This year's Annual Review reports strong financial results, continued strategic progress and enhanced support for shipowners operating in an increasingly complex and uncertain global environment.
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Does cancellation under clause 14 of the SALEFORM 2012 form entitle the buyer to loss of bargain damages where there is only “proven negligence” by the seller?
In reaffirming a ground-breaking judgment where a memorandum of agreement (“MOA”) was cancelled under clause 14 of the Norwegian Saleform 2012, the UK Supreme Court, in The Lila Lisbon (judgment available here), in upholding the Court of Appeal judgment (article available here), held that where an MOA was lawfully cancelled by a buyer under clause 14 in circumstances where the seller had failed to (a) give notice of readiness (“NOR”) to deliver the ship or (b) be ready to validly complete a legal transfer of the ship to the buyer by the amended cancelling date and such failure was due to the seller’s “proven negligence”, the buyer was entitled to recover loss of bargain damages, for the difference between the market price and the contract price of the ship when the MOA came to an end, without having to prove a repudiatory breach of the MOA by the seller.
The UK Supreme Court’s decision confirms the Court of Appeal’s reinstatement of the tribunal’s final arbitration award, after it had been initially overruled by the High Court (article available here), on an appeal by the seller on a point of law under section 69 of the Arbitration Act 1996, where the buyer had been awarded loss of bargain damages of USD1,850,000 after the tribunal had found that the seller’s conduct was a negligent breach but not a repudiatory breach of the MOA.
The answer to the question posed on the appeal, therefore, had a significant impact because if the question was answered in the positive, as in the event it was, it did not limit the buyer’s claim in damages under clause 14 only to accrued losses and wasted expenses attributable to the seller’s failure to deliver or to transfer legal title to the ship by the cancelling date.
The buyer’s accrued losses and wasted expenses up to cancellation, such as to ready a master, officers and crew to embark the vessel on delivery, would likely have been far less significant compared to the far more substantial loss of bargain damages that were awarded.
In reaching its view, the UK Supreme Court, in addressing the interpretation of the language used in clause 14, has decided that only the often easier to prove negligent breach cause of action, rather than the often harder to prove repudiatory breach cause of action, has to be established. So, on proving a negligent breach when lawfully cancelling a MOA, a buyer may be entitled to recover loss of bargain damages without proving an accepted repudiatory breach too.
This highlights that sellers under this form of MOA may run a risk of greater exposure to substantial damages for delay to the delivery or transfer of the ship. With delays being commonplace, parties should carefully negotiate and draft cancellation and associated clauses to ensure their interests are adequately protected in the event of a breach of an MOA.
While this judgment confirms the position under SALEFORM 2012, it is worth noting that, given the then ongoing litigation in this case, the drafters of the recently released SALEFORM 2025 amended the language to update clauses 5 and 14. These updates clarify that (1) the seller is under an obligation to tender a valid NOR before the cancelling date and (2) if the buyer lawfully elects to cancel the MOA and the seller’s negligence in meeting its obligations is proven, then the buyer is entitled to claim loss of bargain damages.
Should members have any queries arising from this judgment or article, they should feel free to approach their usual contact for FD&D matters at NorthStandard to discuss.
