View source for NKD Maritime v Bart Maritime No.2 - The Shagang Giant

DMC/SandT/22/13

'''England'''

'''NKD Maritime Ltd v Bart Maritime (No. 2) Inc (The “Shagang Giant”)'''

'''English Commercial Court: Butcher J: [2022] EWHC 1615 (Comm): 24 June 2022'''

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2022/1615.html 

Simon Rainey QC and Claudia Wilmot-Smith (instructed by Brookes & Co) for NDK (Buyers)

Timothy Young QC and Colleen Hanley (instructed by Wikborg Rein LLP) for Bart (Sellers)

'''VESSEL SALE AND PURCHASE AGREEMENT (“MOA”): SHIPBREAKING: BUYER PAID INITIAL PAYMENT DUE TO SELLER UNDER MOA: BUYER LATER TERMINATED THE MOA AND CLAIMED BACK THE INITIAL PAYMENT: SELLER ACCEPTED TERMINATION AS REPUDIATION OF MOA AND CLAIMED DAMAGES FOR BREACH: WHETHER TERMINATION OF MOA VALID: WHETHER LOCKDOWN MEASURES OR RESTRICTIONS IMPOSED BY INDIAN GOVERMENT AS A RESULT OF THE ONSET OF COVID-19 CONSTITUTED OR GAVE RISE TO A RELEVANT FORCE MAJEURE EVENT'''

'''Summary'''

In dismissing Buyers’ claim to recover the initial payment under the MOA, the High Court held, amongst other things, that the Seller was not “unable to transfer title of the Vessel [to the Buyer] … due to … restraint of governments” under clause 10 (titled Force Majeure), because this did not encompass any requirement for the vessel to be delivered at or about the same time, with the result that the Buyer was not entitled to “terminate this Agreement … and the Initial Payment shall be released [back] to [the Buyer]”.  Further, the High Court dismissed the Seller’s claim to recover damages under clause 8 of the MOA, which entitled the Seller to retain the Initial Payment and to claim any losses incurred in reselling the vessel if such losses exceeded the Initial Payment, because its claimable losses did not exceed the value of the Initial Payment.


Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, IMI Qualified Mediator, LMAA Supporting Member and International Contributor to DMC’s Case Notes

'''Background'''

Bart, Owners of very large ore carrier “Shagang Giant”, wished to scrap the vessel.  NDK, a company specialising in acquiring tonnage for scrapping as a cash buyer, who acted as exclusive intermediary for Shree Ram Group (which operated a recycling yard at Alang, India), entered into a memonrandum of agreement (“MOA”) dated 5 March 2020 to purchase the vessel from Bart.

After making the Initial Payment (USD4,264,723.13) due to Bart under the MOA and the vessel arriving off Alang for delivery, NDK later purported to terminate the MOA on 14 April 2020 and claim back the Initial Payment because the Indian Government implemented measures or restrictions due to the COVID-19 pandemic.

The vessel had arrived off Alang, as close as she could get to the agreed delivery location, on 21 March 2020, port health office clearance had been obtained before that date, and immigration clearance was obtained on 26 March 2020.

However, permission for the vessel to shift to the delivery location, at the outer anchorage, could not be obtained until the pollution control board completed a desk top review of the vessel’s papers.  The board’s officers were instead engaged with COVID-19 duties on the order of the Indian Government.

Bart sought to arrange for the delivery of the vessel to NDK to take place at an alternative location, as provided for under the MOA, but NDK did not cooperate and instead, via its solicitors, purported to terminate the MOA under clause 10.

Bart did not accept that, in the circumstances then prevailing, NDK was entitled to terminate the MOA, because delivery at an alternative location was possible and, in any event, a substantial delay in performing the MOA was not expected.  As such, Bart accepted NDK’s conduct as a repudiation of the MOA and claimed damages for the losses resulting from NDK not performing the MOA as agreed.

In the event, despite the implementation and extension of lockdown measures and restrictions in India from 24 March 2020 onwards, that state of affairs had begun to ease by about 21 April 2020, when Alang shipbreaking activities, including the beaching of vessels, recommenced almost at pre-COVID-19 levels.

Thereafter, on 6 May 2020, Bart agreed to sell the vessel to a new buyer, Best Oasis Ltd, and she was delivered to the new buyer at Alang on 26 May 2020.  The recycling of vessels at Alang is also understood to take about a year to complete.

'''Judgment'''

The judge noted that the fundamental issue was whether NDK had validly terminated the MOA.  If NDK had, it was entitled to the return of the Initial Payment made.  If NDK had not, it was in breach and Bart could keep the Initial Payment and potentially recover compensation for losses incurred in excess of that amount.

The judge identified that NDK’s position essentially equated the transfer of title to the vessel with her physical delivery to NDK at the location agreed, whereas Bart’s position was that it was sufficient if it could transfer her title as envisaged by the MOA, but in any event delivery could take place at an alternative location under the MOA.  On that basis, the judge had to consider what the transfer of title to the vessel between the parties entailed under the MOA and whether NDK was able to place itself on the material facts squarely within clause 10 (titled Force Maejure – fn.1) of the MOA.

The judge concluded that clause 10 could not be invoked by showing an inability to deliver the vessel at Alang.  This was because the obligation specifically identified in clause 10 was that of transferring/accepting the transfer of title to the vessel.  In the MOA, the terms ‘transfer of title’ and ‘delivery’ were not used as interchangeable or synonymous.  When clause 10 referred to ‘transfer of title’ only, this was to be taken to be deliberate.  The ‘transfer of title’ required only payment of the price, delivery of the Bill of Sale, and deletion from the relevant ships’ register, and nothing more, which Bart was able to accomplish.

The judge held that it was not a condition precedent to the transfer of title that there should be a Protocol of Delivery and Acceptance (“PDA”), because clause 4(c) only required a PDA to be executed ‘after’ payment, but did not specify a particular time thereafter for the execution of the PDA.

Further, the judge held that clause 4 did not provide that the provision of the documents referred to in the last two bullets of clause 4(e) (fn.2) were a prerequisite of a valid Notice of Readiness (“NOR”).  The last two bullets were preceded by a provision that required cooperation by NDK and Bart to obtain such documents from the relevant authorities.  It appeared implicit to the judge that if such cooperation could not obtain the relevant documents, then those documents did not have to accompany the NOR, and so were not a precondition to the NOR’s validity.

This was strongly supported by a consideration of how clause 4 interacted with clause 2.  Clause 2(a) (fn.3) provided that if the outer anchorage Alang, being the defined ‘Delivery Location’, was inaccessible, then another location could be deemed to be the Delivery Location, and so delivery of the vessel at that other location would ‘constitute full performance of [Bart’s] obligations’ and all other terms and conditions of the MOA would apply ‘as if delivery had taken place’.

Given that clause 2(a) provided that delivery at the substituted Delivery Location had the effect that Bart’s obligations were deemed fully performed and all other terms and conditions applied as if delivery had taken place, it appeared clear to the judge that Bart must have been entitled, in such a case, to tender a valid NOR.  That could only have been so if the provision of the documents in the last two bullets of clause 4(e) was not a prerequisite of a valid NOR.

Even if the judge were wrong on the above, there was no inability to perform by reason of restraint of governments.  This was because whether there was ‘inability’ to perform for the purposes of clause 10 by reason of a temporary restraint of governments depended on whether the probable period of that restraint was such as materially to undermine the commercial adventure.  In assessing that, similar considerations would be relevant as those which would be involved in the, admittedly analytically distinct, question of whether a contract was frustrated, as referred to in The “Sea Angel” (fn.4).

In that regard, the judge thought the following considerations to be significant:

(1) The MOA was aimed at allowing the demolition, not trading, of the vessel.

(2) The plan of the recycling yard indicated that demolition would take about a year, and so on any view the process would be a lengthy one.

(3) Some delays in commencing the demolition were to be anticipated, in part because a vessel of this size could only be beached on tides twice a month.

(4) The further delay due to the action of the Indian Government which would reasonably have been regarded as possible when NDK purported to terminate the MOA on 14 April 2020 did not, on the evidence, extend beyond 3 May 2020.

The result was the delays envisaged, had NDK not purported to terminate the MOA, did not – in the judge’s view – materially undermine the commercial adventure.  As a result, the judge dismissed NDK’s claim, which meant Bart was entitled to keep the Initial Payment.  However, on the evidence, Bart’s losses did not exceed the value of the Initial Deposit, and so Bart’s counterclaim failed too.

'''Comment'''

This judgment is another reminder that great care needs to be taken in assessing whether or not a party to a contract is able to place itself, on the material facts, squarely within the terms of a force majeure clause on which it seeks to rely.

A great deal of money can turn on the right answer but as the answer is often tied to complex fact patterns and it can be hard to pin down what facts are or may later prove to be material, predicting correctly is fraught with danger.

Words like “inability” are prone to be interpreted strictly, to mean impossible if the probable period of delay materially undermines the whole commercial adventure, with the result that a temporary “hindrance” or “delay” would not meet the standard required.

Further, as the force maejure clause was tied to the transfter of the title to the vessel, NDK were not able to equate that transfer to delivery of the vessel in the sense of her arrival at the agreed place for physical possession of her to be taken over.

This reflects that English law adopts the stance that contracts are agreed to be absolutely performed as envisaged by the parties, and so very clear words are required if the rights and the obligations of the parties are to be watered down.

Consequently, care should be taken when contracting to ensure that the terms of any clauses entitling a party – due to adverse events – to terminate the contract or to protect it from liability for not strictly performing it, are fit for purpose.


Footnote 1:  

“10. Force Majeure

Should the Seller be unable to transfer title of the Vessel or should the Buyer be unable to accept transfer of the Vessel both in accordance with this contract due to … restraint of governments, princes, rulers or people of any nation … then either the Buyer or the Seller may terminate this Agreement upon written or telegraphic notice from one party to the other without any liability upon either party and the Initial Payment referred to in Clause 1.b. hereof shall be released to the Buyer.

The suspension or termination of the activities of the Ship Recycling Facility shall not constitute a force majeure event under this Agreement and the Buyer agrees to pay for and take delivery of the Vessel in accordance with the terms and conditions of this Agreement and after delivery, the Buyer shall be at liberty to ballast the Vessel to another Ship Recycling Facility … for Recycling.”

Footnote 2:  

“4(e) Prior to, or at the time of tendering Notice of Readiness, the Seller will give originals of the following documents to the Buyer or their agents for Buyer’s information only:
…
The Buyer and/or their agents will also cooperate with the Seller and/or their agents to obtain the following documents from the relevant authorities:

o	A Portworthy Certificate issued by an independent local surveyor.

o	Pre-arrival documentation (identification of hazardous materials on board), clearances and certificates issued by all local and customs authorities, GMB, GPCB, AERB and Explosives Department.

The Seller are to provide necessary details and information for ‘Desk Review’, as provided to the Seller by the Seller’s agents, 7 (seven) days prior to the expected date of the Vessel's arrival at Alang, West Coast India.”

Footnote 3:  

“2(a). Delivery Location

The Vessel shall be delivered and taken over safely afloat at outer anchorage Alang, West Coast India, which shall be the ‘Delivery Location’.
If, on the Vessel’s arrival, the Delivery Location is inaccessible for any reason whatsoever including but not limited to port congestion, the Vessel shall be delivered and taken over by the Buyer as near thereto as she may safely get at a safe and accessible berth or at anchorage which shall be designated by the Buyer, always provided that such berth or anchorage shall be subject to the approval of the Seller which shall not be unreasonably withheld. If the Buyer fails to nominate such place within 24 (twenty four) hours of arrival, the place at which it is customary for vessel (sic) to wait shall constitute the Delivery Location. The delivery of the Vessel according to this paragraph shall constitute full performance of the Seller’s obligations and all other terms and conditions of this Agreement shall apply as if delivery had taken place.

Upon delivery, the Vessel shall be recycled at a Ship Recycling Facility …”

Footnote 4:

[2007] EWCA Civ 547, [2007] 2 Lloyd’s Rep. 517 (C.A.)