Clydebank Engineering Co v Castaneda

Factual and Procedural Background

The dispute arose from a contract under which the Respondent (a foreign government) purchased several torpedo-boat destroyers from the Appellant (a ship-building company). Delivery was contractually required by a stated date, failing which the parties agreed that the builder would pay £500 per week for each vessel delayed. The ships were delivered late. The Respondent sued in Scotland to recover the agreed sums. Both the Lord Ordinary and the Inner House of the Court of Session found in favour of the Respondent. The Appellant appealed to the House of Lords.

Legal Issues Presented

1. Whether the contractual clause stipulating £500 per week for late delivery constitutes enforceable liquidated damages or an unenforceable penalty.
2. Whether the Respondent waived its right to recover the contractual sums after accepting delivery and making certain instalment payments without immediate deduction.

Arguments of the Parties

Appellant's Arguments

• The £500 per week clause is a penalty intended in terrorem, not a genuine pre-estimate of loss, and is therefore unenforceable.
• Because warships do not earn freight, any financial loss from late delivery is speculative or non-existent; consequently the stipulated amount is exorbitant.
• The Respondent benefited from the delay because the vessels avoided destruction during wartime; therefore no loss was suffered.
• By paying final instalments without deduction and delaying assertion of the claim, the Respondent waived or released any right to the sums.

Respondent's Arguments

• The clause represents liquidated damages: both parties expressly recognised that timely delivery was essential and that the quantum would avoid complex, impractical proof of loss.
• The amount was proposed by the Appellant in its own tender, demonstrating mutual agreement and absence of oppression.
• Warships plainly have value to a belligerent state; proving precise loss would require intricate evidence of naval operations, which the clause was designed to obviate.
• No waiver occurred: the Respondent’s prompt payment of instalments was motivated by urgency to receive the vessels, not by any intention to relinquish contractual rights.

Table of Precedents Cited

Court's Reasoning and Analysis

Liquidated damages versus penalty. The House emphasised substance over form: labels such as “penalty” or “damages” are not decisive. Echoing Elphinstone, it observed that the clause fixed a weekly rate tied directly to delay, not a single undifferentiated sum. Both parties knew timely delivery was critical; the stipulated amount avoided the “minute and complex” evidential inquiry that an assessment of actual loss would entail, particularly given the naval and strategic context.

The Lords rejected the contention that warships possess no measurable monetary value. The deprivation of a military asset itself constitutes loss, even if profitability cannot be calculated like commercial freight. Arguments that the vessels would otherwise have been sunk were dismissed as “absurd.”

Unconscionability. No evidence showed the amount to be extravagant when viewed from the time of contracting. Indeed, the figure originated from the Appellant’s own tender, undermining any claim of oppression.

Waiver. The Appellant bore the burden of proving waiver of a vested right of action. The House found no agreement, express or implied, relinquishing the claim. The Respondent’s prompt payment of instalments merely facilitated delivery and avoided further delay; it did not evidence intentional abandonment of the damages clause. Even if the doctrine of waiver could apply, the factual basis was absent.

Holding and Implications

HOLDING: The appeal is DISMISSED with costs.

Immediate Effect: The Respondent may enforce the £500 per week clause for the period of late delivery; the Appellant remains liable for those sums.

Broader Implications: The decision re-affirms that Scottish and English law apply the same substantive principles to liquidated damages, focusing on proportionality, intention, and unconscionability at the time of contracting. It underscores that even in specialised contexts—such as military procurement—parties can validly pre-estimate damages to avoid evidential difficulties, and that courts will respect such bargains absent demonstrated extravagance or oppression.