No loss of bargain damages without repudiatory or renunciatory breach

This was the recent decision of the English Commercial Court in Orion Shipping and Trading Ltd v. Great Asia Maritime Ltd (The “LILA LISBON”)[1].

In this case, the cancelling buyers under a Memorandum of Agreement (“MOA”) agreed on an amended Norwegian Saleform 2012 (“NSF 2012”) brought a claim for damages against defaulting sellers for their failure to give Notice of Readiness (“NOR”) and be ready to deliver the vessel by the cancelling date.

The significance of this judgment for parties involved in sale and purchase of ships, particularly on the standard NSF 2012 terms, is that in situations where the buyers elect to cancel the contract pursuant to clause 14 they are unlikely to recover damages for loss of bargain (prospective losses) unless sellers are in repudiatory or renunciatory breach of contract.

Background
The parties entered into the MOA for the sale of the vessel. Sellers failed to tender NOR and deliver the vessel by the agreed cancellation date. The buyers then cancelled the MOA, arrested the vessel and sought security for a claim in damages for the difference between the market price and the contract price of the vessel.

Clause 14 of the MOA (Sellers’ default) provided:

“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…

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.” (emphasis added)

Arbitration
Buyers commenced arbitration and claimed (among other things) market damages for their losses following cancellation of contract by them pursuant to clause 14 of the MOA. The Tribunal held that:

1) The sellers’ failure to give NOR and complete transfer of the vessel by the original cancelling date was due to their “proven negligence” in that they had failed to take reasonable care in making arrangements for the disembarkation of the crew.

2) However, Sellers were not in repudiatory breach of the MOA and accordingly buyers were not entitled to terminate on grounds of repudiatory breach.

3) Sellers’ failure entitled buyers to cancel the MOA and their termination was valid.

4) Buyers were entitled to recover damages for the difference between the market price and the contract price of the vessel, as at the date of termination.[2]

High Court (Commercial Court)
Sellers appealed the award. The question of law addressed by the Court was:

“Where a Memorandum of Agreement on the SALEFORM 2012 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”, is that buyer entitled to recover loss of bargain damages absent an accepted repudiatory breach of contract?”

The Court decided that buyers did not have such a right.

Sellers argued that there was no clear wording in clause 14 which allowed buyers to recover damages for loss of bargain and that such damages were only recoverable if there was a repudiatory breach or a breach of condition.

Buyers argued that the Tribunal’s decision to award market damages was correct, that “due compensation” in clause 14 meant appropriate compensation by reference to the usual principles of causation, remoteness and mitigation and that the clause gave effect to the normal measure of damages for non-delivery.  Alternatively, buyers argued that time of delivery of the vessel was of the essence and that their cancellation under clause 14 was in substance a termination for breach of condition which entitled them to such damages.

The Court allowed the appeal, set aside the section of the award where the Tribunal had awarded market damages to the buyers and held that:

(1)  Under the terms of the MOA there was no positive obligation on the sellers to tender NOR or to be ready to deliver by the cancelling date, which could give rise to a breach of contract[3]. As such there was no breach of contract by the sellers. The only obligation on sellers was to give NOR when the vessel was at the delivery place and physically ready.

(2)  Even if there was a positive obligation on the sellers to tender NOR by the cancelling date, it was not as a condition of contract and there was no clear wording in the MOA to suggest otherwise. In the circumstance, the buyers’ contractual right to cancel in itself did not entitle them to recover damages for loss of bargain without a repudiatory breach.

(3)  Clause 14 only provided a contractual right to buyers to terminate if NOR was not tendered by the cancelling date and it set out specific consequences of the parties’ conduct.

(4)  On a construction of clause 14, the compensation recoverable by buyers would be restricted to their accrued losses and wasted expenses caused specifically by the sellers’ failure to give NOR and deliver by the cancelling date[4]. Such losses crystallised at the point of cancellation and did not include prospective losses/expenses caused by the buyers’ cancellation.

(5)  The buyers’ unilateral decision to terminate pursuant to a cancellation right could not transform the case as a matter of law from one of failure to tender NOR into one of non-delivery. That prevented buyers from recovering the normal market measure of damages.

Conclusion
As a key takeaway from this judgment, buyers should consider negotiating terms in their ship sale and purchase contract that explicitly provide for:

1) the sellers’ obligation to tender NOR by the cancelling date to be a condition of the contract; and,

2) the buyers’ compensation for the sellers’ failure to tender NOR by the cancelling date to include loss of bargain damages.

Sellers are, of course, expected to resist the inclusion of such terms in the contract and which party prevails will ultimately depend on their respective commercial leverage at the point of contract.

Nordisk is always available to assist Members with any queries that they may have in relation to the above. Please do not hesitate to contact us.

[1] [2024] EWHC 2075 (Comm)

[2] Pursuant to the usual measure of damages for non-delivery under s. 51 of the Sale of Goods Act 1979 (“SOGA”)

[3] The Court distinguished the situation from that in Bunge Corporate v Tradax Export SA, [1981] 1 WLR 711 where the last day for shipment/delivery of the cargo was 30 June 1975 and there was a positive obligation on the buyers to give prior notice of readiness and deliver cargo by a specific date. The Court also drew an analogy with delivery into a time charter where it is well established that failure to deliver by the cancelling date gives rise to a right to cancel which is independent of any breach.

[4] The Court held that the recoverable damages under clause 14 of the MOA would include “expenses incurred by the buyers in making arrangements to crew the vessel, carrying out inspections, legal costs and preparing for delivery generally. They will also encompass any loss of profits that could potentially have been made between the date when the vessel should have been delivered but for the sellers’ negligence and the date of cancellation”.