LORD PENROSE
The pursuers, F., are shipbuilders. They have a shipyard at Port Glasgow
on the South side of the River Clyde. The defenders are members of a
group with a marine engineering facility at Heidenheim in Germany. In
1994 the defenders' marine engineering business was a division of J.
M. V. GmbH. That company was dis-aggregated in October, 1995. It is
admitted that the first defenders, V. H. GmbH & Co., KG, succeeded to
the whole rights and obligations of J. M. V. GmbH. For present purposes
it is unnecessary to have regard to the relationships among them and the
other defenders. It was agreed that the defenders might, at this stage
in the case, be dealt with compendiously as "V.". The V. companies are
domiciled in Germany.
V. supplied F. with two propeller systems of V. Schneider Type 32G
VII-200 for incorporation into two tugs ordered by S. T. Limited. There is
a dispute about the delivery and performance of the propeller systems.
F. aver that the first of the two vessels to be constructed failed its trials,
in respect that the specified bollard pull was not achieved. Modifications
were carried out at the expense of V., but there was a further failure. The
hull of the vessel was modified, but it again failed its trials. The hull of the
second vessel was modified at construction. It too failed its trials. Further
modifications were then made to both vessels at the expense of V.. In
July, 1996, the bollard pull was still below specification, but S. accepted
delivery. The delivery dates achieved for the vessels were respectively
six and four months late. F. raised the present action for damages
alleging breach of contract by V.. In particular, F. focus on allegations
of delay arising from the faulty design of the propeller systems. The
claims fall into two categories. There are claims for losses attributable
to late performance of V.'s duty to achieve the specified standards of
performance. And there are claims for indemnity in respect of loss and
expense attributable to V.'s failure to perform design and manufacturing
obligations. The claims for delay are quantified by reference to liquidated
damages paid under F.'s contract with S., bank interest foregone on
instalments withheld by S., and certain expenses and costs. There are
loss and expense claims based on V.'s failure to meet specification which
comprise repeat fees paid to Lloyd's, additional pilotage and tugs, repeat
bollard pull tests, transport costs, and re-setting of the tugs' magnetic
compasses. The defenders contend that the Court of Session does not
have jurisdiction to entertain the action. Preliminary proof was allowed to
determine that question.
F. contend that the dispute which is at the heart of the action is a matter
relating to contract under and in terms of Article 5 (1) of the Brussels
Convention on Jurisdiction and the Enforcement of Judgments in Civil
and Commercial Matters, 1968, incorporated into domestic law by
the Civil Jurisdiction and Judgments Act, 1982. They contend that the
contractual obligations in question included V.'s obligation to deliver
the goods ordered conform to contractual specification and guaranteed
quality, and their obligation to indemnify them in respect of all loss,
damage or expense suffered by them in consequence of V.'s negligence
or breach of duty. They contend further that the place of performance
of V.'s obligations in respect of timeous delivery of goods conform to the
contractual specification was Scotland. They contend that Scots law is the
applicable law of the contract in terms of the Contracts (Applicable Law)
Act, 1990 and the Rome Convention on Contractual Obligations, 1980 in
respect that the place of characteristic performance of the contract was
Scotland, and in any event because the parties had agreed that Scots
law was the governing law of the contract. Lastly, they contend that in
terms of the internal rules of Scots international private law, the place
of performance of each of the obligations relied on was Scotland. The
critical issues of fact at the proof turned on the evidence of those involved
in negotiations relating to the supply by V. of the two propeller systems.
Mr Richard De., Mr Ian Th., and Mr Kenneth Fu. gave evidence of the
parts they played in the negotiations on behalf of F.. Dr Jens Ba. and Mr
Stephen Ta. were the principal witnesses led for V. in relation to those
matters. At the date of the proof, Mr De. was a director and the general
manager of F.. In October, 1994, he was a director and the secretary of
the company. Mr Th. was appointed F.'s commercial manager in 1993 and
remained in that post at the date of the proof. Mr Fu. was at all material
times employed as a naval architect by the company. Dr Ba. was a naval
architect, and in October, 1994 was the project and sales manager of
V.'s marine technology department. Mr Stephen Ta. was a partner in
V.'s United Kingdom agents, E. C. Goldsworthy & Co. The credibility and
reliability of the evidence of these witnesses came to be crucial to the
resolution of the factual issues which arose at the proof.
…V. and F. had entered into a number of earlier contracts for the supply of
V. propeller systems over a long period. The earliest transaction brought
to my attention was in 1938-39. I was referred to a contract for the
supply of two water tractors in December 1981 and January, 1982…. F.
issued orders to V. on 7 June, 1990. V. responded with their own style
of order acknowledgement form dated 5 July, 1990. The 1992 contract
related to a double ended ferry for R. F. line, yard number 606. A similar
exchange of documents took place. It would be impossible to treat either
the basic exchange of these documents, or parties' attitude to them, as
ideal in legal or commercial terms. Mr Th. proceeded on the basis that he
understood F.'s order conditions to prevail, whatever the response from
V.. …In December, 1994, an order was placed for equipment for a further
double ended ferry for R. F. line, yard number 611. This was the third in
a series, and the contract documentation followed the earlier forms. Prior
to the events giving rise to the present dispute, nothing ever emerged
between F. and V. which put to the test the effectiveness of their several
attempts at imposing on the other their contract forms. Their experience
had been trouble-free. There was a high degree of mutual confidence.
This may explain, in part at least, the casual nature of their approach to
entering into contracts. In any event, I considered that there was nothing
established by the evidence of the parties' prior course of dealings other
than a disregard for formality in reaching agreement on the precise terms
and conditions intended to regulate relationships between them.
F. were familiar with the general characteristics of the V. propeller
systems. Tugs equipped with such systems had operated in the North
Sea in some numbers and over a long period and were well known in
the market. All of the vessels in S.'s existing fleet were equipped with
V. propeller systems. While it proved unexpectedly difficult to obtain
precise information from the defenders' witnesses, it was clear from the
evidence of Mr Ta. that S. and V. had discussions relating to the design
and specification of the vessels in question, two towing and fire fighting
tugs for operation at Su. Vo. in S. and generally in the North Sea, over
a period of years prior to any approach to shipbuilders for quotations
for the vessels. The project was developed jointly by V. and S.. Dr Ba.
knew that S. expected to have a contract with B.P. for the handling of
VLCC vessels at Su. Vo.. S.'s specification was prepared on the basis of
discussions with V.. V. effectively defined the scope of that specification
so far as it covered the requirements of the propeller systems. By the
beginning of 1994, S.'s main requirements had been established and
communicated to Goldsworthy. The likely terms of those requirements
can be gleaned from a fax sent by J. M. V. GmbH to Goldsworthy dated
17 February, 1994 in which the projected vessels were described as "Our
Project 59-91", indicating that the project had been commenced by V. in
1991. The document was issued under Dr Ba.s’ reference and signed by
him and by Mr Pe., manager of V.'s design department. The fax prescribed
testing conditions which are not relevant for present purposes…
F. and Richard Du. & Ha. Limited (Du.) were among the shipbuilders
asked to quote for the vessels in March, 1994. The shipbuilders were
supplied with a full specification of the vessels by S. to work up a
design. The specification of the vessels provided by S. described them
as "V. Schneider Tractor Tugs". Shipbuilders' naval architects were
required to develop the vessels' design in accordance with the owners'
specification. The general preliminaries, reflecting V.'s fax of 17 February,
1994, required V.'s approval of the vessels' lines, and of the form and
construction of the propeller wells, guard and skeg. Forward bollard
pull was specified as 55 tonnes in given operating conditions. Following
telephone conversations with Goldsworthy, F. asked for a quotation for
the systems by letter dated 31 March, 1994. The letter stated the delivery
dates for the propeller systems for the two vessels as the first and second
quarters of 1995 respectively, and the vessel completion dates as third
and fourth quarters of 1995 respectively. With the letter, F. enclosed, inter
alia, relevant extracts from S.'s specification, and F.'s general conditions
of purchase. Goldsworthy transmitted V.'s quotation to F. on 15 April,
1994. That quotation bore to be: "subject to our Conditions of Sale – Print
306 VSPe". There was a specific reference to warranty provisions in those
conditions. On 20 April, V. wrote with a more complete tender, enclosing,
inter alia, their conditions of sale. On 29 April, F. sought confirmation that
the propellers offered would give the specified bollard pull of 55 tonnes
at 2000 kW input to the propeller. On 5 May, Goldsworthy transmitted
V.'s reply confirming those values, subject to V. designing the vessels'
lines, or approving the shipbuilder's lines, and subject to the design and
fitting of the propeller guard, and various test conditions. F.'s bid for the
construction of the two vessels, which was prepared and submitted by
Mr De. in about July, 1994, was not successful at that time. S. entered
into negotiations with Du.. The stage these negotiations reached was not
clearly established, but they proceeded sufficiently far for Du. to have
issued a letter of intent to Goldsworthy for transmission to V.. Du.s' letter
indicated a degree of urgency in completing the proposed contract.
During 1994, and probably in the late summer or early autumn, S.'s
negotiations with Du. broke down. By then S. required delivery by
particular dates, to meet obligations to B.P., and time was running short
for construction. …To meet their obligations to S., F. had to enter into a
contract with V..
Matters had also become critical for V.. Du.'s letter of intent had set a
short time limit for the completion of their work. The timing of the project
was important to V. before F. became involved. They commenced design
and manufacture work in reliance on Du.s' letter of intent. When Du.
withdrew and F. received the order, V. understood that the delivery times
remained more or less the same. V. were in extreme time pressure.
There was some dispute as to the meaning of Dr Ba.s’ evidence on this
matter. But I consider that there was no doubt that the significance of
the evidence was that there would be a cost to V. in stopping the ongoing
design and manufacturing processes, and therefore an urgent need to
settle the matter with F.. There were technical matters to settle from
their point of view also. But I consider that it was clear that V. were under
time pressure to conclude a contract with F.. There is no other sensible
interpretation of Dr Ba.s’ evidence that: ".. we were under time pressure
for this contract." Without a contract with F., V. were exposed to the
losses associated with proceeding on Du.s' letter of intent.
It was against this background that the parties made arrangements
to meet at Port Glasgow on 13 October, 1994. By then V. knew that F.
had the contract for the construction of the vessels. I accepted Dr Ba.s’
evidence to that effect. Mr Ta. said that he did not know that F. and S.
had concluded a building contract. I did not consider that this evidence
was reliable. Mr Ta. had no specific recollection of the calling of the
meeting, and I formed the view that, after the lapse of time involved, his
recollection of the circumstances surrounding the meeting had become
generally unreliable.
…There was no agreed written record nor any note on which one could
rely without qualification. Some only of the participants made notes. On
his return to Heidenheim, on 14 October, Dr Ba. prepared a report of the
meeting from his notes, which were thereafter destroyed. The report was
circulated within V. to the project department, the design department,
the technical department and to Mr De. of the commercial department.
An English translation of this document was available from an early
stage in the proceedings. A contemporary report of the proceedings
was always going to be critical to a decision on what transpired, and
the translation presented to the court should have been seen to have
particular significance. At the end of the day, I consider that, properly
translated, the report is significant. But the original translation was false.
It is necessary to trace the history of the document, and to consider its
terms, since they have a material bearing on the credibility of Dr Ba. in
particular.
The German text of Dr Ba.s’ report was made available to V.'s Scottish
solicitors soon after the action was raised. …By the stage at which he
asked for the document to be translated, Mr Hau. knew that F. contended
that a contract had been concluded in Scotland for the supply of the
propeller systems, and, further, that they contended that Scots law
applied to that contract, and that the Scottish courts had jurisdiction
to determine the issues between the parties. It was appreciated by Mr
Hau. that one line of defence open to V. might be that no contract had
been concluded in Scotland. He telephoned Mr Bau. and told him that
V. required papers translated with respect to the defence of the case. …
Mr Bau. was available to carry out the translation, and Mr Hau. sent him
by fax a copy of the note. Mr Hau. did not provide written instructions.
I accepted Mr Hau.'s evidence on these matters of instruction. While he
had not produced and did not have available all of the documents which
may have existed, and in particular did not have available the fax cover
sheet or any other document associated with the transmission of the
report, I found him a credible and reliable witness. At the stage of the
communication between Mr Hau. and Mr Bau., therefore, Mr Bau. had a
straightforward instruction to prepare a translation of Dr Ba.s’ report for
the purposes of the current litigation.
The action came to proof on 8 December, 1998. …When the proof
resumed, on 20 April, 1999, the pursuers had instructed a translation by
Professor Deitrich Sch., Professor of German at Edinburgh University. The
defenders had instructed translations by Dr Colin Gr. and Ana Es. both
of Integrated Language Services, a division of Heriot-Watt Trading Ltd.
Neither of these two translations was spoken to in evidence. …Professor
Sch.'s translation of the important first paragraph of the German text
was: "On 07.10 F. Shipbuilders had signed the contract for construction
of two Eskort V. water tractors for Southern Voe with S. T.e. The objective
of the meeting was to conclude a contract with F. Shipbuilders concerning
the extent of out supply." …Properly translated, Dr Ba.s’ note set out
the objective of the meeting on 13 October to have been to conclude a
contract concerning the extent of the supply agreed to be made by V.. The
language used the technical legal expression for concluding a contract.
Dictionary references indicated the generality of the usage. Indeed it was
conceded by Mr Hau.. The general context of the document supported
that view. There were repeated references in the body of the note to
specific matters having been agreed at the meeting. These included
technical matters, and commercial matters. They were expressed, in
German, in past tenses which indicated past completed acts.
Commenting on Mr Bau.'s translation, Professor Sch. said:
".. The object was not the scope of delivery but the object was finalising
or concluding the contract. So it's actually a confusion between various
parts of the sentence. I'm surprised about it, if I may comment on this.
I'm surprised about this kind of, this translation. It seems that the person,
for reasons I don't know, must have had a scenario in his or her mind and
has manipulated the translation to fit this scenario. It's not a text which I
can in any way see that it may derive from the German original."
The main fault he found with the translation was its failure to render into
English the technical expression "einen Vertrag abzuschliessen", which
clearly and unmistakably indicated that the objective of the meeting was
to conclude a contract with F. concerning the extent of V.'s supply.
When Mr Bau. came to give evidence, it became clear that the translation
had indeed been manipulated. …
The significance of this finding is not restricted to Mr Bau.. His purported
translation was reflected in the evidence given by Dr Ba.. Asked about
his understanding of the purpose of the meeting, he said that it was
"to clarify every point concerning scope of supply", "delivery time",
"and, of course, the general conditions there in which way F. has to draft
the contract". He did not understand that the purpose was to conclude
a contract. If there had been a suggestion that a contract would be
concluded Mr De. would have been with him. Dealing with the report
more particularly, he said that the final sentence meant that the "Target
of the meeting was to conclude the conditions, the scope of supply with
F. Shipbuilders". …V. had authorisation procedures; what was suggested
could not be accommodated within those procedures; and so it could not
be real. …
Mr Gl. properly put to Professor Sch. propositions which anticipated
the defenders' own evidence about the purpose of the meeting. It was
suggested that certain language in the introductory paragraph might
be construed as a limitation on the scope of what was described as a
contract. He rejected that. It was suggested that the language was less
formal in effect than his translation suggested. He rejected that. He
was asked how the German text would differ if the sense were either
(a)that: "the objective of the meeting was to reach agreement on the
contract with F. Shipbuilding so far as concerns the extent of our supply",
or (b) that: "the objective of the meeting was to reach agreement on
the contract with F. Shipbuilders so far as concerns the extent of our
supply". He provided translations into German of the English which
differed materially from Dr Ba.s’ note. They were respectively: "Ziel
der Beratung war es, die Bedingungen des Vertrags mit F. Shipbuilders
unseren Lieferumfang betreffend zu vereinbaren"; and "Ziel der Beratung
war es, eine Vereinbarung uber den Vertrag mit F. Shipbuilders in bezug
auf unseren Lieferumfang zu erreichen". I found his evidence reliable and
compelling. There was no possibility that the alternatives put to him could
properly be said to represent in English the German text of Dr Ba.s’ note.
Dr Ba.s’ evidence about the purpose of the meeting in substance
coincided with Mr Bau.'s purported translation of the report. The chances
of a coincidental error of this nature by two wholly independent witnesses
are remote, in my view. I concluded that in this respect Dr Ba. gave
deliberately false evidence. The expression "vertrag abzuschliessen" refers
in common German legal language to the conclusion of a contract. …
Properly translated, Dr Ba.s’ report presented the purpose of the meeting
and outcome of the negotiations on commercial terms between parties as
follows:
"On 07.10 F. shipbuilders had signed the contract for construction of
two Eskort V. water tractors for Su. Vo. with S. T.e. The objective of the
meeting was to conclude a contract with F. Shipbuilders concerning the
extent of our supply...
2. Commercial issues
2.1 Delivery time
The first ship is to be delivered to S. T.e in week 26/95. The following
delivery dates were agreed upon:
1st shipset ex works in week 16 (at the shipyard in week 17)
2nd shipset ex works in week 24 (at the shipyard in week 25).
It was agreed that we manufacture and test the propellers in a sequence
convenient for us; delivery will then be as agreed.
We were able to define the required delivery time penalty in accordance
with out conditions of sale with a 14-day period of grace.
2.2 Weight penalty
The customer demands a strict weight penalty with respect to exceeding
the weight of the equipment. The penalty will become effective already if
the total weight is exceeded by 1%.
In this respect, nv is to advise the binding equipment weight, at the latest
in week 42.
2.3 Performance penalties
Based on the very strict contract requirements, there are bollard pull and
free-going speed penalties that become effective if the values indicated in
1.8.1 and/or 1.8.2 are not reached. We have to contribute towards these
penalties. 2.4 Currency
We were able to achieve that payment will be made in DM. Therefore
safeties for exchange rate variations and/or currency risks do not apply.
2.5 Payment terms
…The contract with special and standard terms will be sent to us shortly."
The language used was consistently the language of agreement. The
purpose of the meeting was clearly identified. And the date of F.'s
order can be inferred from the projected date for payment of the
down-payment, mentioned in paragraph 2.5, as 13 October, 1994.
In these general respects, the report reflected substantial agreement
with the evidence of Mr Th., whom I considered to be more reliable
in his recollection than Mr De. where the two differed. Much of the
evidence about the arrangement of the meeting for 13 October was
less than impressive. I did not find this surprising. The meeting was
arranged informally, and against the background of the urgency I have
described. Mr Th. thought that he arranged the meeting by telephone
with Goldsworthy. Mr De. also thought that the meeting would have been
arranged by Mr Th.. Mr Th. left it to V. to select their representatives. …I
accepted the evidence of Mr Th. and Mr De. that a meeting was arranged
by informal means between Mr Th. and Goldsworthy to take place in Port
Glasgow on 13 October, 1994. I also accepted as true and reliable Mr
Th.'s evidence that the purpose of the meeting was to conclude a contract
with V. for the supply of the propeller systems. In cross examination, he
said that the meeting was principally to get the order for the equipment
placed. The technical discussions were to ensure that F. got the right
equipment. But F. had to achieve agreement with V. before committing
themselves to expend the money sought for the equipment. …Further, I
consider that there was some support in the evidence of Mr Ta.. He said
that Mr De. started the meeting by saying, "We have a good experience
with previous contracts of working together, let's make a simple contract,
we don't want to spend so much time discussing this, this, this and this,
here is the, what we think in a nutshell should form the contract, or
the commercial side of the contract, let's go through this." It was plain
on his recollection that what Mr De. said reflected a clear intention to
make a contract at that meeting. This was a reference to the commercial
negotiations between parties. Dr Ba. gave evidence to a different effect.
He said that Mr De. said: "Look, let's make it easy, simple, this is what
we have in mind to do with V. concerning the conditions"; and they
went through a document previously prepared by Mr Th.. These special
conditions were considered the basis for the contract. He made notes of
the points agreed on his copy. Again it appeared that Dr Ba.s’ evidence
was tailored to avoid reference to the making of a contract at that time.
I did not accept the qualifications of the observations of Mr De. implicit
in that evidence. There was discussion in the cross examination of F.'s
witnesses whether their evidence that there was a contract concluded on
13 October was inconsistent with F.'s written pleadings. That the evidence
did not coincide exactly with the written pleadings was clear. However,
in my view there was no inconsistency which had significance in the
weighing of credibility in the circumstances of this case.
In anticipation of that meeting, and between 7 and 13 October, Mr Th.
prepared a document containing special conditions of contract relating
to a supply by V. to F. of the propeller systems required for the tugs.
He used the shipbuilding contracts as a source of information relating
to conditions, penalties etc. At the time, F. used standard form general
conditions, and supplemented these by special conditions adapted to the
requirements of the particular contract. There were liquidate damages
provisions which were always important to both parties, since they had
the potential to affect the viability of the contract. In particular, in this
case, the liquidate damages proposals were derived from the S. contract.
Initially F. sought to recover the whole liquidate damages for which they
might be liable to S. from V.. They considered that the performance of
the vessel was almost totally the responsibility of V.. In the course of the
negotiations F.'s representatives agreed with Dr Ba. that the amounts
recoverable from V. should be one half of the amounts for which F. might
be liable to S.. There was considerable discussion in the course of the
proof of the importance of these values, generally intended to suggest
that they were so significant that no commercial person would expect
to reach agreement on them at a meeting such as was held. I found
this discussion to be without point. The parties agreed the price of the
equipment at this meeting. They could not have reached agreement
on that without discussing the factors which might bear on price. In
any event such experience as one has of commercial litigation suggests
that parties have less difficulty in striking a bargain than their lawyers
subsequently experience in rationalising what has happened. As well as
preparing the special conditions, Mr Th. also printed from his computer
a copy of F.'s general conditions in larger type than they appeared in
printed form. The form was substantially the same as had been sent to V.
on earlier occasions. The special document was prepared with blanks for
completion in the course of negotiation. The documents were not sent to
V. before the meeting.
The meeting took place in two parts. Technical issues were dealt with
first. At that stage F. was represented by Messrs Fu., Th., David McCu.
and Norman Br.. V. were represented by Mr Ta. and Dr Ba.. The technical
part of the meeting aimed to tie up the loose ends of design, and make
it possible to agree a price and commercial terms of contract. Significant
changes thereafter would have involved modifications of the contract
works and price variations accordingly. One such modification was
anticipated and provided for at the meeting, as recorded in Dr Ba.s’
report. V. had proposed a mechanical propeller control system which
differed from that intended by S., and which was more expensive than
the system S. had proposed. The price reduction which would apply if
S. insisted in their requirements was discussed and agreed at 210,400
Deutchmarks.
The discussions at the first part of the meeting left a number of matters
outstanding for later discussion and agreement. The extent of these
is seen in the specification prepared by F. and transmitted to V. on
20 October. The set-types were specified for the propeller systems,
shafting and couplings and control stands. The total weight of these
components was understood by F. to be 95.75kg without oil fillings.
The actual projected weight was to be confirmed by V.. The design of
the propeller, spur gear unit, and oil supply system was fully specified.
There was a specification of the propeller monitoring system. But it
was to be amplified by V. providing full details of all instrumentation
as soon as possible. There were similar qualifications relating to the
supply of detailed information and instructions in relation to zero pitch
switches, propeller seatings, the location of lifting pads for installation
purposes, and vibration data on the shafting. But, in my opinion, none
of these matters can be treated as having been regarded by the parties
as material to the conclusion of a contract. F. did not so consider it. V.
had proceeded with the execution of design and manufacturing work on
receipt of the letter of undertaking from Du., and that work continued.
V.'s perception at the time was that all outstanding points were of minor
importance...
The participants at the second part of the meeting were Mr De. and Mr
Th., and Dr Ba. and Mr Ta..
Mr Th.'s paper "Special Conditions of Contract; Yard No's 609/610 V.
Schneider Propellers" was tabled. V.'s representatives and were provided
with copies of the special conditions and studied them. Clauses were
selected for discussion and negotiation leading up finally to a discussion of
price. Some clauses were not discussed. The parties discussed and agreed
a range of matters, and. in particular:
• Delivery dates for each of the sets of propellers.
• Liquidated damages for late delivery.
• Liquidated damages for overweight equipment.
• Liquidated damages for speed deficiencies at trial ahead and astern.
• Liquidated damages ford efficiencies in bollard pull ahead and astern.
• That there would be no requirement for performance bonds.
• Consequential damages were excluded, and
• Price and instalments.
Parties reached agreement on a price variation depending on the
ultimate selection of the propeller control system. Price, the liquidate
damages provisions and delivery dates were the most important matters
requiring resolution at the stage of the commercial part of the meeting.
Price was discussed at length. The forms of liquidate damages clauses
varied little from contract to contract. The amounts were the significant
factor. F.'s agreement to accept a fifty per cent liability by V. was a
material concession by them. Potentially it involved considerable financial
disadvantage. F. agreed to do so because of their confidence in V..
Each party noted the agreements reached in manuscript on the form
prepared by Mr Th.. Some of the clauses were clearly discussed in
some detail. Thus, in relation to liquidated damages for late delivery,
V. stipulated for a period of grace of fourteen days beyond the agreed
delivery date before becoming liable for delay, and that was agreed. Dr
Ba. stipulated for that provision to reflect the standard conditions of V.. It
is significant that he did so by means of a modification of Mr Th.'s special
conditions. …But it was clear that Dr Ba. negotiated with those conditions
in mind. In his report, he referred to the conditions as a measure of his
success in one part of the negotiations: paragraph 2.1. This modification
of the special conditions indicated clearly that V.'s general conditions were
not intended by Dr Ba. to apply directly to this contract. …V. had adopted
in this dispute that the meeting of 13 October was of limited scope. The
technical discussions had involved possible modifications to the total
weight of the units. V. reserved their position on liquidated damages for
overweight equipment by stipulating for seven days to intimate a revised
contract weight over that stipulated in the specification for the tugs. There
was discussion and agreement on F.'s right to reject the goods. The right
to damages on rejection which had been stipulated for by F. was deleted.
V. agreed to F.'s stipulation for interest on repayments on rejection. There
was controversy whether F.'s general conditions of contract were before
the meeting. Dr Ba. said that they were not. He understood that the
special conditions superseded them entirely. In examination in chief he
said that he first saw F.'s general conditions later, with F.'s written order.
However that evidence was inconsistent with his contemporary report that
he anticipated receiving the contract, with special and general conditions,
from F. shortly after the meeting. In cross examination, he accepted
that he had seen the general conditions with F.'s fax of March, 1994.
There were passages in his evidence in cross examination which might
have reflected difficulties with English language. It appeared to me to be
fairer to avoid criticism of these passages. But overall there was difficulty
with his rationalisation of the position relating to F.'s general conditions.
Mr Th. said that the clause in the special conditions superseding the
general conditions was discussed. Every clause of the special conditions
was discussed. The general conditions were not discussed in detail, but
"they were certainly always part of the day's negotiations". In cross
examination, he repeated that they had been discussed. There had been
no discussion of the V. conditions. …At the end of the negotiations, F. gave
V. an order number for the goods. By that stage the price for the goods
had been fixed. The outstanding technical issues were matters of detail,
for elaboration and clarification. The issuing of an order number took on
a certain air of significance. Mr Fu., speaking as a layman, put the matter
in this way: ".. V... went away from that meeting with an order number
and people don't go away from a meeting with an order number unless
there is an order." Mr Th. and Mr De. interpreted the giving of an order
number as an indication that F. were agreeing to purchase the equipment
for the sum of money agreed. …Mr De. said that Dr Ba. had said that
he was satisfied with the special conditions. The parties shook hands on
the deal. They did not exchange notes of the meeting. They did not sign
a memorandum of agreement or any other document at the meeting. I
accepted Mr Th.'s evidence that he had never found such a step to be
necessary in his previous commercial dealings. Mr De.'s evidence was to
substantially the same effect. Dr Ba.s’ oral evidence was that at the end
of the meeting: "I had a certain understanding but of course I have to live
also in certain regulations, therefore I have mentioned look, we have here
made conclusions on this and we will do our very best to continue this
very full co-operation we had with F...." That suggestion, which could only
imply that there had been a specific reservation of the position pending
further discussions, was never put to F.'s witnesses. It was inconsistent
with the implication in his written report that there had been an order on
13 October. I did not find Dr Ba. to be credible in his evidence relating to
the meeting. I did not accept the statement that this particular comment
had been made to be credible.
At the end of the meeting parties anticipated that there would be a
document setting out the terms of the agreement. It was agreed that
F. would send final typed versions of what had been agreed to V.. F.
anticipated sending a written form of order. They would have hoped to
have a formal acknowledgement on their form. On 19 October, F. sent to
V. a fax confirming the order under the order numbers previously given,
identifying the equipment to be supplied, and stating the price, delivery
dates and instalment terms. The fax stated: "Special conditions apply as
discussed. Official order to follow." On 20 October, F. sent fully detailed
purchase order forms. The purchase orders were said to be subject to
F.'s general conditions printed on the forms. The general conditions
provided that all orders made by or on behalf of F. were made or given
subject to the conditions and that "any Conditions put forward by the
Contractor which are inconsistent with these Conditions shall be void
unless specifically agreed in writing by the Company." The form made
provision for return of a copy signed with an acknowledgement that the
terms and conditions were accepted.
On 26 October, V. acknowledged the fax of 19 October and wrote:
"We would like to thank you very much for your fax dated 19. 10. 1994
confirming us your order for our scope of supply for the above mentioned
2 escort vessels for S. T..
We are delighted to have the opportunity of working with you together
and we are looking forward to the pleasant working relationship and
successful outcome we have enjoyed so much for several other projects.
We are looking forward for your official order with enclosed special
conditions......
We thank you once more for this order and shall do our best to perform it
to your entire satisfaction."
That document was signed by Mr De., V.'s Commercial Department
Manager, and Mr Re., of the Project Department, who was, according to
Dr Ba., "in charge for this application". Dr Ba. accepted, however, that
he may have prepared the draft, and that it was signed by Mr Re. in his
absence.
V. at no time completed and returned the form of acknowledgement of
order printed on F.'s formal documentation. Mr Th. described the attempt
to obtain signed acknowledgements of orders as "a continual battle."
The battle of the forms continues to rage, apparently, in the industry. Mr
De. also spoke of the difficulty of getting any form of acknowledgement,
and the battle of the forms. The disinterest of F. in V.'s conditions was
such that he was never informed of them. That disinterest had its
parallel in V.. Dr Ba. comment was that as at the beginning of November:
"Our understanding was that in most essentials for proceeding in our
manufacturing, in the continuation of the building at F. was settled and all
the other points which are related to the final draft or final formulation of
the contract was only of minor importance.... it was never a subject to be
worried about".
F. replied to certain technical questions raised in the letter on 31 October.
On 3 November, 1994, V. invoiced F. for the ten per cent first instalment
payment due in terms of the agreed special conditions. The covering
letter identified the source as V.'s Mr He.. It quoted F.'s order numbers,
and referred to F.'s "fax order". The invoices were specific to the order
numbers for the two vessels. The invoices were stamped by F. with the
date 7 November, 1994. Payment was thereafter made. The date of
payment became controversial. The matter was initially presented on
the basis of agreement between counsel that payment was released
on 29 November, and received by V. on 30 November, 1994. However,
Mr Gl. raised the matter with Mr Th.. He indicated that payment had
been released on 22 or 23 November. Mr Th. was given the opportunity
to explain that he had investigated matters and discovered that the
actual time of release was the earlier time indicated by him. Additional
documents were thereafter lodged by F., and the topic was taken up by
Mr De.. F.'s cashier's notation on a file copy of V.'s invoice was: "Paid
23-11-94". Payment had been authorised by Mr De. and Mr William Sc.,
two authorised directors of F. on or about 20 November, 1994. The office
system was that the invoices would have been seen by Mr Th., because
his reference appeared. They would have been passed by him, and then
payment would have been progressed by the cashier, who would have
required to obtain two authorised signatures. 23 November, 1994 was
probably the date on which the bank were instructed to make the transfer.
The bank purchased the German currency required to give effect to the
transfer instruction on 25 November. The payment was cleared through
F.'s bank account on 29 November. Mr De.'s evidence about the timing
of the payment was less than satisfactory. He said initially that F. wished
to make payment before the proposed meeting at Heidenheim to avoid
the embarrassment of turning up there without having paid the invoices.
However, that meeting took place before the payment was cleared. Mr De.
then said that the payment was made to avoid disrupting relationships
with V.. I do not consider the point to have any significance. …What is
material is that F. cleared the invoices for payment before V. sent their
order acknowledgement form.
Detailed design work proceeded between 13 October and 14 November,
1994. On 14 and 15 November there was a technical meeting in
Heidenheim. It was attended by a representative of S., Captain Do., Mr
St., Dr Ba. and Mr Re. of V., and Messrs Sp., Gray, Du. and Fu. of F.. The
principal reason for the meeting was to finalise the lines plan for the
vessels and the design details of the control mechanism between the
propeller system and the wheelhouse. F.'s lines plan was discussed and
agreement was reached. Agreement on the lines plan was a condition
of V. guaranteeing bollard pull. The control mechanism was primarily an
issue between S. and V., relating to ship operation rather than design and
construction. …
On 22 November, V. wrote stating that they were working on the order
acknowledgement, and drawing attention to the fact that in the official
order F. had included provision for performance bonds. On 24 November,
F. acknowledged that that had been an error, and that performance bonds
were not applicable to this contract. It is of some significance that the
question raised by V. relative to the performance bonds was expressed
in terms of what the parties had done on 13 October, and that Dr Ba.
took issue with the terms of F.'s order forms. V. gave F. a discount from
the price, "honouring" the agreement to delete the performance bond
requirement. Despite the ongoing technical discussions, the language
used was that of completed agreement rather than continuing negotiation.
There was no suggestion that work was not proceeding pending the
preparation of a V. document. F. did not attach any particular significance
to the reference to such a document. Further, it is clear that detailed work
did proceed in the context of an understanding that there was already a
contract in place. By fax dated 24 November, 1994, V. raised a technical
issue which they had overlooked in the papers F. had produced at the
meeting on 13 October. They took the view that a dimension indicated on
a F. drawing was critical to performance. …
The fax was signed by Dr Ba. and Mr Ri.. It is clear that each of the
signatories relied on the provisions agreed on 13 October "in our contract"
to press for the dimensional change required.
On 24 November, V. issued order acknowledgement forms. These, inter
alia, reflected the technical discussions and agreements which had
taken place between 13 October and 24 November, and contained a full
specification of V.'s scope of supply. However, on any construction of their
terms, they also included commercial provisions which differed from those
discussed and agreed on 13 October, 1994. In their form, V. re-formulated
the special conditions of contract, and incorporated their own general
terms and conditions of contract. F. never responded to these forms. …
There was considerable controversy relating to Dr Ba.s’ authority, or lack
of it, to enter into a contract binding on V.. The issue arose initially in the
cross examination of F.'s witnesses. Mr Th. was asked whether he knew
what Dr Ba.s’ authority was. He said: "No, I didn't know,... I don't know
what this authority is, but I assumed, or we assumed, when we asked
for someone to come to negotiate the contract, and they sent him, we
assumed he has the authority." While he did not remember the exact
wording, he was certain that Goldsworthy had been asked to arrange for
someone to come from V. to discuss and place a contract, against the
background of F. having concluded the contract with S.. …I accepted that
Mr De. described accurately the ordinary course of contract negotiation
involving V.. I did not accept that Dr Ba. would have required written
authorisation to depart from the usual regulations. …
V. are, by virtue of their domicile, subject to the jurisdiction of the
German courts. The Court of Session can have jurisdiction only if that
arises under and in terms of Article 5 (1) of the Brussels Convention, as
incorporated into domestic law by the Civil Jurisdiction and Judgments
Act, 1982. Article 5 (1) provides that a person domiciled in a Contracting
State may, in another Contracting State, be sued:
"In matters relating to a contract, in the courts for the place of
performance of the obligation in question."
It was agreed that the expression: "In matters relating to a contract"
referred to an independent European concept to be applied to achieve the
objectives of the Convention: SPRL Arcado v SA Haviland [1988] E.C.R.
1593 at 1554-5. …
It is appropriate to investigate the question of the existence of the
contractual relationship, and its terms, in dealing with questions of
jurisdiction: Effer SpA v Hans-Joachim Kantner [1982] E.C.R. 825. The
pursuers contend that a contract was made in Scotland on 13 October,
1994. The defenders' position, as explained by counsel, was that there
was no dispute that at the end of the meeting on 13 October it was clear
that V. were going to go ahead and provide the propellers and that F. were
going to go ahead with V.. The issue was whether there had formally been
a concluded contract.
…Further, in my view it is impossible to view V.'s letter of 26 October
as other than an acknowledgement of a concluded bargain, following
F.'s fax of 19 October. The technical fax of 24 November is an express
acknowledgement of an existing contract.
Dealing in the first place with the facts, in my opinion it was firmly
established by the credible and reliable evidence at proof that Dr Ba.
purported to bind V. to a contract for the manufacture and delivery of
the units on 13 October, 1994. All of the commercial terms essential to a
binding contract were agreed. And the specification was agreed subject
to minor matters of detail which neither party considered material to
obligation. In any complex engineering contract details of design, and
perhaps in particular interface details, will require greater specification
as the process of elaboration of the design is developed. Sometimes the
process will involve mere specification of what is already inherent in the
contract specification. Sometimes there will be modifications giving rise to
variations of contractual obligations and rights. But the idea that parties
are not bound at all until the last detail is specified is fanciful. …
Mr Gl. argued that this was a typical "battle of forms" case, in which the
party who puts forward the latest terms and conditions wins, if the other
party accepts the forms without objection: Butler Machine Tool Co. Ltd
v Ex-Cell-O Corporation (England) Ltd [1979] 1. W.L.R. 401; Uniroyal
Ltd v Miller & Co. Ltd 1985 S.L.T. 101; Rutterford Ltd. v Allied Breweries
Ltd. 1990 S.L.T. 249; and Findlater v Mann 1990 S.L.T. 465. …The case
of Rutterford Ltd. v Allied Breweries Ltd. does not assist in the present
context. But in Findlater v Mann one has an illustration of the importance
of focusing on the point at which consensus was reached. When once
one has determined the point at which there were no longer any matters
at issue between the parties there was a concluded bargain which could
be enforced on its terms. After that it was too late for either party to
innovate on that contract unilaterally. …
… I am of opinion that Dr Ba. had ostensible authority to conclude a
contract. By 13 October, 1994, both parties required a binding agreement
for their respective purposes. There was no substantial possibility that
the work would not proceed. Each needed the other's commitment to
the essentials of a contract for the manufacture and timeous supply of
the V. equipment. The events after 13 October, down to 24 November
at least, entitled F. to proceed on the basis that they had a contract
concluded with Dr Ba. on behalf of V.. In Freeman & Lockyer v Buckhurst
Park Properties (Magnal) Ltd [1964] 2 Q.B. 480, at page 503, Diplock L.J.
said: "An "apparent" or "ostensible" authority,..., is a legal relationship
between the principal and the contractor created by a representation,
made by the principal to the contractor, intended to be and in fact acted
upon by the contractor, that the agent has authority to enter on behalf of
the principal into a contract of a kind within the scope of the "apparent"
authority, so as to render the principal liable to perform any obligations
imposed upon him by such contract.... The representation which creates
"apparent" authority may take a variety of forms of which the commonest
is representation by conduct..." In this case, Dr Ba. was sent in response
to an invitation to V. to send someone to make a contract. He came.
Nothing was said or done which might qualify the implications arising from
that fact. There could be no more direct and unequivocal representation
by V. that he had authority to enter into the very contract which both
parties knew was required if their respective commercial interests were to
be served. …
Accordingly, I am of opinion that there was a contract concluded in
Scotland on 13 October, 1994. I should note at this stage that no question
was raised with me whether or not V. would be held by the law of their
habitual residence to have consented to the making of a contract,
apart from the issue of Dr Ba.s’ agency. I had the benefit of a report
by Professor Dr Peter Gotthardt and Professor Dr Michael Martinek on a
range of matters of German law. No opinion was expressed that V. would
not be held to have consented to the making of a contract by German
law. This is wholly consistent with the scope of the dispute between the
parties, and I consider it unnecessary to refer further to Article 8 of the
Rome Convention and Egon Oldendorff v Liberia Corporation [1995] 2
Lloyd's Reports 64, to which I was referred by Mr O'Neill.
Before the Court of Session can entertain the dispute, the pursuers must
establish that Scotland was the "place of performance" of the "obligation
in question". F. found their claims on breach of V.'s obligations (a) to
deliver to Port Glasgow manufactured goods conform to contractual
specification and guaranteed quality within agreed times; and (b) to
indemnify them against all and any loss damage and expense suffered
by them in consequence of any negligence or breach of duty by V., and
in particular loss and damage arising as a result of contractual delay
caused by V.'s faulty design of the propulsion units. The first head of claim
is not dependent on incorporation of F.'s general conditions of contract
into the contract between parties. The second is. Dr Ba.s’ note, correctly
translated, clearly identifies F.'s general conditions of contract as an
element in the agreement reached on 13 October, 1994. Mr Th.'s evidence
was that the general conditions were before the meeting. I accepted
his evidence as credible and reliable. In my view it was proved that the
general conditions were incorporated, subject to the qualifications implicit
in the special conditions. Clause 15 of the special conditions is ambiguous
in the language used. It is headed: "CLAUSE PRECEDENCE", and on one
view, read in isolation, superseded F.'s general conditions of contract
entirely. However, that construction would make little sense since it has
to be considered in the context that the general conditions were tabled as
applicable to the contract. If they had not been tabled at all they would
not have been part of the contract concluded on 13 October and would
have required no reference to be made to them. Clause 15 would have
been a wholly redundant reference to a document which had no relevance
to the parties' relationship. The only sensible construction, in the context
of what occurred on 13 October, is that the general conditions were
superseded so far as appropriate by the clauses of the special conditions.
…
In any question relating to the relationship between a contract and a
given territory, it is necessary to have regard to all of the circumstances.
…In my opinion the principal obligation which V. had to perform was
to deliver to Port Glasgow, for incorporation into the ships there under
construction, propeller systems which conformed to specification and met
the standard of manufacture and performance required within the times
agreed. Delivery of the completed machinery to F.'s yard at Port Glasgow
was specifically provided for. But more fundamentally, the completed
machinery had no integrity or function as machinery unless and until
delivered for incorporation into the vessels. The equipment for which
parties contracted in this case was incapable of operating as free standing
machinery. The propeller systems could not perform any function except
as components of the particular vessels for which they were designed.
The interfaces between the equipment and the other machinery and parts
of the vessels were agreed and defined. The negotiations and agreement
concerning the control mechanisms between the wheelhouse and the
propeller systems involving the owners' preferences as the ultimate
determining factor provide a clear example of the adaptation of the V.
components to the vessels. The performance criteria had meaning only
in relation to the hull forms, engines, gearing and other equipment of
the specific tugs. The ships were being constructed in Scotland for a
Scottish buyer, and it was there and there alone that due performance
of the contractual stipulations as to performance and quality could be
ascertained once the goods were incorporated into the ships. The V.
equipment and the ship lines of the vessels, and the design of other
components resulted in the propeller sets being uniquely adapted to
the specific vessels. V. were closely connected with the negotiations
with the owners relating to the specification of the vessels, and with
F. as builders. The modifications which were carried out in an attempt
to meet the owners' performance criteria were carried out in Scotland.
The manufacture of the propeller sets was an act incomplete in itself.
Until delivered and incorporated into the tugs, the propeller systems
could not be tested for performance in terms of the specified bollard pull
criteria. The language of the contract was in English. It was negotiated
and concluded in Scotland. …
In my opinion clause 19(a) of F.'s general conditions met the
requirements of certainty prescribed by Article 3 of the Rome Convention.
There was therefore a relevant choice of Scots law as the law governing
the contract. …For the reasons set out already, I consider that this
contract had a real connection only with Scotland. That question has to
be considered as between the parties. V.'s design and manufacturing
activities resulted in what were no more than components of more
complex units, the vessels into which they were to be incorporated, and
to which they were specifically adapted. This was not a case in which the
output of the Heidenheim facility had an integrity as machinery capable of
performing a function alone, as free-standing machines. V.'s contractual
obligations extended to delivery to F.'s yard at Port Glasgow, and it was
there and there alone that V. performed their contractual obligations.
A comparison can be made with Viskase Ltd v Paul Kiefel GmbH [1999]
1 WLR 1305. The Court of Appeal struck out all but one of the plaintiff's
claims against the German manufacturer of thermoforming machines
used in the production of moulded plastic products on the ground of
lack of jurisdiction. The machines were intended for use in Birmingham,
but all but one of the contracts were completed on delivery "ex works"
at the manufacturers' factory in Germany. The majority of the court
held that that was conclusive in the case of all but one of the machines.
The exception was a demonstration machine exhibited at Birmingham
Exhibition Centre by the manufacturers, bought there, and delivered to
the plaintiffs in Birmingham. The manufacturers' standard conditions
included a choice of law clause. Chadwick L.J. at page 1321 answered
the question as to the identification of the "obligation to be performed" in
these terms: "In the absence of authority I would take the view that there
in only one answer to that question. The obligation is to supply a machine
which is reasonably fit for the known purpose. That obligation has to be
performed at the time when the machine is supplied. There is no other
opportunity to perform it...If the obligation has to be performed at the
time when the machine is supplied, then the place at which it has to be
performed is the place of delivery under the contract." The Birmingham
exhibition piece was distinguished from the others. Jurisdiction was
sustained in the case of that machine. On the same approach, and even
had the V. units been complete machines as the thermoforming machines
were, in the present case delivery was to take place at Port Glasgow. It
was there that the specification had to be satisfied. The present case is
much stronger than the single case in which jurisdiction was sustained in
Viskase.
In Shenavai v Kreischer [1987] E.C.R. 239, it was held that where a
party relied on a number of obligations under a contract the place of
performance of the principal obligation at issue was determinative of
whether there was jurisdiction. In this case, the obligation to indemnify,
as an obligation to make payment, would also be performed in Scotland.
I was referred to a number of cases on the maxim accessorium sequitur
principale: Shenevai;Union Transport plc v Continental Lines S.A. [1992]
1 W.L.R. 15; Hewden Stuart Heavy Cranes Ltd v Leo Gottwald C.A
unreported, 13 May, 1992; Kleinwort Benson; and Source Ltd v T.U.V.
Rheinland A.G. [1998] Q.B. 54. These cases would have been material
had the law of Germany applied and therefore Germany had been
identified as the place of performance of the principal obligation. But,
for the Court of Session to have jurisdiction, it is sufficient that Scotland
is the place of performance of the principal obligation. Breach of that
obligation brings F. within the scope of Article 5: Ets A. de Bloos S.P.R.L.
v Bouyer [ 1976] E.C.R. 1497; SPRL Arcado v SA Haviland; Leathertex
Sintetici Spa v Bodetex [1998] I.L.Pr 505; Case C-420/97, opinion of
Advocate General Leger dated 16 March, 1999. The disposal of the
subordinate or accessory matters is a matter within the jurisdiction of this
court on a proper application of similar principles. There is no scope for
declining jurisdiction in the case of those claims.
For F. it was argued that where a ground of jurisdiction existed under
Article 5, they as pursuers had the option to select which of the courts
of competent jurisdiction should be called on to take cognizance of a
dispute arising in relation the contract: Zelger v Salinitri [1980] E.C.R.
89 at 96 and 98; Bank of Scotland v Seitz 1990 S.L.T. 584 at 587. For
V. it was argued that Article 5 (1) was a derogation from the general
rule under Article 2, and should be construed restrictively: Martin Peters
Bauunternehmung GmbH v Zuid Nederlandse Aannemers Vereniging;
Kafelis v Bankhaus Schroder, Munchmeyer Hengst & Co. [1988]E.C.R.
5565; Davenport v Corinthian Motor Policies at Lloyd's 1991 S.L.T. 774;
and Kleinwort Benson Ltd v Glasgow City Council [1999] 1 A.C. 153. In
my opinion F. have brought themselves clearly within its scope, however
restricted an approach one adopts, for the reasons relating to the contract
which I have already discussed.
I shall therefore repel the defenders' plea of no jurisdiction. The case will
be put out by order for further procedure.