Article | Posted on 12th August 2024
LILA LISBON – no loss of bargain without repudiation
The decision will be of interest to parties involved in ship sale and purchase transactions. The High Court ruled that loss of bargain damages shall not be awarded to a buyer who terminates an MOA under Clause 14 of Saleform 2012, absent a repudiatory breach by the seller
In the recent decision in Orion Shipping and Trading Ltd v Great Asia Maritime Limited (The LILA LISBON) [2024] EWHC 2075 (Comm) the English High Court allowed an appeal on a point of law from an arbitration award under section 69 of the Arbitration Act 1996.
The Court held that where an memorandum of agreement on Norwegian Saleform 2012 (“NSF 2012”) wording is lawfully cancelled by a buyer under clause 14, in circumstances where the seller has failed to give notice of readiness or failed to be ready to validly complete a legal transfer by the Cancelling Date and such failure is due to the seller’s “proven negligence”, the buyer is not entitled to recover loss of bargain damages absent an accepted repudiatory breach of contract.
Background
The parties had entered into a memorandum of agreement dated 4 June 2021 on amended NSF wording (the “MOA”) whereby Great Asia Maritime (“Buyers”) were to purchase a capesize bulk carrier, the MV “LILA LISBON” (the “Vessel”) from Orion Shipping and Trading (“Sellers”). The Vessel was not delivered by the extended Cancelling Date and Buyers arrested her, seeking security for a claim for damages which they eventually brought in arbitration.
Arbitration
The LMAA Tribunal awarded “loss of bargain damages” to Buyers because it found that Sellers had failed to deliver the Vessel by the cancelling date by reason of “proven negligence” within the meaning of clause 14 of the MOA. The damages awarded reflected the usual measure of damages in sale of goods cases for non-delivery under section 51 of the Sale of Goods Act 1979 (“SGA 79”), namely the difference between the market price of the Vessel and the contract price as at the date of termination of the contract. It was found that on its ordinary meaning, the parties would have understood clause 14 to provide for compensation extending to the consequences of cancellation, including loss of profit.
The issues on appeal
Sellers argued there was no clear wording which provided for Buyers to recover the market measure of damages for loss of bargain, and that “due compensation” within the meaning of clause 14 meant compensation due at law, subject to proof of negligence. Otherwise, the scope of the damages recoverable would have no limit and the traditional common law principles of causation, remoteness and mitigation would not apply. Further, if tender of Notice of Readiness by the Cancelling Date was not a condition (Sellers said it was not), there was no obvious reason why the parties would have agreed that near-identical results should ensue under clause 14.
Buyers argued that there was therefore no reason why “loss and all expenses” under clause 14 could not encompass different losses depending on whether Buyers cancelled or not. They also argued that clause 14 simply gave effect to the normal measure of damages for non-delivery pursuant to s. 51(3) of the SGA 79, and that if the clause did not include loss of bargain damages, it was unclear what losses would be covered. Further, they submitted that Sellers’ construction was uncommercial, and created an imbalance with clause 13 where, on materially identical wording, loss of bargain damages had been held recoverable. In addition, Buyers put forward an alternative case that time was of the essence, so Sellers’ breach was of a condition.
The Court’s Decision
Breach of condition
Dias J’s analysis as to whether clause 14 was a condition of the contract began in light of the fact that clause 14 did not itself impose any obligations relating to time of delivery. These obligations were found in clause 5 of the MOA which did not impose any obligation to deliver nor give Notice of Readiness by the Cancelling Date. As such, the question of whether any such obligation was a condition or an innominate term was found not to arise. Clause 14 was seen as merely a permissive provision which allowed Buyers to cancel if in fact no Notice of Readiness has been given by the stipulated Cancelling Date. The circumstances were therefore distinguishable from that in Bunge Corporate v Tradax Export SA, [1981] 1 WLR 711 where there was a positive obligation on the buyers to give notice of readiness by a set date.
Clause 14
The construction of clause 14 was approached from the starting point that Sellers were not in breach of any condition and that there was no presumption that the clause was intended to produce the same results as the compensatory principle would produce at common law. As the judge noted, as a matter of English law, loss of bargain damages cannot be recovered on the exercise of a contractual right of termination unless the claimant can show a repudiatory breach and that it exercised its common law right to terminate for repudiation.
The court found that the provision for compensation “to the Buyers for their loss and for all expenses… if [the Sellers’] failure is due to proven negligence and whether or not the Buyers cancel this Agreement” was said to only refer to the failure to give Notice of Readiness or to be ready to validly complete a legal transfer by the Cancelling Date. It therefore followed that the losses and expenses recoverable under clause 14 must be caused by that specific failure. The Court found this was a prima facie reference to accrued losses and expenses which have crystallised at the point of cancellation and not to prospective losses and expenses caused by the cancellation.
The recoverable damages under clause 14 were found to include expenses incurred by Buyers in making arrangements to crew the Vessel, carrying out inspections, employing legal support, preparing for delivery generally, and any loss of profits that could potentially have been made between the date when the Vessel should have been delivered but for Sellers’ negligence and the date of cancellation.
The standard wording of clause 5(d) was taken to support this further. It makes clear that Buyers’ potential claim for damages under clause 14 is “for the Vessel not being ready by the original Cancelling Date” not for damages for loss of bargain, particularly as the cancellation depends on the Buyers’ election.
For these reasons, the Court found that relevant trigger was the failure to give Notice of Readiness by the Cancelling Date and only losses caused by that specific failure are recoverable under clause 14, not losses caused by the loss of the contract more generally. The judge held that a buyer’s unilateral decision to terminate pursuant to a cancellation right does not as a matter of law transform the case into one of non-delivery.
The result
On the correct construction of clause 14, damages for loss of bargain were found not to be recoverable on the basis that the right to claim damages exists only in respect of the failure to give a Notice of Readiness by the Cancelling Date, and not breach of an obligation to deliver by that date.
Accordingly, the Court set aside the relevant sections of the Tribunal’s Award in so far as it had awarded damages for loss of bargain.
Comment
This decision has implications for both buyers and sellers contracting under the NSF 2012:
- If a buyer opts to unilaterally cancel the contract under clause 14 where there has been ‘proven negligence’ on the part of the seller that falls short of repudiatory conduct, damages for loss of bargain will not be owed.
- As such, a buyer should be wary of exercising their right to terminate under clause 14 in a rising market where it might not make commercial sense to cancel unless sellers are in repudiatory breach.
- Clause 14 still allows for buyers to recover damages to which they would not otherwise be entitled where there has been ‘proven negligence’ and they elect to use the cancellation clause so it remains valuable to them.
- Equally, this judgment assists sellers in so far as they will not be liable for the loss of the entire bargain in circumstances where they are not in breach of a condition and buyers have the choice as to whether to cancel the contract.
- Importantly, the Court has held that a seller under NSF 2012 is not under a positive obligation to deliver the vessel by the Cancelling Date.
Ed Mills-Webb, Ross Attfield, and James Stephenson of Preston Turnbull acted for Orion Shipping and Trading Ltd, instructing Alexander Wright KC of 4 Pump Court.
The full judgment can be found here: https://www.bailii.org/ew/cases/EWHC/Comm/2024/2075.html