Briefing

The LILA LISBON: UK Supreme Court affirms buyers’ entitlement to loss of bargain damages

The Supreme Court¹has affirmed the long-held industry understanding of the operation and effect of Clause 14 (Sellers’ Default) of the Norwegian Saleform 2012. Where buyers terminate a memorandum of agreement pursuant to Clause 14, due to a sellers’ proven negligence in failing to exercise reasonable due diligence to deliver the vessel by the cancelling date, the buyers are entitled to claim loss of bargain damages even where no separate repudiatory breach occurred.

Background

In June 2021, Great Asia Maritime (the Buyers) and Orion Shipping and Trading (the Sellers) concluded a memorandum of agreement (the MOA) on an amended Norwegian Saleform 2012 (the NSF 2012) for the sale of the m.v. LILA LISBON (the Vessel). The parties later agreed that the cancelling date would be extended from 20 August 2021 to 15 October 2021 (the Cancelling Date), without prejudice to the Buyers’ rights to claim damages under Clause 14 (Sellers’ Default) of the MOA.

The Sellers failed to tender a valid notice of readiness by the original and revised Cancelling Date(s) in accordance with Clause 5 (Time and place of delivery and notices) and deliver the Vessel. At arbitration, the Buyers were awarded USD 1,650,992 for lost profit arising from the Sellers’ failure to deliver by the original Cancelling Date, and a further USD 1,850,000 in loss of bargain damages, being the difference between the MOA price and the market price at the latest permissible delivery date.

The Sellers successfully appealed to the Commercial Court to set aside the loss of bargain portion of the award. Buyers were subsequently successful in the Court of Appeal in having the arbitration award reinstated in full.

For further discussion of the Commercial Court and Court of Appeal’s decisions, please see our previous article, “Entitled or Not Entitled: Court of Appeal Restores Industry Understanding on Loss of Bargain Damages“. You can also watch HFW’s Summer 2026 Commercial Shipping Breakfast Webinar for a discussion of the Court of Appeal’s decision.²

The Supreme Court decision

Unanimously dismissing the Sellers’ appeal and affirming the judgment of the Court of Appeal, the Supreme Court looked to (i) the language of Clause 14; (ii) wider contextual matters of the NSF 2012; (iii) past decisions relating to Clause 14 of the NSF 2012; and (iv) the commercial consequences of the Sellers’ rival interpretation.

Language of Clause 14

The Supreme Court suffered no delay in affirming that the natural and ordinary meaning of “loss” was wide enough to include loss of bargain damages. The wording of “loss” was general and unqualified, and loss of bargain was clearly a type of loss. Accordingly, where the clause expressly contemplated recovery of “loss” in the event of cancellation, it would be unclear what else the term would cover, if not loss of bargain. Applying the ordinary principles of causation, remoteness and mitigation, the Supreme Court found no good justification to exclude the recoverability of loss of bargain damages.
Wider Contextual Matters of the NSF 2012

As a matter of contractual symmetry, the Supreme Court drew further support from Clause 13 (Buyers’ Default), which used materially identical wording for a sellers’ claim on the buyers’ default, and which prior authority³ had viewed as including loss of bargain damages. The Supreme Court also endorsed the position that compensation for the Buyers’ claim was analogous, or at least akin, to non-delivery under a sale of goods contract, for which section 51(3) of the Sale of Goods Act 1979⁴ made the ordinary measure of damages the difference between the contract and market price at the time of delivery.
Past Decisions on Clause 14 of the Norwegian Saleform

Considerable weight was placed on the authorities of The Solholt⁵ and The Al Tawfiq⁶, in which loss of bargain damages were held to be recoverable under Clause 14 following cancellation due to the sellers’ default, and where successive revisions of the Norwegian Saleform (1983, 1987, 1993, 2012) did not attempt to expressly remove or narrow the buyers’ entitlement to such damages.

Applying well-established principles favouring certainty, predictability and continuity in the interpretation of industry-wide standard forms, the Supreme Court was satisfied that the Sellers had not shown any good reason to depart from what was therefore the established meaning of Clause 14.
Commercial Consequences

The Supreme Court was not persuaded by the Sellers’ rival interpretation of Clause 14 in view of its commercial consequences. Allowing the Sellers to retain the benefit of the Vessel’s value in a rising market, despite their proven negligence, would be an “uncommercial outcome”, creating a perverse incentive for sellers to delay in a rising market. Conversely, it would encourage buyers to delay cancelling at the risk of waiving their rights to do so. Recognising the Buyers’ entitlement to loss of bargain damages avoided both distortions and better reflected the ordinary commercial expectations of risk allocation.

Sellers’ submissions

The Supreme Court also dealt comprehensively with the Sellers’ central arguments, ultimately rejecting them as a barrier to the Buyers’ entitlement to loss of bargain damages under Clause 14.

The Causation Principle

The Sellers, principally relying on Financings Ltd v Baldock [1963] 2 QB 104, argued that it was the Buyers’ own election to terminate under Clause 14 that was the effective cause of the Buyers’ loss of bargain, and not the Sellers’ non-repudiatory breach of their readiness obligation, since a non-repudiatory breach itself could not destroy the bargain. The Supreme Court was not persuaded by the Sellers’ causation analysis.

In any event, and even if Financings was correctly decided in relation to a bare cancellation clause, such an analysis could not apply to an express compensation clause which conferred more than a simple right to terminate. The Supreme Court also identified an internal inconsistency in the Sellers’ position; on their own logic, the Buyers’ entitlement to wasted expenses, which the Sellers accepted were recoverable, would equally have been caused by the Buyers’ election to cancel.
The Clear Words Principle

The Sellers also argued that clear words were required to confer a right to damages where none would arise at common law, citing the authority of Novasen SA v Alimenta SA [2013] EWHC 345 (Comm)⁷. In rejecting this submission, the Supreme Court held that the clear words principle existed to protect a party from losing valuable existing rights or remedies without express words to that effect, finding that it carried no equivalent force where a clause instead conferred additional rights and where a loss had been suffered.

HFW comment

Managing the risk of a moving market

Even though Clause 14(e) of the Norwegian Saleform 2025 now expressly provides for a buyers’ entitlement to loss of bargain damages, the NSF 2012 is likely, for the time being at least, to remain the industry’s preferred standard form for the sale and purchase of second-hand tonnage. The Supreme Court’s judgment has therefore provided welcome certainty and affirmed that Clause 14 of the NSF 2012 operates as the markets have understood it to since the 1980s.

This decision, however, is a clear illustration of the commercial risks borne by sellers, particularly in circumstances where vessel prices continue to appreciate as they have in recent times. That said, this decision is also relevant to the operation of Clause 13 (Buyers’ Default), and in the event of a broader market correction, we might expect a sellers’ right to loss of bargain damages, and the Supreme Court’s view of the operational symmetry between such clauses, to be tested in future disputes.

Practical takeaways

Whilst sellers of second-hand vessels now stand to bear the full exposure to their buyers’ loss of bargain if the buyers cancel in a rising market, a buyers’ entitlement to loss of bargain damages remains conditional on establishing that the sellers’ failure to be ready by the cancelling date was due to their “proven negligence” in failing to exercise reasonable due diligence. This fact-sensitive threshold is where we can expect future disputes to arise.

For sellers, the advice is to enhance risk management and operational efforts in preparing the vessel for delivery, and to thoroughly assess whether the proposed date for delivery is achievable. In particular, sellers should contemporaneously and comprehensively evidence the due diligence exercised in effecting the vessel’s readiness throughout the course of the transaction, so as to be able to rebut an allegation of negligence should it arise, or to fully substantiate an extension to the cancelling date if required.

For buyers, they too should build a similarly contemporaneous record of the sellers’ conduct in preparing for delivery, such as tracking any non-compliance by the sellers with the notice milestones in Clause 5(b) and the circumstances behind any request to extend the cancelling date under Clause 5(c). As envisaged in our previous article, we expect this judgment’s impact to bring the latter under increased scrutiny from buyers in future transactions.

Drafting implications

Following this decision, sellers may naturally wish to limit their exposure to the buyers’ expenses, or even attempt to exclude loss of bargain damages, in cases of proven negligence or in their entirety. Sellers may similarly consider seeking to define the required standard of reasonable due diligence in their favour, or to classify Clause 14 as a condition of the contract. In any case, sellers who wish to depart from what is now the established meaning of Clause 14 will need to do so through clear and express language.

However, such attempts will inevitably receive push back from buyers, who should remain alert to any seller-proposed amendments seeking to narrow “loss” or “due compensation” within Clause 14, or the threshold at which their entitlement to loss of bargain damages crystallises. Unless a seller is willing to accept symmetrical amendments to its own rights, for example under Clause 13, neither party is likely to prevail on its financial recourse against the other.

While it is inevitable that parties will seek to negotiate the most favourable terms within the NSF 2012, any such amendments to Clause 14, along with their subsequent effects, should now be carefully considered by both sellers and buyers. It is, however, worth recognising that the NSF 2012 is broadly regarded by the market as a balanced standard form, and its negotiation should therefore not be viewed by the parties as a zero-sum game.

HFW has extensive experience advising on all aspects of ship sale and purchase transactions and the disputes that arise out of them. For more information, or to discuss any queries raised by this judgment, please contact the authors, or your usual HFW contact.

Footnotes