The Lila Lisbon - Caselaw Update

The UK Court of Appeal confirms recovery of loss of bargain damages under Clause 14 of Norwegian Saleform 2012

Following up on my article covering the Commercial Court’s judgment in the November ’24 edition, on 2 October the Court of Appeal delivered a landmark judgment in The Lila Lisbon, clarifying the scope of sellers’ obligations and buyers’ remedies under the Norwegian Saleform 2012 (“NSF 2012”) when delivery is delayed beyond the cancelling date. This decision overturns the earlier ruling of the Commercial Court and significantly impacts the drafting and interpretation of ship sale agreements.

Background

By way of recap on the facts, Great Asia Maritime Limited (“Buyers”) and Orion Shipping and Trading LLC (“Sellers”) entered into a Memorandum of Agreement dated 4 June 2021 on amended NSF 2012 wording for the sale of the vessel M/V Lila Lisbon. Clause 14 of the MOA mirrored the standard NSF 2012 wording and provided:

Clause 14 – Sellers’ Default

[A] 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…

[B] 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. 

The original cancelling date was 20 August 2021 and later extended to 15 October 2021 without prejudice to Buyers’ right to claim damages under Clause 14. Sellers failed to tender Notice of Readiness (“NOR”) by the extended cancelling date, prompting buyers to cancel under Clause 14. Sellers subsequently fixed the vessel on a voyage charter with Vale, and Buyers arrested the vessel on 24 September 2021. Buyers then commenced arbitration seeking damages, including for the difference between the market price and the contract price (loss of bargain damages) as a result of the sellers’ failure to deliver by 15 October.

The Award

An arbitration tribunal initially held that Buyers had validly cancelled the MOA under Clause 14(A) and awarded them damages based on the difference between the market price and the contract price (loss of bargain damages).

The Commercial Court’s Decision

The Commercial Court (Dias J) reversed that decision, holding that:

•   Under the terms of the MOA, Sellers did not have a positive obligation to tender NOR or to be ready to deliver by the cancelling date. 

•   Clause 14 did not permit recovery of loss of bargain damages. Compensation under Clause 14 was confined to accrued losses and wasted expenses up to cancellation, excluding future or market-based losses.

•   Any obligation to meet the cancelling date was not a condition, so no repudiatory breach arose.

Dias J granted permission to appeal to the Court of Appeal on the first two grounds. The Commercial Court’s conclusion that the obligation on Sellers to meet the cancelling date was not a condition, remained unchallenged.

Court of Appeal Decision

The Court of Appeal has now unanimously reversed the first-instance decision, holding that:

1.   Sellers under NSF 2012 must exercise reasonable diligence (based on an implied obligation) to deliver the vessel by the cancelling date. The Court drew an analogy with an owner’s obligation to meet laycan under a charterparty^[1] .

2.   Where sellers fail to deliver by the cancelling date due to proven negligence and buyers cancel, this is equivalent to non-delivery, the buyer can recover damages for loss of bargain under Clause 14(B). 

Importantly, the Appeal Court did not disturb the finding that the obligation to deliver by the cancelling date is not a condition, meaning Sellers’ failure does not amount to repudiatory breach.

Key Takeaways

•   For buyers, the Court of Appeal’s decision strengthens their position under NSF 2012 such that loss of bargain damages are now recoverable even without repudiatory breach.

•   For sellers, there is now greater exposure to market-based claims for delayed delivery.

Conclusion

This judgment represents a significant shift in the interpretation of Clause 14 of NSF 2012. In light of this Court of Appeal decision, parties negotiating ship sale agreements should carefully consider their contractual provisions and their strategies around cancelling dates and compensation clauses in the MOAs.

Nordisk remains available to assist Members with any queries regarding this judgment or its implications. Please do not hesitate to contact us.

^[1]              The Democritos [1976] 2 Lloyd’s Rep 149