The LILA LISBON - CA allows loss of bargain recovery in MOA cancellation dispute

Background

The parties entered into a Memorandum of Agreement (MOA) on an amended Norwegian Saleform 2012 form for the sale of the bulk carrier MV "LILA LISBON".

The Cancelling Date under the MOA was 20 August 2021. The Sellers’ initial intention was to deliver the vessel on 2 August, but the parties later agreed that delivery would take place on 12–14 August. The Sellers were unable to deliver her on those dates and requested an extension of the Cancellifng Date from 20 August 2021 to 15 October 2021. The Buyers agreed without prejudice to their right to claim damages under Clause 14 of the standard form. In the event, the Sellers were also unable to deliver the vessel by 15 October, and the Buyers claimed damages for the difference between the contract price and the market price of the vessel.

The Tribunal ruled that:

1. The Sellers’ failure to deliver the vessel by the original Cancelling Date was due to their proven negligence, but this failure was not repudiatory. They awarded damages for loss of use for 56 days from 20 August to 15 October 2021; and
2. The Sellers’ failure to be ready to deliver by 15 October 2021 was also attributable to their proven negligence. The Tribunal awarded the Buyers loss of bargain damages as compensation for the Sellers’ default under Clause 14 and assessed such damages at $1.85m, being the difference between the market price as at the date of cancellation ($16.85m) and the contract price ($15m).

The Sellers appealed to the Commercial Court in respect of the Tribunal’s decision at (b) above. The Commercial Court Judge, Dias J, disagreed with the Tribunal, holding that:

1. There was no obligation at all on the Sellers to tender Notice of Readiness, nor to be ready to validly complete a legal transfer by the Cancelling Date; and
2. Clause 14 did not entitle the Buyers to recover loss of bargain damages.

The Commercial Court decision is discussed at: Steamship Mutual - MOA – is loss of bargain recoverable? 

The Case in the Court of Appeal

The Buyers appealed on two grounds:

1. The Judge was wrong to conclude that there was no obligation on Sellers to tender Notice of Readiness nor to be ready to validly complete a legal transfer by the Cancelling Date. There were such obligations.
2. The Judge was wrong to conclude that Clause 14 only allows Buyers to recover losses and expenses which have accrued prior to cancellation. Clause 14 entitles Buyers to recover loss of bargain damages.

The Sellers argued:

1. Clear wording would be required in order for Clause 14 to be construed as including or permitting loss of bargain damages. There were no such words present in the MOA.
2. If the MOA is found to impose an obligation as contended for by Buyers in its Ground 1, Clause 14 has the effect of permitting or preserving a claim for accrued damages where there is proven negligence and so the words “due compensation” refer to accrued damages only, and not to loss of bargain damages.

The Contractual Provisions

5. Time and place of delivery and notices

1. The Vessel shall be delivered and taken over safely afloat at ….

   Notice of Readiness shall not be tendered before: 20th July 2021
   Cancelling Date (see Clauses 5(c), 6(a)(i), 6(a)(iii) and 14): 20th August 2021
   …….

2. The Sellers shall keep the Buyers well informed of the Vessel's itinerary and shall provide the Buyers with twenty (20), ten (10), five (5) and three (3) days' notice of the date the Sellers intend to tender Notice of Readiness and of the intended place of delivery.
3. If the Sellers anticipate that the Vessel will not be ready for delivery by the Cancelling Date, they may notify the Buyers in writing stating the date when they anticipate that the Vessel will be ready for delivery and proposing a new Cancelling Date. Upon receipt of such notification the Buyers shall have the option of either cancelling this Agreement in accordance with Clause 14 (Sellers' Default) within three (3) running days of receipt of the notice or of accepting the new date as the new Cancelling Date.
   …..
4. Cancellation, failure to cancel or acceptance of the new Cancelling Date shall be entirely without prejudice to any claim for damages the Buyers may have under Clause 14 (Sellers' Default) for the Vessel not being ready by the original Cancelling Date.

14. Sellers' Default

1. 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.
2. 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)

The Court of Appeal Decision

Ground 1: Were Sellers contractually obliged to tender Notice of Readiness by the Cancelling Date?

This question was answered in the affirmative. Delivering the Court of Appeal’s judgment, Lord Justice Nugee considered that the wording of the Saleform 2012 (how the words “default”, “negligence”, “damages” and “compensation” are used) and the reasoning in The Democritos [1976] 2 Ll Rep 149 supported his view that Clause 5 imposed on Sellers an implied obligation to exercise reasonable diligence to deliver the vessel by the Cancelling Date:

62. The contractual scheme that this gives rise to seems to me both logical and coherent, and is not I think difficult to understand. Sellers do not give any absolute promise that they will have the vessel ready by any particular date. If, therefore, despite the exercise of due diligence, they are unable to deliver by the Cancelling Date, they are not in breach of contract. But nevertheless failure to do so gives Buyers an option to cancel under Clause 14(A), exercise of the option not being dependent on breach. This is, in the absence of proven negligence, a species of termination without fault on either side, and consistently with this Buyers are entitled to return of the deposit but do not have any claim to damages.

63. But Sellers are for the reasons I have sought to express under an obligation to use reasonable or due diligence to deliver the vessel by the Cancelling Date. “Negligence” in Clause 14(B) means a failure by Sellers to comply with this obligation. So if Sellers are not ready to deliver by the Cancelling Date, and Buyers show that this is due to their failure to use due diligence, then not only do Buyers have the option to cancel under Clause 14(A), but they also have a right to damages in the shape of compensation for their loss under Clause 14(B). This right to damages subsists whether or not Buyers exercise their right to cancel (as Clause 14(B) says), and whether or not they accept a proposal by Sellers for a new Cancelling Date under Clause 5(c) (as Clause 5(d) says).

Ground 2: Can Buyers recover loss of bargain damages under Clause 14(B)?

The Court of Appeal first looked at the wording of Clause 14(B) and agreed with the Commercial Court Judge that “due compensation” in this clause means compensation which is appropriate using the common law principles of causation, remoteness and mitigation, and rejected the Sellers’ argument that it referred to accrued damages only.

Turning to the question as to whether “their loss” in the same clause could include loss of bargain, the Court of Appeal agreed with the Tribunal that the parties would have understood the ordinary meaning of the clause to be that loss of bargain would be recoverable. Lord Justice Nugee explained as follows:

76. ……Great Asia did not get the ship it had contracted for. The ship was by the time the contract was cancelled worth $16.85m, but Great Asia was only due to pay $15m for it. Having thus lost the benefit of the contract, its loss was the loss of that bargain.

77. …..Great Asia did not get it because Orion was not ready to deliver it in the time allowed for that purpose by the MOA, that is by the (extended) Cancelling Date; Great Asia was therefore entitled to, and did, call the contract off; and Orion was not ready to deliver it because it had failed to exercise due diligence to get itself ready by the relevant date….

The following points were addressed:

• Whilst the Court of Appeal agreed with the Commercial Court that the losses for which the Buyers can claim are those caused by the Sellers’ (negligent) failure to be ready, it did not agree that those losses had to be crystallised at the point of cancellation. As a matter of fact, the losses that the Buyers suffer will depend on what actually happens, and the Court will take account of what happened by the time the losses are to be assessed (The Golden Victory [2007] UKHL 12, [2007] 2 AC 353) [www.steamshipmutual.com/publications/articles/goldenstrait0507 and see Repudiatory Breach, Damages and the Ability to Perform - The Glory Wealth (2013)]. If, as here, the Buyers suffer a loss of bargain, that loss is still caused by the Sellers’ failure because, had the Sellers been ready, the Buyers would not have been able to cancel.
• The Court of Appeal drew a parallel with the right conferred on the Sellers by Clause 13 of the Saleform whereby, if the Buyers fail to pay the contract price, the Sellers can cancel the contract and claim compensation for their losses, which could include loss of bargain (The Griffon, [2013] EWHC 593 (Comm), [2013] EWCA Civ 1567). The structure of Saleform 2012 led one to expect that Clauses 13 and 14 would operate in a similar fashion, payment and delivery being the basic duties of buyers and sellers under a contract for the sale of goods.
• Contrary to the Commercial Court, the Court of Appeal found that in the event that the Sellers are not ready to deliver the vessel by the Cancelling Date and the Buyers exercise their right to cancel, this is to be equated with a case of non-delivery with the result that, if the Buyers can prove that the non-delivery was caused by the Sellers’ negligence, the normal measure of damages for non-delivery (namely the difference between market price and contract price as set out in s.51(3) of the Sale of Goods Act 1979) should apply.
• The Court disagreed with Sellers’ submission that allowing loss of bargain to be recovered in case of cancellation produced an odd result where the obligation to deliver by the Cancelling Date had not been drafted as a condition (breach of which entitles the innocent party to terminate and claim damages). In circumstances where the Sellers’ delivery obligation was not absolute, the scheme in the Saleform 2012 made perfect sense as it conferred an express contractual right on Buyers to cancel without the need for them to prove breach by Sellers, coupled with a right to claim damages if they could.
• The Sellers relied on the principle that loss of bargain damages cannot be recovered on the exercise of a contractual right of termination unless the claimant can show a repudiatory breach and that it exercised its common law right to terminate for repudiation, but this did not take matters further. It is open to parties to make express provision as to the consequences of cancellation pursuant to a contractual right, and Clause 14(B) did precisely that, i.e. it conferred on Buyers the right to claim compensation for their loss.
• When dealing with the Sellers’ argument that clear words are required to confer on Buyers a right which they do not have at common law, the Court of Appeal dismissed the authorities relied on as irrelevant. In the Court of Appeal’s view, Clause 14(B) does contain clear words giving Buyers the right to compensation and it does not purport to provide for recovery where there has been no loss.
• Previous authorities, in particular The Solholt [1983] 1 Ll Rep 605, though not precisely in point, supported the Buyers’ construction with which the Court of Appeal agreed.
• The Court of Appeal also agreed that the Buyers’ interpretation made more commercial sense. On the Sellers’ case, in a rising market, Buyers would be foolish to cancel the contract, but where they saw no other alternative given the Sellers’ negligence, Clause 14 would be of limited assistance to them. This, the Court said, “would provide a perverse incentive to Sellers to delay completing in a rising market in the hope that Buyers would lose patience and cancel, leaving Sellers with a more valuable ship”.