latreefers in respect of vessels 1 and 2?
- In the earlier phase of this litigation it was established that the Yard had rescinded the contracts for vessels 1 and 2 for non-payment of the keel laying instalments and were entitled to the keel laying instalments and to plead a claim for damages. It was in respect of that claim that the issue of the scope of clause 5 arose. In the hearing before me, the Yard also claimed damages for repudiation by Latreefers of the contracts for vessels 1 and 2.
- Latreefers contended that they were not in repudiatory breach of contract, but in any event, the claim had not been pleaded. In response, the Yard maintained that it had been pleaded, but, if it had not, they sought permission to amend. This point was one of a number of pleading points that arose at the outset of the trial; although I ruled on all the other pleading points in the course of the trial, it became apparent that some of the facts needed to be investigated and that it was more convenient to deal with this particular pleading issue as part of the final submissions and set out my decision in my judgment.
The course of the pleadings in the action
- It is necessary therefore first to consider whether the claim for damages for repudiatory breach had been pleaded. The matter is somewhat complex.
- In the specially endorsed writ issued in the first action in January 1994, the Yard alleged in paragraph 12 that Latreefers were in repudiatory breach of all six contracts, in addition to the claim for breach of the first contract. In the defence served by Latreefers there was a non admission of paragraph 12, but in the course of the hearings before Clarke J in November 1994, Latreefers admitted they were in redudiatory breach and amended their pleading to do so by admitting paragraph 12. Clarke J recorded:
“The present position is thus that [the Yard] asserts that [Latreefers] was in repudiatory breach of all the contracts by reason of the facts alleged in the re-amended Points of Claim and [Latreefers] admits it.”
- In the second action begun in 1995 for the instalments due on vessels 3-6, the Yard did not claim that Latreefers was in repudiatory breach, but in July 1996 served particulars claiming damages for all six vessels on the basis that there had been a repudiation of all six contracts; these particulars were struck out by Longmore J, though that Order was set aside by the Order of the House of Lords
- The position at the conclusion of the appeal to the House of Lords was clear; the Yard was entitled to plead a claim for damages on a common law basis in respect of vessels 1 and 2 (see the speech of Lord Goff at p 591-2). This was embodied in a formal Order which set aside the Orders of Colman J and Longmore J and remitted the action to the Commercial Court in accordance with the guidance set out in the speech of Lord Goff. It was common ground that the House of Lords had indicated that the Yard was entitled to plead a claim for damages for repudiation of the contracts for vessels 1 and 2. The Yard contended that prior to consolidation there was a claim for damages for repudiatory breach in respect of vessels 1 and 2; the defendants did not accept that there was a claim for damages for an accepted repudiation.
- On 19 March 1998 the solicitors for Latco and Latreefers wrote to the Yard’s solicitors suggesting consolidation and asking whether it was the Yard’s intention to pursue a claim for damages for all six vessels and, if so, whether they intended to “re-jig” the pleadings. The parties thereafter agreed to an order for consolidation and this was made by Mance J on 3 August 1998.
- On 6 August 1998, the Yard served their consolidated statement of claim pursuant to the Order of Mance J. At paragraphs 11-16 of that pleading, they alleged that Latreefers was in breach of contract in respect of vessels I and 2 and that they were therefore entitled to rescind the contract. In contrast they alleged in respect of vessels 3-6 that the conduct of Latreefers amounted to an anticipatory repudiatory breach. Paragraph 30 stated that “by reason of the matters aforesaid, the Yard has suffered loss and damage in the sum of not less than US$41m…”
- A defence to the consolidated statement of claim was served in August 1998 in which Latreefers denied repudiation of the contracts for vessels 3-6 and made specific responses to that plea, but did not address the question of repudiation of contracts 1 and 2.
- On 21 July 1999, the Yard served further particulars which included a schedule particularising the damages of $41m claimed; in the schedule claims for damages were made for vessels 1 and 2 as well as the other vessels.
- Shortly after, on 29 July 1999, a Case Management Conference was heard before David Steel J; Latreefers was not represented as in December 1998, provisional liquidators had been appointed and a winding up order made on 27 May 1999. On 2 July 1999, the Yard had issued an application for leave to continue against Latreefers; the liquidators had not consented and had advised that a proof of debt be submitted. On 20 July 1999, the proof of debt had been submitted by the Yard. Thereafter the solicitors for Latco had asked the liquidators if the claim against Latreefers and their counterclaim could be dealt with in this action, with Latco funding their solicitors for this purpose. The liquidators had not responded to the proposal at the time of the hearing and so Latreefers’ participation in the trial was not clear.
- A case memorandum was prepared for the Case Management Conference; a footnote (as amended) stated that Counsel for the defendants other than Latreefers (who were not represented) had indicated that the claim for damages in respect of vessels 1 and 2 had not been pleaded and ought to be the subject of a formal amendment; this point was repeated by Miss Maxwell, junior counsel for Latco and Latmar Services in her skeleton argument, but she also recorded that the Yard wished to pursue such a claim. The point was raised by Miss Maxwell at the hearing; according to a contemporary note, she said that it was necessary for the Yard to plead the breach of contract which Mr Flynn, junior counsel for the Yard, accepted had not been properly pleaded in relation to vessels 1 and 2; she reserved her position on any time bar. A contemporaneous note of the hearing records the Judge as stating that if the Yard wished to make a claim for repudiation in respect of contracts 1 and 2 this should be pleaded; another states that the Judge would give leave in relation to pleading repudiation of contracts 1 and 2. However, the point was not dealt with in the formal Order made after the Case Management Conference and sealed on 14 September 1999.
- Although the Yard contended that David Steel J had given them leave to amend, they said they did not do so because the action was stayed against Latreefers. In November 1999, Latco’s solicitors, acting for Latmar Holdings, sought an order that the liquidators’ decision to deal with the matter by proof of debt be reversed. The Yard maintained its position that they wanted the matter dealt with by proof of debt. On 27 March 2000, Latmar Holdings’ application was heard by Sir Richard Scott V-C; that morning the Yard’s solicitors withdrew their objection on terms which it is not necessary to set out, as none of them is material to the issues before the Court. The Liquidators agreed to Latmar’s application and a Minute of Order was drawn up giving permission for the claim by the Yard to proceed in the action against Latreefers. On 3 April 2000, Latco’s solicitors wrote to the Yard’s solicitors to say that they represented Latreefers in the litigation.
- Morison J was then asked to deal with further applications. On 6 April 2000, the Yard’s solicitors wrote to the solicitors for Latco asking for confirmation that the stay had been lifted against Latreefers; in the letter they stated:
“… there is we believe one outstanding matter which requires clarification on the pleadings front. You may recall that your counsel have previously suggested that it is not accepted that damages have been claimed in respect of all six shipbuilding contracts. This is not accepted by the [Yard], but for the avoidance of doubt, we propose making a minor amendment to paragraph 15 of the Amended Consolidated Statement of Claim to add the following:
“For the avoidance of doubt, the Claimant claims damages in respect of [Latreefers’] breach in relation to vessels 1 & 2 and, on a true construction of clause 5.05, the yard is entitled to recover damages on the measure recoverable at common law.
In addition to the above we propose making consequential amendments to paragraph 30 to read:
“not less than US$41 million in respect of all six shipbuilding contracts”
and to add the same phrase to paragraph 1 of the prayer.”
- The Yard served a revised pleading that day. At the hearing before Morison J where the principal issue related to whether there should be a split trial of the issues of liability and quantum, further particulars were sought and, as there was no time to deal with the matter, the issue was adjourned to trial.
- Although the question primarily related to Latreefers, it was contended that the issue also concerned the defendants to the tort claims as it was said that no claim had been advanced against them for inducing breach of or interfering with the first and second contracts and for damages in respect of the repudiation of the contracts relating to vessels 1 and 2.
The Yard’s application
- The Yard contended that the consolidated statement of claim sufficiently pleaded the claim in respect of vessels 1 and 2; if not a slip had been made and it should be entitled to amend. The Yard wished to make 4 amendments:
(1) to amend paragraph 13 so that instead of alleging that the non payment was in breach, it alleged that it was in repudiatory breach
(2) to add to paragraph 15:
“For the avoidance of doubt, the Claimant claims damages in respect of Latreefers’ breach in relation to vessels 1 and 2 ….”
(3) to add to paragraph 30, after the reference to damages of not less than $41m, the words “in respect of all 6 shipbuilding contracts”
(4) to make a similar amendment to the prayer
- Latreefers contended that an amendment should not be allowed, as by 11 May 2000 when the application was formally made during the course of the trial, the claim for such damages was time barred; the cause of action had accrued in respect of the first and second vessels when the Yard had rescinded – 3 March and 12 April 1994 respectively.
The effect of the winding up
- Although the Yard made a number of submissions in response, it is convenient first to deal with a new submission on the time bar point made at the very end of its closing submissions at the hearing. The Yard contended that the new submission was a complete answer to the time bar point; it submitted that the effect of the winding up Order was that time ceased to run and, as the claim was not time barred at that time, it could not have become time barred thereafter. The Yard relied on Re General Rolling Stock Co (1872) LR 6 Ch App 646, Re Taff’s Well Ltd [1992] Ch 179 and s. 130 of the Limitation Act 1980 and Rules 12 and 13 of the Insolvency Rules 1986. As this new point was raised in the closing stages of the Yard’s reply in answer to a limitation issue that had been raised much earlier in the trial, I allowed Latreefers time to consider the point and respond in writing after the conclusion of the trial.
- In written submissions in reply delivered in June 2000, Latreefers accepted that the effect of the winding up order was to stop time running and, as the claim was not time barred then, there was no time bar point. They reserved their position should this matter go further.
- Nonetheless Latreefers submitted that leave to amend was needed and should be refused on ordinary principles.
Is an amendment necessary for the claim made in contract?
- It is first necessary to consider whether leave to amend was necessary. Latreefers had initially accepted that the Yard had pleaded repudiation in their writ. However, when the argument was developed later in the trial, they contended that the Yard had never pleaded a claim for repudiation, as the claim being advanced was a claim for damages for accepted repudiation and no claim for accepted repudiation had ever been pleaded at all. At the time the writ in the first action was issued, there had been a non payment and no accepted repudiation. It was suggested that the Yard pleaded repudiatory breach in their specially endorsed writ because it went to the tort claim; but at that time, it was the Yard’s claim that Latco were a party to the contracts and the claim for repudiation of the contracts was advanced against them and against Latreefers. Although it is clear there was a claim for repudiatory breach of all six contracts, it was said that the claim could not at that stage have been a claim for accepted repudiation. Although it is clearly right that at that time, the repudiation had not been accepted, I do not consider that a claim for damages for accepted repudiation is a different cause of action to a claim for damages for repudiation. In any event the writ was amended in May 1994 after the rescission of the first and second contracts. It pleaded repudiation by Latreefers of all six contracts with the Yard and expressly pleaded that acceptance; on any fair reading of the writ, there was a claim then for damages for a repudiation that had been accepted. In my view the Yard’s initial view was correct and that claim had been properly pleaded. Prior to consolidation, I am satisfied that there was a properly pleaded claim for damages on the basis of repudiation of all six contracts.
- Latreefers next contended that any claim for repudiation made in the pleadings before consolidation had been abandoned by the Yard when it did not plead the matter in the consolidated statement of claim served on 6 August 1998; they relied on Cargill v Bower (1878) 10 Ch D 502 at 508 and Lewis & Lewis v Durnford (1907) 24 TLR 64. In response I was referred by the Yard to Burton v MBC (Builders Ashington) Ltd (1995) 69 P&CR 496 and Phelps v Spon Smith (The Times, 26 November 1999). I do not think these cases assist greatly in this case, given its unusual procedural history. It was clearly intended that the consolidated pleading should set out what was in issue; if a matter was not in the consolidated pleadings, the other parties were entitled to assume that the issue was not being pursued. On the facts of this case, the omission of the claim in contract for damages for repudiatory breach was noticed as an omission and the point raised.
- In my view the consolidated statement of claim did not plead a contractual claim for repudiation in respect of vessels 1 and 2; there is a clear contrast between the way in which the contractual claim for the keel laying instalments on vessels 1 and 2 was pleaded and the claim for repudiation of the contracts for vessels 3 to 6. The point was expressly raised prior to the Case Management Conference and I am satisfied that junior counsel for the Yard accepted that the claim had not been pleaded and the Judge indicated that if it was to be pursued, it should be pleaded; he did not give leave to amend. In my view an amendment was necessary and this was acknowledged by the Yard.
Should an amendment be granted to permit the contract claim to be made?
- The Yard’s position in not amending was understandable, as it then was intending to pursue the claim against Latreefers by proof of debt. The Yard remained content to pursue matters by proof of debt before the liquidator, until Latmar Holding’s application was allowed and the contract claim came back into the action as a matter to be determined. The Yard indicated at once that it wished to make the amendment, but the issue was not dealt with in the hearing before Morison J, as there was no time, and left to the trial. There was no delay on the Yard’s part.
- Nor in my view was there any prejudice. The question as regards liability, in so far as it concerns the facts, was covered in the evidence before me and is otherwise a point of law. As regards the quantification of the claim, again there is no prejudice, as the losses on the contracts for vessels 1 and 2 will have to be considered in any event. The work in relation to the losses is still continuing.
- I therefore grant leave to amend in the terms submitted at the trial.
Does the claim against the tort defendants include a claim for damages for repudiation in respect of vessels 1 and 2?
- It was submitted on behalf of the defendants to the tort claim that the claim against them did not include a claim for inducing the repudiation of the contracts in respect of vessels 1 and 2; apart from that point, which went to the scope of their liability, they said that, in any event, the pleading did not include a claim for damages in respect of vessels 1 and 2. They said that, as the pleading referred back to the contractual claims against Latreefers, the claims against them were therefore made on the same basis – a claim for inducing the non payment of the keel laying instalments on vessels 1and 2 and for the repudiation of the contracts for vessels 3 to 6.
- However, in my view the nature of the claim against the tort defendants was clear – it was for bringing about the breaches and the wrongful interference with the contractual relations in respect of all six vessels; for that the Yard claimed damages of $41m particularised in respect of all six vessels. Whereas the pleading can in the circumstances be fairly read as only claiming the delivery instalments against Latreefers, the claim against the tort defendants was for inducing the non performance of all six contracts and the loss suffered thereby. It could never have been sensibly understood from a reading of the pleadings that the claim being made against the tort defendants was for inducing only the non payment of the instalments on vessels 1 and 2 and for inducing the non performance of contracts 3 to 6. It was plainly a claim for inducing non performance of all six contracts. It seems to me clear that at the Case Management Conference, although Miss Maxwell was not representing Latreefers, the point being raised was the contract claim and that was what Mr Flynn accepted had not been properly pleaded; it was a point that needed to be clarified as the trial might include the claim against Latreefers.
- Moreover, the pleading in the consolidated statement of claim against the tort defendants referred expressly to and relied upon the admissions in the original defences that Latreefers had repudiated all six contracts; that again made clear that the claim being made by the Yard against the tort defendants referred to the repudiation of all six contracts; so too did the further particulars which were given under paragraph 26 served on 1 December 1999.
- However, even if that view is not correct, I would have allowed an amendment to plead that the defendants induced the repudiation of all six contracts and damages on that basis. There is no limitation point as the tort is pleaded and the amendment would only add to the scope of the common design or inducement of a tort already pleaded and to quantum of damages already pleaded. If the allegation that the inducement or common design in respect of vessels 1 and 2 is a new cause of action, it is accepted that it arises substantially out of the same facts. Although a minute examination of the highly convoluted pleadings in this case might at time raise doubts as to the precise scope of the pleadings, it is clear that the tort defendants must have appreciated that the scope of the inducement and common design pleaded against them was in respect of the repudiation of all six contracts, as it would have made little sense that the Yard’s case was that they had merely induced the non payment of the instalments on contracts for vessels 1 and 2 and yet induced the repudiation of the contracts for vessels 3-6; the evidence before me dealt with the case on the broad basis. There would be no prejudice or other injustice in giving permission to amend on liability. In my view the same considerations would apply to an amendment in respect of the quantum of damages; if the claim in respect of the damages for repudiation of the contracts for vessels 1 and 2 is a new cause of action (which in my view it is not), then it arises out of the same or substantially the same facts, as the Yard has always maintained a claim in respect of the losses on vessels 1 and 2 and there is no prejudice or other injustice.
(4) Was Latreefers in repudiatory breach of contract in respect of vessels 1 and 2?
- The Yard claimed that there was a repudiatory breach of contracts 1 and 2. Latreefers contended at the trial that the only breach by them was the non payment of the instalments and, at the time the Yard rescinded the contracts (3 March and 12 April 1994), there was, in respect of those vessels nothing more than delay in payment; they had not by their words and conduct led the Yard reasonably to believe that they did not intend to carry out their obligations under the contract. The contention must be decided on the evidence, but after setting out my decision based on the evidence, it may be helpful to refer to the way in which Latreefers had previously characterised the position both in their pleadings and before the Court.
- The non payment of the instalments has to be viewed in the light of the other events and in particular, the decision that Mr Henriksen would deal with the Yard without anyone with whom the Yard had previously dealt, the nature of the proposed terms for renegotiation put forward by Mr Henriksen and discussed with the Yard on 22 and 23 November 1993 and Latreefers’ conduct in December 1993 and thereafter. The question is whether looking at all the events together, Latreefers were making it clear to the Yard (or leading the Yard reasonably to believe) that they were refusing and would refuse to carry out their part of the contract: see the short passages in the speech of Lord Reid in White & Carter Council v McGregor [1962] AC 413 at 427 and in the judgment of Devlin J in Univeral Cargo Carriers v Citati [1957] 2 QB at 436.
- The approach to renegotiate the contracts (which it will be necessary to examine in more detail) was not in itself repudiatory; Latco may itself have still wanted the ships for Latreefers (as Mr Henriksen told the Yard at the meeting on 22 and 23 November 1993). However they made clear that they considered it was impossible to take them on the terms of the existing contracts. They were prepared to negotiate, but their conduct made it quite clear to the Yard that if the terms of those negotiations did not result in an outcome satisfactory to them, they were not going to perform the terms of the contracts. When the Yard wanted to deal with the people they had dealt with in the past, that request was refused; I am also satisfied that the Yard did not seek this so as to hold Latco responsible, but to talk to someone they had dealt with in the past. I am satisfied that Latreefers’ refusal was intended to make it clear to the Yard that they were only interested in performance of the contracts on the terms proposed by Mr Henriksen (or substantially similar thereto) and if the Yard did not agree them, then they would not perform the existing obligations.
- In those circumstances, it is my view that the Yard reasonably believed when Latco and Latreefers maintained their stance and did not approach them in the early part of 1994 that Latreefers had no intention of performing the contracts in respect of vessels 1 and 2. I reached that clear conclusion on the evidence before me.
- Though, as I have set out, Latreefers put forward the submissions I have outlined in seeking to persuade me not to reach the conclusion I set out in the preceding paragraph, Latreefers’ position at the hearing before Clarke J and in the pre-consolidation pleadings accords with the conclusion I have reached:
• At the hearing before Clarke J in December 1994, they admitted and submitted that they were in repudiatory breach of all six contracts (see p 602 of [1995] 2 Lloyd’s Rep)
• Latreefers amended their defence in the first action in February 1995 to admit that they were in repudiatory breach.
• In October 1995 they pleaded in the defence in the second action at paragraph 4(2) that by 3 December 1994 they had indicated an intention not to perform the contracts and they had evinced an intention not to be bound by them and as a result of the meetings and correspondence between September and December 1993, the Yard had understood that.
- The history is important as it demonstrates Latreefers’ attitude to this litigation. They had changed their position before me for purely tactical reasons. As the Yard pointed out, no application was made to withdraw the admissions made in the pre-consolidation pleadings. However, as the claim for repudiation of the first two contracts had not been pleaded by the Yard in the consolidated pleadings and, as the amendment point has only been decided by me as part of this judgment, this point cannot now assist the Yard in respect of the contracts for these two vessels.
(5) Was Latreefers in anticipatory repudiatory breach in respect of the contracts in respect of vessels 3-6?
The issue
- As a result of the decision of the House of Lords that the keel laying notices for vessels 3-6 were invalid, there had been no breach of contract by non-payment, as no keel laying instalments ever became due. The claim made by the Yard against Latreefers at trial in respect of vessels 3-6 was a claim for anticipatory repudiatory breach of the contracts for these vessels.
- When the Yard originally sought to advance a claim for damages for anticipatory breach of contracts 3-6, it was struck out by Colman J in the judgment to which I have briefly referred, but the House of Lords permitted the claim to be pursued; in his speech. Lord Goff said at page 594 of [1998] 1 WLR:
I prefer to approach the matter on the realistic basis that Colman J's decision to dispose of the second action in the way he did found its origin in an erroneous decision of the Court of Appeal, which led Colman J mistakenly to believe that the substance of the yard's claim in this action should be disposed of on an application for leave to amend; and that on that basis your Lordships' House should set aside his decision in toto so far as it relates to the second action. If that is done, full consideration can in particular be given at the trial to the yard's substantial argument, which was outlined before your Lordships by Mr Cordara for the yard, that the buyers' anticipatory repudiation of the contracts for vessels 3 to 6 should be regarded as a repudiation of a continuing nature and so could, despite the yard's unsuccessful attempt to invoke the right of rescission under cl 5.05 in respect of these contracts, subsequently be accepted by the yard as a ground for terminating the contracts and claiming damages for their breach. That this argument is of a substantial nature is fortified by Sir Gunther Treitel's note on the present case ((1998) 114 LQR 22); I wish to add that the point in question did not arise for consideration in Motor Oil Hellas (Corinth) Refineries SA v Shipping Corp of India, The Kanchenjunga [1990] 1 Lloyd's Rep 391, a case relied upon by Colman J in his judgment. Full consideration can also be given at the trial to the question when, on the evidence, the anticipatory repudiation occurred -a potentially important question which, on the submissions advanced before your Lordships, appears to be in contention. …. Obviously, there are substantial arguments which the buyers would wish to advance against such a claim which may be fatal to it, in particular that cl 5.05, if applicable, provides an exhaustive code which excludes any claim for damages for anticipatory breach ……..”
- It was the Yard’s case that the conduct of Latreefers amounted to an anticipatory repudiatory breach. Latreefers denied this and said that they had not by their words and conduct led the Yard reasonably to believe that they did not intend to carry out their obligations under the contracts. They also asserted that the Yard had in any event affirmed the contract 3-6 by serving the invalid keel laying notices. The Yard responded by claiming that, where there was an anticipatory repudiatory breach of a continuing nature, then they did not lose the right to rescind so long as the repudiatory breach continued or so long as there was no hardship to Latreefers. There was a further point taken by Latreerfers – the Yard’s wrongful rescission notices (which had been held to be invalid) could not operate as acceptances by the Yard of the repudiation of the contracts.
The facts
- I have already outlined at paragraphs 78-81 the main events in relation to the service of the keel laying notices for vessels 3-6. After service of the keel laying notices for vessels 3 and 4 on 16 April 1994, the Yard wrote on 19 April 1994 to the Latvian Ambassador to Poland setting out the options they considered open – (1) building all six vessels or (2) building the remaining four if the keel laying instalments were paid or (3) rescinding all six contracts and attempting to recover the sums due. The letter concluded by stating that the Yard could not wait indefinitely to receive sensible proposals from Latco, and that if none were received, they would assume that they should rescind all six contracts. After service of the notices they wrote on 4 May 1994 to Mr Avotins stating that if the keel laying instalments on vessels 3 and 4 were not paid, they would rescind the contracts for those vessels and proceed with the contracts for vessels 5 and 6. Although they said that they would enforce their claims, they again reiterated their wish to build all six vessels. The letter concluded by offering Latreefers the choice of either going ahead and building the vessels or facing legal action to recover what was due. There was no response. The notices of rescission were given for vessels 3 and 4 on 16 May 1994. On 13 and 17 June 1994 the Yard gave keel laying notices for vessels 5 and 6. On 12 July 1994 the Yard wrote to Latco enclosing a draft press release making clear that they had rescinded the first four contracts. On 12 and 18 July 1994, the Yard gave notice rescinding the contracts for vessels 5 and 6. On 18 July 1994, Latreefers’ solicitors returned the guarantees given by the Yard.
Were Latreefers in repudiatory breach?
- I have already set out my conclusion at paragraph 151 that Latreefers were in repudiatory breach in respect of contracts 1 and 2 by reference to the whole of their conduct. I am satisfied that they were by what they said and what they did making it clear that they were not going to perform any of the contracts; it is my view that that became clear in March 1994 and certainly at the latest in early April 1994, when it became clear that Latreefers was not going to pay the instalments on the vessels.
- The Yard also took the point that Latreefers should not be permitted to resile from the admission made to which I have referred at paragraph 152 that they had repudiated all six contracts. However, in the defence served in August 1998 to the consolidated statement of claim, Latreefers denied that they were in repudiatory breach. No point appears to have been taken then or at any stage before the trial that they should not have resiled from the previous admissions. If that point was to be raised in the circumstances of this case, it should have been raised earlier and could not assist the Yard by the time of the trial. This, however, does not detract from my view that the change of position by Latreefers was purely tactical.
Did the Yard affirm?
- Latreefers contended that the Yard affirmed the contracts in respect of vessels 3 to 6 when it issued a writ in January 1994 seeking a declaration and injunction; that it did so again on 14 and 15 April and 13 and 17 June 1994 when it served keeling laying notices. Even though it was held by the House of Lords that these were invalid notices under the contracts, they were an attempt by the Yard to keep the contracts on foot so that they could claim the keel laying instalments as a debt rather than having to prove damages.
- I do not accept these arguments. In the first place, the conduct of Latreefers was not an irrevocable and incurable breach; although I am satisfied on the whole of the evidence before me that Latreefers decided that they would not perform the contracts unless they were renegotiated substantially on the terms they put forward, that was not the view that was formed at the time by the Yard. The Yard initially hoped that the buyers might still perform and Latreefers still had that opportunity; the Yard thought that Latreefers still wanted the vessels, but only wanted to re-negotiate the price. The Yard were prepared to negotiate. It was for that reason that it continued to work on vessel 2 and served the keel laying notice on 14 March 1994. I agree with the conclusion of Clarke J that the Yard did not act unreasonably in so doing (see p 605 of [1995] 2 Lloyd’s Rep at 605). It did not abandon that hope until at least sometime after Latreefers failure to pay that instalment. I accept the evidence of Mr Nawrocki that the decision to stop was made sometime in March 1994, though as I have stated in paragraph 76, I cannot give a precise date.
- 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.
- It is said that in the way the Yard chose to bring these contracts to an end, it affirmed the contract by operating the contractual termination provisions and did not accept the conduct as repudiatory and terminate the contract. But can it really be said that a party has made an irrevocable election to affirm the contract when he terminates the contract not by rescinding it on the basis of accepting the conduct of the guilty party as entitling him to do so, but wrongly relies upon a contractual right to rescind? I do not think so. A party entitled to terminate for breach can effectively terminate, even if he relies on grounds not open to him. When they served the notices for vessels 5 and 6, the Yard still had a small hope that Latreefers would perform; the position was essentially the same.
- However, if the Yard’s action in serving the keel laying notices did amount to an affirmation, it is necessary to consider whether the Yard could nonetheless thereafter bring the contracts to an end.
If the Yard affirmed, could they subsequently bring the contract to an end?
- Latreefers contended when one party to a contract repudiated it, the innocent party had an election either to continue with the contract or bring it to an end. It was appropriate that the innocent party should make an election as there were two inconsistent rights as to which a choice had to be made. An election once made to keep the contract alive, kept the contract alive for both parties. There could be no room for the innocent party to change his position, unless there was a further act of repudiation which would give rise to a right to make a further election. In the case of an anticipatory repudiatory breach, the same applied and there had to be a fresh repudiatory act; there was none here.
- There are a number of authorities that make it clear that in the case of a repudiatory breach, the innocent party must make an election: see The Kanchenjunga [1990] 1 Lloyd’s Rep 391 at 398. An election once made is irrevocable: see Bentsen v Taylor [1893] 2 QB 274 at 279, ERDC Construction v HM Love & Co [1994] SC 620 at 634 and The Kanchenjunga where Lord Goff said: “ Once an election is made, however, it is final”.
- Furthermore in Fercometal v Mediterranean Shipping, The Simona [1989] AC 788 at 805, the House of Lords expressly rejected a middle course; Lord Ackner said:
“When A wrongfully repudiates his contractual obligations in anticipation of the time for their performance, he presents the innocent party B with two choices. He may either affirm the contract by treating it as still in force or he may treat it as finally and conclusively discharged. There is no third choice, as a sort of via media to affirm the contract and yet to be absolved from tendering further performance unless and until A gives reasonable notice that he is once again able and willing to perform. Such a choice would negate the contract being kept alive for the benefit of both parties and would deny the party who unsuccessfully sought to rescind the right to take advantage of any supervening circumstance which would justify him in declining to complete”
- However it is also clear that where there is continuing repudiatory conduct, such as where there is an obligation to pay, the innocent party who has elected to continue with the contract may be able to treat the continued non performance as a fresh act of repudiation. In Johnson v Agnew [1980] A.C. 367, a seller had obtained a summary order for specific performance of a contract for the sale of land against the buyer. The House of Lords held that the seller was entitled, after the buyer had failed to comply with the order, to apply to court to put an end to the contract and claim damages for breach – see the speech of Lord Wilberforce at pages 392-4. The buyer’s argument on election was rejected. At page 398, Lord Wilberforce said:
“In my opinion, the argument based on irrevocable election, strongly pressed by the appellant’s counsel in the present appeal is unsound. Election, though the subject of much learning and refinement, is in the end a doctrine based on simple considerations of common sense and equity. It is easy to see that a party who has put an end to a contract by accepting the other party’s repudiation cannot afterwards seek specific performance. This is simply because the contract has gone – what is dead is dead. But it is no more difficult to agree that a party who has chosen specific performance, may quite well thereafter, if specific performance fails to be realised say, “very well, then the contract should be regarded as terminated”. It is quite consistent with a decision provisionally to keep alive, to say, “Well this is no use – let us now end the contract’s life”. A vendor who seeks (and gets) specific performance is merely electing for a course which may or may not lead to implementation of the contract – what he elects for is not eternal and unconditional affirmation, but a continuance of the contract under the control of the court which control involves the power, in certain events, to terminate it.”
- That was a case where the actual breach continued and was capable of being remedied by compliance with the order for specific performance. In Safehaven v Springbok [1996] 71 P&CR 59, a seller had refused to accept the purchaser’s repudiation of the contract and had gone on demanding performance; the purchaser refused and the seller accepted the continued refusal as a repudiation and rescinded the contract. After referring to the speech of Lord Wilberforce in Johnson v Agnew, Mr Sumption QC (sitting as a Deputy Judge of the High Court) said at p 66:
“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.”
- I agree with that analysis. It fits in with the ordinary conduct of business; an innocent party faced with a repudiatory breach should be able to press for performance of continuing obligations by the party in breach, taking the risk that, if the party in breach has a change of heart and performs his continuing obligations, the contract is then kept alive for both parties. The repudiation is spent and the innocent party must going on performing his part of the contract and cannot change his mind. In that sense his decision to press for performance of continuing obligations is irrevocable. But if there is a continued refusal to perform by the party in breach and that continued refusal amounts to further repudiatory conduct, the innocent party must be entitled to bring the contract to an end, otherwise the innocent party would have to continue to go on performing his obligations when it was clear from that continued refusal to perform that the party in breach would never do so. This analysis is, in my view, entirely consistent with the decision of the House of Lords in The Simona and the subsequent decision in Vitol SA v Norelf Ltd [1996] AC 800 at 810-811. In The Simona the House of Lords made clear that if the innocent party did not accept the repudiation, he had to go on performing, as the contract was kept alive for the benefit of both parties. The point did not arise as to whether, after affirmation by the innocent party, persistence by the party in breach in a refusal to perform a continuing obligation amounting to a repudiation can entitle the innocent party to bring the contract to an end.
- Latreefers submitted that in the case of actual breach which continued after affirmation, something more or worse was required before the innocent party could accept the continuing breach as a repudiation; there had to be something to add to the gravity of the breach or at the very least that the position was being maintained. For example in the case of non-payment, time might be that additional element. I do not accept that as necessarily correct. When the innocent party who has affirmed wishes to bring the contract to an end because of a continuing breach, the question is whether at that time the continuing conduct amounts to repudiatory conduct.
- In the present case, the breach was an anticipatory repudiatory breach, but I cannot discern any reason why the same principles should not apply if the breach is a continuing one. I can see no difference between the position of the innocent party in such cases; if that party, when there has been an actual breach, affirms the contract by pressing for performance, and there is a continued refusal to perform which amounts to a repudiatory breach, then he is entitled, in my view, to accept that continuing refusal as a fresh repudiation. It cannot make a difference if the repudiatory breach which is affirmed is anticipatory, provided there is a continuing breach which amounts to repudiation. Once the innocent party has affirmed, he must going 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 a 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). To require an innocent party, who has by pressing for performance of the contract affirmed it, to wait until there is an actual breach by the party in breach before he can bring the contract to an end might well, as in this case, have required that innocent party to engage in performance that is entirely pointless and wasteful as the party in breach would, when he became under an obligation to accept performance, refuse to do so.
- In my view, there is nothing in the authorities to the contrary; in Bensen, the breach was in the misdescription of the position of the vessel at the time a charterparty was made and thus not a continuing breach. In ERDC, the question of whether the breach was continuing or not was not considered. In the appeal in this case, Lord Goff made it clear that the point was not decided in the Kanchenjunga.
- Quite clearly, as the Yard accepted, if the breach in this case was not a continuing repudiatory breach, then the election made by the Yard was final, subject to the argument on hardship. Not all anticipatory breaches are of a continuing nature such as where a person who has agreed to sell a specific article to a buyer sells it to a third party; I was referred by Latreefers to Howard v Pickford Tool Co Ltd [1951] 1 KB 417. The plaintiff managing director of a company sought a declaration that the alleged conduct by the chairman towards him was a repudiation of his service contract so that he was no longer bound by it, even though he had continued to perform his duties as managing director. The court struck out the statement of claim seeking a declaration on the basis that the question was an academic one; as the plaintiff was still performing his duties, the alleged conduct of the chairman could not constitute a repudiation as it had not been accepted. Asquith LJ said:
An unaccepted repudiation is a thing writ in water and no value to anybody; it confers no legal rights of any sort or kind.
I do not, however, consider that the case assists on the issue of whether a breach is a continuing one or not, as on the limited basis on which the decision was reached, that was not in issue.
- 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. Professor Sir Guenter Treitel QC in a note Affirmation after repudiatory breach (1998) 114 LQR 22, to which Lord Goff referred in his speech in the House of Lords, considered that affirmation should not necessarily in such cases be regarded as irrevocable. An innocent party should, in principle, be entitled to go back on his affirmation without there being the need for new repudiatory conduct on the part of the contract breaker, unless there had been some change of position by the party in breach in reliance upon the affirmation which would be prejudiced by the change of mind by the innocent party. It seems to me that there is great force in this view. I am quite satisfied on the facts that there would be no hardship to Latreefers; they were not prepared to perform the contracts unless there was a substantial reduction in the price payable; they suffered no hardship when the Yard eventually brought the contracts to an end. Therefore, if it were open to me to decide the case on the basis of this principle, it would form an alternative basis for the decision I have reached.
Was there a fresh acceptance by the Yard?
- Latreefers contended that if the Yard was entitled to accept their conduct as a repudiation, then they had not done so as the rescission notices were invalid and had been intended to achieve a different result. The notices, if effective, would have triggered rights under clause 5 of the contract; they could not therefore be used for the wholly different purpose of terminating the contract and claiming damages at common law.
- They relied on Johnson v Milling (1886) 16 QBD 460, United Dominions Trust v Ennis [1968] QB 54 and Decro-Wall v Practitioners in Marketing [1971] 1 WLR 361. None of these was helpful; in the first two cases, the point in issue in this case did not arise and the third case dealt with the converse situation, namely that a letter purporting to accept a repudiation could not operate as a notice to terminate under a contractual provision.
- 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.
(6) Latreefer’s counterclaim to recover the initial instalments on vessels 3-6
- If Latreefers had been correct and the Yard were not entitled to accept their conduct as repudiatory, then Latreefers contended that the Yard were in repudiatory breach by the rescission notices and Latreefers were entitled to recover as damages the initial instalments which they had paid to the Yard.
- On the findings I have made, this point does not arise. I will therefore deal with the matter briefly. In my view, the Yard plainly wanted to build the vessels and had a bona fide belief that they had a right to terminate in the circumstances that had arisen: see Woodar v Wimpey [1980] 1 WLR 277. I do not consider that by their conduct they had repudiated these contracts. In any event, Latreefers did not accept their conduct as amounting to a repudiation until 6 November 1996; this was not only too late, but a clear indication that they never thought that there was a repudiation at the time.
- The pleading raised the further issue as to whether Latreefers were entitled to recover the initial instalments on the basis that there had been a total failure of consideration; it was agreed that there was insufficient evidence for me to be able to determine that issue.
Conclusion on the claims in contract
- I therefore conclude that the Yard succeeds in its claim against Latreefers for repudiation of all six contracts and is entitled to damages on that basis. However, as the first two vessels had been completed and sold to L’Orient Maritime, there may be little scope for further recovery outside the terms of clause 5 and there will have to be an assessment of the financial position under that clause.
THE CLAIMS BY THE YARD IN TORT AGAINST LATCO AND MR HENRIKSEN
- The Yard advanced their claims in tort against Latco, Mr Henriksen and Latmar Services primarily as a claim for inducing breach of contract, but they also advanced a claim for conspiracy. As a result of the further evidence they sought to amend these claims and the claim for unlawful interference with the Yard’s contractual relations with Latreefers; they also sought to add a claim for unlawful interference with the Yard’s business. It was difficult to see throughout the trial what the claim in conspiracy and unlawful interference added to the primary claim for inducing breach of contract, but the Yard contended that there were circumstances in which they could succeed on those claims, even if their failed on their primary claim. It is convenient to consider these claims in turn before dealing with some further short general arguments that arose on the tort claims.
1. The claim for inducing breach of contract
- The Yard claimed that Latco had directly induced a breach of contract by Latreefers by instructing them not to perform the contracts and that Mr Henriksen and Latmar Services were liable as joint tortfeasors. They also contended that there was indirect inducement. It was therefore necessary for the Yard to prove:
(a) An intention to induce a breach of contract and the defendants had the requisite knowledge;
(b) There was either a direct inducement or an indirect inducement and the use of unlawful means;
(c) The inducement caused the breach of contract.
- There was no dispute that each of Latco, Latmar Services and Mr Henriksen knew of the terms of the shipbuilding contracts.
(1) The Yard’s claim for direct inducement.
- The Yard put forward its case of direct inducement relying on the first three of the categories summarised in Thomson v Deakin [1952] Ch 646 and by Neil LJ in Middlebrook Mushrooms v T.G.W. [1993] ICR 612 at 618:
(1) Direct persuasion or procurement or inducement applied by the third party to the contract breaker, with knowledge of the contract and with the intention of bringing about its breach.
(2) Dealings by the third party with the contract breaker which to the knowledge of the third party are inconsistent with the contract between the contract breaker and the person wronged.
(3) An act by the third party with knowledge of the contract which, if done by one of the parties to it, would have been a breach of that contract.
In its claim for direct inducement, the Yard did not have to show unlawful means.
- The principal claim against Latco was of direct inducement on the basis that Latco instructed Latreefers what to do; there were alternative cases on direct inducement, but it is convenient to outline these later. The Yard did not contend that Mr Henriksen gave any instructions to Latreefers; their claim against him and Latmar Services was made on the basis that they were joint tortfeasors and accessories in the direct inducement carried out by Latco giving instructions. It was contended that they participated in the common design to bring about either an end to the shipbuilding contracts or “capitulation” by the Yard in agreeing a very substantial variation of the shipbuilding contracts. Mr Henriksen gave the message to the Yard and Latmar Services gave him assistance in that task as Mr Avotins asked them to do. Their respective shares in the commission of the tort were done in furtherance of that common design: see The Koursk [1924] P 152, Unilever v Gillette (UK) Ltd [1989] RPC 583 and ICS Ltd v West Bromwich Building Society [1999] Lloyd’s Professional Negligence Reports 501.
- The Yard’s factual case on what amounted to direct inducement can be summarised as follows:
(1) Control: Latreefers did what it was instructed to do by Latco either through direct instructions, as it controlled Latreefers, or through instructions given by Latmar Services, the agent it also controlled. The directors of Latreefers did as they were instructed and exercised no independent judgement. A clear example was the decision of Latco to exercise the option for the further vessels on 11 January 1993 which the directors of Latreefers implemented a little while later. The Yard submitted that it was not essential that it establish control, as what it had to prove was inducement, not whether that inducement was the result of control or only of persuasion.
(2) Strategy: In the summer of 1993 Latco made a decision in conjunction with Mr Henriksen either that there would be no further performance of the shipbuilding contracts by Latreefers or that the contracts would only be performed if there was “capitulation” by the Yard agreeing a very substantial variation to the contracts. It would be made clear to the Yard that Latreefers would not be performing any of the contracts; they would instruct Latreefers not to pay the instalment on the first contract due in December 1993 to make that clear.
(3) The negotiations: The negotiations into which Mr Henriksen and Latco then entered were not bona fide negotiations. They made demands in November 1993 which they knew it was impossible for the Yard to accept and that the Yard was dependent upon receipt of the instalment in December 1993; it was, it was said, an attack at the moment of maximum vulnerability.
(4) When the instalment on the first contract was not paid, this amounted to an actual breach of the first contract and their entire conduct amounted to anticipatory repudiatory breaches of the other contracts. All the decisions were made in the interests of Latco, as Latreefers would have no real interest in repudiating the only contracts it had.
- Latco submitted that any direct inducement had to operate directly on the party induced to break the contract; in the case of a company, the company could only be induced by an approach made to a director or other person who had the requisite authority to act for the company; they relied on the judgment of Sir Raymond Evershed MR in Thomson v Deakin at p 681-2.
- They contended therefore that the Yard had to prove that some inducement worked on the directors of Latreefers. TheYard had pleaded only two matters as giving rise to direct inducement – the giving of instructions by Latco to Latreefers to cease to perform the contractual obligations and the prevention by Latco of any further performance by Latreefers by a failure to fund. The Yard had failed to prove either of these.
(2) The Yard’s claim for indirect inducement by unlawful means
- The Yard contended in the alternative that the defendants indirectly induced or procured a breach of contract by unlawful means. They relied on:
• A pretence that the defendants had made genuine efforts to find finance and had failed. It was made clear that the Yard was not alleging the misrepresentation as to the attempts to find finance was fraudulent or that the Yard relied on the misrepresentation.
• A threat made throughout the negotiations that, unless there was a renegotiation, the contracts would be broken, leaving the Yard with a remedy against an insolvent company. They relied upon the passage in the speech of Lord Reid in Rookes v Barnard [1964] AC at p 1168-9 where he said:
“So long as the defendant only threatens to do what he has a legal right to do, he is on safe ground. …..But I agree with Lord Herschell that there is a chasm between doing what you have a legal right to do and doing what you have no legal right to do, and there seems to me to be the same chasm between threatening what you have a legal right to do and threatening to do what you have no legal right to do.”
• The failure to fund Latreefers was a breach of the contract between Capco and Latco. This allegation was raised after the conclusion of the trial on the basis of further evidence which I gave leave to admit. As the Yard accepted, to make this allegation they had to amend their pleadings, but the only objection to this by Latco was on the grounds that the allegation was “hopeless”. I do not, for the reasons I set out at paragraphs 261-266, when considering this allegation, regard it as “hopeless” and I therefore grant leave to amend.
• The use of Latreefers for an unlawful activity in breach of the contract between Capco and Latco, as the repudiation of the contracts with the Yard was an unlawful activity. Again this was an allegation raised after the conclusion of the trial on the basis of the further evidence. It seems to me that this allegation cannot succeed for the reasons set out at paragraph 267 and I therefore refuse leave to amend.
- The Yard contended that the unlawful means need not operate on the party induced, but the defendants all contended that it was for the Yard to prove that there were unlawful means and these were directed at the party induced to break the contract.
(3) The evidence given
(a) Mr Larsson
- Mr Larsson had acquired the right to 55 per cent of the Yard’s claim and was funding the action. I have taken this fact very much into account in assessing his evidence and his reliability as a witness. I found him an impressive witness whose evidence I accept.
(b) The absence of Mr Avotins and the weight to be attached to his evidence
- A written statement of the evidence of Mr Avotins was provided and the correspondence from Latco’s solicitors indicated their intention to call him. A hearsay notice was served and, although no formal application was made that he attend for cross-examination, it was made clear by the Yard that it wished to cross-examine him. It was initially submitted by Latco that in the circumstances under the provisions of CPR Part 33 none of his evidence could be challenged; however, it was accepted, in the light of the exchange of correspondence shortly before the trial, that I could take into account, in assessing the weight to be given to his evidence and its reliability, the fact that he had not given oral evidence and therefore that his statement had not been tested by cross-examination. He was the most important participant in the events as must have been obvious to Latco and its advisers. He could have explained a great deal if he had attended. In the circumstances, as no one was called by Latco to explain the actions of Latco, I have taken into account his non attendance in the inferences I have drawn.
(c) The absence of Mr Henriksen and the weight to be attached to his evidence.
- A written statement of Mr Henriksen’s evidence was served. In a claim for security for costs, an item was claimed for the costs of his attendance. Correspondence from his solicitors then indicated that they would be relying on his statement under CPR Part 33.2(2). During the course of the trial I was told that he would not be giving evidence, not only because he was resident in Monaco, but also because of a medical condition. A dispute ensued as to whether the written statement had been properly served. It was, however, agreed that I should extend the time necessary so that his statement was taken as properly served and take his statement into account as evidence, according it such weight as I thought appropriate in the light of the circumstances that had led to him not giving oral evidence, as I found them to be. It is therefore necessary to set out those circumstances.
- Mr Henriksen’s statement was served on 24 January 2000. When security for costs was sought, an amount of £7,500 was claimed by Mr Henriksen’s solicitors for the cost of his fares to England and his accommodation during the trial. When the Yard’s solicitors queried this as an item for security, Mr Henriksen’s solicitors commented in a letter dated 21 March 2000:
We do not accept that Mr Henriksen’s fares and accommodation are not recoverable.
- On 30 March 2000, Mr Henriksen’s solicitors gave notice by letter that Mr Henriksen was resident out of the jurisdiction and that they would be relying on his witness statement under CPR Part 33(2). It was not clear from this whether there had been a change in his position about giving oral evidence and so, on 7 April 2000, the Yard’s solicitors asked his solicitors to clarify the position, making it clear that they wanted to cross examine him. They sent a chaser on 13 April 2000. When the trial began, I was given by the Yard a timetable which recorded that it was not clear whether Mr Henriksen would be attending. On the seventh day of the trial (15 May 2000), Mr Henriksen’s solicitors provided a medical report dated 2 and 3 May 2000 which set out a medical condition as a reason for Mr Henriksen not giving evidence.
- Mr Henriksen, who at the time of the trial was in his early forties and had lived in England for a number of years until 1998, relied in respect of his medical condition on the evidence of two London doctors, Dr Kaye, a cardiologist at the Cromwell Hospital and Dr Jenkins, a consultant cardiologist at the Cromwell Hospital and at St Thomas’ Hospital and on a letter from Mr Henriksen’s physician at the Cardiothorasic centre in Monaco, Dr M Sabatier detailing the arrangements for his treatment in Monaco. Dr Kaye had the care of Mr Henriksen for about 15 years; his report dated 2 and 3 May 2000 stated that Mr Henriksen had had unstable cardiac arrhythmia from 1992 and, despite extensive attempts, the condition had been resistant to treatment. His view was that one of the consequences was that when Mr Henriksen was under undue stress, there was a serious risk of unpredictable and worsening cardiac rhythms which could lead to loss of consciousness; for this reason Mr Henriksen had been advised to reduce his work load. There was a high probability that an appearance in court and cross examination would induce dysrhythmia and loss of consciousness. Dr Jenkins had had Mr Henriksen under his care for some years and in his report of 17 May 2000 he advised on cardiological grounds strongly against any stress inducing events, such as a court appearance with cross examination.
- An examination for the Yard of Mr Henriksen’s medical records was carried out by Dr Coltart, a consultant physician and cardiologist at the cardiothorasic unit at St Thomas’ Hospital. In his report dated 18 May 2000, he agreed that Mr Henriksen suffered form paroxysmal cardiac arrhythmia, but considered it to be moderately well controlled and noted that he worked out regularly in Monaco. He concluded that the investigations demonstrated his heart function to be “excellent for a man of his age”. His view was that Mr Henriksen could give evidence, provided that he was allowed to sit and there were breaks in the cross examination. Dr Kaye’s response to this report on 19 May 2000 was that he strongly disagreed and regarded Mr Henriksen’s case as exceptional. Cross examination with frequent breaks was likely to augment and bottle up stress and not reduce it.
- Although I give considerable weight to the fact that both Dr Kaye and Dr Jenkins had examined Mr Henriksen and Dr Coltart had not, I must take into account the fact that Mr Henriksen’s medical condition was only put forward as a reason why he would not be giving evidence during the course of the trial, even though the medical condition advanced was one of long standing. Mr Henriksen then refused to come to London to be examined by Dr Colthart who could not go to Monaco to see him in view of his clinical commitments. Bearing in my mind the lateness of the issue being raised and the difficulty in which this placed the Yard in finding an eminent cardiologist who could fly to Monaco to examine him, I consider his refusal to come to London unreasonable, particularly as there was no medical evidence that suggested that there was any impediment to him doing so.
- In addition to this medical evidence, I was provided with a letter by Mr Henriksen dated 19 May 2000; in it he made it clear that he was not prepared to expose himself to the risk of giving evidence and being cross examined and was afraid of doing so. He had stopped running a business on a day to day basis and had changed his lifestyle because of his medical condition; he could not justify putting himself at risk for his own sake and that of his wife and children. He made it clear that he would not come.
- I have very carefully considered all of the explanations for his non attendance and the state of the medical evidence. Although there is plainly a firm basis for concern about Mr Henriksen’s health, his medical condition is not new. If this was the real reason why he would not attend, then I would have expected this to have been raised much earlier and not in the oblique way it emerged at the outset of the trial. In a case of this importance where his role was central to the events in question and the course of conduct alleged against him reflected seriously on his commercial integrity, he must have appreciated that little weight would be accorded to his statement, if his non attendance been solely due to his residence in Monte Carlo. I have little doubt that his medical condition was advanced, on his instructions, to provide a more convincing reason for his non attendance. If it had been the substantial reason, I am sure it would have been advanced at the outset. Moreover, given the lateness at which the issue was raised, he must also have appreciated that his refusal to come to London even for a medical examination would mean that the court did not have the evidence of the Yard’s doctor based on an examination of him. Although I accept there is a basis for concern about his health, I am not satisfied that such concerns could not have been met by suitable arrangements for his giving evidence. I therefore approach his evidence on the basis that he has ensured that it was not subject to cross examination and that he was not prepared to answer in person the allegations made against him.
- In assessing the reliability of Mr Henriksen’s evidence I ignored the evidence of Mr Larsson in relation to his character; no notice of this was given and it would have been unfair to rely on it.
(d) The Isle of Man directors of Latreefers
- As I mentioned at paragraph 15, the Isle of Man directors of Latreefers did not give evidence nor did they provide witness statements. There was a statement from one of the directors, Ms Alexandra Potts, but no one sought to adduce it in evidence; there were materials from the misfeasance proceedings, but it was accepted that they contained no admissible evidence. No attempt was made to adduce the transcripts of the interviews of Ms Potts and Mr Hobson conducted by the liquidator.
- In the application made by the Yard to introduce further evidence after the conclusion of the trial, the Yard sought to introduce and rely on the defences served in the misfeasance proceedings by the Isle of Man directors as the defences contained signed statements of truth. On the basis of those statements, they sought to re-open one of the rulings I made during the trial. I refused that part of the application for the reasons I gave in the written ruling I handed down in October 2000. An attempt was made by the Yard’s solicitors to obtain a statement in the form of a letter from the solicitors to the Isle of Man directors. In letters dated 3, 6 and 7 November 2000, the solicitors for those directors made it clear that they did not wish to volunteer letters, witness statements or other evidence for the Yard to use in this action, as the claim against them in the misfeasance proceedings was being pursued by the same person who was funding the Yard’s claim in these proceedings. In the result therefore there was no evidence from the Isle of Man directors in this action, but I understand their reasons for not volunteering to give evidence and I do not hold it against them.
(e) The other witnesses
- I found Mr Engel and Mr Nawrocki to be impressive witnesses. They gave their evidence honestly and to the best of their recollection. I also found Mr Foster a very impressive, reliable and honest witness who was doing his best to assist the court. He clearly was also very knowledgeable and highly skilled in ship finance and would, in my judgment, have been an impressive and valuable member of any team that genuinely sought to raise finance for these vessels. I did not find Mr Kisselev as impressive a witness; he was doing his best to protect Latco. I found his evidence less reliable than that of Mr Foster and wherever it conflicted with that of Mr Foster, I prefer Mr Foster’s evidence.
(4) My findings of fact
- The principal issue on the claim in respect of direct inducement was the extent to which and the manner in which Latco and Mr Henriksen had made the decision that the keeling laying instalments should not be paid and the contracts repudiated and whether Latco had instructed Latreefers that the contracts be cancelled. It is therefore necessary for me to set out my findings of fact in relation to these matters on which, as I have recorded, I had no oral evidence from Mr Avotins or Mr Henriksen and no evidence at all from the Isle of Man directors.
(a) The market and attempts to obtain financing
- Although, as I have set out at paragraph 14, the intention was that the vessels would have been chartered by demise to Latco, it was common ground that this would have been purely a financing arrangement designed to provide a bank financing the vessels with Latco’s covenant backed by Latco’s cash flow. It is therefore the employment intended by Latco for these vessels that is material. It was accepted by Mr Kisselev that there was a significant prospect that these vessels would be used to supply the Latvian home market and that the need for these vessels to be chartered in the freight market would have been limited. Thus, although the decline in the freight market during 1993 (as set out at paragraphs 21 and 22) was a factor, I am satisfied it was not as significant a factor as it would otherwise have been, as the intended employment of the vessels was largely to be independent of the market. Clearly when employed in the freight market, the income they would earn for Latco would be governed by the rate obtainable on the reefer market; that market had seen a substantial decline in the reefer market by mid 1993. The reefer market is, however, much more relevant to the quest for financing from banks.
- I am satisfied that some attempts were made by Mr Henriksen on behalf of Latco to see if external financing could be obtained in the autumn of 1993, but I regret to conclude that Mr Henriksen had no genuine desire that they should succeed. It is important to note that there is no evidence of any detailed submissions being made to any of the banks; it was common ground between the banking experts that an owner would normally make a detailed proposal supported by more detailed information than was provided in the initial enquiries. Secondly, Mr Foster, who had previously been involved with obtaining finance was not concerned with Mr Henriksen’s attempts; if the efforts had been genuine, he would have been made part of the team as he had extensive experience of ship finance and had been involved in the earlier attempts. I am satisfied that his exclusion from the discussions with the banks was a deliberate decision taken on the advice of Mr Henriksen, as he had no wish to see the negotiations with the banks succeed. Thirdly, if, as Mr Kisselev thought, the responses from the bank were a starting point (as I have set out at paragraph 40), the inference must be that they were not pursued as Mr Henriksen had no wish to pursue them. Finally, Mr Henriksen’s fax to Mr Avotins on 22 September 1993 (see paragraph 51) where he described negative replies as “ very useful” is again consistent with the fact that he had no genuine desire that finance should be obtained from banks.
(b) The explanation of Mr Avotins and Mr Kisselev
- Mr Avotins’ written statement gave a short explanation of the non payment and cancellation:
What resulted in the cancellation of the contracts was the inability/failure of Latreefers to pay the keel laying instalments when they fell due and the Yard’s cancellation of the contracts thereafter.
According to Mr Henriksen’s statement, he was told by Mr Avotins shortly after his involvement with these vessels that the State of Latvia was running out of cash and that there was a risk that any income generated by Latco would be seized by the Government of Latvia. No documents were disclosed in respect of communications between the Government of Latvia and Latco.
- Mr Kisselev said much the same as Mr Avotins in his written evidence – the Latco group did not obtain finance for Latreefers and it was not prepared to sell ships to raise the finance to enable Latreefers to perform the contracts. It was, he said, quite unnecessary for Latco to induce the directors of Latreefers not to proceed with the shipbuilding contracts for the simple reason that Latreefers would have had considerable difficulty in raising the finance without the backing of Latco. There was no need or incentive on anyone’s part to dissuade Latreefers from continuing with the contract. No one had said to the directors of Latreefers that they should not try and obtain their own finance, although in reality it would have been impracticable without any security or contribution from the Latco group. In his cross examination, he made it clear that his evidence as to why Latreefers did not pay was his opinion; he had had no contact with the directors of Latreefers. I am satisfied that he appreciated that Latreefers were dependent on Latco to finance the vessels and the directors would not be expected to take any independent steps to raise finance; raising the finance was the task of Latco.
(c) The role of Mr Henriksen and Mr Avotins and their decision
- It was suggested in final submissions on behalf of Mr Henriksen that Latco had already decided not to pay the keel laying instalment on the first vessel when they retained Mr Henriksen. I do not consider that was so; as Mr Avotins did not give oral evidence, it is difficult to be precise as to his and Latco’s intentions at that early stage. In my view, however, the probabilities are that Latco had not reached any decision at that early stage before Mr Henriksen was involved as to what to do about the contracts. That is why they hired Mr Henriksen. Latco were facing a very serious problem in economic and political circumstances that had radically changed and of which Mr Avotins had little experience. They looked to Mr Henriksen to provide advice on what to do; he did this at once. The letter of 30 September 1993 (referred to at paragraph 52) is evidence of his “creative” thinking and some of the underhand means he was prepared to advise. Mr Henriksen claimed in his statement that he was to take the role of a mediator to try to facilitate a dialogue; I cannot accept that evidence. I infer that it was Mr Henriksen who throughout his involvement devised the strategy for the renegotiations and Mr Avotins, who probably genuinely wanted to take delivery of the ships on renegotiated terms, who acted on that advice .
- Mr Henriksen’s evidence in his statement was that his brief was at all times to try and persuade the Yard to meet the changed times and the realities of the then market. However, it is difficult to understand how Mr Henriksen could ever have thought his strategy would ever bring about a re-negotiation. If he genuinely wanted the contracts to continue, it is difficult to understand either the way in which he approached the banks for finance or the decision to exclude Mr Foster from all participation in the attempts to obtain finance and to negotiate with the Yard as Mr Foster knew the personalities at the banks and at the Yard. It was Mr Henriksen who then obtained advice from Watson Farley & Williams in later September 1993 that Latco would not be liable if Latreefers defaulted. Then, on his initial visit, he put forward terms which, by seeking what was in effect a 30 per cent reduction in the price, he knew the Yard could never accept. I cannot accept the explanation put forward by his counsel that he was a negotiator whose tactics were to go in “high”. In my experience, they make no commercial sense viewed in that way. I regret that I have concluded that he never wanted the negotiations to succeed. Although his main fee under his agreement with Latco was dependent on the savings from a renegotiation, the probabilities are that he thought that the cancellation would lead Latco to investing in tankers from which anticipated benefiting as he had done in the past; I accept Mr Foster’s evidence (set out at paragraph 28) that Mr Henriksen persuaded Mr Avotins that Latco would be better off spending its money on tankers. However, Mr Avotins and Latco were reluctant to cancel the contracts (as is clear from the letter of 30 September 1993) and Mr Henriksen had to act with that in mind. Had he been interested in a genuine re-negotiation, he would have advised Latco to negotiate directly with the Yard as the Yard continually requested or at least have included in his team someone the Yard knew. His responses to the Yard consistently refused this request. I infer that Mr Avotins again followed his advice on this.
- At the meetings on 22 and 23 November 1993, it was obvious that the Yard would not agree to renegotiate on Mr Henriksen’s terms; Mr Henriksen said in his statement that the Yard was not prepared to enter into constructive negotiations. I reject that evidence and am satisfied that the Yard was prepared to negotiate on realistic terms, but not on the basis of the demands which Mr Henriksen knew that they could not and would not accept. 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. This was the course suggested in Mr Henriksen’s memorandum of 24 November 1993 and it is what happened. Neither Mr Avotins nor Mr Henriksen gave oral evidence and therefore could not be questioned about this. I am, however, 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.
- As I have stated at paragraph 150, the non payment was intended by Mr Henriksen and Mr Avotins to make clear to the Yard that Latco were only interested in further performance of any of the contracts if the terms proposed by Mr Henriksen were accepted in substance and that, if the Yard did not agree, then Latreefers would not perform their existing obligations.
(d) The position as between Latco and Latreefers
- As none of the Isle of Man directors gave any evidence and Mr Avotins and Mr Henriksen did not attend the trial, there was no direct evidence as to what then happened as between Latco and Latreefers which resulted in the non payment of the keel laying instalment on the first vessel.
- The Yard contended that the documents admitted as evidence after the conclusion of the trial helped make clear what happened. My conclusion in respect of that evidence can be summarised:
• Capco, which provided the Isle of Man directors of Latreefers, had a group brochure which set out the terms and conditions on which it provided its services; the terms provided at clause 5 that the client (defined to include the beneficial owners and beneficiaries of the managed entity) covenanted that:
3.2 the Managed Entity will not be engaged or involved directly or indirectly in any unlawful activity or be used for any unlawful purpose and the Client will keep the Manager adequately and reliably informed of all business to be transacted by, in the name of or for the account of the Managed Entity.
5.4 the client will use his best endeavours to ensure that the Managed Entity is run in a business-like manner and complies with all applicable laws and regulations.
5.6 No instructions given to the Manager will require or involve any unlawful act or contain any falsehood and that all information given to the Manager will be full complete and accurate.
5.9 the Managed Entity would be kept in sufficient funds by the client to honour its liabilities as and when they become due ..
Different editions of this brochure contained fee tables dated 1990 and 1994; it is reasonable to infer there was a brochure in similar terms current in 1992 and that is the information provided by the liquidator of Latreefers.
• It was common ground that the “Managed Entity” referred to in the terms and conditions was Latreefers.
• It is clear from a fax from Watson Farley & Williams to Capco dated 6 March 1992 in relation to an unrelated company that terms and conditions identical in all material respects to the 1990 and 1994 terms were in force in 1992 for companies for which Capco provided services. From the terms of that fax, it is clear that Watson Farley & Williams who arranged for the formation of Latreefers for Latco were well aware of the terms and conditions.
• After the formation of Latreefers, invoices for Capco’s fees were sent to Latco; the first was dated 22 September 1993 and included a fee for the work between 14 September 1992 and 30 September1993 for dealing with the shipbuilding contracts. Each of the invoices stated that they were for “professional services rendered pursuant to our standard terms and conditions” and that
The standard Terms and Conditions attached hereto apply to all services provided by the CAPCO group.
In addition there was an invoice dated 22 February 1993 addressed to Latco in repect of Latmar Holdings for the period 1 January 1993 to 31 December 1993; this included a charge for work done between 28 August 1992 and 31 December 1992 on the documentation for the shipbuilding contracts. It was unclear to what this related, but it is probable that this referred to the work on the contracts prior to the incorporation of Latreefers, as work from 14 September 1992 on the shipbuilding contracts was charged to Latreefers under the invoice dated 22 September 1993.
• Latco submitted that, if the terms were incoporated (which they did not accept), the likely inference was that Capco were appointed by Latmar Holdings and that the terms took effect with Latmar Holdings.
• On the evidence before the court, I take the view that Latreefers was formed for Latco, as the ultimate beneficial owners, on the basis of Capco’s terms and conditions and not for Latmar Holdings. In my view, Watson, Farley & Williams, when Latreefers was formed, contracted on that basis on Latco’s behalf and the subsequent course of dealing was consistent with that, as the invoices were sent to Latco and not Latmar Holdings. It would also seem highly improbable that Capco would want the covenants from another Liberian company in which the bearer shares were held for Latco, particularly as the evidence of Mr Foster (which I accept) was that it was a “paper company”. Capco would have wanted the covenants from the ultimate beneficial owner- Latco, particularly as that was a company with very large assets and was owned by the state of Latvia. Latco were, in my view, therefore the parties to those terms and conditions and were “the client” within the meaning of those terms and conditions.
- Although it may be important to determine whether the Capco terms give rise to enforceable rights and obligations as between Latreefers and Latco for the purposes of the funding obligation alleged, the terms and conditions show:
• that the management of Latreefers was intended to be properly conducted by the directors of Latreefers. By stipulating for funding and requiring the other covenants, I infer that the directors, as experienced solicitors conscious of their professional obligations and standing, wanted to ensure that they had the proper information and the requisite funds to conduct the business properly. They were not, I infer, going to act as mere ciphers implementing instructions, but as directors carrying on the business of the company taking due account of the requests on all commercial matters of the beneficial owner and client, Latco, and expecting to be put in funds for that purpose. They were not, I infer, on the very sparse information available to me, acting very differently to the properly constituted board of a subsidiary requested by a parent company to carry out their wishes. There was one important exception. As they were independent contractors outside the hierarchy of a normal company group, they made express stipulations with the beneficial owner for funding and for the proper conduct of the company’s business. I infer that they wanted to act properly; that they would not have entered into commitments on behalf of Latreefers, unless they were satisfied that they were proper and that there was every expectation that they would be provided with the funds to discharge them.
• 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.
- In these circumstances, given that there are no statements or documents which showed what happened as between the directors of Latreefers and Latco, what inference am I to draw?
- There are it seems to me at least three possibilities:
(1) The decision made by Latco that the keel laying instalment should not be paid was made known to the directors of Latreefers who were requested to carry it out. Mr Henriksen suggested in his closing submissions, “Latreefers was controlled and run by Latco…Latco was the mind and centre of government of Latreefers”. In my view there can be no doubt that Latco made all the commercial decisions and requested the directors of Latreefers to carry them out. If the directors were requested to break a contract, as this would not involve the directors acting in any way that was illegal or improper, it is my view that the directors would have done as they were requested, but they would have formally made the decision on behalf of Latreefers, thus implementing the commercial decision arrived at by Latco.
(2) The directors simply did nothing, as they were provided with no funds to pay. Nothing was said to them by Latco and they said nothing to Latco. It was the evidence of Mr Avotins and Mr Kisselev, which I have set out, that it was the inability of Latreefers to pay that was the cause of the non payment of the instalments; neither of them stated that Latreefers were told that Latco would not provide the finance. As the directors of Latreeefers knew Latreefers had a contractual obligation to pay the instalment, but did not have the funds to do so, then I would have expected the directors to made enquiries of Latco about the funding and would have resolved that Latreefers should cease trading, unless they were reasonably satisfied that funds would, if necessary, be made available at some stage to honour the commitments or pay damages. They did not do that, but instructed solicitors to defend the proceedings which were brought against Latreefers; presumably the directors would not have done that without being satisfied their obligations to their solicitors would be met. As the directors were experienced solicitors, I do not think therefore that I should infer that Latreefers did not pay the instalments and did nothing, simply because they were unable to pay, even though the directors may have wanted to pay. The directors throughout appear to have behaved responsibly as is evidenced not only by the conditions on which their services are provided, but by their other conduct.
(3) The directors of Latreefers were told that funds would not be provided at that time for the instalment and they were requested to do nothing in response to the keel laying notice. This required them to do nothing at all; they would not have to hold a board meeting and there are no minutes of any meeting.
- In my view the last possibility is the most probable. It is entirely consistent with the transfer of funds from Latreefers (whatever be the explanation for that transfer) between 30 November 1993 and 3 December 1993 and with the evidence of Mr Henriksen that he had been told by Mr Avotins that the State of Latvia was running very short of cash. The evidence of Mr Kisselev is clear; Latco had decided that they would not provide the funds to pay the instalment. His evidence was that he was in regular contact with Mr Avotins and, that, if he had had any discussion with the directors of Latreefers not to proceed with the contract, he was sure he would have heard about it. However, 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.
(e) The subsequent position of Latco and Mr Henriksen
- After the non payment, Mr Henriksen was no longer involved, though, as set out at paragraph 70, he answered the Yard’s letter of 22 December 1993. His evidence was that his mission had failed and his role was at an end. It seems clear that his role was essentially at an end. It is, however, probable that Mr Avotins hoped that, as a result of the non payment, the Yard would be prepared to negotiate on Latco’s terms or at least make a proposal that Latco could accept. This was Mr Henriksen’s evidence as to the intention of Latreefers at that time. Furthermore it is difficult to understand why Latco kept the supervisors acting for Latreefers at the Yard if they had finally determined to abandon all hope of obtaining a renegotiation. The supervisors remained until the end of January or beginning of February 1994 (see paragraph 73). If Latco had made a final decision at the time they decided not to pay the keel laying instalment that they would in fact not perform any of the contracts, then they would have withdrawn their supervisors then. However when the Yard did not change their stance on negotiations, I am satisfied that Latco then decided that Latreefers would not to 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. The probabilities are 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.
- It is clear that when in December 1993, Latco decided to settle Mr Henriksen’s invoices they did not anticipate any further work for him to perform, but I do not consider that a final decision was reached by Latco until sometime in February 1994 when they decided that the supervisors would not return, though, as I have found at paragraph 158, this did not become clear to the Yard until sometime in March or at the latest in April 1994.
- The Yard for their part did not want to see the contracts cancelled; I do not accept the suggestion that they were content that the contracts be cancelled. They were simply not prepared to renegotiate on the terms put forward by Mr Henriksen, though they were prepared to do so on other terms. However, as they had binding contracts, they were entitled to stand by the terms of those contracts.
(5) My conclusion on the claim against Latco for direct inducement
- A number of arguments were put forward by the parties as to the consequences in law of such findings. It was argued by the Yard that the arguments advanced by the defendants were not covered on the pleadings and involved Latco departing from the position they had taken throughout the proceedings that Latreefers was separately incorporated. If and in so far as Latco wished to rely upon specific facts, that would have been a good submission, but, in my view, the general arguments of law arising out of the facts I have found did not have to be pleaded specifically. If I am wrong in that view, I grant Latco leave to amend the defence in the terms served on 7 June 2000. The points raised were points of law and no prejudice arises. None of the arguments advanced by Latco involved them departing from their case that Latco and Latrefeers had separate legal personality.
(a) The principle in Salomon v Salomon
- Latco submitted that in the context of the relationship between a parent and subsidiary company it was not permissible to draw the inference that the directors of the subsidiary merely carried out the wishes or requests of the parent company which they simply executed as instructions. It was accepted by the Yard that in the ordinary context of the relationship between a parent and a subsidiary, a request by the parent to the subsidiary in relation to a contract made by the subsidiary would not, if the request was properly considered by the independent board of the subsidiary, ordinarily be an actionable inducement, as the independent consideration by that independent board would break the chain of causation. But where outside the ordinary operation of independent corporate governance of a subsidiary or other company, the parent company or sole shareholder told the company it controlled that a contract was not to be performed, then that parent company or sole shareholder was liable for an actionable inducement. Thus, for example, in the case of one ship companies incorporated in jurisdictions where the directors or officers of the company did as they were told by the shareholder, the shareholder would be liable for inducing breach of contract.
- The foundation for Latco’s argument rested upon the principle in Salomon v Salomon [1897] AC 22; they submitted that to hold a parent company liable for inducement merely by virtue of the fact that it controlled the subsidiary would deprive the parent of the protection afforded by the principle in Salomon.
- Although it is recognised that this principle can cause injustice, the Court of Appeal made it clear in Adams v Cape Industries [1990] Ch 433 at 536 that a court is not free to disregard this principle,
“merely because it considers that justice so requires. Our law for better or for worse, recognises the creation of subsidiary companies, which though in one sense the creature of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities”.
- It is common in the shipping industry that ownership is organised through a series of individual ship owning companies controlled by a single person. This has a number of consequences; in the present case, the Yard’s argument that Latco were parties to the contract and not Latreefers was struck out. In Atlas Maritime v Avalon Maritime (No 1) [1991] 4 All ER 769, Staughton LJ at 779 declined to draw an inference of agency:
The creation or purchase of a subsidiary company with minimal liability, which will operate with the parent’s funds and on the parent’s directions but not expose the parent to liability, may not seem to some the most honest way of trading. But it is extremely common in the international shipping industry and elsewhere. To hold that it creates an agency relationship between the subsidiary and the parent would be a revolutionary doctrine.
- In The Glastnos [1991] 1 Lloyd’s Rep 482, Steyn J refused to draw an inference that single ship owning companies were a sham:
I accept that Mr Farias resorted to the device of incorporation to attain the benefits of limited liability. That is, of course, why the shipping trade is structured on the basis of one ship companies, but by itself it affords no basis for piercing the corporate veil….
- There is, I was told, no case, so far as the researches of counsel and solicitors have gone, where a parent company has been sued for inducing breach of contract on the basis that its subsidiary has acted on its instructions by the mere fact it is a subsidiary.
- It seems to me to follow from the principle in Salomon that the mere fact that Latreefers is a wholly owned subsidiary controlled by Latco does not enable the court to draw the inference that the directors simply did as they were told and treated requests as if they were instructions simply to be carried out; Latreefers is a distinct legal entity. To infer in such circumstances that the officers of the subsidiary were to be taken to have acted on the instruction of its parent, would mean that the principles underlying the separate incorporation of the subsidiary were ignored. On that essential question, I consider that the submissions of Latco are correct. It was also submitted that the interposition of Latmar Holdings in the company structure made the inference in any event more difficult as Latco could not give a direct instruction to Latreefers. I do not accept that submission; it seems to me that the interposition of Latmar Holdings makes no real difference to the essential point.
- Latco submitted that it was not permissible for the Yard to allege anything more as they had not pleaded it; in particular they had not alleged that the directors of Latreefers were not independent and simply did as they were told. As I have stated at paragraph 15, there was no evidence from the Isle of Man directors of Latreefers.
- It could not seriously be disputed that the directors of Latreefers would carry out the requests of the beneficial owner of the company, provided it was proper to do so. They were all experienced solicitors and there is no evidence before me that they acted other than entirely properly. Capco’s terms and conditions formed the basis of the way in which they conducted the affairs of Latreefers; for example, the stipulation Capco made for funding is consistent only with a wish on the part of those appointed as directors to carry out the governance of Latreefers in an entirely proper manner. I cannot, on the very limited materials before me, infer that they were simply operating a sham company and not having regard to their duties as directors. Thus, although the directors would always endeavour to comply with the requests of their single shareholder, Latco, I do not consider that it can be inferred in such circumstances that they acted merely because they were instructed. Although they would endeavour to comply with requests made by Latco in relation to the six shipbuilding contracts, their duties as directors meant that they had to consider any request made to them and not simply act as if Latreefers were a sham.
- It seems to me to follow that once it is accepted that Latreefers was not a sham, had legal personality and a responsible board of directors, then any request by their ultimate parent company that a contract of Latreefers as the subsidiary be broken by the subsidiary was not to be treated as if it were an instruction simply to be acted on by the subsidiary and thus an actionable inducement. In the ordinary case of a subsidiary or sole shareholder company (which are not treated as sham entities) requested to break a contract, the inference to be drawn is that the request was considered by the subsidiary which then made its own independent decision. In my view the same applies to Latreefers.
- As, for the reasons I have given, I have come to the conclusion that the directors of Latreefers were told that Latco would not provide the funds and they were requested to do nothing in response to the keel laying notice, there was no actionable direct inducement. Once they were told that funds were not going to be provided for that instalment, they had no alternative but to do nothing.
- Latco also submitted that the breach was the failure to pay the instalment and I should not infer an instruction to that effect; Latreefers simply had no money to pay. As I set out below (see paragraph 315), a pleading point arose in relation to this upon which I ruled during the course of the trial. On the basis of the very narrow point that this left open to Latco, I cannot conclude that they could never have paid because they had no money to pay.
(b) A decision by Latco as shareholder was the decision of Latreefers
- Latco further contended that, even if I made a finding that Latco instructed the directors of Latreefers to break the contracts and the directors simply complied with the instruction, the actions were the actions of Latco as shareholders and were therefore the acts and decisions of Latreefers; there could therefore be no actionable inducement. They said this was a reflection of the principle in Said v Butt [1920] 3 KB 497, which I consider at paragraph 286 below. They relied, however, on principles set out in the decision of the Court of Appeal in Multinational Gas and Petrochemical Co. v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258 that the decision of the shareholders was binding on the company and therefore the act of the company. The claim in that case was brought by the liquidator of a Liberian company formed by three oil companies to carry out a joint venture through a Liberian company; the three oil companies also formed an English company to act as its agent. The Liberian company chartered several vessels but got into financial difficulties when the market fell. It ceased trading. The claim was made against the directors of the Liberian company and the English company; the claim was also made against the three oil company shareholders for breaches of duty of care in the conduct of the management of the Liberian company. Permission was sought to serve out of the jurisdiction. It was refused on the basis that the claim would not succeed. At page 268, Lawton LJ said:
In my judgment these cases establish the following relevant principles of law: first, that the plaintiff was at law a different legal person from the subscribing oil company shareholders and was not their agent: see the Salomon case [1897] AC 22, per Lord MacNaghten at p. 51. Secondly, that the oil companies as shareholders were not liable to anyone except to the extent and the manner provided by the Companies Act 1948: see the same case at the same page. Thirdly, that when the oil companies acting together required the plaintiff’s directors to make decisions or approve what had already been done, what they did or approved became the plaintiff’s acts and were binding on it: see by way of examples Attorney-General for Canada v. Standard Trust Co. of New York [1911] AC 498; In re Express Engineering Works Ltd. [1920] 1 Ch. 466 and In re Horsley & Weight Ltd. [1982] Ch. 442. When approving whatever their nominee directors had done, the oil companies were not, as the plaintiff submitted, relinquishing any causes of action which the plaintiff might have had against its directors. When the oil companies, as shareholders, approved what the plaintiff’s directors had done there was no cause of action because at that time there was no damage. What the oil companies were doing was adopting the directors’ acts and as shareholders, in agreement with each other, making those acts the plaintiff’s acts.
It follows, so it seems to me, that the plaintiff cannot now complain about what in law were its own acts. Further I can see no grounds for adjudging that the oil companies as shareholders were under any duty of care to the plaintiff. In coming to this conclusion I have kept in mind the doubts expressed by Cumming-Bruce and Templeman L.JJ. in In re Horsley & Weight Ltd. [1982] Ch. 442, 455-456. Their comments were obiter. Both Cumming-Bruce and Templeman L.JJ. were thinking of “misfeasance” which probably does not cover “an ordinary claim for damages for negligence simply”: see In re B. Johnson & Co. (Builders) Ltd. [1955] Ch. 634, 648. Having regard to the long line of authorities to which I have referred and the examples I have mentioned I do not share their doubts.”
- At p 288, Dillon LJ said
The shareholders, however, owe no such duty to the company. Indeed so long as the company is solvent the shareholders are in substance the company. The most commonly cited passage as to the position of the shareholders is in the decision of the Privy Council in North-West Transportation Co. Ltd. V. Beatty (1887) 12 App.Cas. 589 delivered by Sir Richard Baggallay who said, at p. 593:
“The general principles applicable to cases of this kind are well established. Unless some provision to the contrary is to be found in the charter or other instrument by which the company is incorporated, the resolution of a majority of the shareholders, duly convened, upon any question with which the company is legally competent to deal, is binding upon the minority, and consequently upon the company, and every shareholder has a perfect right to vote upon any such question, although he may have a personal interest in the subject matter opposed to, or different from, the general or particular interests of the company.” (My emphasis).
- He continued at p 289:
The case set up is that all the shareholders, the joint venturers, made the impugned decisions at the outset. In so far as the decisions were made at the three meetings in New York and Paris referred to in the statement of claim, it matters not that these meetings were called board meetings, rather than general meetings of the plaintiff: see In re Express Engineering Works Ltd. [1920] 1Ch. 466. It would equally matter not if the decisions were made by all the shareholders informally and without any meeting at all: Parker and Cooper Ltd. v. Reading [1926] Ch. 975 and In re Duomatic Ltd. [1969] 2 Ch. 365.
The well known passage in the speech of Lord Davey in Salomon v. A. Salomon and Co. Ltd. [1897] AC 22, 57 that the company is bound in a matter intra vires by the unanimous agreement of its members is, in my judgment, apt to cover the present case whether or not Lord Davey had circumstances such as the present case in mind.
If the company is bound by what was done when it was a going concern, then the liquidator is in no better position. He cannot sue the members because they owed no duty to the company as a separate entity and he cannot sue the directors because the decisions which he seeks to impugn were made by, and with the full assent of, the members.
- The Yard accepted that, if the shareholders acted in good faith within the scope of a duly constituted shareholders’ meeting as part of the structure of the governance of the company, then the acts of the shareholders would be the acts of the company. Thus if the shareholders at a properly constituted meeting of the company acting within the structure of the governance of the company decided that the company should not perform a contract that the company had entered into, then the shareholders would not be under any liability for interfering with the contract as their actions would be the actions of the company. What mattered was that the shareholders had to act in good faith and in a properly constituted meeting.
- Latco, however, submitted, that it mattered not whether the decision was taken formally or informally; the company was bound by the unanimous decision of its members, even if given informally. They relied on a passage in the judgment of Buckley LJ in Re Horsley & Weight [1982] Ch 442 at 454. He considered that the action in question was within the power of the company but not within the power of the directors, Mr Campbell-Dick and Mr Horsley. But those two directors were the sole shareholders:
A company is bound in a matter which is intra vires the company by the unanimous agreement of its members (per Lord Davey in Salomon v. Salomon & Co. Ltd [1897] AC 22, 57; and see In re Express Engineering Works Ltd. [1920] 1 Ch. 466) even where that agreement is given informally: Parker & Cooper Ltd. v. Reading [1926] Ch. 975. That both Mr Campbell-Dick and Mr. Frank Horsley assented to the transaction in question in the present case is beyond dispute. They both initialled the proposal form and they both signed the cheques for the premiums. Their good faith has not been impugned, nor, in my view, does the evidence support any suggestion that in effecting the policy they did not honestly apply their minds to the question whether it was a fair and proper thing for the company to do in the light of the company’s financial state as known to them at the time. In my judgment, their assent made the transaction binding on the company and unassailable by the liquidator.
In that case, both Cumming-Bruce LJ and Templeman LJ raised the question as to whether if there had been misfeasance (or gross negligence amounting to misfeasance) on the part of the directors, they could, as shareholders, have ratified their actions; however, in these proceedings, such issues do not arise as there is no issue of misfeasance and the directors of Latreefers were not shareholders.
- In my view, Latco’s arguments are powerful ones and the reasoning is in a sense analogous to the reasoning in Said v Butt, where it was held that a person with authority to act on behalf of the company cannot induce a breach of the company’s contracts. In my view it would have been open to Latco to act in that way and, properly as shareholders, to make a decision that Latreefers would not perform the contracts. However, they have steadfastly denied that they ever made any such decision; my finding on the very limited evidence adduced, is that they made a decision not to provide funds, but only made a request to the directors not to respond to the keel laying notice. They did not act as the shareholders, even informally, to make a decision, as the decision of the company, as to what the company would do in response to the keel laying notice; they decided as ultimate shareholders not to provide funds, but in that respect their decision was not a decision of the company. Where they could have made a decision for Latreefers, they did not do so, but merely made a request to the directors not to respond to the keel laying notice and left the directors to make the actual decision.
(d) A decision by Latco as the directing mind of Latreefers
- A different argument was advanced on behalf of Mr Henriksen derived from the principles in Tesco v Nattrass [1972] AC 153; if the directing mind of the subsidiary company was the parent company, there could be no question of the parent inducing a breach of contract as the parent would in effect be the person in breach. The argument relied on the well known passage in the speech of Lord Reid at p 170
I must start by considering the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company’s servant or agent.
…..
In some cases the phrase alter ego has been used. I think it is misleading. When dealing with a company the word alter is I think misleading. The person who speaks and acts as the company is not alter. He is identified with the company. And when dealing with an individual no other individual can be his alter ego. The other individual can be a servant, agent, delegate or representative but I know of neither principle nor authority which warrants the confusion (in the literal or original sense) of two separate individuals.
Reliance was also placed on similar passages in the speeches of Lord Morris of Borth y Gest at p 180, Viscount Dilhorne at p 187, Lord Pearson at p 190 and Lord Diplock at 199.
- If I had found that the directing mind of Latreefers was Latco on the basis that the directors of Latreefers merely acted as ciphers, there might have been considerable force in this submission. But, as I have found at paragraph 235, as the directors considered requests made to them and acted on them provided they did not involve illegality or impropriety, I do not consider that Latco can be taken as the directing mind of Latreefers. Furthermore this submission involved a clear departure from the way in which Latco had conducted its case, namely that Latreefers were an entirely separate corporate entity with a mind of its own; it would not, in my view, have been open to Latco to rely on the submission made on behalf of Mr Henriksen.
(e) Latco as a shadow director
- The Yard also pleaded that Latco was a shadow director of Latreefers. The Insolvency Act defines a shadow director as:
a person in accordance with whose directions or instructions the directors of the company are accustomed to act.
- S 741(3) provides, in respect of the provisions under which shadow directors are treated as directors:
a body corporate is not to be treated as a shadow director of any of its subsidiary companies by reason only that the directors of the subsidiary are accustomed to act in accordance with its directions or instructions.
- In re Hydrodam (Corby) Ltd [1994] BCLC 180 (where the directors of the company were Channel Island companies), Millett J summarised the burden that lay upon a party making an allegation that another was a shadow director:
“To establish that a defendant is a shadow director of a company, it is necessary to allege and prove: (1) who are the directors of the company, whether de facto or de jure; (2), that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so (3) that those directors acted in accordance with such directions; (4) that they were accustomed so to act. What is needed is first, a board of directors claiming and purporting to act as such; and, secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others.”
He added:
“in practice, in a case of the present kind, it is much more likely that it will be found that the executive directors of the ultimate parent company (or some of them) have from time to time individually and personally given directions to the directors of the subsidiary and thereby rendered themselves personally liable as shadow directors of the subsidiary. But if all they have done so to act in their capacity as directors of the ultimate holding company, in passing resolutions at board meetings, then in my judgment, the holding company is the shadow director of the subsidiary and they are not.”
- On the evidence that was before me, I do not consider that the Yard have proved that Latco was a shadow director; on the very sparse evidence before me, it seems that the relationship between Latreefers and Latco, particularly in the light of the Capco terms, was intended to be the relationship between ultimate parent and subsidiary and that it appears to have been conducted in that way. Latco submitted that if there had been a shadow director, it might have been Mr Avotins rather than Latco; I do not think it is appropriate for me to comment on Mr Avotins’ position.
- Latco contended that if they were shadow directors, then they were to be treated as directors and entitled to the benefit of the principle in Said v Butt. I cannot accept that submission. Shadow directors are not part of the ordinary governance of a company; they give directions to it; they do not act as agents for the company and are therefore outside the scope of the principle in Said v Butt.
(f) The Yard’s alternative cases on direct inducement
- The second and alternative basis on which the Yard put their case was a conscious decision not to provide Latreefers with the financial resources to perform the contracts. Clearly there was a refusal to provide the resources, as Latco accepted; indeed I am satisfied that a conscious decision was made by Latco that they would not commit more financing to the contracts, unless they were renegotiated. But the mere refusal of a parent to fund a subsidiary, where there is no obligation to do so, does not in my view amount to an actionable inducement. I was not referred to any authority that suggested that it did, and a decision to that effect would in many cases negate the principle of limited liability. On this part of the claim the issues relating to funding under the Capco terms did not arise.
- The third basis on which the Yard put their case was that there were dealings by Mr Henriksen and Latco that were inconsistent with the contract between Latreefers and the Yard. They contended that the commission agreement and the conduct of the negotiations were inconsistent with the shipbuilding contract and thus fell within the second of the categories set out in Middlebrook Mushrooms to which I referred at paragraph 187. In view of my findings, I can deal with this briefly. The commission agreement between Mr Henriksen and Latco was not inconsistent with the subsistence of the shipbuilding contracts; the agreement was aimed at a renegotiation and, if that had happened, there would have been no breach of the contracts. Nor was the conduct of the negotiations necessarily inconsistent with the contracts; parties often try to renegotiate. It was only when Latco decided that the contract would not be performed by their decision not to provide funds was their conduct inconsistent with the contract, but that decision and the alleged instruction given is the primary way in which the Yard put their case.
- The fourth basis on which the Yard put their case was that the conduct by Latco and Mr Henriksen would have been wrongful in itself if done by Latreefers. They contended that Latco and Mr Henriksen’s conduct in threatening that the shipbuilding contract would not be performed was an act which, if done by Latreefers, would have been a breach of that shipbuilding contract as it evinced an intention not to be bound by the contract. It therefore fell within the third of the categories set out in Middlebrook Mushrooms to which I referred at paragraph 187. However, in my view, there was nothing wrongful done by Latco, unless their decision not to provide funds can be characterised as wrongful for this purpose. But the involvement of Latco and Mr Henriksen in that decision not to provide funds is one of the bases of the primary way in which the case is put.
- I therefore conclude that the claim against Latco for direct inducement fails. My conclusion that the claim against Latco as the parent company fails should have no adverse commercial implications. The difficulty that the Yard faced arose in this case because the Yard did not seek the guarantee of the parent company and a parent company is not usually under an obligation to provide funds to its subsidiary. It can rely upon the limited liability of the subsidiary.
(6) My conclusion on the claim against Latco for indirect inducement
- I have outlined at paragraph 192 the nature of the Yard’s case; three issues arose – whether the matters relied on amounted to unlawful means, whether it was immaterial that some of the acts relied on were not directed at Latreefers and whether the breach was the direct result of the unlawful means.
(a) Were there unlawful means and were they directed at the Yard?
- The first unlawful means relied on was the pretence that genuine efforts had been made to find finance. As set out at paragraph 210, I have concluded that Mr Henriksen’s attempts to obtain finance were not genuine. Thus when Mr Henriksen told the Yard on 29 October 1993 (as set out in paragraph 57) that they had spent a great deal of time and effort trying to obtain finance, this was untrue. The efforts had not been genuine. It was contended by Latco that, even if there had been a pretence, then as it was not contended by the Yard that the pretence amounted either to a misrepresentation (which it was not, as it was accepted by the Yard that it was not relied on) or to fraud (which was not alleged by the Yard), there were no unlawful means. This same question arises in relation to the claim in conspiracy (see paragraph 304); for the reasons I set out in that paragraph, I do not consider that this amounted to unlawful means.
- The second unlawful means relied on was the threat that the shipbuilding contract would be broken; again the Yard contended that was unlawful as it was a threat to do that which they were not entitled to do. This act is also relied on in relation to the claim in conspiracy (see paragraph 305); for the reasons I set out in that paragraph, I do not consider that this amounted to unlawful means.
- If, contrary to the conclusion I have reached, these two acts were unlawful means, it is clear that these acts were directed at the Yard and not at the party alleged to have been induced, Latreefers. Neither of the acts was directed at Latreefers nor can they have induced Latreefers to break its contract with the Yard nor can they have prevented Latreefers from performing its contract with the Yard. Although it was not in issue that the unlawful means do not have to be actionable at the suit of the claimant, Latco contended that the unlawful means had to be directed at the person induced, a point on which it was common ground there was no direct authority. The Yard submitted that the objective of the tort was to prevent unlawful means being used to procure a breach of contract and therefore it was not relevant that the unlawful means were directed at someone other than the person to be induced, as long as the unlawful means formed part of the process of inducement or were used to overcome an obstacle that had to be overcome for the defendant to succeed in inducing the breach of contract.
- In my view, the unlawful means have to be used in connection with the inducement of the breach of contract; I do not see why they necessarily have to be directed specifically at the person induced, so long as they form a part of the activity to secure the inducement. The formulations of this tort, particularly those in Thomson v Deakin, are all consistent with this. However, on the facts of this case, the statements made to the Yard about the efforts to obtain finance and any threat made to them did not form any part of the activity to secure the inducement. They were directed solely at the Yard and formed no part of any activity to induce Latreefers to break its contracts.
- The third unlawful means relied on was the failure to fund Latreefers in breach of clause 5.9 of the contract between Latco and Capco. It was contended by the Yard that the breach was a breach directed at Latreefers, irrespective of whether the obligation was enforceable by Latreefers. They said that the failure to fund caused the breach of the shipbuilding contracts and relied on the evidence of Mr Avotins which I have set out at paragraph 211 to the effect that the inability or failure of Latreefers to pay had led to the termination of the contracts.
- It was not in issue that a breach of contract constitutes illegal means (see Clerk & Lindsell on Torts (18th edition) para 24.80- 24.81. Latco contended, however, that there was no breach by Latco or Latmar Services, as they were not parties to the agreement with Capco; in any event any breach was not directed at Latreefers, but at Capco. For the reasons I have given at paragraph 218, I am of the view that Latco was a party to that agreement with Capco.
- Was there a breach? I have set out my finding on the very limited evidence available that Latco informed the directors that they would not be providing the funds to pay the instalment and requested the directors not to pay the instalment due on keel laying.
- In my view, this was a breach of the obligation owed by Latco to Capco to keep Latreefers in funds to honour its liabilities as and when they became due. It does not, in my view, matter for this purpose whether the obligation was enforceable by Latreefers or even the directors. It was a term of the agreement with Capco and it was breached by Latco.
- The breach of the obligation under the Capco terms was in my view directed, as Latco submitted at Capco, but it was also in my view 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. Furthermore it seems to me a breach by Latco of its contract with Capco by not funding Latreefers was directed at Latreefers, even though Latreefers was not a party to that contract. For this purpose, it does not matter that the contract may primarily have been intended to benefit Capco itself and that it might not be enforceable by Latreefers as a contract for their benefit.
- 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 fourth unlawful means relied on was the use of Latreefers in an unlawful activity in breach of clause 5.2 of the agreement between Latco and Capco. The Yard contended that the decision to repudiate the contract or repudiate it if necessary was not a lawful decision. This resulted in the affairs of Latreefers not being conducted in the manner required by clause 5.4. I regard both of these contentions as misconceived; the clauses relied on were not directed at breaches of ordinary commercial contracts but at activity that was unlawful in the sense of being contrary to law or regulations. Read as a whole in their commercial context, it seems clear to me that what Capco aimed to avoid was the company being involved in unlawful conduct of that kind. It was not aimed at breaches of ordinary commercial contracts.
(b) Causation
- Latco submitted that any inducement or interference had not caused the breach of the shipbuilding contract through the failure to pay the keel laying instalment on the first contract or any other breaches. They contended that Latreefers did not pay because it did not have the money and that the Yard had made it clear that it was their case that Latreefers was never going to perform its contracts.
- I do not accept this submission in respect of inducement by the use of the unlawful means I have found were used. 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 could be disabled from further performance of those shipbuilding contracts.
(c) Conclusion on claim against Latco
- I therefore conclude that the claim against Latco succeeds on the basis that Latco used unlawful means directed at Latreefers to induce breaches of the shipbuilding contracts between Latreefers and the Yard. Such a conclusion does not in any way affect the principle of the limited liability of a subsidiary; the specific arrangements that Capco made with Lacto are the basis for this conclusion. In the case of subsidiaries within the ordinary structure of a group, it is highly unlikely that there would be any such arrangements, but if the ultimate parent makes such a commitment, then it seems to me there is no commercial objection to the consequences that flow from it.
(7) The Claim against Mr Henriksen
(a) The Yard’s claim
- As I have already set out, no case was made against Mr Henriksen that he had directly induced the breach of contract; nor could it be, as he did not control Latreefers and there was no action of his that could be shown to have directly induced any breach.
- The claim made against him was that he had participated in a common design to induce the breaches of contract. To establish liability on that basis it was for the Yard to prove that there was a common design: see Credit Lyonnais v ECGD [1998] 1 Lloyd’s Rep 19 (at 35-6, 46) (CA) and [1998] 1 Lloyd’s Rep 563 (at 569-72). It is clear from the passage in the judgment of Hobhouse LJ at p 46 that knowing assistance does not suffice to make a secondary party liable with the primary party as a joint tortfeasor:
He must have conspired with the primary party or procured or induced his commission of the tort..; or he must have joined in the common design pursuant to which the tort was committed.
Furthermore merely facilitating a tort does not make the facilitator a joint tortfeasor: see PLG Research v Ardon International [1993] FSR 197 at 239 and the authorities there cited. However no formal agreement is necessary to establish a common design; a tacit agreement is enough: see Unilever plc v Gillette (UK) Ltd [1989] RPC 583 at 609
- There was an alternative claim against him of indirect inducement advanced on the same basis as that against Latco as set out at paragraph 192.
- Mr Henriksen denied that he had in any way interfered with the contract and also maintained that he was the agent of Latco or Latreefers or both. It was his case that as he had been appointed as agent to reduce the price payable by Latreefers and, as he could only negotiate as the agent of Latreefers, he was their agent from the time of his appointment; there could be no doubt that that was the case from 29 October 1993 when he received the power of attorney as set out at paragraph 61. Mr Henriksen stated that in any event he was not liable, either because the powers of Latreefers had been delegated to him or he had acted throughout as an agent of Latreefers.
(b) My findings on Mr Henriksen’s intention and actions
- As set out at paragraph 215, I have concluded that Mr Henriksen advised Latco after the meeting on 22 and 23 November 1993 that the keel laying instalment should not be paid and Mr Avotins followed that advice. Mr Henriksen knew that this was a breach of contract and intended that it occur, as he wanted to make clear to the Yard that Latco and Latreefers were only interested in further performance of any of the contracts if the terms proposed by him were accepted in substance; and that, if the Yard did not agree, the existing obligations would not be performed. However there is no evidence that Mr Henriksen was involved after his final invoice was paid after its submission on 20 December 1993. As I have found at paragraph 223, no final decision had been made by Latco at the time they decided not to pay the keel laying instalment on vessel 1.
- Thus the common design to which he was party with Mr Avotins was to bring about the non payment of the keel laying instalment due under the first contract with the intention of making it clear to the Yard that Latreefers would only be interested in further performance of the contracts if they renegotiated the contracts and agreed in substance to the terms put forward by Latreefers.
- However, as I have concluded in respect of the claim for direct inducement that the actions of Latco were not an actionable inducement, then as Mr Henriksen was advising and assisting them, no liability can attach to him.
- The claim made against Mr Henriksen for indirect inducement is similar to that made against Latco; for the reasons given, that claim failed save on one ground.
- As the ground on which the claim against Latco succeeded was on the basis that unlawful means had been employed in that there had been a breach of an obligation by Latco to Capco to fund Latreefers, then the question arises as to whether Mr Henriksen was liable as a joint tortfeasor. There was no evidence that he knew anything of the arrangements between Latco and Capco and nothing to suggest that he would have been told of them; I therefore find he did not know of them and therefore cannot have known (if it were the case) that there had been a breach of contract in that respect; he therefore would not have known of the unlawful means employed by Latco.
- Nonetheless it was contended by the Yard that Mr Henriksen was liable as a joint tortfeasor; the only matter of which he had to have knowledge was the contract with the Yard. They relied on a passage in the judgment of Evans-Lombe J in ICS v West Bromwich at p 538 where he said:
It is not necessary to establish that the joint enterprise included a common design to commit the tort in question. “It is enough if the parties combine to secure the doing of acts which prove to be .. torts.” See per Mustill LJ in Unilever
It was contended on Mr Henriksen’s behalf that as he did not know of the contract with Capco, he could not be liable if the sole unlawful means were the breach of that contract. In my judgment this contention is correct. It seems to me that it is an essential requirement of this tort that the means be unlawful. As the sole basis of liability of Latco for the commission of the tort was the breach of this contract with Capco, I do not consider that Mr Henriksen would be liable as a joint tortfeasor, as he was not party to any common design that included the use of the unlawful means employed, as he did not know of the unlawful means. In my view, his knowledge of the facts that constituted the unlawful means was essential if he was to be liable.
- In the light of that conclusion it is not strictly necessary for me to express my views on the two other points made by Mr Henriksen: delegation and agency.
(c) Delegation
- Mr Henriksen contended that if the powers of Latreefers had been delegated to him, then he was not liable, as his actions were the actions of Latreefers. He relied on a short passage in the speech of Lord Reid in Tesco v Nattrass at p 171:
But the board of directors may delegate some part of their functions of management giving to their delegate full discretion to act independently of instructions from them. I see no difficulty in holding that they have thereby put such a delegate in their place so that within the scope of the delegation, he can act as the company…
- It is not necessary for me to consider this further, as I am satisfied that the powers of Latreefers were not delegated to him. He acted throughout as the agent first of Latco and then of Latreefers, giving advice and conducting negotiations, but always in accordance with the decisions of Latco.
- He also contended that he always acted for Latreefers, as Latco were in fact acting as the agents of Latreefers. I do not accept that contention. As I have set out above, I have made the finding that it was Latco who decided not to pay the keel laying instalment on the first vessel and thereafter not to perform the contracts. They were not making these decisions as agents of Latreefers, but as the parent company that ultimately controlled Latreefers. In fact, in negotiating with the Yard, Mr Henriksen was acting as the agent of both companies. Although any decision in the renegotiations would have had to be implemented in the form of an agreement between the Yard and Latreefers, the negotiations were conducted by Mr Henriksen in his capacity as agent for both Latco and Latreefers.
(d) Agency
- Mr Henriksen’s second point was that, if I concluded that he was acting as an agent of Latreefers or Latco, he was not liable because of the principles relating to agents established in Said v Butt [1920] 3 KB 497.
- In Said v Butt the defendant manger of a theatre refused the claimant admission to a performance for which he had a ticket. He was sued for inducing breach of the contract between the claimant and his employers, the owners of the theatre. Although the claim failed for other reasons, McCardie J held that it would have also failed because an employee who procures a breach of contract between his employer and a third party when bona fide acting within the scope of his authority cannot be sued by the third party for inducing breach of contract. He said at p 505:
But the servant who causes a breach of his master’s contract with a third person seems to stand in a wholly different position. He is not a stranger. He is the alter ego of his master. His acts are in law the acts of his employer. In such a case it is the master himself, by his agent, breaking the contract he has made….
I hold that if a servant acting bona fide within the scope of his authority procures or causes the breach of contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken. I abstain from expressing any opinion as to the law which may apply if a servant, acting as an entire stranger, or wholly acting outside the range of his powers procures his master to wrongfully break a contract with a third person…..
- In subsequent decisions of the Court of Appeal (G Scammell v Nephew Ltd [1929] 1KB 419, Thomson v Deakin, and WDA v Export Finance Co [1992] BCC 270) and in decisions of overseas court, McCardie J’s views have been followed. In the most recent of the Court of Appeal cases, Dillon LJ said that although he had grave reservations about the reasoning of McCardie J, the reasoning and conclusions had stood for so long that it was not for the Court of Appeal to interfere with it. In New Zealand, the principle has been applied to agents: see Official Assignee v Dowling [1964] NZLR 578.
- Although my attention was drawn to the forcible criticisms of Professor Reynolds QC in the sixteenth edition of Bowstead at page 638, the Yard rightly accepted that I must apply the principles set out in that decision. It is not therefore necessary for me to consider the wider reasons advanced by Mr Henriksen as to the correctness of the principle or the possible arguments based on Williams v Natural Life [1998] 1WLR 830 relating to the assumption of personal liability by directors or employees of companies.
- However the Yard contended that the principle in Said v Butt should not be extended and referred me, in support of that submission, to a decision of a Canadian Court: Einhorn Investments v Westmount Investments Ltd 6 DLR (3d) 71 (1969). They put forward a number of submissions as to why Mr Henriksen could not rely on Said v Butt:
(a) For the principle to apply, all the acts had to be done by the employee or agent or in conjunction with other agents or employees. The principle did not apply where the agent acted with others and no case went that far. The reason was that, if the agent was acting with others, he was engaged in a joint design with others and therefore was an external mover and not acting in an internal capacity; in this case, Mr Henriksen had acted with Latco and was not acting in a capacity internal to Latreefers. There is no authority to support the Yard’s proposition and I do not accept it; there seems to be no logical reason for limiting the principle in Said v Butt (which for this purpose I must assume to be correct) in this way as Mr Henriksen would still be acting as the agent of Latreefers in what he did.
(b) The actions of Mr Henriksen were not performed primarily in his capacity as an agent but for his own account as he had a substantial financial interest; he was a joint venturer with Latco in an enterprise. However, the direct financial interest he had was in the remuneration he would be paid as agent; the fact that that remuneration was payable by way of commission rather than by way of a time charge or some other method is no basis for saying that he should be deprived of the protection given by Said v Butt.
(c) The actions of Mr Henriksen were not bona fide; first, he had engaged in an enterprise which would have made a profit for him out of inducing the breach of the contract with the Yard. Secondly during the course of the negotiations he put forward the pretence about the attempts to obtain finance. So far as the researches of counsel and solicitors disclosed, there is no authority that discusses what is meant in this context by bona fide. I do not, however, accept either of these propositions; Mr Henriksen would have made a profit if there had been a re-negotiation, but that would have resulted from a consensual variation of the contracts and there would have been no breach. Secondly, the duty to act bona fide is to act bona fide in his relationship with his principal and in the scope of his authority; it is in his relationship with his principal that the duty to act bona fide exists. I consider that he did act bona fide to Latco and Latreefers and Latco seems to have approved of what he said about finance.
(d) The actions of Mr Henriksen were not within the authority conferred by Latreefers; the power of attorney he obtained from them on 3 November 1993 was conferred as part of the process of inducement. It was not within his authority to place Latreefeers in anticipatory repudiatory breach of all six of its contracts, as it was not appropriate and necessary to do so and the board of Latreefers had not authorised that. However, the actions of Mr Henriksen at all times met with the approval of Latco; furthermore, as the directors of Latreefers were prepared to act in accordance with the wishes of Latco, provided the actions did not involve impropriety or illegality, it seems to me fair to conclude that his actions, as authorised by Latco, were within the scope of his authority.
(e) The principle only applied to the alter ego of the company or to someone who was performing the acts of the company. However, there is nothing in the authorities to suggest that the principle is so limited and no logical reason for so limiting it.
(f) Mr Henriksen became party to the strategy agreed against the Yard, before he became the agent of Latreefers and therefore could not rely on his being made an agent if he was made an agent for the purpose of carrying out the strategy. I see no reason why this follows, particularly as the events happened within a group structure.
(g) The authority must be communicated to the other party; the Yard only received the power of attorney at the meeting on 22 and 23 November. Even if this was a requirement, the power of attorney was sent to the Yard on 9 November 1993 (see paragraph 63).
(h) The acts complained of must be done in the capacity as the agent of the employer whose contract was broken; the sole capacity in which Mr Henriksen acted until 3 November 1993 was as the agent of Latco. Thereafter he also acted as the agent of Latreefers, but continued to act as the agent of Latco as his letter of 29 December 1993 made clear. In WDA v Export Finance Co [1992]BCC 270, Staughton LJ said at p 305
No authority was cited to show that an agent has immunity when he procures someone other than his principal to break his contract and I can think of no reason why an agent should enjoy such immunity.
However, as I have found in paragraph 284, Mr Henriksen acted for both Latco and Latreefers; there is no reason why he should not be entitled to the protection of the principle in Said v Butt as he was acting for one of his principals when, on this basis, he induced Latreefers to break the contract by not paying the keel laying instalment.
- The Yard also submitted that it was not open to Mr Henriksen (and Latmar Services) to rely on Said v Butt, as they had not pleaded good faith or the authority relied on. At the conclusion of the trial when this point was made, a new pleading was produced on behalf of Mr Henriksen pleading these points and it was agreed I would rule on the amendments as part of my judgment in the light of further written submissions and taking into account all the circumstances as I found them to be. About two weeks before the trial started, counsel for Mr Henriksen informed the Yard that he would be relying on Said v Butt and the Yard’s opening dealt in some detail with this and their answer to it. It was unfortunate that the point had not been expressly pleaded by Mr Henriksen, but the failure to plead, unlike the other points on which disputes arose was not the subject of discussion until the closing submissions. Although I made it clear in the main ruling I made during the trial on amendments that all pleading issues should be put on the table, this appears to have been overlooked, no doubt because it was thought that as the point had been dealt with in the opening without objection to the fact that it had not been pleaded, no point arose. I am satisfied that no prejudice has been caused by the late formal application as the evidence was adduced on the basis that the point was in issue. I therefore allow the amendment to be made.
(8) The claim against Latmar Services for inducement
- The claim by the Yard against Latmar Services was on the same basis as that against Mr Henriksen and the arguments that arise need not be repeated, save for two matters.
- First, Latmar Services contended that there was no evidence of any common design on their part; Mr Avotins and Mr Kisselev both denied in their statements that there was any plan to induce Latreefers to induce a breach of contract. I do not accept that evidence. I am satisfied that Mr Kisselev knew what was agreed between Mr Henriksen and Mr Avotins and he was instructed to help him. However, Latmar Services played no greater role than that. Unlike Mr Henriksen, they did not devise the strategy or give advice; they merely assisted Latco and Mr Henriksen.
- Second, did Latmar Services know of the Capco terms and that the withholding of funds would be a breach? The four main invoices in respect of Latreefers were addressed direct to Latco; the invoice for Latmar Holdings was addressed to Latco “c/o Latmar Services Limited”. The instructions to incorporate Latreefers seem to have been given directly to Watson Farley & Williams by Latco. Neither Mr Foster or Mr Kisselev were asked about these terms as they were not known about during the trial and no evidence was subsequently adduced to show that they did. On this very limited material, I cannot conclude that the Yard have proved that Latmar Services knew of the Capco terms. Their position is in this respect therefore the same as Mr Henriksen.
- Latmar Services also relied on the principle in Said v Butt; the evidence of Mr Kisselev was that they acted pursuant to an agency contract with Latmar Holdings Corporation and acted as agents for companies controlled by Latco.
- I accept that evidence and on that basis, for reasons similar to that applicable to Mr Henriksen, they would have been entitled to rely upon the principles set out in Said v Butt.
2. THE CLAIM IN CONSPIRACY
(a) The Yard’s claim
- The Yard’s claim, as initially put, was that there was a conspiracy to injure by unlawful means; they had to prove that they had suffered loss or damage as a result of unlawful action taken pursuant to an agreement between Latco and Mr Henriksen or Latmar Services to injure them by unlawful means, whether or not it was the predominant purpose of the defendants to do so. It was not necessary to show an express agreement; it was sufficient that two or more combined with a common intention to achieve a common end.
- There was no dispute about the applicable legal principles as summarised by the Court of Appeal at paragraphs 106 to 133 of their judgment in Kuwait Oil Tanker Co v Al Bader [2000] 2 All ER (Comm) 271. The Court of Appeal also held that unlawful means could include actionable torts; they concluded at paragraphs 129-130:
“ We have reached the conclusion first that there is no authority that binds us to hold that where the unlawful means are tortious, the conspiracy merges in the tort and secondly we should not do so……
The unlawful means may be both tortious and criminal or both tortious and a breach of contract or all three. Or in a case of this kind, A and B may conspire to injure C by breach of contract by B such that B would be liable for the breach of contract but A would be liable for the tort of inducing breach of contract. We are far from sure how the doctrine of merger could or would operate in such a case. Moreover we can see no reason in principle to restrict the tort in this way”
- For a good part of the trial, it was not clear what precise case the Yard were making. The Yard clarified its case on the tenth day of the trial, just after the handing down of the Court of Appeal’s decision in Kuwait Oil Tankers. It contended that Latco, Mr Henriksen and Latmar Services conspired together to use unlawful means to achieve a lawful end. In essence, it was alleged that they agreed on a strategy to bring unlawful pressure to bear on the Yard to force it to renegotiate the contractual terms. The key matters on which it relied and which it then contended were unlawful means were:
• The approach they made to the Yard with the pretence that Latreefers had made substantial and genuine efforts to find financial backing and that such efforts had failed; that such failure meant that Latreefers could not perform the contracts.
• The threat made to the Yard of an actual or anticipatory breach of contract.
• The fact that they ensured that there were breaches of contract by Latreefers by exercising control over Latreefers so as to prevent Latreefers performing or confirming that it would perform the contracts.
- The Yard contended these acts were done with an intent to injure the Yard in that their aim was to reduce the income of the Yard from the contracts, if necessary, to nil. It was common ground that such an intention could be proved by inference and, if proved, it need not be a predominant intention.
- The defendants submitted that there was nothing that went beyond an agreement to renegotiate. In any event, any agreement was between the shareholders and Latreefers; there could not be a conspiracy as the acts of the shareholders became the acts of the company; Latmar Services were not part of the conspiracy. There was no intention to injure as the objective of Latco was to maintain the contracts, but at a lower price. No damage had been suffered by the Yard.
(b) Was there a conspiracy?
- The first question is whether there was a combination amounting to a conspiracy; it is difficult to see how the test can be any different to the test as to whether the person is liable as a joint tortfeasor; I agree with the passage in Clerk & Lindsell (18th edition) at paragraph 24.120 to that effect. I have found at paragraph 276 that Mr Henriksen was party to a common design with Mr Avotins of Latco to bring about the non payment of the keel laying instalment due under the first contract with the intention of making it clear to the Yard that Latreefers would only be interested in further performance if they renegotiated the contract and agreed in substance to the terms put forward by Latreefers; I have also found at paragraph 292 that Latmar Services were also parties to that common design by agreeing to assist in that.
(c) Were there unlawful means and was there a common design to use the unlawful means?
- It was contended that none of the three original unlawful means relied on and to which I have referred was pleaded; I do not accept that contention; the matters were pleaded in paragraph 27 of the Points of Claim.
- It is convenient to consider first the three unlawful means originally pleaded.
- The pretence in relation to the financing. The defendants submitted that what was alleged did not amount to a tort; the pretence was not fraudulent and there was no reliance on it. They were plainly correct. In fact, as was accepted by the Yard, their case was simply that an untrue statement constituted unlawful means; it contended an untrue statement was the essence of the tort of misrepresentation without the necessary reliance and therefore that was sufficient. However, it is important that the Yard did not contend the untruth was deliberate; the Yard contended it was either innocent or negligent. Is therefore an untruth which is in itself not tortious “unlawful means” for the purposes of the tort of conspiracy? I do not consider it is. As the pretence is not actionable in itself and does not fall within any of the other established categories of unlawful act for the purposes of the tort of conspiracy, it is in my view not an unlawful means.
- The threat to break the contract. It is suggested by the editors of Clerk and Lindsell (18th edition) at paragraph 24.128 that a threat to break a contract can be unlawful means and that therefore a combination to perpetrate a breach of contract can be an actionable conspiracy:
For since a party to the conspiracy can be liable even if he is not a party to the contract, he could be liable even where it was not possible to establish that he had procured any breach of it, but where he had merely combined, with a common design, together with the parties committing the breach. This seems to run counter to the policy of not extending liability under the principles in Lumley v Gye. Despite the problems surrounding it, the principle appears to have been accepted that a deliberate breach of contract is unlawful means for the purposes of a conspiracy”.
- However, there was no threat at the meeting of 22 and 23 November 1993 not to pay the keel laying instalment; on that occasion, as I have found at paragraph 64, Mr Henriksen stated that there was no possibility of Latreefers performing that contract; I do not think that amounted to a threat as the statement was made in the context of Latreefers’ financial position and was the type of remark that might be made in a renegotiation. He said nothing then to the Yard about not paying the keel laying instalment. His recommendation to Mr Avotins came only after that meeting and was not communicated to the Yard in the letter written on 3 December 1993. I therefore do not consider that there was a threat at the meeting to break the shipbuilding contracts.
- Ensuring there were breaches of contract. I am satisfied for the reasons I have given in relation to the claim for inducing breach of contract that the action by Latco (as the ultimate shareholder) in requesting the directors of Latreefers not to pay the keel laying instalment was not unlawful; nor was it unlawful therefore for Mr Henriksen to give advice and support nor for Latmar Services to carry through the necessary instructions.
- However, as a result of the further evidence admitted after the trial, the Yard sought leave to amend to add a fourth unlawful means – the failure to fund in breach of the agreement between Latco and Capco. I grant leave to amend on the same basis as I have granted leave to amend to add this as unlawful means for the purpose of the claim for inducing breach of contract.
- For the same reasons as I gave in relation to the claim for inducing breach of contract, I consider that these were unlawful means and they were the sole unlawful means. However, for the reasons I have given, neither Mr Henriksen nor Latmar Services knew these were unlawful means. Although a party to a conspiracy need not understand the legal effect of the facts, he must know the facts which make the conspiracy unlawful (see Clerk & Lindsell 18th edit at para 24-119). Although I have found that there was a common design to bring about the non payment of the keel laying instalment due under the first contract with the intention of making it clear to the Yard that Latreefers would only be interested in further performance of the contracts if they renegotiated the contracts and agreed in substance to the terms put forward by Latreefers, neither Mr Henriksen nor, on the evidence, Latmar Services knew of the Capco terms. They did not therefore know the facts which made their agreement to this common design unlawful, as they did not know that unlawful means would be employed. They were therefore not parties to a common design to use those unlawful means. It follows therefore that out of the only parties to the alleged conspiracy - Latco, Latmar Sevices and Mr Henriksen - the only person with knowledge of the facts which made the conspiracy unlawful was Latco. Thus the claim in conspiracy against them must fail.
(d) Was there an intention to injure?
- In view of the conclusion I have reached that this claim must fail, it is not strictly necessary for me to deal with the question of intention to injure and I will therefore do so briefly. The Yard submitted that there must have been an intention to injure the Yard as the objective of Latco and Mr Henriksen was to secure that a lower price was payable and that would in fact injure the Yard. For the tort of conspiracy where unlawful means are proved, it is only necessary to show an intention to injure; it does not have to be predominant: Lonhro v Fayed [1992] 1 A.C. 448. In my view, it was intended that the Yard be injured by the non payment of the instalment on the first contract, as it was hoped that that the financial effect of the non payment would bring pressure to bear on them; the memorandum from Mr Henriksen to Mr Avotins after the meeting on 22 and 23 November (set out at paragraph 65) makes this clear. Furthermore it was obvious a reduction in the price or an extended delivery date would injure the Yard and, although Latco was acting predominantly in its own interests, it must by its actions have intended to injure the Yard.
3. UNLAWFUL INTERFERENCE WITH THE YARD’S CONTRACTUAL RELATIONS WITH LATREEFERS AND WITH THE YARD’S BUSINESS
- As a result of my decision to admit the further evidence in relation to Capco’s terms and conditions, the Yard sought leave to amend their statement of claim to add their claim for unlawful interference of the Yard’s contractual relations with Latreefers. Prior to the application for leave to amend, the claim, as pleaded, added nothing to the claims for inducing breach of contract and conspiracy and hardly featured at the trial. The new claim alleged:
• The failure to fund Latreefers was a breach of contract by Latco
• That breach was unlawful
• That breach caused the Yard’s loss
• Latco and Mr Henriksen intended that the failure to fund Latreefers would interfere with the Yard’s business with it.
• The failure to fund was directed at Latreefers
The Yard contended that it did not have to show that the unlawfulness was unlawfulness which gave the Yard a remedy or that the unlawfulness was actionable. They relied on Lonhro v Fayed. Latco submitted that that decision did not assist the Yard and that difficult issues of policy arose.
- The Yard also sought to add a new claim for unlawful interference with the Yard’s business; the unlawful means employed by Latco in breaking the contract with Capco to fund Latreefers was directly causative of the loss suffered by the Yard.
- Latco submitted that I should not grant leave to amend to allow these claims to be made as they were time barred and did not arise substantially out of the same facts. In my view this submission is correct as to the new claim for unlawful interference with the Yard’s business which it is now sought to plead. This is an entirely new allegation of a further tort and I see no reason to permit the Yard to plead it at this stage. As to the re-casting of the claim for unlawful interference with the Yard’s contractual relations with Latreefers, I consider that the amendment should be allowed as against Latco only, as it does no more than follow the amendments made to the claim for inducing breach of contract. However, as I have reached the view that Latco is liable for inducing breach of contract, it seems to me neither necessary or desirable, to extend the length of this judgment by considering the separate and difficult issues of law raised by this claim which arise out of the decision in Lonroho v Fayed.
4. HAVE THE YARD SUFFERED ANY LOSS?
- Latco, Latmar Services and Mr Henriksen contended that, even if there was an instruction by Latco not to pay or a conspiracy, the Yard in fact suffered no loss, as there were no monies in the retention account at the time in December 1993 when the keel laying instalment was due and therefore Latreefers would not have honoured their obligations. To understand the narrow scope of this point it is necessary to refer briefly to an application to amend during the course of the trial.
- At an early stage of the trial the Yard wished to amend to plead the circumstances in which a sum of $13m had been transferred out of Latreefers’ account in December 1993 and to which I referred at paragraph 67; this was resisted by the tort defendants on the basis it would involve a substantial enquiry. When the argument was made, it became apparent that it was closely connected with an argument that the tort defendants wished to make to the effect that Latreefers had no funds and therefore the Yard had suffered no loss. Latco refined its amendment to say that there was no loss by reference to the position of Latreefers on 10 December 1993, the day the instalment was due; they accepted that if an enquiry beyond the position that day was necessary, then it would parallel the enquiry necessary by reason of the Yard’s amendment. Such an enquiry would have involved an adjournment of several months to enable investigations to be carried out and further witnesses called; it was unclear when it would have been possible to resume the trial. Counsel for Latco and the Yard both came to the view that it was their preference that I should not allow the amendments, save that the tort defendants should be allowed to plead the narrow point that they had advanced. Mr Henriksen’s counsel did not agree, but for reasons that I set out in my ruling, I refused the Yard’s amendment and only allowed the tort defendants to amend to plead that the Yard had suffered no loss on the basis that Latreefers did not have in its account on 10 December 1993 the funds to pay. As this ruling would have had a substantial effect on the evidence called at the trial, Mr Henriksen was asked to clarify his position as to whether he would seek leave to appeal against it prior to the conclusion of the trial. It was subsequently stated on his behalf that he would not do so.
- Latco contended that on 10 December 1993, Latreefers had no funds, whatever the position might have been at an earlier time; although they might have had a claim against Latco in respect of the funds transferred out or some other matter, that was irrelevant as the question was whether they could have paid on 10 December 1993.
- The Yard submitted that the inability of Latreefers to pay could not be judged solely by reference to its account on 10 December 1993. I accept that position. In the light of my ruling, the sole point open to the defendants relates to the funding position of 10 December 1993. In my view, in the light of the fact that Latreefers paid the initial instalments even before it had a bank account, I consider that there is no evidence to show that that they 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. It seems to me clear that the decision made by Latco that it would not advance the funds to enable Latreefers to honour their obligation to pay the keel laying instalment was a deliberate decision to put pressure on the Yard. However at that time, the directors of Latco must have thought that they would in due course be able to honour the obligation, if it was thought necessary, or pay damages, for otherwise it is difficult to see how the directors could have continued to allow Latreefers to trade.
- As I have mentioned, I declined to admit further evidence which might have allowed the Yard to re-open this ruling. Nonetheless on the basis of the further evidence which I permitted the Yard to adduce in relation to Capco’s terms and conditions, the Yard contended that, as Latco were bound to fund Latreefers, then Latreefers would have been put in funds and been able to pay the Yard, as Latco plainly had the means to fund Latreefers. This involved the Yard proving that Latreefers either had a direct contractual right against Latco or that the directors of Latreefers (or Capco as their employers) would have enforced the right for the benefit of Latreefers.
- As I have reached the clear view on the other materials before me that Latco cannot show that Latreefers could not have funded the instalment due on 10 December 1993 had they wished to pay it, it is not necessary for me to decide this issue. Because of the point in time at which this issue arose, although I have had written submissions on this issue, there have not been oral submissions and the issue raised is not altogether straightforward; furthermore in the light of my decision on the contract claims that Latreefers are liable for substantial damages and the outstanding judgment against Latreefers, there may be a conflict of interest between Latco and Latreefers. In these circumstances, I do not think it right for me to decide this point which has such far reaching implications, when it is not necessary for the decision of the issues currently before me. The parties did not ask me, after they had seen the judgment in draft, to reconsider this view.
5. THE YARD’S CLAIM FOR EXEMPLARY DAMAGES
- It was agreed that this could not be dealt with at this stage.
6. ARE THE YARD ENTITLED AS A MINIMUM AGAINST THE TORT DEFENDANTS THE SUMS FOR WHICH THEY HAVE OBTAINED JUDGMENT AGAINST LATREEFERS?
- The Yard contended that the tort defendants must at the very least be liable for the sums of over $11m for which they had obtained judgment against Latreefers, giving credit for any recovery they made. They said that if the tort defendants were liable, then this was an irreducible minimum as the tort defendants’ conduct had led to Latreefers not paying and the Yard suffering this loss.
- Latco submitted that the decision on this issue depended on my decision on the contract claims. I agree. As I have held that there were sales of the first two vessels, then there will have to be a computation under clause 5.05 and a computation of any damages over and above that. It seems to me that some preliminary computations can be made and in the light of those computations, a determination can be made as to whether there is a sum that should be paid without waiting for the detailed assessment of damages.
Conclusion
- For these reason therefore I hold that:
(1) Latreefers is liable to the Yard for damages for breach of all six contracts, subject in the case of vessels 1 and 2 to the operation of clause 5.05 as these vessels were sold.
(2) Latco is liable to the Yard for damages for inducing breach of contract.
(3) Mr Henriksen and Latmar Services are not liable to the Yard in respect of any of the claims made against him.
- It will be necessary to decide how the further issues are to be determined and to give directions for that purpose.
