Partner London
"Without prejudice to its right to claim for wasted costs."
The widely used memorandum of agreement or ‘MOA’ for the sale of ships on BIMCO’s Norwegian Saleform (2012 version) (“NSF 2012”) provides that the buyer may cancel the MOA and recover its deposit if the seller fails to tender notice of readiness (“NOR”) or to complete a legal transfer of the ship by an agreed ‘Cancelling Date’. The Cancelling Date is a ‘long stop’ or ‘drop dead’ date after which a buyer may terminate the MOA should the seller’s delay in making the ship ready for delivery exceed a pre-agreed period. This period is typically two-four months after the sale is agreed, to allow the seller to complete pending cargo/charter employment commitments and/or any repairs required to restore the ship to full Class status.
Delivery is not infrequently delayed by unexpected contingencies, such as bad weather or port congestion. In such event, NSF 2012 entitles the seller to propose a new Cancelling Date if the seller anticipates that the ship will not be ready by the Cancelling Date “notwithstanding the exercise of due diligence” by the seller (Clause 5(c)). The buyer then has two options, either to (i) agree the new Cancelling Date; or (ii) to cancel the MOA for ‘Seller’s Default’ (Clause 14) and to have its deposit returned. If the buyer fails to exercise this option within seven days, it is deemed to have agreed the new Cancelling Date.
The buyer’s agreement will be “entirely without prejudice to any claim for damages” that it may have (Clause 5(d)). This approach balances the buyer’s desire to take delivery at the earliest opportunity against the seller’s wish to keep the ship earning for as long as possible. If, for example, the seller requests the buyer to agree an extension to the Cancelling Date after fixing the ship for a voyage that the seller could not reasonably have estimated to end in time to meet the Cancelling Date, the buyer may either cancel the MOA or agree the new Cancelling Date without prejudice to its right to claim for wasted costs (such as crew mobilisation costs) and damages for its loss of use of the ship in the delay period.
"The buyer would have to take its seller to arbitration to claim damages for its loss of opportunity to trade the ship."
In a buoyant market, a seller may be tempted to fix a ship for further employment beyond the Cancelling Date, in the belief that it will not have to compensate its buyer or at worst, not have to pay compensation greater than its ill-gotten gains. The buyer may not set off or deduct damages claimed from the balance of the MOA price payable on delivery. The buyer would have to take its seller to arbitration to claim damages for its loss of opportunity to trade the ship. To pursue an SPV seller after delivery that no longer owns the ship, nor likely any sister-ship, would present its own challenges. Possibly the buyer could obtain security for its claim by arresting another ship in the ‘associated’ ownership of the seller in South Africa, where arrests of such ships are permitted from MOA claims, provided the ‘direct’ ship was, at the time the buyer’s claim arose, still owned by the defendant seller (that would be the case where a buyer claims earnings lost in the delay period prior to delivery). Otherwise, a buyer’s remedies may be elusive.
The buyer’s only alternative where the Cancelling Date is missed is to cancel the MOA and to recover its deposit. But that would leave the buyer without the ship and uncompensated for the additional cost of purchasing another ship, where the market has risen in the meantime. This raises the question whether the buyer may claim damages not only for (i) earnings lost in the period of the seller’s delay, but also (ii) the difference between the MOA price and the higher market value of the ship at the date of cancellation.
Recovery of loss of bargain damages – The Lila Lisbon
S. 51(3) of the Sale of Goods Act 1979 (“SOGA”) provides that the prima facie measure of damages in the case of non-delivery of goods is the difference between the contract price and market price when the goods ought to have been delivered. In the recent case of Orion Shipping And Trading Ltd v Great Asia Maritime Limited (“The Lila Lisbon”) [2024] EWHC 2075 (Comm), the court held that loss of bargain damages of the kind referred to in s. 51 SOGA would only be recoverable if the buyer terminates the MOA at common law for a repudiatory breach by the seller, and not if the buyer cancels an MOA for ‘Seller’s Default’.
"Under an MOA there is no obligation on a seller to deliver the ship by the Cancelling Date."
In The Lila Lisbon, a buyer cancelled an MOA on amended NSF 2012 form after the seller failed to tender NOR by the Cancelling Date (as extended). A tribunal found the seller’s delay to be caused by its proven negligence and awarded the buyer damages not only for lost earnings in the period of the seller’s delay but also for its loss of bargain, in a sum representing the difference between the MOA price and the ship’s higher market value as at the date of cancellation.
The High Court, on the seller’s appeal against the award, held that under an MOA there is no obligation on a seller to deliver the ship by the Cancelling Date. A seller is merely obliged to tender NOR: “…when the Vessel is at the place of delivery and physically ready for delivery in accordance with this Agreement” (Clause 5). Accordingly, there was no contractual breach, still less a breach of a contractual condition, by the seller in failing to tender NOR by the Cancelling Date, even though the delay was due to the seller’s ‘proven negligence’. A ‘default’ by the seller, that could result from reasons beyond its control, was not a breach by the seller. Accordingly, the difference between the MOA price and the ship’s higher market value was a loss caused by the buyer’s decision to cancel the MOA, rather than by the seller’s default and could therefore not be claimed as ‘loss of bargain’ damages. The buyer could, however, recover for lost earnings in the delay period, a loss that was caused by the seller’s ‘proven negligence’ in failing to tender NOR by the Cancelling Date.
Where a ship’s market value increases between MOA signature and later delivery, a buyer would ordinarily not wish to cancel the MOA but would rather agree a new Cancelling Date, hoping to benefit from the market upturn whilst preserving its right to claim for lost earnings in the delay period (if the delay was attributable to the seller’s proven negligence).
But should a buyer wish to cancel the MOA, the buyer could then only claim the difference between the MOA price and ship’s higher market value by terminating for a repudiatory or ‘renunciatory’ breach by the seller. Mere delay by a seller in tendering NOR is unlikely to be repudiatory. Egregious delay or a refusal to deliver is much more likely to be repudiatory but is much less likely to occur.
"Such a provision would elevate seller’s ‘default’ to a breach."
What can buyers do to deter their sellers from delaying delivery until the last moment or beyond?
MOAs are sometimes amended to give the buyer liquidated damages for delay in delivery beyond the Cancelling Date, expressed to be deductible from the balance of the price. As long as the daily liquidated amount is not exorbitant, in essence as long as it is not wholly disproportionate to estimated lost earnings, it ought not to be vulnerable to being struck down as a penalty and should provide a good enough deterrent. The MOA could also be amended to oblige the seller to tender NOR by the Cancelling Date and to prohibit the seller from fixing the ship for further employment at the end of whatever fixture is running when the sale is agreed, or by restricting itineraries for any permitted follow-on fixture. Such a provision would elevate seller’s ‘default’ to a breach, although whether such a breach would be repudiatory would be a question of fact and degree. If the provision were expressed to be a ‘condition’ of the MOA, the buyer could terminate the MOA for breach of such a condition, as if it were repudiatory. Whether a seller would accept such wording, however, is another matter.
The judgment is available here:
