Entitled or Not Entitled: Court of Appeal Restores Industry Understanding on Loss of Bargain Damages

The Court of Appeal¹ has held that under the Norwegian Saleform 2012, where the buyers lawfully terminate the memorandum of agreement pursuant to Clause 14 (Sellers’ Default), due to the sellers’ proven negligence in failing to exercise reasonable due diligence to deliver the vessel by the cancelling date, the buyers are entitled to make a recovery for loss of bargain damages under Clause 14 – without needing to establish a separate repudiatory breach.

This significant decision represents the restoration of a long-established industry understanding on loss of bargain damages and will be of comfort to buyers of second-hand vessels.

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 by when the Vessel had to be tendered for delivery would be extended from the 20 August 2021 to 15 October 2021 (the Cancelling Date), without prejudice to the Buyers’ rights to claim damages under Clause 14 of the MOA.

Clause 14, known as Clause 14[A] and [B] throughout, provided as follows:

When the Sellers failed to tender a valid notice of readiness (NOR) by the Cancelling Date, the Buyers arrested the Vessel and brought a claim in arbitration against the Sellers for damages.

The Arbitration Award

The LMAA Tribunal was satisfied that the Sellers had breached Clause 14 of the MOA by reason of their “proven negligence” in failing to tender NOR by the Cancelling Date or to be ready to complete the legal transfer of the Vessel. The Buyers were awarded USD 1,850,000 by way of loss of bargain damages and USD 1,650,992 for their loss of use of the Vessel between 20 August 2021 and 15 October 2021.

The damages awarded reflected the usual measure of damages for non-delivery under section 51 of the UK Sale of Goods Act 1979,² namely the difference between the market price of the Vessel as at the time of the breach and the contract price.

The Commercial Court Decision

On appeal, under section 69 of the Arbitration Act 1996,³ Mrs Justice Dias (the Trial Judge) sitting in the Commercial Court set aside the section of the Tribunal’s Award dealing with loss of bargain damages.⁴

Breach of Condition

The Trial Judge held that Clause 14 did not impose any positive obligations upon the Sellers but rather provided for the consequences if the Sellers defaulted. She opined that it was Clause 5 (Time and place of delivery and notices) of the MOA which set out the Sellers’ obligations relating to the time of delivery, noting that the only obligation imposed by this clause was to give a written NOR when the Vessel was ready and at the place of delivery. As such the Trial Judge concluded that there was no positive obligation capable of giving rise to a breach of condition.

Clause 14 (Sellers’ Default)

The Trial Judge held that, absent a repudiatory breach, the ordinary and natural meaning of Clause 14 did not give rise to a right to claim loss of bargain damages in circumstances where a unilateral cancellation takes place in accordance with Clause 14, or where there is no positive obligation to give a NOR by the Cancelling Date. The Trial Judge was similarly satisfied that it must have been the parties’ intentions that the right to cancel should confer no entitlement to loss of bargain damages without a repudiatory breach.

The Court of Appeal Decision

Mr Justice Bright granted the Buyers leave to appeal to the Court of Appeal on the following two grounds:

1. The [Trial] 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 [Trial] Judge was wrong to conclude that Clause 14 only allows Buyers to recover losses and expense which have accrued prior to cancellation. Clause 14 entitles Buyers to recover loss of bargain damages.

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

Yes; in finding so, the Court of Appeal looked to the language used throughout the MOA, considering the use of “default” in the headings of, and throughout Clauses 13 and 14; the use of “due compensation” and “loss” in Clause 14[B]; and “any claim for damages the Buyers may have under Clause 14“. The Court of Appeal were satisfied that such language pointed to the Sellers being under “some contractual obligation” to be ready before the Cancelling Date.

In approaching this conclusion, the Court of Appeal agreed with the Trial Judge’s finding, in so far as there was no “absolute obligation” for the Sellers to be ready to deliver the Vessel by the Cancelling Date. However, concern remained that this did not address the separate question of whether there was some obligation on the Sellers to exercise due diligence to be ready to deliver the Vessel by the Cancelling Date.

On this point, the Court of Appeal found the decision in The Democritos [1976] 2 L1 Rep 149 instructive; a case which considered owners’ delivery obligations under a time charter on the NYPE form. The Court of Appeal found the ratio of Lord Denning MR at paragraph 152 of assistance in so far as it illustrated that, “these authorities show that as long as the owner uses reasonable diligence, he is not in breach, but the charterer is entitled to cancel if the vessel is not delivered by the cancelling date.”

Ultimately, the Court of Appeal were satisfied that there was no reason that the same principles shouldn’t apply in the context of an MOA on the NSF 2012 and held that Clause 5 (“Time and place of delivery and notices“) imposed an implied obligation on the Sellers to exercise reasonable diligence to deliver the Vessel by the Cancelling Date.

Ground 2: Can Buyers recover loss of bargain damages under Clause 14[B]?

Yes; in finding so, the critical point for the Court of Appeal to consider was the meaning of “loss” within Clause 14[B]. Much like their consideration of Ground 1, the Court of Appeal looked to the language used in the Clause. In arriving at the conclusion that the natural and ordinary meaning of “loss” extended to the Buyers’ loss of bargain, the Court considered the Clauses use of “due compensation” and “their loss“.

The Court of Appeal saw no reason not to give “due compensation” its “straightforward meaning” and rejected the narrow linguistic interpretations posed by the Sellers that “due” was to be understood as “already accrued” as opposed to “proper” or “appropriate” compensation. In rejecting the Sellers’ submissions, the Court of Appeal looked to Clause 5(d) and held that it’s wording indicated that damages were payable under Clause 14 itself, rather than simply preserved by it. Additionally, the Court of Appeal agreed with the Tribunal that it was not obvious what loss was to be compensated for under Clause 14[B] if it did not include loss of bargain.

The Court of Appeal found further assistance from the case of The Solholt [1983] 1 L1 Rep 605. The court noted that if the intention behind the various iterations of this Clause was to depart from the Court’s interpretation of the 1966 version, one would have expected clear drafting to that effect. The absence of such clarity added weight to the view that loss of bargain damages remains integral to the operation of Clause 14[B].

The Court of Appeal also found support in considering the Sellers’ corresponding rights under Clause 13 (Buyers’ Default) finding that, in addition to running parallel to common law remedies, both Clauses 13 and 14 would be expected to operate in a similar manner given the balanced structure of the NSF 2012; i.e., in the event of non-performance by one party (either the Buyers’ failure to pay the purchase price or the Sellers’ failure to deliver the Vessel), the other has the benefit of a claim for the losses incurred, including for loss of bargain, and without the need for a separate repudiatory breach.

Finally, the Court of Appeal also considered the commercial context. In agreeing with the Buyers, the court observed that when faced with the Sellers who twice failed to meet their delivery deadlines, it was commercially reasonable for the Buyers to have lost patience and exercised their right to cancel under Clause 14[A]. Therefore, if Clause 14[B] did not allow recovery for loss of bargain, even where the Sellers were proven to be negligent, it would absolve the clause of its utility and incentivise the Sellers to delay delivery in a rising market.

HFW Comment

This is a significant appeal judgment that will be welcomed by those contracting under the NSF 2012, which remains overwhelmingly the shipping industry’s preferred form of contract for the sale and purchase of second-hand tonnage. This judgment provides the necessary clarity on the interpretation of Clause 14[B] and the recoverability of loss of bargain damages in view of a default by a seller.

However, though the clarity is welcome, those engaged in ship sale and purchase should remain cognisant of the following:

1. The Implied Obligation to Exercise Due Diligence: Whilst this judgment presents parties with contractual certainty on the one hand it sows additional uncertainty with the other. For example, whilst there is the suggestion throughout this judgment, “that Clauses 13 and 14 will operate in a similar fashion“, it remains to be seen whether the obligation to exercise reasonable due diligence will similarly apply to a buyer’s obligations under Clause 13 (Buyers’ Default) to lodge the deposit or pay the purchase price.
   
   Additionally, the Court of Appeal does not offer any substantive guidance on what amounts to “reasonable” or “due diligence” in the context of an MOA concluded on the NSF 2012; will the standard of “due diligence” required be analogous to the scope and rigor of an owner’s seaworthiness obligations under a time charterparty, or will it be more akin to the standard of a “reasonably observant and careful master” in describing the true and apparent condition of cargo as in The David Agmashenebeli [2002] EWHC 104 (Admlty)?⁵
    
   Likewise, will the standard of “reasonable” be analogous to that required of “reasonable endeavours” in RTI Ltd v MUR Shipping BV [2024] UKSC 18⁶ or draw inspiration from the tortious standard of “reasonable care” from the eminent authority of Donoghue v Stevenson [1932] AC 562,⁷ notwithstanding the Court of Appeal’s rejection that a strict tortious duty of care would be owed by a seller to a buyers’ interests?
2. Anticipatory Breach and Clause 5(c): Clause 5(c) of the NSF 2012 provides sellers the ability to seek an extension of the cancelling date if they anticipate that, notwithstanding the exercise of due diligence, they will not be ready to deliver the vessel by the cancelling date.
   
   In light of the Court of Appeal’s decision, it is within the realms of possibility that, following receipt of a notice to extend the cancelling date, a buyer may seek a shortcut to cancel the MOA and argue that receipt of a notice of extension is prima facie evidence of a seller’s proven negligence, or amounts to an anticipatory breach of the MOA.
   
   From a practical perspective this may be a very difficult argument for a buyer to make; notwithstanding a buyer’s timeframe of 3 banking days to respond to a seller’s request, an anticipatory breach would only apply where the non-performance threatened by one party would deprive the other party of substantially the whole benefit of the contract. The mischief of Clause 5(c) is not non-performance but to delay it by agreement. Nevertheless, it brings into sharper focus the strategic importance of such extension requests to sellers and potential difficulties buyers may face in view of the same.
3. Amendments to NSF 2012: Understandably, following the judgment at first instance, parties seeking to conclude an MOA on the NSF 2012 would likely have sought to negotiate and amend Clause 14 to expressly include (or exclude in the case of the sellers) a buyers’ right to loss of bargain damages, as well as to expressly provide that a breach of Clause 14 would be a breach of condition, for example by stipulating that time is of the essence.
   
   However, in view of the Court of Appeal’s ratio at paragraphs 109 to 111 of the judgment, we would caution against this instinct. Providing for Clause 14 (Sellers’ Default) as a condition of the contract may now add unwanted difficulties for a buyer. For example, if a buyer is unable to prove a seller’s negligence in breach of their obligation to exercise reasonable due diligence, they will be liable for the cost consequences of a wrongful repudiatory breach. On the other hand, if a buyer fails to promptly terminate for a repudiatory breach they may be held to have affirmed the seller’s breach and to have lost the right to terminate.
   
   If the same standard of due diligence is applicable to a buyer’s obligations to lodge the deposit and pay the purchase price, a seller may face exactly the same difficulties. In any event, if parties seek to make amendments to Clause 14 (Sellers’ Default), Clause 13 (Buyers’ Default) or Clause 5 (Time and place of delivery and notices) and depart from what is, at least judicially considered a balanced standard form, neither party is likely to gain the upper hand without concessions.

Whilst this is a welcome judgment from the Court of Appeal in its affirmation that contractual remedies should reflect the commercial realities of sale and purchase transactions and in its respect for long-standing market expectations and industry practice, there are still a number of unanswered questions.

As such, this may not yet be the end of the story; it remains to be seen whether the Sellers will seek to appeal this decision to the Supreme Court.

HFW has extensive experience advising on ship sale and purchases as well as disputes arising from memorandums of agreement. For more information or to discuss any queries raised by this judgment, please contact the authors, or your usual HFW contact.

Footnotes:

1. Orion Shipping and Trading LLC v Great Asia Maritime Ltd [2025] EWCA Civ 1210
2. Section 51 of the Sale of Goods Act 1979
3. Section 69 of the Arbitration Act 1996
4. Orion Shipping and Trading Ltd v Great Asia Maritime Limited [2024] EWHC 2075 (Comm)
5. The David Agmashenebeli [2002] EWHC 104 (Admlty)
6. RTI Ltd v MUR Shipping BV [2024] UKSC 18
7. Donoghue v Stevenson [1932] AC 562