The Lila Lisbon – cancellation by buyer under clause 14 of SALEFORM 2012 alone does not entitle buyer to recover loss of bargain damages from negligent seller

Does cancellation under clause 14 of the SALEFORM 2012 entitle the buyer to loss of bargain damages where there is only “proven negligence” by the seller?

In a judgment that should bring greater clarity where a memorandum of agreement (“MOA”) is cancelled under clause 14 of the Norwegian Saleform 2012, the High Court, in The Lila Lisbon (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 to deliver the vessel or (b) be ready to validly complete a legal transfer of the vessel to the buyer by the cancelling date and such failure was due to the seller’s “proven negligence”, the buyer was not entitled to recover loss of bargain damages absent an accepted repudiatory breach of the contract.

The High Court’s decision set aside the tribunal’s final arbitration award, 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 despite the tribunal having found that the seller’s conduct while negligent was not also a repudiatory breach of the contract.

The answer to the question posed on the appeal, therefore, had a significant impact because if the question was answered in the negative, as in the event it was, it limited the buyer’s claim in damages only to those accrued losses and wasted expenses attributable to the seller’s failure to deliver or to transfer legal title to the vessel by the cancelling date under clause 14.

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 be far less significant compared to loss of bargain damages, which are the difference between the market price of the vessel and the contract price of the vessel as at the date of the termination of the contract.

In reaching its holistic view, the High Court carefully addressed the interpretation of clause 14, distinguished between a party’s contractual right to cancel as opposed to a common law right to terminate for a repudiatory breach, considered that negligence did not equate the seller’s conduct to the level of a repudiatory breach, and acknowledged the commercial implications, with loss of bargain damages only making sense for repudiatory breach whereas the contrary would otherwise undermine the certainty that parties seek in commercial contracts.

The decision in this case, accordingly, reinforces the principle that, unless expressly provided for in the contract, a party who exercises a contractual right to cancel cannot ordinarily recover loss of bargain damages in the absence of a repudiatory breach of the contract.

It also serves as a reminder to those entering into ship sale and purchase agreements of the potential limitations on the recoverability of damages.  With delays being commonplace, the parties should carefully negotiate and draft cancellation and associated clauses to ensure their interests are adequately protected in the event of a breach of the contract.

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.