Questions concerning the sale and purchase of second-hand vessels have been before the English courts again, resulting in an interesting judgment on damages.
Following King Crude Carriers SA v Ridgebury November LLC (2023) (see HERE), Orion Shipping and Trading Ltd -v- Great Asia Maritime Ltd (Lila Lisbon) [2024] EWHC 2075 (Comm), concerns an appeal of an arbitration award to the Commercial Court which held that, where a Memorandum of Agreement on the Saleform 2012 had been lawfully cancelled by a buyer under Clause 14 in circumstances where the seller had failed to give notice of readiness or failed to be ready to validly complete a legal transfer by the Cancelling Date due to "proven negligence", the buyer was not entitled to claim damages for loss of profit. A summary by Senior Claims Manager Alexandra Bailey and Managing Associate Stuart Plotnek.
Background:
In June 2021 the Parties concluded an MOA for the sale of the LILA LISBON based on an amended Saleform 2012. The Cancelling Date was originally stated as 20th August 2021 and the contemplated delivery date was 2 August 2021.
However, in July 2021 the Vessel’s classification society imposed a recommendation on the Vessel as a result of which the Sellers required an extension of time to the contemplated delivery date. The parties agreed by way of an addendum that the delivery would take place between 12 and 14 August 2021.
The Buyers were unable to meet this delivery date either, so asked for an extension of the cancellation date to 15 October 2021. The Buyers agreed to this but without prejudice to their right to claim damages under clause 14 of the MOA if the Sellers failed to meet the new cancellation date or complete the legal transfer of the Vessel due to their proven negligence.
The Buyers subsequently brought a claim for loss of use of the Vessel between 20 August 2021 and 15 October 2021 when the Sellers failed to take reasonable care in making arrangements for the disembarkation of their crew (“Claim 1”). Clause 14 of the MOA was as follows,
“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.
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.”
In addition, when the Sellers failed to deliver the Vessel by 15 October 2021, the Buyers arrested the Vessel on 18 October 2021 as security for their separate claim against the Sellers for the difference between the MOA price and the market price for the Vessel (“Claim 2”). This brought the MOA to an end.
The two claims by the Buyers were the subject of an LMAA arbitration in London. The tribunal found in favour of the Buyers and its key findings were that:
- The Buyers were entitled to cancel the MOA under clause 14 because the Sellers failed to deliver tender a Notice of Readiness (“NOR”) by the extended cancellation date. This default was the reason for the cancelled MOA.
- Clause 14 also conferred a right to compensation where the failure is due to proven negligence. On its ordinary meaning, the parties would have understood clause 14 to provide for compensation extending to the consequences of cancellation, including loss of profit. Therefore, the Buyers were entitled to recover loss of market damages under this clause.
- While negligent, Sellers’ conduct was not repudiatory, and Buyers were accordingly not entitled to terminate on the grounds of repudiatory breach. Further that, contrary to the position taken by the Sellers that loss of market damages could only be recoverable where there had been a repudiatory breach or a breach of a condition, the Buyers could still recover loss of market damages under clause 14 of the MOA.
The Seller appealed the decision of the Tribunal in relation to Claim 2, but not in relation to Claim 1.
Commercial Court:
Mrs Justice Dias allowed the Seller’s appeal and set aside the section of the Award dealing with damages.
The Judge opined that there was no positive obligation on a seller in Clause 5 or elsewhere in the Saleform 2012 to deliver nor give Notice of Readiness by the Cancelling Date. The Buyer’s right to cancel under clause 14 of the Saleform 2012 arose independently of any breach by the Seller. A seller’s only obligation is to give a written Notice of Readiness "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 Notice of Readiness 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 Notice of Readiness 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.
The relevant trigger for determining damages was the failure to give Notice of Readiness 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).
The Buyer’s loss of bargain claim accordingly failed, as it was held this was not a loss that was caused by the failure to give Notice of Readiness by the cancelling date. It was caused by the exercise of the Buyer’s right of cancellation. Such losses could be claimed only where the Seller’s conduct was repudiatory. The Tribunal had already held that the Seller’s conduct was not repudiatory.
Conclusion
This judgment includes a detailed review of the relevant case law and the wording of clause 14. However, the potential commercial ramifications are interesting.
Buyers negotiating on the basis of Saleform 2012 may well attempt to make an obligation to tender Notice of Readiness by the Cancelling Date a condition of the contract. In light of this ruling a well-advised seller will oppose this. Furthermore, any change to the terms of Clause 5 which purport to make tendering NOR and delivering the vessel by a certain date a positive obligation might require additional amendments to the Saleform (perhaps, for example, in relation to an extension of the Cancelling Date).
Might then a buyer seek to include an express reference in Clause 14 to its right to claim damages for loss of profit? Again, in the absence of overwhelming commercial pressure so to do, it seems doubtful that any seller would willingly agree.
Without such an amendment buyer, entering into an MOA and placing reliance on his seller, and who may also have waited several months to take delivery of a ship, may well be without recourse to a claim for loss of bargain even in cases where the seller has been proven negligent.
Given that a seller is entitled to claim the full deposit in circumstances where his buyer defaults some in the market may feel that the judgment strengthens the position of the seller under the Saleform 2012.