UKSC Settles The Debate On Loss Of Bargain Damages In SALEFORM 2012

The Supreme Court clarifies buyers' rights to recover loss of bargain damages under SALEFORM 2012 when vessels are not delivered on time.

A buyer who lawfully cancels a SALEFORM 2012 MOA under clause 14 due to the vessel not being delivered by the cancelling date as a result of the sellers “proven negligence”, may recover loss of bargain damages, even where no repudiatory breach is accepted.

What is loss of bargain damages?

The standard position in contract law for a repudiatory breach of contract (i.e a breach that goes to the essence of the contract) is that the innocent party should be put into the position they would have been if the contract had been fully performed.

Summary of the Lila Lisbon UKSC 23

On 4 June 2021, the Sellers and Buyers of the M/V Lila Lisbon entered into a MOA for the sale of the Vessel. The MOA was on an amended Norwegian SALEFORM 2012, the most commonly used standard form contract for the sale and purchase of second hand vessels.

Clause 14 of the MOA provided that:

14.[A] Sellers’ default
Should the Sellers fail to give Notice of Readiness in accordance with Clause 5(b) or fail to be ready to validly 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.

14[B].
Should the Sellers fail to give Notice of Readiness by the Cancelling Date or fail to be ready to validly complete a legal transfer as aforesaid 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 MOA had an original cancelling date of 20 August 2021. The Buyer’s agreed to extend this until 15 October 2021, without prejudice to the rights contained within clause 14. The Vessel was not ready for delivery on the cancelling date.

Sellers did not refuse to perform the contract but were liable due to commercial and operational decisions which prevented the delivery of the vessel by the cancelling date. The Sellers took an intervening voyage charter and failed to make arrangements to ensure delivery by the revised cancelling date.

Therefore the Buyer sought to arrest the Vessel in China. Both parties purported to terminate the MOA on the basis of repudiatory breach.

At the cancellation date, the value of the ship was $1.85 million more than the contractual price. The key question was whether the Buyer was entitled to recover this amount as damages for “loss of bargain”.

What Was the Legal Question?

“If a Memorandum of Agreement on the SALEFORM 2012 form is lawfully cancelled by a buyer under clause 14 because the Vessel is not delivered by the cancelling date as a result of the seller’s ‘proven negligence’, is that buyer entitled to recover loss of bargain damages absent an accepted repudiatory breach of contract?”

Tribunal decision

The Tribunal found in favour of the Buyers, that even though the Seller had not committed a repudiatory breach, as its failure to give Notice of Readiness was attributable to “proven negligence” the Buyer was entitled to cancel the MOA under clause 14 and claim for the loss of bargain.

The case was subsequently appealed all the way to the Supreme Court.

Supreme Court Decision

The Supreme Court judgment clarified an important point in how SALEFORM 2012 is construed:

“If a Memorandum of Agreement on the SALEFORM 2012 form is lawfully cancelled by a buyer under clause 14 because the vessel is not delivered by the cancelling date as a result of the seller’s “proven negligence”, the buyer is entitled to recover loss of bargain damages even though there has been no accepted repudiatory breach of contract.”

Wider application to the law of contract

The judgment of Lord Hamblen and Lord Burrows considered other significant points for the law of contract.

In Financings Ltd v Baldock 1963 2 QB 101, it was an established legal principle that where one party exercises a contractual right to terminate, they are not entitled to damages for loss of bargain but only to those accruing up to the point of termination, unless the contract provides otherwise. The Supreme Court held in the Lila Lisbon that the MOA fit into the exception.

There is a different legal position when a party terminates at common law on the basis of a repudiatory breach in which a loss of bargain is available (Phones 4u Ltd v EE Ltd 2018 EWHC 49 (Comm).

Although the Supreme Court was not asked to overturn Financings in the Lila Lisbon, their Lordships did seem to open the possibility for future legal arguments that a party who terminates on the basis of a contractual termination clause is entitled to loss of bargain damages. Persuasively the Canadian Supreme Court departed from the Financings authority in Keneric Tractor Sales Ltd v Langilee 1987 2 SCR 440.

The judgment has spread uncertainty over the future position of contract termination clauses more generally.

Key Takeaways

• A Buyer can now claim loss of bargain damages under clause 14 of the Norwegian SALEFORM 2012
• Sellers can face significantly larger claims if they negligently fail to make the vessel ready for delivery by the cancelling date.
• The UKSC decision provides certainty on how clause 14 should be interpreted and will reduce future disputes and arbitration costs.

Overall, the judgment provides important confirmation that under the Norwegian SALEFORM 2012 clause 14, loss of bargain damages are available when a negligent Seller fails to deliver a Vessel on time. This increases buyer protection and provides certainty across the international shipping market.