Griffon Shipping v Firodi Shipping - The Griffon

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England

Griffon Shipping LLC v Firodi Shipping Limited – The “MV Griffon”

High Court of Justice, Queen's Bench Division, Commercial Court: Teare J.: [2013] EWHC 593 (Comm): 21 March 2013

SHIPSALE AGREEMENT ON NORWEGIAN SALE FORM 1993: WHETHER SELLER CAN RECOVER UNPAID DEPOSIT WHERE BUYER IN REPUDIATORY BREACH

Mr. Marcus Mander, instructed by Reed Smith LLP, for the Claimant Seller

Ms Charlotte Tan, instructed by Holman Fenwick Willan LLP, for the Defendant Buyer

Summary

On the true construction of cll. 2 and 11 of a Memorandum of Agreement on the Norwegian Saleform 1993, the seller of the vessel was entitled to recover from the buyer the amount of an unpaid deposit, instead of being restricted to a lesser claim for damages, based on the difference between the sale price and the market price. The stated purpose of the deposit was to be security for the correct fulfilment of the Agreement, which indicated that when it accrued due, it did so unconditionally.

Background

This case concerned an appeal - pursuant to section 69 of the Arbitration Act 1996 - relating to a controversial issue as to the true construction of the Norwegian Saleform 1993 (“NSF 1993”) and the payment of the buyer's deposit.

On 28 April 2010, the claimant Sellers agreed to sell the MV “Griffon” to the defendant Buyers at a price of US$22m. On 1May 2010, the Memorandum of Agreement ( “MOA”) based upon NSF 1993 was signed. A deposit of 10%, some US$2,156,000, was payable within three banking days of signature, that is, by 5 May 2010. The deposit was not paid by 5 May 2010. On 6 May 2010 the Sellers accepted the Buyers' conduct as a repudiation of the MOA and/or cancelled the MOA pursuant to an express contractual right to do so and thereby brought the MOA to an end. The Buyers accepted that their failure to pay the deposit was a repudiatory breach.

The damages recoverable by the Sellers on the conventional measure of the difference between the contract and the market price were said to be US$275,000, that is, very substantially less than the deposit.

The dispute went to arbitration. The Tribunal held that the Sellers were not entitled to recover the deposit and, instead, had to be content with their claim for damages calculated on the conventional basis. The Sellers obtained leave to appeal.

Judgment

The question to be decided was whether the Sellers could recover the deposit or could only claim damages in a lesser sum. There was no dispute, the judge noted, that if the deposit had been paid, the Sellers would have been entitled to retain it, even though it would have exceeded the recoverable damages.

The relevant terms of the MOA were as follows:

“1. Purchase price USD 22,000,000 …less 2% total commission

2. Deposit

As security for the correct fulfilment of this Agreement the Buyer shall pay a deposit of 10% (ten per cent) of the Purchase Price within 3 (three) banking days after this Agreement is signed by both parties….

3. Payment

The said Purchase Price ….shall be paid ….on delivery of the vessel….

13. Buyers' default

Should the deposit not be paid in accordance with Clause 2, the Sellers shall have the right to cancel this Agreement, and they shall be entitled to claim compensation for their losses and for all expenses incurred together with interest. Should the Purchase Price not be paid in accordance with Clause 3, the Sellers have the right to cancel the Agreement, in which case the deposit together with interest earned shall be released to the Sellers. If the deposit does not cover their loss, the Sellers shall be entitled to claim further compensation for their losses and for all expenses incurred together with interest.”

The judge noted that the question of the recovery of the deposit had a controversial history. Similar wording in the NSF 1987 had been considered by the Court of Appeal of Singapore in Zalco Marine Services v Humboldt Shipping [1998] 2 SLR 536 . The contract in that case came to an end before the deposit fell due and the seller claimed the deposit as damages. The Court of Appeal held, however, that the sellers' only remedy was for “compensation” pursuant to the first limb of clause 13, which was to be assessed on the conventional basis of the difference between the contract and market price.

The two practitioners' texts on ship sales supported the approach of the Singapore Court of Appeal; see Sale of Ships 2nd.ed. by Strong and Herring at paragraph 5.10 and Ship Sale and Purchase 6th.ed. by Goldrein, Hannaford and Turner at paragraph 5.50.3.

Furthermore, the decision of the arbitrators in the present case was in conflict with the decision of the tribunal in a similar case in 2011.

In the present case, the Sellers argued that the right to payment of the deposit had accrued before the MOA was terminated and accordingly they were entitled to claim the deposit either as a debt or as damages for breach of contract. The Buyers' case was that, in the event of non-payment of the deposit, the Sellers, on the true construction of the MOA and in particular clause 13, were only entitled to claim “compensation for losses” and not the deposit.

As to this, the judge said:

“Clause 2 makes provision for the payment of a deposit as “security for the correct fulfilment” of the MOA . It follows that, in the event that the deposit is paid and the buyer subsequently repudiates the contract, the deposit will be forfeited or, in the language of clause 13, “released to the Sellers.” That would be so even if the sellers' recoverable damages assessed by reference to the difference between the contract and market price were less than the amount of the deposit. This is implicit in the nature and function of a deposit. A deposit is different from a part-payment of the price. If the contract comes to an end by reason of the buyer's breach, he must forfeit his deposit because it is paid as an earnest of his performance….

In the present case the deposit has not been paid but the right to payment of it has accrued before the contract was terminated. The question therefore is not whether a deposit which has been paid can be recovered by the buyer but whether payment of the deposit can be enforced by the seller, notwithstanding the termination of the contract. It is a principle of the substantive law of contract that accrued rights are not lost by reason of the subsequent termination of the contract consequent upon a repudiation of the contract…. The termination operates prospectively, not retrospectively. This would suggest that deposits which have fallen due for payment remain payable notwithstanding that the contract was terminated after the deposit fell due. This has indeed long been recognised to be the case [references quoted]… ; it follows that had clause 2 of the MOA stood alone, the Appellant Sellers would have been able to recover the deposit in debt.”

The question was, therefore, whether clause 13 of the MOA had the effect of depriving the Sellers of their right to claim the deposit which had fallen due before the MOA was terminated so that, on the true construction of the MOA as a whole, the deposit did not fall due unconditionally. But, the judge said, the right to a deposit is valuable and, as it had long been recognised that a deposit remains payable, notwithstanding the termination of the contract, the Court would expect “that if the parties intended to exclude such right, they would do so by the use of clear words.”

The judge continued:

“Clause 13 does not contain words which expressly deprive the sellers of the right to payment of the deposit in circumstances where it has accrued due. Nor do I consider that clause 13 impliedly deprives the sellers of the right to payment of the deposit in circumstances where it has accrued due. Both limbs of clause 13 confer an express right to cancel the MOA. The natural meaning of this express right is, in my judgment, that it is an additional right to the common law contractual right to accept a repudiation of the MOA by the buyer as terminating the MOA. It would not be construed as limiting that common law right. In that context it would not be a natural construction of clause 13 that it excluded another common law contractual right, namely, the right to claim payment of a deposit which has fallen due for payment. There are no clear words excluding such right….

In my judgment the language of the MOA does provide that the Sellers might recover the amount of the deposit in any event. That intention is to be found in clause 2 of the MOA, which expressly describes the payment as a deposit for the purpose of providing security for the correct fulfilment of the MOA. That indicates that when the deposit accrued due, as it did on 5 May before the MOA was terminated on 6 May, it accrued due unconditionally. The rights provided by clause 13 of the MOA are in addition to the right to claim the deposit as a debt. The reason why the second limb refers to the release of the deposit is because the limb assumes that the deposit has been paid. The reason why the first limb does not refer to the release of the deposit is because the limb assumes that the deposit has not been paid. I accept that the first limb does not say in terms that the deposit may be recovered but, for the reasons I have endeavoured to express, it does not need to and it would not be appropriate to infer from that omission an intention to exclude the right to recover the deposit otherwise provided by clause 2.”

The judge went on to say that if, contrary to his view, cl.13 of the MOA was ambiguous, such that there were two possible constructions of it, one which excluded the right of the seller to payment of the deposit under cl.2 and one which did not but gave additional rights, then the latter was, in his view, more consistent with business common sense. A deposit served the commercial purpose of providing the seller with security for performance of the MOA. It would not be consistent with business common sense to enable a buyer to put himself in a better position than he would be in, having paid the deposit, by adopting the simple expedient of refusing to pay the deposit!

Accordingly, the judge held that the Sellers’ appeal should be allowed.

Comment

The judgment, well-reasoned as it is, runs contrary, as it acknowledges, to perceived wisdom in the maritime community. It is currently (September 2013) under appeal.