When a vessel is sold for the purpose of demolition, the Seller’s eligibility for compensation if it is subsequently traded is limited to actual losses proven, according to the High Court ruling in the case of The Lory [2019] EWHC 2804 (Comm). Angeliki Panera explains a case whose decision reiterates a Supreme Court ruling on the non-compete clause.

Keeping up with the recent trend, The Lory is yet another judicial proclamation of the compensatory principle in English contract law; that is to say that, save for exceptional circumstances, a contract breaker will only be liable for the innocent party's actual losses adequately proven. This is the case even when the breach was deliberate or self-interested.

The claimant Buyer purchased a 2002-built Capesize bulk carrier (the "Vessel") from the defendant Seller pursuant to a memorandum of agreement (the "MOA"), which provided that the Vessel was being sold for the purpose of demolition only. The purchase price was US$9,623,184.90. Clause 19 of the MOA provided that:

"The vessel is sold for the purpose of demolition only and the Buyers hereby guarantee that they will not trade the Vessel…"

The Buyer traded the Vessel for two fixtures for the carriage of coal from Indonesia to India and South Africa to India respectively. The Buyer claimed that its decision to trade the Vessel was reached after delivery, due to a fall in the scrap market and a rise in the freight market for Capesize bulkers. Although the Buyer was in breach of Clause 19 of the MOA, the Buyer sought a declaration from the English High Court that the Seller was entitled to nominal damages only, on the basis that the breach had not caused the Seller any loss.

The Seller, on the other hand, counterclaimed for "negotiating damages" in an amount corresponding to the value of the right which had been breached, in other words, the amount which the Seller would have required in order to release the Buyer from its undertaking not to trade the Vessel. The Seller also sought an injunction to prevent the Buyer from continuing to trade the Vessel.

Decision

1. Injunction

The final injunction was granted, as it was the normal remedy for breach of a negative covenant and was an appropriate remedy in this case. Although the Court enjoys a discretion to refuse to grant an injunction and/or to award damages instead of an injunction, such discretion will usually be exercised where the granting of an injunction would be unconscionable or oppressive.

On the facts, the Buyer failed to persuade the Court that the granting of the injunction would be unconscionable or oppressive. The breaches of Clause 19 by the Buyer were deliberate and, although the decision was based upon commercial considerations, that in itself did not lead to the conclusion that the financial or other consequences for the Buyer of an injunction would be so extraordinary that the injunction should be regarded as oppressive. The Buyer had alternative means of minimising its loss (e.g. by laying up the Vessel until the scrap market picked up) but reached the commercial decision to try and make a profit. The Judge also found that the Seller had a policy of scrapping its older tonnage in order to address market overcapacity of Capesize vessels and its impact on freight rates. The Seller therefore had a legitimate commercial interest in insisting on the restriction.

2. Negotiating Damages

The Judge reiterated the principles set out by the Supreme Court in Morris-Garner and another v One Step (Support) Ltd [2018] UKSC 20, which concerned a breach of a non-compete clause. Similarly to this case, that clause was held not to fall within the limited exceptions, where negotiating damages can be awarded for breaches of contract. In order for a case to fall within the exception, the breach must result in the loss of a valuable asset. The relevant asset cannot be the contractual right itself but something else, created or protected by the right which has been breached. Examples include breaches of a restrictive covenant over land, or of a contractual right to control the use of land, or breaches of intellectual property or confidentiality agreements.

This case did not concern the invasion of property rights - the Seller no longer had any property or financial interest in the Vessel, but only a personal right under contract against the Buyer. To be entitled to compensation, the Seller had to show that it had suffered an actual loss – i.e. that it was worse off than if the MOA had been properly performed. The Seller failed to show that it would have been better off if the Buyer had not traded the Vessel. It is the Buyer's position which would have been worse (the Buyer would have either suffered a loss or not made a gain), but that was not the correct basis to assess damages for a breach of contract in an ordinary case.

The Judge did, however, give the Seller permission to appeal. So, stay tuned…