Reardon Smith Line Ltd v Hansen-Tangen
[1976] 3 All ER 570(Judgment by: Lord Wilberforce)
Between: Reardon Smith Line Ltd
And: Hansen-Tangen
Judges:
Lord WilberforceViscount Dilhorne
Lord Simon of Glaisdale
Lord Kilbrandon
Lord Russell of Killowen
Subject References:
SHIPPING
Charterparty
Description of vessel
Vessel not in existence at date of charterparty
Vessel identified by yard number and name of builders
Vessel built by different builders with different yard number under sub-contract
Original yard number used on export papers
Sub-contract builders a subsidiary of builders named in charterparty
Whether words identifying vessel by reference to yard number and builders part of contractual description
Whether charterers entitled to refuse to take delivery of vessel on ground it failed to comply with description
Case References:
Behn v Burness - (1863) 3 B & S 751; 2 New Rep 184; 32 LJQB 204; 8 LT 207; 9 Jur NS 620; 122 ER 281; Ex Ch, 41 Digest (Repl) 182, 220
Cargo Ships 'El-Yam' Ltd v Invoer-en Transport Onderneming 'Invotra' NV - [1958] 1 Lloyd's Rep 39
Cehave NV v Bremer Handelsgesellschaft mbH - [1975] 3 All ER 739; [1976] 1 QB 44; [1975] 3 WLR 447; [1974] 2 Lloyd's Rep 445, CA; Digest (Cont Vol D) 784, 510a
Charrington & Co Ltd v Wooder - [1914] AC 71; 84 LJKB 220; 110 LT 548, HL; 39 Digest (Repl) 499, 452
Couchman v Hill - [1947] 1 All ER 103; [1947] KB 554; [1948] LJR 295; 176 LT 278, CA; 2 Digest (Repl) 348, 333
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd - [1962] 1 All ER 474; [1962] 2 QB 26; [1962] 2 WLR 474; [1961] 2 Lloyd's Rep 478, CA; 41 Digest (Repl) 363, 1553
Hvalfangerselskapet Polaris Aktieselskap v Unilever Ltd, Hvalfangerselskapet Globus Aktieselskap v Unilever Ltd - (1933) 39 Com Cas 1, HL; 39 Digest (Repl) 490, 384
Lewis v Great Western Railway Co - (1877) 3 QBD 195; 47 LJQB 131; 37 LT 774, CA; 8(1) Digest (Reissue) 60, 350
Moore & Co and Landauer & Co, Re - [1921] 2 KB 519; [1921] All ER Rep 466; 90 LJKB 731; 125 LT 372, CA; 39 Digest (Repl) 528, 660
Prenn v Simmonds - [1971] 3 All ER 237; [1971] 1 WLR 1381; HL, 17 Digest (Reissue) 359, 1264
Schuler (L) A G v Wickman Machine Tool Sales Ltd - [1973] 2 All ER 39; [1974] AC 235; [1973] 2 WLR 683; [1973] 2 Lloyd's Rep 53, HL; Digest (Cont Vol D) 123, 3613a
Utica City National Bank, The v Gunn - (1918) 222 NY 204; 118 N E Reporter 607
Judgment date: 7 October 1976
Judgment by:
Lord Wilberforce
My Lords, these appeals arise out of a charterparty and a sub-charterparty both relating to a medium sized newbuilding tanker to be constructed in Japan. By the time the tanker was ready for delivery the market had collapsed, owing to the oil crisis of 1974, so that the charterers' interest was to escape from their contracts by rejecting the vessel. The ground on which they hoped to do so was that the vessel tendered did not correspond with the contractual description. Both charterparties were on the well-known form Shelltime 3. The result of the appeal depends primarily on the view taken of the sub-charterparty between the appellants in the first appeal ('Reardon Smith') and the respondents in that appeal ('Hansen-Tangen'), but, for the issue to be understood, it is necessary first to state some dates.
In 1972 the respondents in the second appeal ('Sanko'), a Japanese company, formed the 'Sanko plan' which was a project for the construction in Japanese yards of some 50 tankers of about 80,000 tons each which would be placed on charter by Sanko. At this time the market was strong. Before any vessels were actually built or even started Sanko arranged a number of charters, called 'fixtures', defining the contractual terms of hire, the actual ships covered by each of them to be nominated later by Sanko. One such charter was that between Sanko and Hansen-Tangen ('the intermediate charter'). It was dated 15 August 1972. Clause 41 contained the following (emphasis supplied):
'This Charter Party, subject to what is hereinafter stated, is for a motor tank vessel to be built at a yard in Japan to be declared by Owners [ie Sanko], together with the applicable Hull Number for the vessel within 30 June, 1973 ...'
Clause 42 conferred an option (not exercised) to nominate a slightly smaller vessel, 'Owners to declare name of shipyard and Hull Number ... at the time such option ... is exercised.' The description of the vessel-warranted by the owners-was (as provided by cl 24) set out in Form B, which is a standard form giving very detailed particulars about the ship, its equipment and performance. It is to be assumed for the purposes of these appeals that the vessel tendered complied in all respects with these requirements, and that therefore the charterers got precisely the kind of ship they wanted of precisely the 'description' stipulated.
On 28 March 1973, by which time progress had been made with the plan, Sanko as charterers entered into a charterparty with a Liberian company called Sculptor Shipping Ltd ('Sculptor') and as 'Owners' for 'the good newbuilding tank vessel called Osaka Shipbuilding Co Ltd hull No 354 until named'. This charterparty also contained a Form B in the same form as in the intermediate charter. Osaka Shipbuilding Co Ltd ('Osaka') is a substantial and reputable Japanese shipbuilding company with a yard at Osaka, which, however, could not build ships exceeding 45,000 tons. (The vessel contracted for was of about 88,000 tons.) So at this point, as the document shows, the vessel to be taken by Sanko, and passed on by Sanko to charterers from Sanko had gained an identity, not a physical identity, since construction had not yet started, but an identity in contracts and in order books. Following on this, Sanko nominated the vessel to perform the intermediate charter. This was done by an addendum to that charterparty dated 10 August 1973, which also altered the duration of the intermediate charter and the hire payments to be made under it. The nomination was made in the following terms:
'With reference to Clause 41 and 42 of [the intermediate charter] the vessel to perform this Charter is to be built by Osaka Shipbuilding Co. Ltd and known as Hull No. 354, until named, and shall have a deadweight of about 87,600 tons [other details follow].'
Soon after this, on 12 October 1973, the sub-charter between Hansen-Tangen and Reardon Smith was signed. I set out the preamble having italicised the words which were added to the printed form.
'It is this day agreed between H E Hansen-Tangen of Kristiansands, Norway (hereinafter referred to as "Owners") being Disponent Owners of the good Japanese flag (Subject to Clause 41) Newbuilding motor tank vessel called Yard No 354 at Osaka Zosen [shipbuilding] (hereinafter referred to as "the vessel") described as per clause 24 hereof and Reardon Smith Line Limited of Cardiff (Sir William Reardon Smith and Sons Ltd of Cardiff-Managers) (hereinafter referred to as "Charterers").'
The charterparty contained a cl 24 and Form B similar to the intermediate charter.
Parallel with these charter agreements were a number of contracts and arrangements concerning the building of the vessel. It is not necessary to specify these in detail. Osaka was, as I have mentioned, unable to build a vessel of 80,000 tons in its Osaka yard so it set about arranging for a new yard to be built at Oshima, which is on the island of Kyushu about 300 miles from Osaka. The method chosen was for Osaka to enter into a joint venture with two companies of the powerful Sumitomo group followed by the formation of a new company called Oshima Shipbuilding Ltd ('Oshima') in which Osaka had a 50 per cent interest and the two Sumitomo companies the other 50 per cent. Oshima took over responsibility for building the new yard. A series of contracts was entered into by which the Liberian company Sculptor ordered the vessel from a Sumitomo company, Sumitomo Shoji Kaisha Ltd ('SSK'), which agreed to build it by sub-contract with Osaka; SSK placed a shipbuilding contract with Osaka; and Osaka placed a shipbuilding (sub) contract with Oshima. As mentioned above, it was Sculptor from whom Sanko chartered the vessel on 28 March 1973. As regards Oshima, a large part of its work force and a preponderant part of its expert managerial staff was provided on secondment from Osaka. The vessel to be constructed was to be numbered 004 in Oshima's books but also 354 in Osaka's books and in export documents. The chain, therefore, was (1) Oshima agreed to construct the vessel under contract with Osaka, (2) Osaka contracted with SSK to build and deliver the vessel, (3) SSK agreed to build the vessel by Osaka and to sell it to Sculptor, (4) Sculptor agreed to hire it to Sanko, (5) Sanko agreed to hire it to Hansen-Tangen, (6) Hansen-Tangen agreed to hire it to Reardon Smith. In all these contracts the vessel was described as No 354 in connection with Osaka.
These being the background facts, the whole case, as regards the first appeal, turns, in my opinion, on the long italicised passage in the sub-charter set out above which, for convenience of reference I repeat: 'the good Japanese flag (Subject to Clause 41) Newbuilding motor tank vessel called Yard No 354 at Osaka Zosen'. I shall refer to this as the 'Box' since it appears enclosed in a typed box on the document. The contract is in the English language and (cl 40) is to be construed in accordance with English law. But it has been sought to introduce, as an aid to construction, a considerable amount of evidence as to Japanese usages and practice, some of which was in fact taken into account by the Court of Appeal. To decide how far this is legitimate one must make a distinction. When it comes to ascertaining whether particular words apply to a factual situation or, if one prefers, whether a factual situation comes within particular words, it is undoubtedly proper, and necessary, to take evidence as to the factual situation. Thus once one has decided what is meant by 'Yard No 354', or 'to be built at a Yard', it is proper by evidence to establish the characteristics of particular yards, the numbering used at those yards and the 'building' which may have been done, in order to answer, Yes or No, the question whether the contractual requirements have been met. There is no difficulty, in law, about this part of the case.
It is less easy to define what evidence may be used in order to enable a term to be construed. To argue that practices adopted in the shipbuilding industry in Japan, for example as to sub-contracting, are relevant in the interpretation of a charterparty contract between two foreign shipping companies, whether or not these practices are known to the parties, is in my opinion to exceed what is permissible. But it does not follow that, renouncing this evidence, one must be confined within the four corners of the document. No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. I give a few illustrations. In The Utica City National Bank v Gunn the New York State Court of Appeals had to consider the meaning of 'loans and discounts' in a contract of guaranty. The judgment of Cardozo J (222 NY 204 at 208) contains this passage:
'The proper legal meaning, however, is not always the meaning of the parties. Surrounding circumstances may stamp upon a contract a popular or looser meaning. The words "loans and discounts" are not so clear and certain that circumstances may not broaden them to include renewals. They often have that meaning in the language of business life ... To take the primary or strict meaning is to make the whole transaction futile. To take the secondary or loose meaning, is to give it efficacy and purpose. In such a situation, the genesis and aim of the transaction may rightly guide our choice. 4 Wigmore on Ev. § 2470; Stephen, Digest of Law of Ev., art. 91, subds. 5 and 6.'
In Prenn v Simmonds it was necessary to construe 'profits available for dividend'. The judgment in that case, following Cardozo J, relied on the commercial background and the objective aim of the transaction to give meaning to that phrase. In L Schuler A G v Wickman Machine Tool Sales Ltd the critical word was 'condition'. Their Lordships interpreted this word (unusually) in the light of a special business situation.
It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively-the parties cannot themselves give direct evidence of what their intention was-and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly, when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties. It is in this sense and not in the sense of constructive notice or of estopping fact that judges are found using words like 'knew or must be taken to have known' (see, for example, the well-known judgment of Brett LJ in Lewis v Great Western Railway Co ((1877) 3 QBD 195 at 207).
This proposition can be illustrated by some authoritative judgments. In Hvalfangerselskapet Polaris Aktieselskap v Unilever Ltd the different emphasis placed by individual members of this House on knowledge, Lord Atkin (39 Com Cas 1 at 3) not referring to it, Lord Russell of Killowen (39 Com Cas 1 at 19) mentioning it as an element, Lord Macmillan (39 Com Cas 1 at 25) distinguishing between objective and subjective elements, seems to show that mutual knowledge of extrinsic circumstances, while relevant, is not an essential condition of the admissibility of factual evidence. Particularly interesting are the speeches in Charrington & Co Ltd v Wooder, the question being what was meant by 'fair market price'. Viscount Haldane LC ([1914] AC 71 at 77) used once more the expression 'circumstances which the parties must be taken to have had in view'. Lord Kinnear, after explaining that the term had no fixed meaning, said ([1914] AC 71 at 80):
'Words of this kind must vary in their signification with the particular objects to which the language is directed ... it may be necessary to prove the relation of the document to the facts; and I take it to be sound doctrine that for this purpose evidence may be given to prove any fact to which it refers, or may probably refer ...'
And Lord Dunedin ([1914] AC 71 at 82) said that-
'in order to construe a contract the Court is always entitled to be so far instructed by evidence as to be able to place itself in thought in the same position as the parties to the contract were placed, in fact, when they made it-or, as it is sometimes phrased, to be informed as to the surrounding circumstances.'
I think that all of their Lordships are saying, in different words, the same thing-what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were. All of these opinions seem to me implicitly to recognise that, in the search for the relevant background, there may be facts, which form part of the circumstances in which the parties contract, in which one or both may take no particular interest, their minds being addressed to or concentrated on other facts, so that if asked they would assert that they did not have these facts in the forefront of their mind, but that will not prevent those facts from forming part of an objective setting in which the contract is to be construed. I shall show that this is so in the present case.
So I ask what was the commercial purpose of these charterparties and what was the factual background against which they were made? The purpose is clear: it was to make available (1) to Hansen-Tangen and (2) to Reardon Smith a medium sized tanker suitable for use as such, this tanker not being in existence, or even under construction, at the date of either charter and, at the date of the intermediate charter, not even the subject of contracts made by the supplying company. The vessel was to be constructed in a Japanese yard and made available on charter to Sanko as part of a programme. At the date of the sub-charter the vessel was identified in contracts for its construction in Japan and had a serial number. In order to ensure that the tanker was suitable for its purpose, a detailed specification was drawn up, by way of a warranted description with which, of course, the vessel must strictly comply. In addition, since at the time of either charterparty the vessel was not in existence or under construction, some means had to be agreed on for identifying the particular vessel-one out of a programme-which would form the subject-matter of the charters. This was indispensable so as to enable those committing themselves to hire the vessel, to sub-hire it, if they wished, and if necessary to arrange finance. This necessary identification was to be effected by nomination, by Sanko in the first place and then by Hansen-Tangen.
The text of the charterparties confirms beyond doubt that this was what was intended and done. The preamble, in the Shelltime 3 form, provides for the insertion of a name-'being owners of the good ... tank vessel called ... ' The box insertion in the sub-charter was made in this place-'called Yard No 354 at Osaka Zosen'. The intermediate charter, entered into before Sanko had nominated any vessel, provided in its preamble-instead of 'called ... '-for a declaration by the owners together with the hull number, and the addendum, entered into after Sanko had nominated, provided 'to be built by Osaka Shipbuilding Co Ltd and known as Hull No 354, until named'. What is vital about each of these insertions is that they were simple substitutes for a name, serving no purpose but to provide a means whereby the charterers could identify the ship. At the dates when these insertions were made no importance could have been attached to the matters now said to be so significant; they were not a matter of negotiation, but of unilateral declaration. What is now sought is to elevate them into strict contractual terms in the nature of 'conditions'.
The appellants sought, necessarily, to give to the 'box' and the corresponding provision in the intermediate charter contractual effect. They argued that these words formed part of the 'description' of the future goods contracted to be provided, that, by analogy with contracts for the sale of goods, any departure from the description entitled the other party to reject, that there were departures in that the vessel was not built by Osaka and was not Hull No 354. I shall attempt to deal with each of these contentions.
In the first place, I am not prepared to accept that authorities as to 'description' in sale of goods cases are to be extended, or applied, to such a contract as we have here. Some of these cases either in themselves (Re Moore & Co and Landauer & Co) or as they have been interpreted (eg Behn v Burness) I find to be excessively technical and due for fresh examination in this House. Even if a strict and technical view must be taken as regards the description of unascertained future goods (eg commodities) as to which each detail of the description must be assumed to be vital, it may be, and in my opinion is, right to treat other contracts of sale of goods in a similar manner to other contracts generally, so as to ask whether a particular item in a description constitutes a substantial ingredient of the 'identity' of the thing sold, and only if it does to treat it as a condition (see Couchman v Hill ([1947] 1 All ER 101 at 105, [1947] KB 554 at 559), per Scott LJ). I would respectfully endorse what was recently said by Roskill LJ in Cehave NV v Bremer Handelsgesellschaft mbH ([1975] 3 All ER 739 at 756, [1976] 1 QB 44 at 71):
'In principle it is not easy to see why the law relating to contracts for the sale of goods should be different from the law relating to the performance of other contractual obligations, whether charterparties or other types of contract. Sale of goods law is but one branch of the general law of contract. It is desirable that the same legal principles should apply to the law of contract as a whole and that different legal principles should not apply to different branches of that law.'
And similarly by Devlin J in Cargo Ships 'Ei-Yam' Ltd v Invoer-en Transport Onderneming 'Invotra' NV ([1958] 1 Lloyd's Rep 39 at 52). The general law of contract has developed, along much more rational lines (eg Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd), in attending to the nature and gravity of a breach or departure rather than in accepting rigid categories which do or do not automatically give a right to rescind, and if the choice were between extending cases under the Sale of Goods Act 1893 into other fields, or allowing more modern doctrine to infect those cases, my preference would be clear. The importance of this line of argument is that Mocatta J and Lord Denning MR used it in the present case so as to reject the appellants' argument on 'description' and I agree with them. But in case it does not appeal to this House, I am also satisfied that the appellants fail to bring the present case within the strictest rules as to 'description'.
In my opinion, the fatal defect in their argument consists in their use of the words 'identity' or 'identification' to bridge two meanings. It is one thing to say of given words that their purpose is to state (identify) an essential part of the description of the goods. It is another to say that they provide one party with a specific indication (identification) of the goods so that he can find them and if he wishes sub-dispose of them. The appellants wish to say of words which 'identify' the goods in the second sense, that they describe them in the first. I have already given reasons why I can only read the words in the second sense. The difference is vital. If the words are read in the first sense, then, unless I am right in the legal argument above, each element in them has to be given contractual force. The vessel must, as a matter of contract, and as an essential term, be built by Oska and must bear their yard number 354; if not, the description is not complied with and the vessel tendered is not that contracted for. If in the second sense, the only question is whether the words provide a means of identifying the vessel. If they fairly do this, they have fulfilled their function. It follows that if the second sense is correct, the words used can be construed much more liberally than they would have to be construed if they were providing essential elements of the description.
The two significant elements (whether in the 'box', or in the intermediate charter) are (i) the yard number 354, (ii) the expression 'built by Osaka Shipbuilding Co Ltd'. (These words do not appear in the 'box' but I will assume, very much in the appellants' favour, that the 'box' has the same meaning as if the word 'built' were used.) The appellants at one time placed great stress on the yard number provision. They contended that by using it the 'owners' assumed an obligation that the vessel should bear a number which would indicate that it would be constructed in the yard, where that number was appropriate, in sequence after vessels bearing earlier yard numbers (350-353). But this argument broke down in face of the fact, certainly known to Sanko which used and introduced the number into the charterparties, that the sequence through 354 was the sequence used at Osaka's yard at Osaka, which yard could not construct the vessel. Thus the use of the yard number for the contracted vessel must have had some other purpose than indicating construction at a particular yard. This turns the argument against the appellants for it shows the words to be 'labelling' words rather than words creating an obligation.
So the question becomes simply whether, as a matter of fact, it can fairly be said that-as a means of identification-the vessel was 'Yard No. 354 at Osaka Zosen' or 'built by Osaka Shipping Co Ltd and known as Hull No. 354, until named'. To answer this, regard may be had to the actual arrangements for building the vessel and numbering it before named. My Lords, I have no doubt, for the reasons given by the Court of Appeal, that an affirmative answer must be given. I shall not set out the evidence which clearly makes this good. The fact is that the vessel always was Osaka Hull No 354-though also Oshima No 004-and equally it can fairly be said to have been 'built' by Osaka as the company which planned, organised and directed the building and contractually engaged with Sculptor to build it, though also it could be said to have been built by Oshima. For the purpose of the identificatory clause, the words used are quite sufficient to cover the facts. No other vessel could be referred to: the reference fits the vessel in question.
There are other facts not to be overlooked. (1) So long as the charterers could identify the nominated vessel they had not the slightest interest in whatever contracting or sub-contracting arrangements were made in the course of the building, a fact which no doubt explains the looseness of the language used in the 'box'. (2) In making the arrangements they did for building the vessel, Osaka acted in a perfectly straightforward and open manner. They cannot be said to be substituting one vessel for another; they have not provided any ground on which the charterers can claim that their bargain has not been fulfilled. The contracts all down the chain were closely and appropriately knitted into what Osaka did. (3) If the market had risen instead of falling, it would have been quite impossible for Osaka or Sculptor, or Sanko, to refuse to tender the vessel in accordance with the charters on the ground that it did not correspond with that contracted for. No more on a falling market is there, in my opinion, any ground on which the charterers can reject the vessel. In the end I find this a simple and clear case.
I would dismiss both appeals. Hansen-Tangen must pay the costs of the second appeal and Reardon Smith must pay the costs of the first appeal including the costs which Hansen-Tangen has to pay to Sanko under the second appeal.