“The Lila Lisbon”: Court of Appeal recognises loss of bargain damages under clause 14 of the Norwegian Saleform 2012

Factual Background

Orion Shipping and Trading LLC (the "Sellers") had agreed to sell the M/V Lila Lisbon (the "Vessel") to Great Asia Maritime Ltd (the "Buyers") for US$ 15M. The sale had been documented in a memorandum of agreement (the "MoA") in the form of the NORWEGIAN SALEFORM 2012 (the "NSF 2012"). 

Clause 14 of the MoA (Sellers’ Default), in line with the NSF 2012, provided that:

“["14A"] Should the Sellers fail to give Notice of Readiness…or fail to be ready to validly complete a legal transfer by the Cancelling Date the Buyers shall have the option of cancelling [the MoA]…In the event that the Buyers elect to cancel [the MoA], the Deposit together with interest earned, if any, shall be released to them immediately.

["14B"] 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 [MoA].” (emphasis added)

The original cancelling date under the MoA was 20 August 2021. On 12 August 2021 the Sellers notified the Buyers that the Vessel would not be ready for delivery by the original cancelling date and proposed a new date of 15 October 2021, which the Buyers accepted. The Vessel was not, however, delivered by the extended cancelling date.

The market rose and the Buyers arrested the Vessel on 18 October 2021 as security for a claim for loss-of-bargain damages (for the difference between the MoA price and market price of the Vessel). The Sellers wrote to the Buyers that same day accepting the Buyers’ cancellation as bringing the MoA to an end, and on 22 October 2021 the Buyers sent a notice to the Sellers stating they were cancelling or terminating the MoA on account of the Sellers’ repudiatory conduct. 

The Tribunal’s Award

The Tribunal held, amongst other things, that:  

• The Buyers’ conduct in arresting the Vessel and seeking security for loss-of-bargain damages evinced an intention to bring the MoA to an end. That did not however preclude the Buyers from seeking to justify such termination either on account of the Sellers’ alleged repudiatory conduct or under Clause 14 of the MoA. 
• Although the Sellers’ failure to deliver the Vessel by both the original and extended cancelling date did not meet the threshold for repudiation (i.e. would not have led a reasonable person to conclude that Sellers no longer intended to be bound by the MoA), such failure to deliver was due to the Sellers’ “proven negligence”. 
• The Buyers were therefore entitled to bring the MoA to an end in accordance with Clause 14 of the MoA (which they so did on 18 to 22 October), and claim “due compensation” for their loss under Clause 14B. 
• That loss included, notwithstanding the absence of repudiation, loss-of-bargain damages which were quantified at US$ 1.85M. 

The Sellers were granted permission to appeal the Tribunal’s award to the High Court on the following question of law (the "Loss-of-Bargain Damages Issue"): 

"If a Memorandum of Agreement on the SALEFORM 2012 form is lawfully cancelled by a buyer under clause 14 because the vessel is not delivered by the cancelling date as a result of the seller’s “proven negligence”, is that buyer entitled to recover loss of bargain damages absent an accepted repudiatory breach of contract?"

The Buyers sought to uphold the Tribunal’s award but also raised an additional argument which the High Court had to consider (the "Breach of Obligation / Condition Issue"). The Buyers argued that time of delivery was of the essence under the MoA so that their cancellation under Clause 14 was akin to termination for breach of a condition, which entitled them to loss-of-bargain damages.

The High Court’s Decision

The High Court overturned the Tribunal’s award. It held that with respect to the:

• Breach of Obligation / Condition Issue – there was no positive obligation on the Sellers to tender notice of readiness or to be ready to complete legal transfer by the cancelling date. There was simply a contractual right for Buyers to cancel the MoA upon such failure. Given there was no obligation to be breached, the issue of whether the obligation was a condition did not arise. Yet, even if there were such an obligation, Dias J noted in obiter that she would not have held it to be a condition of the MoA.
• Loss-of-Bargain Damages Issue – on a proper construction of Clause 14, damages were limited to losses flowing from the Sellers’ failure to tender notice of readiness by the cancelling date. They did not extend to losses flowing from the loss of the contract more generally, as the Judge did not consider this to be a case of non-delivery. As such, the Buyers were only entitled to recover losses and expenses which had accrued prior to cancellation and not damages incidental to termination (such as loss-of-bargain damages). The judge considered that these would include the Buyers’ crewing, inspection and legal expenses, as well as any loss of profits that could have been made between the date when the Vessel should have been delivered but for the Sellers’ negligence and the date of cancellation.

Permission to appeal to the Court of Appeal was granted on both grounds.   

The Court of Appeal’s Decision

The Court of Appeal allowed the appeal and restored the Tribunal’s award.

On the Breach of Obligation / Condition Issue, it found that there was an implied qualified obligation on Sellers to exercise reasonable or due diligence to deliver the Vessel by the cancelling date (which the Sellers had breached). This interpretation was supported by:

• The textual indications in the MoA, such as the references to “default”, “compensation for loss”, and “damages” (respectively found in clauses 14 and 5 of NSF 2012), all of which pointed towards the Sellers being under a contractual obligation to be ready before the cancelling date.
• The Democritos [1976] 2 Lloyd’s Rep 149, by way of analogy, where Lord Denning MR had recognised such obligation of reasonable diligence to deliver by the cancelling date in the context of time charters.

On the Loss-of-Bargain Damages Issue, the Court found that on cancellation of the MoA, loss-of-bargain damages were recoverable under Clause 14B even absent repudiation. This interpretation was supported by amongst other things:

• The structure of the NSF 2012, which led one to expect that Clauses 13 (Buyers’ Default) and 14 (Sellers’ Default) would operate in a similar fashion, including with respect to the remedies for breach. In The Griffon [2013] EWCA Civ 1567 the Court of Appeal had held that Sellers were entitled to loss-of-bargain damages under Clause 13 for Buyers’ default. The Court therefore held that one would expect Clause 14B to confer on Buyers the same right, if they cancelled and proved that the non-delivery was due to Sellers’ lack of due diligence.
• The fact that where Sellers have breached their obligation to use due diligence to deliver the Vessel by the Cancelling date and the Buyers have exercised their cancellation right, that is a situation equivalent to non-delivery. In such a situation, loss-of-bargain damages are ordinarily available where the market has risen such that the market price at the time of cancellation exceeds the MoA price. 

Key Takeaways

The Court of Appeal’s judgment is significant in its findings. It is the first judicial decision recognising what was the market understanding until the Commercial Court’s decision, namely the availability of loss-of-bargain damages in circumstances of cancellation for Sellers’ default under NSF 2012, absent repudiation. As such, should parties wish to exclude loss-of-bargain damages in these circumstances going forward, express provision should be made to that effect in the contract. 

The judgment also contains significant obiter comments. In particular, the Court expressed scepticism as to the application, in the context of a single transaction such as a sale (as opposed to a charterparty / lease), of the principle from Financings Ltd v Baldock [1963] 2 QB 104 - the principle that (subject to contrary provision) a party exercising a contractual right of termination as a reaction to a breach is not entitled to damages for loss of bargain unless the breach was repudiatory.