Orion Shipping & Trading Ltd v Great Asia Maritime Ltd (The “Lila Lisbon”)
DMC/SandT/24/12
England
Orion Shipping & Trading Ltd v Great Asia Maritime Ltd (The “Lila Lisbon”)
English Commercial Court: Dias J: [2024] EWHC 2075 (Comm): 9 August 2024
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2024/2075.html
Alexander Wright KC (instructed by Preston Turnbull LLP) for Orion (Sellers)
David Lewis KC (instructed by MFB Solicitors) for Great Asia (Buyers)
SHIP SALE & PURCHASE: MEMORANDUM OF AGREEMENT (“MOA”): NORWEGIAN SALEFORM 2012: WHETHER BUYERS ENTITLED TO CLAIM LOSS OF BARGAIN DAMAGES, BEING THE DIFFERENCE BETWEEN THE SALE PRICE AND THE MARKET PRICE OF THE VESSEL, FOR SELLERS’ NEGLIGENCE WHERE BUYERS CANCELLED MOA UNDER CLAUSE 14 OF SALEFORM 2012: SECTION 69 APPEAL ON A POINT OF LAW UNDER THE ARBITRATION ACT 1996
(N.B. a further appeal to the Court of Appeal has been scheduled to be heard in the latter part of 2025 and will be reported on in due course.)
Summary
The High Court held that, where an MOA on the NOWEGIAN SALEFORM 2012 was lawfully cancelled by Buyers under clause 14 in circumstances where Sellers had failed by the original cancelling date (a) to give notice of readiness to deliver the vessel or (b) to be ready validly to complete a legal transfer of the vessel, and such failure was due to Sellers’ “proven negligence”, Buyers were not entitled to recover loss of bargain damages in the absence of a repudiatory breach on Sellers’ part. In thus finding for Sellers, the High Court set aside the award for loss of bargain damages, of USD1,850,000, that had been awarded to Buyers by the arbitration tribunal.
The High Court also dismissed Buyers’ alternative case to uphold the award, on the grounds that the Sellers not delivering or transferring the legal title to the vessel before the cancelling date was not a breach of a condition under the MOA.
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 Deputy Editor of DMC’s CaseNotes
Background
The dispute arose from the sale of a Capesize bulk carrier, “Lila Lisbon”, on a Memorandum of Agreement (“MOA”) based on an amended NORWEGIAN SALEFORM 2012. The MOA provided for the delivery of the vessel in mainland China by 20 August 2021, after her then current laden voyage from South Africa to Qingdao, People’s Republic of China.
In the weeks leading up to delivery, the vessel’s classification society imposed a recommendation, which led to a delay in the intended delivery. The parties agreed a new cancelling date of 15 October.
However, when Sellers failed to deliver the vessel by this new cancellation date, Buyers arrested the vessel on 18 October, seeking security for their claim for the difference between the contract price and the market price of the vessel. Buyers then cancelled the MOA, and alleged Sellers’ “proven negligence”, under clause 14, in failing to deliver the vessel on time, and claimed damages at large.
The experienced tribunal of maritime arbitrators found that Sellers’ negligence had indeed caused the failure to deliver on time and awarded Buyers damages, including compensation for the difference between the market price and the contract price of the vessel; namely, loss of bargain damages. Sellers, however, contested the tribunal’s decision to award loss of bargain damages, which led to the appeal to the High Court under section 69 of the Arbitration Act 1996.
Judgment
(1) Breach of Condition
Having addressed the background to the dispute, the Judge first considered and then dismissed Buyers’ alternative case (to seek to uphold the award on alternative grounds), because neither clause 5 (fn.1), which dealt with the cancelling date and the potential extension thereof, nor any other terms of the MOA made time of the essence of Sellers’ obligation to deliver or legally transfer the vessel.
Therefore, Sellers’ breach in not delivering or transferring legal title in the vessel before the cancelling date expired was not a breach of a condition, the breach of which would have justified an award of loss of bargain damages (where Buyers’ conduct after the cancelling date had expired, which included arresting the vessel and cancelling the MOA, was otherwise tantamount to the acceptance of an alleged repudiatory breach, had it instead been a breach of condition, that terminated the MOA).
(2) Clause 14
The Judge next turned to consider clause 14 of the MOA. The key points in the Judge’s reasoning, for setting aside the arbitration tribunal’s award of loss of bargain damages in Buyers’ favour, were as follows:
(A) Interpreting Clause 14A and 14B
Clause 14 (fn.2) provided two options for Buyers in the event of Sellers’ failure:
(i) Clause 14A (the first paragraph of clause 14) allowed Buyers to cancel the MOA if the vessel was not delivered by the cancelling date, as a result of which the deposit paid by Buyers was to be refunded immediately.
(ii) Clause 14B (the second paragraph of clause 14) provided that Sellers would “make due compensation” to Buyers for their “loss and for all expenses”, plus interest, if Sellers’ failure was due to “proven negligence”, whether or not Buyers also chose to cancel the MOA.
However, neither part of clause 14 expressly provided for loss of bargain damages. The Judge held that the wording of clause 14B – which focused on loss and expenses caused by the failure to give notice of readiness to deliver or to be ready validly to complete a legal transfer of the vessel by the cancelling date – could only refer to the failure to give notice or to transfer in time, with the loss and expenses being caused and having crystallised by that specific point.
That also suggested, to the Judge, that the loss and expenses should be the same whether or not Buyers cancelled the MOA. Otherwise, because the right to cancel was at Buyers’ option, clause 14B would create a significantly enlarged right to claim loss of bargain damages in the event that Buyers did decide to cancel. That was reinforced by clause 5(d) making clear that Buyers’ potential claim for damages under clause 14 was “for the Vessel not being ready by the original Cancelling Date”, not for damages for loss of bargain.
(B) Contractual Cancellation Right v. Common Law Termination
The Judge distinguished between a party exercising a contractual right to cancel and a common law right to terminate due to a repudiatory or renunciatory breach of the contract. The Judge explained that loss of bargain damages, which compensate for the lost benefit of the bargain (being the difference between the contract price and the market price of the vessel on termination), are typically recoverable only when there is a repudiatory or renunciatory breach of contract.
However, here, the tribunal had found no such breach. Therefore, Buyers’ cancellation under clause 14 was only a contractual remedy, not a termination for a serious breach that would have entitled Buyers to loss of bargain damages.
(C) No General Rule for Loss of Bargain Damages
The Judge rejected the tribunal’s assumption that loss of bargain damages could automatically flow from a failure to deliver under a contractual cancellation clause. The Judge emphasised that the right to loss of bargain damages depended on whether the contract explicitly allowed for it or there had been a repudiatory or renunciatory breach.
The Judge concluded that, while clause 14B provided a remedy for damages, clause 14B did not imply a right to loss of bargain damages in the absence of a repudiatory or renunciatory breach.
(D) Causation and Proven Negligence
The tribunal’s finding that Sellers’ negligence caused the failure to deliver the vessel by the extended cancelling date was not disputed. However, the Judge found that this negligence did not amount to a repudiatory breach, which would have entitled Buyers to claim loss of bargain damages.
Thus, the Judge reasoned, Buyers were only entitled to damages for specific losses caused or triggered by Sellers’ delay itself, in failing to tender notice of readiness before the cancelling date expired, and not the wider consequences of the termination of the MOA, such as loss of bargain.
(E) Commercial Implications
The Judge also noted that loss of bargain damages would only make commercial sense if Sellers had committed a repudiatory breach, with a right of cancellation providing the parties with as much certainty as a condition in enabling them to know where they stood irrespective of any need to prove fault or any particular degree of fault.
Buyers, under the MOA, were granted the right to cancel if delivery were delayed, but this did not imply that they would be compensated for market fluctuations in the absence of a serious breach that justified the termination of the MOA.
The Judge, therefore, was of the view that parties negotiating contracts like the MOA could expressly provide for loss of bargain damages, or another remedy, if that is what they intended Buyers to be able to recover on cancellation.
(3) Conclusion
The Judge held that Buyers were not entitled to loss of bargain damages on the natural and ordinary meaning of clause 14, absent (a) a termination of the MOA by Buyers for a repudiatory or renunciatory breach by Sellers, and (b) a breach of condition by Sellers. Accordingly, the Judge set aside the arbitration tribunal’s award of loss of bargain damages to Buyers.
Comment
This judgment grapples with the difficulties that may arise where contract terms do not expressly spell out the intended consequences of a lawful cancellation of the contract where there is no actual repudiatory or renunciatory breach nor a breach of condition concerning the time by when something must be done, the acceptance of which, at common law, would terminate the contract and entitle the innocent party to claim damages at large, including for any loss of bargain contracted for.
The Judge in this case had in part preferred to interpret clause 14 in light of what would otherwise be the position at common law, in view of the lack of express language spelling out the damages claimable on cancellation, rather than to follow earlier judgments on different earlier saleform wordings.
As the Judge’s decision is being further appealed to the Court of Appeal, one may expect to see some of the lines of argument touching on whether the increasing preference for clarity in contractual terms to achieve a desired result is to prevail; the alternative would be to trawl through and extrapolate an anticipated result from earlier judgments based on different wordings of the standard terms.
In the writer’s view, absent clear words or sufficiently similar form wordings addressed in earlier judgments that cannot be distinguished, the courts should continue the more modern approach of focusing on interpreting the language actually used, taking the contract as a whole and in the light of the factual matrix.
Footnote 1:
“5. Time and place of delivery and notices
(a) The Vessel shall be delivered and taken over safely afloat at a safe and accessible berth or anchorage at/in mainland China exclude Taiwan, Macao, Hong Kong in the Sellers' option.
Notice of Readiness shall not be tendered before: 20th July 2021
Cancelling Date (see Clauses 5(c), 6(a)(i), 6(a)(iii) and 14): 20th August 2021
However, the Vessel shall effect delivery to Buyers immediately after present laden voyage from South Africa to Qingdao China (ETA Qingdao on around 18th July 2021) and no more laden voyage allowed.
(b) The Sellers shall keep the Buyers well informed of the Vessel's itinerary and shall provide the Buyers with twenty (20), ten (10), five (5) and three (3) days' notice of the date the Sellers intend to tender Notice of Readiness and of the intended place of delivery.
(c) If the Sellers anticipate that, notwithstanding the exercise of due diligence by them, the Vessel will not be ready for delivery by the Cancelling Date they may notify the Buyers in writing stating the date when they anticipate that the Vessel will be ready for delivery and proposing a new Cancelling Date. Upon receipt of such notification the Buyers shall have the option of either cancelling this Agreement in accordance with Clause 14 (Sellers' Default) within three (3) running days of receipt of the notice or of accepting the new date as the new Cancelling Date
If this Agreement is maintained with the new Cancelling Date all other terms and conditions hereof including those contained in Clauses 5(b) and 5(d) shall remain unaltered and in full force and effect.
(d) Cancellation, failure to cancel or acceptance of the new Cancelling Date shall be entirely without prejudice to any claim for damages the Buyers may have under Clause 14 (Sellers' Default) for the Vessel not being ready by the original Cancelling Date. …”
Footnote 2:
“14. Sellers’ Default
Should the Sellers fail to give Notice of Readiness in accordance with Clause 5(b) or fail to be ready to validly complete a legal transfer by the Cancelling Date the Buyers shall have the option of cancelling this Agreement… In the event that the Buyers elect to cancel this Agreement, the Deposit together with interest earned, if any, shall be released to them immediately. [14A]
Should the Sellers fail to give Notice of Readiness by the Cancelling Date or fail to be ready to validly complete a legal transfer as aforesaid they shall make due compensation to the Buyers for their loss and for all expenses together with interest if their failure is due to proven negligence and whether or not the Buyers cancel this Agreement. [14B]”
