Case 1: the Lila Lisbon[i] — an appeal on an LMAA arbitration award, at the High Court, London, dealing with whether a Buyer under a NSF 2012 can claim loss of bargain (market price vs purchase price) following Seller’s failure to deliver within Cancelling Date [held: no].
Case 2: King Crude Carriers v Ridgebury[ii] — a second appeal of an LMAA arbitration award, at the Court of Appeal, dealing with whether a Buyer’s failure to pay the deposit can be excused on account of the Buyer not having provided the escrow holder with the necessary documents (KYC) [held: no], and whether such failure entitles the Seller to terminate and claim the deposit amount from the Buyers [held: yes].
Case 1: The Lila Lisbon
This is a case that has stirred the waters and has agitated even the most phlegmatic lawyers.
Facts
- The Sellers contracted to sell the MV Lila Lisbon to the Buyers under a MOA on NSF 2012. The Sellers failed to deliver a NOR within the (already extended[iii]) Cancelling Date pursuant to the terms of the MOA.
- The Buyers cancelled the MOA pursuant to Clause 14 of the MOA on the basis that “…Sellers fail[ed] to give Notice of Readiness by the Cancelling Date…”.
- The Buyers arrested the Vessel 3 days after the Cancelling Date as security for their claim following Seller’s breach under the MOA.
- The ensued dispute was submitted to LMAA arbitration.
- Pursuant to the Award, the Buyers were awarded:
- USD1.85m in damages for non-delivery, the amount being the difference between the market price of the Vessel and the contract price at the date of termination (the “loss of bargain”); and
- USD1.65m in damages for loss of use of the Vessel between the original Cancelling Date and the extended Cancelling Date (the “loss of use damages”).
- Only the loss of bargain part of the Award was appealed by the Seller under s. 69 of the Arbitration Act 1996, on the basis of the matter being of public importance (NSF 2012 is after all the most popular template for sale and purchase of ships globally).
- The judge, Dias J, held that given there is no positive obligation by the Seller to deliver the NOR within the Cancelling Date, and therefore there was no breach of a condition or a repudiatory breach[iv], the termination here was simply a contractual termination under Clause 14, and that therefore loss of bargain could not be claimed.
Observations on the Lila Lisbon
Dias’s J decision tells us that the NSF 2012 wording of Clause 5 does not evince a clear obligation on the Seller to deliver (the NOR/Vessel) within the Cancelling Date, and that Clause 5 and Clause 14 do not create a positive obligation on the Sellers, but simply a mechanism allowing termination (an interesting viewpoint). She goes on to say that even if such Seller’s obligation can be inferred, it would not amount to a condition of the contract (breach of which would have been repudiatory) – it would have been good if Dias J also examined, on that hypothesis, what the result should be when both a repudiatory and a contractual breach are concurrently found in the Buyer’s armoury[v]. Would the Buyer be barred from claiming damages arising from a repudiatory breach, if the termination notice invoked only the “contractual breach” of Clause 14?[vi]
Dias J does rationalise her view with an apparent surgical precision, yet, distanced from the commercial considerations in such transactions. And thus,she overlooks the fact that commercial considerations and sense have repeatedly been applied, even if with extreme caution, in preceding milestone decisions of disputes under mercantile contacts[vii].
While shipping lawyers will know how to bring the contracts to expressly satisfy the requisites for certainty, as laid down by Dias J, they can hardly be blamed for not having shared her view up to the date of her decision.
Case 2: King Crude Carriers v Ridgebury
This case is easier to follow, but it was the third hearing of the dispute, and the second appeal: first an LMAA arbitration award, then appealed at the High Court, and lastly appealed at the Court of Appeal.
Facts:
- The Buyers of three ships failed to pay the contractually agreed deposit (10%). The MOA contracts for the sale of the ships were concluded on NSF 2012.
- According to Clause 2 of the NSF, the Buyers had to provide the Deposit Holder (escrow agent) with the documents necessary to enable it to open an escrow account for the payment of the deposit.
- The Deposit Holder could neither open the account nor give the confirmation required to fulfil the condition precedent to the obligation to pay the deposit.
- The Buyers did not pay the deposit.
- The Sellers served a notice of termination under cl.13 and commenced arbitration, seeking to recover the amount of the deposit as a debt. They argued that because it was the Buyers’ breach of cl.2 which had prevented their own fulfilment of the condition precedent, they were entitled to be put in the position in which they would have been, had the condition been fulfilled (see below, the Mackay principle). The arbitration tribunal agreed.
- On first appeal by the Buyers, at the High Court, Dias J, (the same who delivered the questioned Lila Lisbon decision), held that the Sellers had no claim in debt and had instead to seek damages for breach of contract. Dias J concluded that the Mackay principle (see below) would only allow the condition precedent to be dispensed with if it related to the mechanism for payment of a debt which had already accrued, not if it related to the accrual of the debt.
- On the second appeal, by the Sellers, at the Court of Appeal, Popplewell LJ (with Nugee LJ and Falk LJ agreeing) argued that the Mackay principle was in fact applicable, given (i) there was an agreement capable of giving rise to a debt; (ii) it was agreement that the debt would accrue and/or be payable subject to fulfilment of a condition precedent; and (iii) there was an express or implied agreement that the obligor would not do anything which prevented the condition precedent being fulfilled.
Observations on the King Crude Carriers v Ridgebury
The Court of Appeal reversed the first appeal decision (of Dias J) and reinstated the arbitration Award. It did so by applying a fine decision by the House of Lords (on appeal of a Scottish case), dating back to 1881, namely the Mackay v Dick[viii], which established a civil (Scottish) law principle: that where a party wrongfully prevented the fulfilment of a condition precedent to a debt, the condition would be deemed fulfilled. A consistent line of authority[ix] established that the Mackay principle was a well-established principle of English law that applied to conditions precedent, both for accrual of debts, and accrued debts.
Here the Buyers did not fulfil the condition precedent (providing documents and KYC) under clause 2 of the MOA, a task in their own full control. That should not allow the Buyers to rely on its own breach, as regards their obligation to pay the deposit.
Does this decision establish that generally, in all sets of facts possible, the Seller can terminate and claim the deposit, on account of Buyer’s failure to satisfy KYC requirements of an escrow agent? No. In fact, improvements toward certainty on time-limits and on KYC requirements have long been made by most of us, by amending and supplementing the NSF 2012, specifically on clause 2.
Conclusion
As an English solicitor practising in Oslo for the last 15 years, I have admired the Norwegian laconic drafting style, manifested in the NSF 2012, which remains the most used contract for sale and purchase of ships worldwide. But such is the power of English courts over it, that perhaps it is time a revision is made, to spell out in greater detail what the basic commercial intentions are, for the sake of a cross-jurisdictional certainty. Till then, red font will be more prevalent on the NSF Form.
Footnotes
[i]Orion Shipping and Trading Ltd v Great Asia Maritime Limited [2024] EWHC 2075 (Comm)
[ii] King Crude Carriers SA v Ridgebury November LLC [2024] EWCA Civ 719
[iii] Note: the original Cancelling Date was already extended by the Sellers pursuant to Clause 5 (Time and Place of delivery) paragraph (c), and accepted by the Buyers pursuant to Clause 5 paragraph (d), that means, without prejudice to the Buyers’ rights to claim damages under Clause 14 (Sellers Default). We will come back to that extension, but it is not relevant for the assessment of this appeal, which looked into the Buyer’s termination when the Sellers failed to deliver NOR by the extended Cancelling Date
[iv] Note: It is common ground that an innocent party may terminate for a breach by its counterparty (i) that is a repudiatory breach (i.e. a breach regarded by the courts as “frustrating the commercial purpose of the contact” , or “sufficiently serious to justify termination”, or depriving the innocent party of substantially the whole benefit which he was intended to receive”; (ii) of a condition (agreed by the parties as such, and which the courts now deem as equivalent to (i), i.e. repudiatory); (iii) of a term agreed by the parties to entitle the innocent party to terminate. English law principles ascribe to all three types the right to claim for damages flowing from such breach and suffered prior termination, whereas, it is only the repudiatory breach that confer the right to claim for “loss of bargain” damages.
[v] Hyundai Heavy Industries Ltd v Pournaras [1980] 1 W.L.R. 1129; The Almare Seconda [1981] 2 Lloyd’s Rep. 433; Lombard orth Central Plc v Butterworth [1987] Q.B. 527.
[vi] Lonsdale Sports Ltd v Leofelis SA [2012] EWCA Civ 985; Phones 4U v EE Ltd [2018] EWHC 49 (Comm).
[vii] The Moorcock (1889) 14 P.D. 64; Bentsen v. Taylor, Sons & Co. [1893] 2 Q.B.; Hongkong Fir case [1962] 2 Q.B. 26; Bunge Corp v Tradax Export SA [1981] 2 All E.R. 540; United Scientific Holdings Ltd. v. Burnley Borough Council [1978] A.C. 904, et al. Dias J distinguished this Lila Lisbon case from Bunge v Tradax and found shelter in the Spar Shipping case ([2015] EWHC 718 (Comm)), when the opposite would seem more apt to a shipping law practitioner.
[viii] Mackay v Dick (1881) 6 App Cas 251
[ix] Panamena Europea Navegacion Compania Limitada v Frederick Leyland & Co Ltd [1947] A.C. 428; Cory & Son v London Residuary Body Daily Cory & Son v London Residuary Body Daily Telegraph, December 7, 1990; Luxor (Eastbourne) Ltd v Cooper [1941] A.C. 108, Compagnie Noga d’Importation et d’Exportation SA v Abacha (No.3) [2002] EWCA Civ 1142, [2003] 1 W.L.R. 307.