Azimut-Benetti Spa (Benetti Division) v Healey

This is an application by the claimant, Azimut-Benetti SpA, for summary judgment under a guarantee. The claimant is a luxury yacht builder based in Italy. By a Yacht Construction Contract dated 25 September 2008, the claimant agreed to construct, and an Isle of Man special purpose company called Shoreacres Ltd agreed to purchase and take delivery of, a white 60 metre yacht with a hull number FB256. Shoreacres is wholly owned by the defendant. The price was €38 million payable in instalments, and the scheduled delivery date was 30 November 2011. The defendant gave his personal guarantee also dated 25 September 2008. The defendant resists this claim for summary judgment under the guarantee on the basis that the liquidated damages clause upon which the claimant sues in the contract with Shoreacres was a penalty, so that there is no liability on which the guarantee can fasten. The claimant maintains that the defendant does not have an arguable case in that regard; alternatively it argues that by the terms of the guarantee the guarantor is liable even if the clause is unenforceable, and the principal debtor is not, or that an estoppel arises. That is the first issue which I have to decide. The claimant has an alternative claim for the first instalment of the price which had fallen due under the contract at the time of termination. The defendant contends that having elected to sue on the liquidated damages clause, the claimant should not be entitled to summary judgment for the first instalment. That is the second, and only other, issue raised by the defendant by way of defence.

Before coming to the evidence, it is convenient to set out the clause on which the claimant relies, and which is in contention as a penalty clause. Clause 16 of the Yacht Construction Contract dated 25 September 2008, and in particular clause 16.3, provided as follows:

“16.

Termination by Builder

16.1

In addition to such rights as it may have at general law the Builder may suspend construction of the Yacht and/or terminate this Contract at any time by written notice to the Buyer:

(a)

if the Buyer fails to pay any sum due and owing under this Contract within forty-five days after the due date;

...

16.3

Upon lawful termination of this Contract by the Builder it will be entitled to retain out of the payments made by the Buyer and/or recover from the Buyer an amount equal to 20% of the Contract Price by way of liquidated damages as compensation for its estimated losses (including agreed loss of profit) and subject to that retention the Builder will promptly return the balance of sums received from the Buyer together with the Buyer’s Supplies if not yet installed in the Yacht.”

Subject to a letter which the defendant sought to adduce at the hearing, the evidence consists of witness statements by the parties’ respective solicitors. This shows that the parties’ relationship began with a letter of intent made on 11 October 2007 pursuant to which the buyer (the defendant’s purchasing vehicle was at that time a company called GSE Investments Ltd) paid a returnable deposit of €500,000. Matters appear to have gone quiet for a time, and much of the subsequent evidence consists of email negotiations between the builder and the buyer of another similar yacht with a hull number FB250. There is no connection between the buyer of FB250 and Shoreacres Ltd or the defendant Mr Healey. The name of the buyer of FB250 has not been disclosed by the claimant, though it is a reasonable inference that the buyer is Russian. Though the transactions are unconnected, and these negotiations so far as admissible are seemingly irrelevant, it is a fact that both Shoreacres and the buyers of FB250 used as English solicitors the firm of Shoosmiths, and also used the same yacht brokerage, namely Viare s.a.r.l The claimant’s case is that this overlap is relevant as regards discussions over the liquidated damages clause that took place in due course.

There was an issue between the parties as to how far the content of the negotiations is admissible, but the question was effectively resolved during the hearing, by reference to a passage in Murray v Leisureplay plc [2005] IRLR 946 at [52], in which Arden LJ said:

“Lord Dunedin in the Dunlop case makes the point that, although the issue is one of construction, the court is not confined to the terms of the agreement and may look at the “inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not at the time of the breach …” (at page 87). In my judgment, the inherent circumstances to which the court may have regard extend beyond those which may be adduced in evidence for the purposes of determining the true interpretation of the agreement under the well known test in the Investors' Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. But the purpose of adducing that evidence is not so that the parties can demonstrate that they agreed to opt out of the remedies regime provided by the common law but rather that the reasons that they had for doing so constitute adequate justification for the discrepancy between the contractual measure of damages and that provided by the common law.”

This passage was applied in General Trading Company (Holdings) Ltd v Richmond Corporation Ltd [2008] 2 Lloyd’s Rep 475 at [124] (Beatson J), and the defendant accepts this approach for the purpose of this hearing. The argument between the parties has been what, if anything, the negotiations demonstrate as regards the parties’ reasons for agreeing clause 16.3 as contemplated in this passage. I should say that I accept the defendant’s submission that the mere assertion by or on behalf of the builder that the clause was a genuine pre-estimate of damage does not in itself advance matters.

Factually, so far as clause 16.3 is concerned the position is as follows. On 20 March 2008, the Russian lawyers acting for the buyer of FB250 provided draft amendments to the contract in respect of that yacht reducing the percentage payable by way of liquidated damages from 20% to 10% of the contract price. Shoosmiths were copied in, but clearly in their capacity as solicitors for the buyer of FB250. On 31 March 2008, Holman Fenwick and Willan (HFW), the solicitors acting for the builder, responded rejecting the proposed amendment on the basis that 20% of the contract price was a genuine pre-estimate of the builder’s loss. That email was not copied to either Shoosmiths or Viare.

On 16 April 2008, the Russian lawyers acting for the buyers of FB250 responded with a “Discrepancy Report” which stated that, “we’d insist on 10% for 20% sounds unreasonably high”. That email was copied on the same day to Shoosmiths, who made it clear that despite the involvement of the Russian lawyers, they remained involved in the transaction, and asked to be copied in with subsequent communications. Again, this was in relation to, and only to, FB250.

On 2 May 2008, HFW reverted as follows:

“20% is a genuine pre-estimate of the Builder’s loss and the Buyer needs to understand that this clause provides, not just compensation for the Builder, but also an immediate refund of the rest of the Buyer’s money.

The alternative, should the current clause be unacceptable, is to revert to the more conventional model whereby the Builder completes and sells Yacht to someone else; realises its actual loss; and then accounts back to the Buyer for any excess remaining. In this scenario the Builder will retain the Buyer’s instalments for a very long time, particularly if there has to be an arbitration.”

At this point, Viare entered the negotiations, again acting in relation to FB250. It told the builder that its clients felt that the clause was too onerous, and a figure of 10% was again suggested. This was rejected by the builder by email of 15 May 2008 (neither were copied to Shoosmiths) which states:

“As already discussed with Sergei in the past we once again stand by our figure of 20% as this is the minimum it would cost Benetti to resell the ship in case of the client terminating the contract. On top of the cost of resale we would have all of the costs due to borrowing the money from the bank, depreciation of the yacht and depreciation of the yacht due to the fact that it is tailored on [a]n other client i.e. modifications to apply to the boat to be resold. This … is a very firm point in our contracts.”

It was shortly thereafter that negotiations in relation to FB256 came back to life. On 21 May 2008, Shoosmiths emailed HFW to the effect that it was instructed to proceed with the completion of that contract. The latest version at that time was one sent as long ago as 30 October 2007. On 22 May 2008, Viare emailed to the effect that since the deal had to be concluded within a short time scale, “we should use the same build contract (save minor details) for FB250 and FB256”. Shoosmiths responded shortly afterwards saying that it was using the October 2007 draft “and making changes to that agreement which will conform to a great extent to the one we are discussing on FB250”. HFW responded to the effect that the builder would prefer to work off the October draft and its response thereto (which had been circulated that morning). Shoosmiths responded saying that the October draft had never been accepted, and that it would be in a position to circulate a revision that afternoon. That was indeed done by them on behalf of the buyer of FB256, and I believe that it is common ground between the parties that the draft contained the builder’s liquidated damages clause in the form of clause 16.3 providing for liquidated damages in the sum of 20%. There is no record in the evidence of any subsequent discussion between Benetti, HFW, Viare or Shoosmiths about clause 16.3 so far as the FB256 contract is concened, or the level of liquidated damages payable by the purchaser of that yacht (i.e Shoreacres). When HFW on 29 May 2008 responded to the draft, it referred to changes that had been agreed for FB250, but there was no discussion of clause 16.3.

There was however further discussion as regards the FB250 yacht. On 29 May 2008, the Russian lawyers for the buyer reverted with an updated version of the Discrepancy Report repeating the request for a 10% rather than 20% figure in the liquidated damages clause in that contract. That email was copied onto Shoosmiths and Viare, again in connection with FB250. On 2 June 2008, HFW responded as follows:

“Not agreed. If preferred we can revert to a more traditional clause whereby, on termination of the Contract, the Builder completes the yacht, sells to someone else to realise its actual loss, and then accounts to the Buyer for any surplus remaining. You need to recognise, however, that in this scenario there will be no accounting to the Buyer until after the yacht has been sold, or in a disputed case, until after an arbitration award has been published. The clause as it stands allows the Buyer to recover his instalments immediately, even in a disputed case, and subject only to the agreed liquidated damages, but Benetti are not willing to take any greater risk of loss and if the Buyer is unwilling to agree the clause as it is then we may have to revert to the more traditional solution. I should add that we have had this discussion on several occasions with buyers – after consideration they invariably prefer the clause as it is.”

HFW copied this to Shoosmiths and Viare, but in the context of the FB250 yacht. That is as far as the evidence of discussions as to clause 16.3 goes. The contract in respect of FB256 was signed some months later on 25 September 2008. It is not in dispute that the first instalment of 10% of the price was due on 17 October 2008, and was not paid. Some considerable time went by before the claimant exercised its right to terminate. By letter of 22 January 2010, the claimant said that over the past 15 months it had refrained from taking any formal action in the hope that the parties would be able to resolve the matter amicably. That had not proved possible, and it was left with no option but to terminate the contract pursuant to clause 16.1. The letter continues, “Clause 16.3 provides that, upon termination, we are entitled to retain and/or recover from you an amount equal to 20% of the Contract Price by way of liquidated damages. Taking into account the deposit of €500,000, you are obliged to pay us €7.1 million”. By letter of the same day, demand in the same sum was made on the defendant under his guarantee.

I now set out how the parties invite the court to view this evidence. The claimant submits that the negotiations for the two yachts proceeded “in tandem”, with amendments agreed in relation to FB250 being transposed into the FB256 contract. The important point for present purposes, it submits, is that in the period between March and June 2008 the parties’ agents debated at some length the question of whether the amount payable under the liquidated damages clause (clause 16.3 in the concluded contract) should be 10% or 20%. In its written submissions, the claimant also submitted that the knowledge acquired by Shoosmiths and Viare in the course of acting for the purchaser of FB250 can be attributed to the defendant, and that this adds to the force of its argument on commercial purpose. Reliance is placed on cases which establish that where an agent is a party’s “agent to know”, or the party has effectively “bought” that agent’s knowledge, then knowledge of the agent derived from acting for other principals can be imputed to the new principal. Alternatively, it is said to be a case in which the agent had a duty to communicate what they knew from outside the agency to the principal, and it can be inferred that that duty was discharged. These points on attribution of knowledge were not pursued in oral argument, and are at least in part fact-dependent issues that cannot in my view be resolved at the summary judgment stage. I will say no more about them.

The defendant submits that it is inaccurate to say that the negotiations in respect of the two yachts proceeded “in tandem”. He submits that matters negotiated in one transaction cannot simply be transposed into the other because the agents concerned happened to be the same. Broadly, I accept this submission. I agree that for present purposes, the claimant is asking the court to read too much into the evidence. On a summary judgment application, the court is not concerned to reach conclusions on disputed evidence, rather to proceed on the basis of facts that are clearly established. These appear to me to be as follows. At about the same time (insofar as material), the solicitors and yacht brokers retained for Shoreacres in relation to FB256 were independently retained for the purchaser of a similar yacht FB250. In the context of the latter, there was considerable discussion as to whether the amount of the liquidated damages clause should be reduced from 20% to 10% of the price, which the builder refused to do. Explanations were given as to the builder’s commercial reasoning in that respect, which I shall come back to later. There was no specific discussion of the liquidated damages clause in connection with FB256, though the parties’ lawyers would have been aware of the discussions in relation to the other contract when settling the terms of the FB256 contract. In the event, the parties agreed to a liquidated damages clause fixed at 20% of the contract price, on the basis that upon termination the builder would return the balance of sums received. This can be seen against the fact that the price was payable in instalments, and delivery was not due until 30 November 2011. The question is what (if anything) follows from this so far as the penalty point is concerned.

The defendant submits that the liquidated damages figure specified at clause 16.3 of the contract (viz. 20% of the purchase price) was not a genuine pre-estimate of the loss that Benetti would suffer upon termination of the contract; rather, it represented a penalty, designed to discourage Shoreacres from breaching its terms. Clause 16.3 is therefore, it submits, unenforceable. The defendant’s written submissions dealt primarily with the evidence, rather than why the clause should be treated as penal. He points out (rightly) that on a summary judgment application, it is for the claimant to show that the defence has no real (as opposed to fanciful) prospect of success. Though that is correct, because the burden of showing that a contractual provision is an unlawful penalty lies on the party claiming that it is (Murray v Leisureplay, ibid, [106], Clarke LJ) it seems to me that even at the summary judgment stage a defendant must do more than merely assert that a provision is a penalty. Mr N.G. Casey, counsel for the defendant, dealt with this in his oral argument, submitting that clause 16.3 is a penalty because at the time when the parties entered into the contract, they would never have considered that a loss even approaching 20% would be incurred in the event of termination. The deterrence, as he put it, is in the size of the amount payable, being €7.6 million.

He submits that in determining the question, the court will have to form a view as to the maximum possible loss that the parties would have expected to flow from any determination of the contract and the extent to which the stipulated figure for liquidated damages exceeded that maximum possible loss. Extensive disclosure, the defendant says, will be required as to the claimant’s order book in September 2008, the market generally for yachts of this size and specification, whether the yacht was to be built to a standard design, whether the parties would have expected that (in the event of termination) the yacht could be sold to another buyer, how long it would take to find another buyer (requiring consideration, it is said, of detailed evidence about the claimant’s past experiences in the event of default by a buyer), evidence as to the costs associated with finding a new buyer, whether the claimant might have expected to sell the yacht for a premium on the basis that there would be no need to wait for the full lead time before delivery, and what the financing costs of building the yacht would be without the benefit of stage payments (i.e. the instalments due but not paid under the Yacht Construction Contract). The defendant asserts that these are questions that need to be explored properly by reference to disclosure, factual evidence and expert evidence. Absent this evidence, the defendant submits, the Court is not in a position to consider this issue properly. This is a compelling reason why this matter should proceed to a full trial.

At this point, I should mention that shortly before the hearing the defendant produced a letter from a firm called Kerr Gilmour & Partners, described in their letterhead as “The Large Luxury Yacht Experts”. This letter expresses the opinion that, “Based solely on the information you have provided to me and our organisations knowledge of the luxury yacht market at the date of contract, I am of the opinion, on the balance of probabilities and at the time the parties entered into the contract, that a 20% charge was not a reasonable and legitimate estimate of the loss suffered by the Claimant in the event that the Defendant defaulted”. The claimant invites me to exclude this letter altogether because it was tendered so late, but that does not seem to me to be realistic on a summary judgment application. There are however a number of reasons why I can give little weight to this letter, the first of which is that it does not comply with the CPR requirements as to expert evidence. Nor does it explain the information on which the opinion expressed is based. It only answers the first part of the question on which an opinion was requested (the second being whether 20% was a punitive figure inserted solely to punish Mr Healey if he defaulted). Perhaps most important, no reasons are given for the opinion expressed. Without such reasons, the letter seems little more than an assertion.

On its part, the claimant’s evidence is concerned largely with the discussions about clause 16.3 that I have set out above. Shoreacres through Shoosmiths had had the rationale of the clause and the alternative explained to it, the claimant says, and chose this clause rather than the alternative. It is to be inferred, it is said, that it preferred the certainty and speedy resolution offered by the liquidated damages/refund clause. The claimant says that there is no evidence to suggest that the figure stipulated for is extravagant and unconscionable within the meaning of the case-law. It says that were this matter to proceed to trial, it could (and would if necessary) call more detailed evidence as to why the 20% figure was a genuine pre-estimate of loss.

Leaving on one side any inferences as to what Shoreacres may have preferred, which seem to me to raise factual questions, the claimant’s central submission is that the discussions which I have described above show that, objectively regarded, the liquidated damages clause had a clear commercial and compensatory justification akin to that which was recognised by the Court of Appeal in Murray—see for example at [74] and [76]. The amount payable was discussed in terms both of pre-estimate of loss and in terms of the broader commercial purpose of the clause, which is not solely a liquidated damages clause. As can be seen from the clause itself (it is submitted) aside from the provision for payment of 20% liquidated damages, there was another feature, namely a provision that in the event of termination all payments other than the 20% would be returned immediately. Thus if the contract was terminated after the third instalment, the third instalment would be returned at once. The alternative would have been that if the buyer defaulted the claimant might well continue to build the yacht to completion and then sell it, with any remaining sums being returned only after the sale when the extent of the loss (including the costs of resale) had been ascertained. Whereas the contract was entered into in September 2008, the contractual delivery date was 30 November 2011, so that the delay could be considerable. The clause is plainly not a deterrent, it is submitted, and that is the end of the matter.

There was no dispute as to the applicable law, some of which is cited above. I am content to adopt the defendant’s submissions in this respect. The classic definition of a penalty clause appears in the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co Limited v New Garage and Motor Co [1915] A.C. 79, at 86-87:

“The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage ... The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach... It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.”

In Lordsvale Finance Plc v Bank of Zambia [1996] QB 752, 762, Colman J explained the above test in the following terms:

“... whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred.”

On the other hand, (as the claimant points out) this does not imply that if the comparison between the amount payable on breach and the loss that might be sustained on breach discloses a discrepancy, it follows that the clause is a penalty. A particular clause might be commercially justifiable provided that its dominant purpose was not to deter the other party from breach (see Cine Bes Filmcilik VE Yapimcilik v United International Pictures [2004] 1 C.L.C. 401 at [15], Mance LJ, Murray v Leisureplay, ibid, at [50], Arden LJ, and [106], Clarke LJ). As Lord Woolf said in Philips Hong Kong Ltd v AG of Hong Kong (1993) 61 BLR 41 at 59, the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. At least in connection with commercial contracts, great caution should be exercised before striking down a clause as penal (Murray v Leisureplay, ibid, at [114], Buxton LJ), though the circumspection that the courts show before striking down a clause when the parties are of equal bargaining power does not displace the rule that the clause must be a genuine pre-estimate of damage (Lansat Shipping Co Ltd v Glencore Grain BV [2009] 2 C.L.C. 465 at [33], Lord Clarke MR).

Besides its principal point set out above, the claimant has two other arguments as regards penalty. First, it is suggested that an estoppel by convention arises on the basis the parties in fact agreed that clause 16.3 was not a penalty. This in my opinion raises factual issues completely unsuitable for determination on a summary judgment application.

Second, an argument is based on clause 2(f) of the guarantee by which the liability of the guarantor was not to be “impaired, diminished, discharged or released by reason or in consequence of … the irregularity, illegality, unenforceability or invalidity in whole or in part of the Yacht Construction Contract”. So, it is submitted, the liabilities of principal debtor and guarantor are not co-extensive under these arrangements, and the defendant guarantor is liable for the sum in question, even if Shoreacres was not.

It is correct that by clear drafting a guarantor’s liability may be other than co-extensive with that of the principal debtor, but I do not think that clause 2(f) (a standard clause in guarantee contracts) would be apt to impose on a guarantor a liability for a sum that is irrecoverable against the principal debtor where the reason for it being irrecoverable is that the sum in question is a penalty. The rule against penalties is ultimately based on public policy. In this regard, I would follow the decision of Clarke J in Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1 at p.21D, a New South Wales case. He held, and I agree, that it would be contrary to principle to allow the indirect enforcement of a claim for a penalty in this manner. There is a further reason why the claimant cannot in my judgment rely on clause 2(f) of the guarantee. On appeal to the New South Wales Court of Appeal, Citicorp Australia was decided on the basis that, since a penalty clause does not bring into existence any obligation on the part of the debtor, there is no relevant liability covered by the guarantee, and nothing for the protective provisions in the guarantee to operate upon (ibid at page 40, Priestly JA). Such a conclusion depends on the terms of the guarantee in question. Here, the claimant argues that since the defendant’s guarantee extends to sums of money “arising out of any breach or termination”, even if clause 16.3 is a penalty so that the stipulated amount is irrecoverable against the principal debtor, the sum in question remains a sum of money “arising out of a breach or termination”, and hence payable by the guarantor. I reject this proposition for the reasons given by the defendant. The Guarantee provides that the defendant guarantees “all of the Buyer’s obligations under or pursuant to the Yacht Construction Contract or arising out of any breach or termination thereof”. If the clause 16.3 sum is a penalty, it does not give rise to an obligation, whether arising out of any breach or termination, or otherwise. Since the Guarantee is limited to the “obligations” of Shoreacres, if Shoreacres has no obligation under the contract, the defendant has no obligation under the Guarantee. So I reject the clause 2(f) point as well.

I come therefore to the main issue between the parties, which is whether it is arguable that clause 16.3 is a penalty, in which case the claimant is not entitled to summary judgment. The point made by Mr Casey, who has argued the case well for the defendant, is that the effect of clause 16 is that the builder may terminate the contract by reason of the buyer’s failure to make payment when due. Thereupon, 20% of the contract price is payable, which, he submits, cannot have been foreseen by the parties as conceivably representing the builder’s loss when the contract was entered into. Accordingly, the function of the clause was deterrent, and it is to be treated as a penalty on ordinary principle. He relies on the presumption referred to by Lord Dunedin in Dunlop Pneumatic Tyre at p. 87 that it is a penalty where a single lump sum is payable by way of compensation on the occurrence of one or more of several events, some of which may occasion serious and others trifling damage. He does however recognise that this is not a “powerful presumption” (as Lord Dunedin makes plain in the passage cited).

In my judgment, Ms Sara Cockerill, counsel for the claimant, is right to say that these submissions do not take account of the provisions of clause 16.3 as a whole. The clause places an obligation on the buyer, but it also places an obligation on the builder, namely an obligation “promptly [to] return the balance of sums received from the Buyer together with the Buyer’s supplies if not yet installed in the Yacht”. The contract, it will be recalled, was a construction contract with scheduled delivery some three years after the contract date. Over that period of time, the price became payable by instalments. The purpose of the clause was to strike, or seek to strike, a balance between the interests of the parties should the builder lawfully terminate upon the buyer’s breach.

The claimant relies on the law as stated in Cine Bes Filmcilik, ibid, at [15]. Citing Lordsvale, Mance LJ pointed out that a dichotomy between a genuine pre-estimate of damages and a penalty does not necessarily cover all possibilities. There are clauses, he says, which may operate on breach, but which fall into neither category, and they may be commercially perfectly justifiable. As Clarke LJ put it in Murray v Leisureplay at [106], a particular clause may be commercially justifiable, provided that its dominant purpose is not to deter the other party from breach. The claimant submits that the evidence shows that clause 16.3 had a clear commercial and compensatory justification, and was not merely a liquidated damages clause, but provided for payments to the buyer also, was not a deterrent, and falls within these principles.

In that regard, the claimant relies on the exchanges between the parties to the contracts in relation to FB250 and FB256 that I have set out above. As I have said, the parties accept that this evidence is admissible so far as it goes to the reasons the parties had for agreeing the clause in question. The defendant accepted in oral submissions that the HFW email of 2 June 2008 which I have set out at paragraph 10 above is admissible on that basis, and he was right to so do so in my view. So far as the respective position of the parties is concerned, reference is made in it to the advantage of an immediate refund to the buyer. It shows that an alternative provision was held out by the builder, namely a clause based on actual loss, but with the attendant possibility of considerable delay in reimbursement.

In the event (and for whatever reason), the buyer in this case (Shoreacres) agreed to clause 16.3 as proposed by the builder. In my judgment, the evidence clearly shows that the purpose of the clause was not deterrent, and that it was commercially justifiable as providing a balance between the parties upon lawful termination by the builder. I do not accept the defendant’s submission that the court has to form a view as to the maximum possible loss that the parties would have expected to flow from any determination of the contract and the extent to which the stipulated figure for liquidated damages exceeded that maximum possible loss, and that since it cannot do so without extensive disclosure, and factual and expert evidence, the defendant must be permitted to defend the claim. This was a contract for the construction and sale of a very expensive yacht, aptly described in the evidence as a “super-yacht”. Both parties had the benefit of expert representation in the conclusion of the contract. The terms, including the liquidated damages clause, were freely entered into. As the authorities referred to above show, in a commercial contract of this kind, what the parties have agreed should normally be upheld. In my view, the clause in question is not even arguably a penalty, and is enforceable in its terms. It follows that the claimant is entitled to summary judgment for €7.1 million being 20% of the contract price of €38 million less €0.5 million paid by way of deposit.

In the light of my decision on the penalty point, the claimant’s alternative case for payment of the first instalment due under the contract does not arise. However I should express my conclusions in that respect. The sum in question is €3.3 million, being the first instalment of 10% of the contract price less €0.5 million paid by way of deposit. The parties’ submissions were narrowly confined and were as follows

It is not in dispute that the first instalment of the price was due on 17 October 2008, and was not paid, and that the claimant was accordingly entitled to terminate the contract. The claimant says that it must be entitled to that sum because it fell due before the contract was terminated. The defendant submits that the claimant exercised its right to terminate the contract pursuant to clause 16.1. The exercise of this right, it is said, brought to an end all other accrued and future rights under the contract save those provided for in clause 16. Thus, the defendant submits, it thereby extinguished Shoreacres’ obligation to pay instalments of the purchase price and replaced them with the obligation to pay damages in accordance with Clause 16.3 (although the defendant argues that this clause is unenforceable as a penalty).

In oral argument, Mr Casey made it clear that the defendant’s point in this respect is that, upon failure to pay the first instalment, the claimant had a choice. It could either treat the contract as repudiated and seek to recover the first instalment, or it could exercise its contractual right to terminate and claim liquidated damages pursuant to clause 16.3. Having elected to do the latter by its letter of 22 January 2010, it could not assert what is says is a contradictory right to the first instalment. Reliance is placed on Dalkia Utilities Services plc v Celtech International Ltd [2006] 1 Lloyd’s Rep 599, where at [144] Christopher Clarke J said that the fact that service of a contractual notice of termination is not inconsistent with the acceptance of repudiation does not mean that in all cases such a notice amounts to such an acceptance. If the notice makes explicit reference to a particular contractual clause, and nothing else, that may, in context, show that the giver of the notice was not intending to accept the repudiation and was only relying on the contractual clause.

I do not think that the present case is one of exclusive reliance on the contractual clause, or that, in context, the claimant is adopting a contradictory position. It is not in dispute that Shoreacres’ failure to pay the first instalment was a repudiatory breach, nor that the claimant terminated the contract on the basis of failure to pay the first instalment. One has to see what happened next to place matters in context. The defendant asserted that the contractual amount payable upon termination was irrecoverable as a penalty. It was in response to that assertion that the claimant raised its alternative case that even if the penalty point is correct, there is a liability for the lesser sum that had already fallen due prior to termination. There is in my view nothing contradictory about that position, and had I not held that clause 16.3 was enforceable, I would have held that there was no reason why the claimant should not be able to claim for the first instalment.

On that basis, the position falls within the decision in Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129, HL, which (like the present case) concerned a claim under a guarantee of the obligations of the buyer under a contract to build and sell a ship. The buyer failed to pay the second instalment due under the contract, and the builder terminated the contract. One of the questions that arose for decision was whether or not the termination extinguished the buyer’s accrued right to the second instalment, or whether the builder was still entitled to claim this instalment. On this question, a majority of the House of Lords held that the builder’s right to the instalment was not affected by the termination of the shipbuilding contract. Mr Casey has pointed out that the provision that applied in the event of cancellation in that case differed materially from clause 16.3 in the present case. But once one accepts (as I have) that an alternative claim based on repudiatory breach is not precluded by the claim under the liquidated damages clause challenged as a penalty, it seems to me that the point of principle applied in Hyundai applies here also. As Dixon J put it in McDonald v. Dennys Lascelles Ltd (1933) 48 C.L.R. 457, 476-477:

“When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected.”

This statement of principle was approved in Johnson v. Agnew [1980] A.C. 367, HL, at p.396, and referred to with approval in Hyundai itself by Lord Edmund Davies at p.1141F-H. Had I been in the defendant’s favour on the penalty point therefore, I would nevertheless have held that there was no defence to the claim for the first instalment which had accrued prior to termination.

The claimant is entitled to summary judgment. There are issues as to interest which will be resolved together with any other outstanding matters. I am grateful to the parties for their assistance.