August, 2024 - The Lila Lisbon: Commercial Court reverses industry understood practice on damages

In Orion Shipping and Trading Ltd -v- Great Asia Maritime Ltd (The Lila Lisbon) [2024] EWHC 2075 (Comm) the Commercial Court considered the question: 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 (“NOR”) or failed to be ready to validly complete a legal transfer by the stipulated cancelling date, and such failure is due to the seller's "proven negligence", is the buyer entitled to recover loss of bargain damages absent an accepted repudiatory breach of contract?

The industry has long considered that a buyer could recover damages at large in such a situation. However, the Commercial Court held otherwise, finding that in such circumstances a buyer was not entitled to claim damages for loss of profit despite a seller’s proven negligence.

In light of this ruling, a buyer should seek to impose an express obligation on the seller to tender NOR and deliver the ship by the cancelling date, with a failure by the seller to tender NOR  being a breach of condition.  Whether a seller would accept such a condition is moot.  Alternatively a buyer might seek to include an express reference to damages for loss of profit in this type of situation.  

It is understood that the seller will be seeking leave to appeal. It is hoped that the Court of Appeal will be able to review the law on this important point.

Background:

In June, 2021 the parties concluded an MOA for the sale of the ship based on an amended Saleform 2012. The cancelling date was originally stated as 20th August, 2021 but extended to 15th October, 2021 with the buyer’s agreement but without prejudice to its right to claim damages under clause 14 on the basis that the failure to meet the original cancelling date was due to the seller’s proven negligence.

In consequence of the claim brought by the buyer, the tribunal held that the Seller's failure to be ready to deliver the ship by the original cancelling date of 20th August, 2021 was due to its "proven negligence" as it had failed to take reasonable care in making arrangements for the disembarkation of the crew. The tribunal awarded the buyer damages for loss of use of the ship between 20th August, 2021 and 15th October, 2021.

The seller also failed to deliver by 15th October, 2021. The buyer arrested the  ship and sought damages, being the difference between the contract price and market price of the ship.

The arbitration:

The tribunal decided that as clause 14 contained both a right to cancel for the Seller’s failure to deliver as well as a right to claim damages if the Seller’s failure was due to proven negligence, there was no requirement for an innocent party to show it had exercised its common law right to terminate because the defaulting party was in repudiatory breach in order to claim damages for loss of profit. Accordingly, the buyer was entitled to recover damages for loss of profit as compensation for the seller’s default under clause 14.

The seller appealed the decision of the tribunal.

Commercial Court:

On appeal Mrs Justice Dias allowed the seller’s appeal and set aside the section of the arbitration award dealing with damages.

The Judge opined that there was no positive obligation in clause 5 or elsewhere in the Saleform 2012 to deliver nor give NOR by the cancelling date. In fact, the seller’s only obligation is to give a written NOR "when the Vessel is at the place of delivery and physically ready for delivery in accordance with this Agreement.", and a buyer is allowed under the provisions of clause 14 to cancel if no NOR has been given by the stipulated cancelling date.

The fact that a buyer’s right to claim damages for non-delivery by the cancelling date is not unconditional implies that a failure to tender NOR by the cancelling date is not in itself a breach of contract and the buyer’s right to damages will depend on the terms of clause 14.

In the Judge’s opinion, the relevant trigger for determining damages was the failure to give NOR by the cancelling date and it was only losses caused by that failure which could be recovered under clause 14 (e.g. the buyer’s expenses incurred arranging crew, costs of inspections,  legal costs and general preparations for delivery).

Clause 14 only permits recovery of damages of the entire bargain in cases of negligence falling short of repudiation or renunciation. So, in a situation where the buyer would otherwise recover no damages at all, there seemed “no great injustice in limiting recovery to accrued losses and wasted expenses. On the contrary, it is difficult to see why, in circumstances where Sellers are not in breach of condition, they should nonetheless be liable for the loss of the entire bargain when Buyers have a choice whether to cancel or not.”

The right to recover damages for loss of profit arises when the breach in question is repudiatory and the innocent party can show that it exercised its common law right to terminate for repudiation. A claim for damages under clause 14 depends on whether the seller is proven negligent. In circumstances where the market is rising it seems highly unlikely that the buyer would seek to cancel the MOA as it would make no commercial sense to do so – unless of course the seller was also held to be in repudiatory breach in which case damages for loss of profit would be recoverable in any event.

Conclusion:

The result in this case is perhaps surprising given the industry’s prior understanding of what a buyer could recover as a consequence of a buyer’s cancellation of the MOA where a seller’s failure to give NOR has been caused by its negligence. Buyers may, in light of this ruling, seek to impose an express obligation on sellers to tender NOR and deliver the ship by the cancelling date, with a failure by the sellers to tender NOR  being a breach of condition.  It is unlikely that such a clause would be accepted by a seller. Changes of this nature to a well-known standard clause are unusual and a well-advised seller would almost certainly reject such attempts to change standard wording.

A buyer might seek to include an express reference to damages for loss of profit in clause 14 in the event of a failure by the seller to tender NOR or deliver the ship prior to the cancelling date, but in the absence of overwhelming commercial pressure to do so, it seems doubtful that any seller would agree.

As always, if Members have any questions in relation to the above issues they are invited to contact the Club for further information.