Devil in cancelling date detail

Court of appeal rules buyers can recover loss of bargain damages
 

By Sebastian Lea & Maria Kaperoni, Clyde & Co
 

Does a seller’s failure to deliver a ship by the agreed Cancelling Date under a ship sale Memorandum of Agreement (MOA) on the Norwegian Saleform 2012 (NSF 2012) - resulting in the cancellation of the MOA - entitle the buyer to recover “loss of bargain” damages under Clause 14 of the NSF 2012 where said failure did not amount to a repudiatory breach by the seller?

The Court of Appeal answered this in the affirmative in Orion Shipping & Trading LLC v Great Asia Maritime Ltd (The “LILA LISBON”) [2025] EWCA Civ 1210, overturning the earlier High Court decision.

In this case, the seller (Orion Shipping and Trading LLC) had agreed to sell the Lila Lisbon, a capesize bulk carrier, to the buyer (Great Asia Maritime Ltd) for $15 million under a Memorandum of Agreement made on the Norwegian Saleform 2012, dated June 4, 2021.

Following the seller’s failure to serve the Notice of Readiness by the (extended) Cancelling Date, the buyer proceeded to cancel the sale contract in accordance with its terms and commence arbitration proceedings. The buyer sought to recover from the seller $1.85 million, this amount representing the difference between the market price of the vessel at the date of cancellation ($16.85 million) and the sale contract price ($15 million).

Clause 14 NSF 2012

Under the terms of the MOA, Clause 14 of the NSF 2012 provided that, “should the Sellers fail to give Notice of Readiness … or fail to be ready to complete a legal transfer by the Cancelling Date the Buyers shall have the option of cancelling this Agreement…In the event that the Buyers elect to cancel this Agreement, the Deposit together with interest earned, if any, shall be released to them immediately.”

In addition, Clause 14 provided that in the event the sellers failed to provide Notice of Readiness by the Cancelling Date or failed to be ready to validly complete a legal transfer, “…they shall make due compensation to the Buyers for their loss and for all expenses together with interest if their failure is due to proven negligence and whether or not the Buyers cancel this Agreement.”

The Arbitration Tribunal found in favour of the buyer and awarded them $1.85 million by way of damages for “loss of bargain” together with compound interest at 5% per annum. The Tribunal found that the seller’s failure to deliver by the Cancelling Date was due to proven negligence on their part and concluded that the buyer was entitled to loss of bargain damages under Clause 14.

Following an appeal by the seller to the High Court, the judge reversed the Tribunal’s award holding that the buyer were not entitled to damages for “loss of bargain” under Clause 14 and that, furthermore, the seller were under no obligation to provide Notice of Readiness by the Cancelling Date.

Court of Appeal

The buyer proceeded to appeal to the Court of Appeal which held that a buyer was entitled to “loss of bargain” damages where the seller’s failure to deliver the vessel by the Cancelling Date was caused by “proven negligence” as contemplated by Clause 14 of the NSF 2012.

Furthermore, the Court found that, under the NSF 2012, a seller is under an obligation to use reasonable diligence to deliver the vessel by the Cancelling Date. It held that the 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.

Importantly, the Court did not find the seller’s conduct to be a repudiatory breach. Typically, under English law, “loss of bargain” damages are only recoverable where a contract is terminated following such a breach. However, Clause 14 of the NSF 2012 creates a distinct contractual mechanism: if the seller fails to deliver due to proven negligence, the buyer may cancel and claim compensation for losses and expenses, including the “loss of bargain”.

So, what was the “proven negligence” in the Lila Lisbon? The seller’s failure to deliver by the original Cancelling Date of August 20, 2021 derived from regulations at Qingdao which required the departing crew to leave mainland China on the day of disembarkation. The seller’s failure to arrange the necessary flights in time, resulting in the loss of the berthing slot, constituted “proven negligence” on the part of the seller.

Following this, the seller proposed a revised Cancelling Date of October 15, 2021, which the buyer accepted, however, without prejudice to their rights under Clause 14 to claim damages for all loss and expense suffered. The seller, once more, failed to deliver the vessel by the revised Cancellation Date, not having taken reasonable steps to arrange this, and this failure was again attributable to their proven negligence.

Loss of Use Damages

It should be noted that the seller’s failure to deliver by the original Cancelling Date due to proven negligence also entitled the buyer to damages under Clause 14 for loss of use of the ship for 56 days - from August 20 to October 15, 2021 – and this was assessed by the Arbitration Tribunal at $1,650,992. This aspect of the award was not challenged before the Court of Appeal.

It is well known that in volatile markets, the difference between the contract price of an asset and its market value on or around the time of sale can vary significantly.

In a seller/owner-friendly market, this may tempt sellers to delay delivery of the vessel under the relevant MOA (potentially agreed when the market was less seller-friendly) either to simply delay delivery and continue benefiting from flows of charter income or, should they eventually wish not to deliver the vessel at all, to purposefully extend the Cancelling Date in the hope that buyers will at some point cancel the MOA and only seek compensation of mere-out of pocket expenses (estimated to be lower than the forecasted sellers’ gains from a future sale of the vessel or even from its continuous employment in the charter market) without buyers engaging in expensive litigation and arrest proceedings.

Also, in a seller/owner-friendly market, the buyers would not normally opt to cancel an MOA (entered into on the NSF 2012 form) if the sellers simply missed the contractually agreed Cancelling Date unless, in the meantime, the market price of the same type of vessel had been, or was forecasted to be soon, significantly reduced and the vessel had, consequently, become or would soon become “overpriced”.

The Lila Lisbon Court of Appeal ruling now provides valuable clarity as to the required performance standards for sellers and the remedies available to buyers under the widely used NSF 2012 in commercial shipping.

For sellers, this judgement emphasises the importance of operational diligence and underlines the fact that it is now clear that:

• sellers have to be reasonably diligent in meeting the Cancelling Date under the NSF 2012 (and any extension would be “entirely without prejudice to any [buyers’] claim for damages” under the standard NSF 2012), and
• loss of bargain damages are recoverable under Clause 14 of the NSF 2012 following a contractual cancellation, and
• the lack of a repudiatory breach does not prevent buyers from claiming “loss of bargain” damages. This also signifies the importance of sellers considering their potential exposure to the aforementioned damages if they fail to meet the relevant deadline variations in the Cancelling Date under the MOA.

For buyers, this decision brings comfort knowing that their financial interests in the transaction are, in principle, safeguarded under the NSF 2012 form. It might be expected that, if sellers missed the deadline for delivery of the vessel due to their own negligence (especially more than once as in this case), buyers would wish to cancel the NSF 2012 under Clause 14 of the MOA.

The decision, therefore, strengthens the buyers’ position by ensuring that the right to cancel under Clause 14 is backed by a sensible financial remedy, assuming that sellers do not negotiate wording that restricts buyers from the right to claim such remedies unless a proven repudiatory breach has taken place on the sellers’ side. However, in practice, buyers may not be in a position to prove the sellers’ negligence and lack of reasonable diligence at the time they cancel the MOA.

One point that also remains open is that the Court of Appeal decision does not elaborate on the standard for assessing what equates to “reasonable due diligence” in the context of an NSF 2012 MOA, although there is substantial case law material that addresses the interpretation of these two terms (albeit not necessarily in a conclusive way).

Sebastian Lea is a partner and Maria Kaperoni is an associate at Clyde & Co.