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The Supreme Court has confirmed that a clause entitling the innocent buyers of a vessel to compensation for its “loss” on exercising a contractual termination right did include loss of bargain damages, even in the absence of a repudiatory breach of contract: Great Asia Maritime Limited v Orion Shipping and Trading LLC [2026] UKSC 23. In doing so, the court upheld the Court of Appeal's decision, which we considered in our blog post here.
In a case of termination for repudiatory breach, the innocent party is usually entitled to claim damages for its loss of bargain arising from the breaching party. This case raises the question of whether an innocent party who terminates in reliance on a contractual right, and with no repudiatory breach, can claim loss of bargain damages.
The clause in this case included not only a right for the buyers to terminate for certain breaches but also an express provision requiring the sellers to make “due compensation to the buyer for their loss and for all expenses”. Applying orthodox principles of contractual construction, the Supreme Court said that the strong prima facie conclusion was that the word “loss” in the clause should be construed to include loss of bargain damages.
The sellers argued, however, that a party cannot claim loss of bargain damages in the absence of a repudiatory breach, relying on Financings Ltd v Baldock [1963] 2 QB 104 in which the Court of Appeal held that a party exercising a contractual right of termination under a hire purchase agreement was not entitled to loss of bargain damages where there was not also a repudiatory breach. That decision has long been treated as having established a more general rule that a party exercising a contractual right of termination is not entitled to damages for loss of bargain unless the termination was due to a repudiatory breach. However, Financings has not been followed by the Supreme Court of Canada and has been the subject of some judicial and academic criticism.
The Supreme Court in this case was not asked to overrule Financings, and so it expressly left open the question of whether it should be reconsidered for another more “appropriate” case – although the Supreme Court expressed some scepticism about the extent of the principle it established. In any event, the court distinguished Financings, which involved a bare termination clause, from a case such as the present which included an express compensation clause, where there was no need to interpret the clause in line with Financings.
The Supreme Court also dismissed an argument from the sellers that clear words were needed to confer a right to loss of bargain damages where no such right would arise at common law.
In terms of practical lessons from the decision, despite the Supreme Court's apparent doubts in relation to Financings, it has not been overruled. Accordingly, parties terminating for non-repudiatory breach will still have to think carefully about whether they are entitled to loss of bargain damages, particularly where there is no express compensation clause addressing the point. Parties negotiating contracts may also wish to consider express words clarifying where, or in what circumstances, loss of bargain damages will be recoverable on exercising a contractual termination right.
Background
We covered the background in detail in our earlier post, linked above, but the key facts are as follows. In June 2021, the claimant buyers entered into a Memorandum of Agreement with the defendant sellers, using the "Norwegian Sale Form" standard contract, for the sale of the M/V LILA LISBON for US$15 million.
Clause 14 conferred a right of cancellation on the buyers if the sellers failed to give the required notice of readiness for delivery by the "Cancelling Date". It also conferred on the buyers a right to recover "due compensation" for "their loss and for all expenses together with interest" if sellers' failure was due to "proven negligence", whether or not the buyers cancelled the agreement.
The sellers failed to give notice of readiness by the Cancelling Date. The buyers terminated the contract and claimed its loss under clause 14.
Between the date of contracting and the date of breach, the market value of the vessel had risen from US$15,000,000 (the contract price) to US$16,850,000 (the market price). The question was whether the buyers were entitled to the difference of US$1,850,000, being their loss of bargain damages.
The arbitration tribunal held the sellers were not in repudiatory breach of contract but that the failure to give notice of readiness was due to their "proven negligence". It also held that the buyers were entitled to loss of bargain damages. The High Court overturned the arbitrators' decision on loss of bargain damages, but that decision was itself overturned by the Court of Appeal, and loss of bargain damages were reinstated.
The sellers appealed to the Supreme Court.
Decision
The Supreme Court dismissed the appeal. Lord Hamblen and Lord Burrows gave the only judgment, with which Lord Briggs, Lord Stephens and Lord Doherty agreed.
The court's decision started by focusing on the language of clause 14. Applying orthodox principles of contractual construction, the Supreme Court said that the phrase "due compensation" means appropriate compensation applying the common law principles of causation, remoteness and mitigation. The word "loss" is general and unqualified, and loss of bargain is a type of loss. In this case, loss of bargain was the most obvious form of loss that would be suffered by the buyers if there was a cancellation, and if it was not covered then it was unclear what loss would be covered in the event of cancellation. The natural and ordinary meaning of "loss" in clause 14 therefore included loss of bargain damages.
That interpretation was supported by past decisions and practice, as well as academic commentary, which indicated that clause 14 of the Norwegian Sale Form had an established meaning in which “loss” included loss of bargain damages. Given that this was a commonly-used contract in the industry, and given the importance of certainty and consistency in the interpretation of industry-wide standard form contracts, the clause should be construed in accordance with that meaning unless the sellers established a good reason why that meaning was inapplicable (eg because it was clearly wrong).
When testing the competing commercial consequences of the different constructions proposed, they clearly favoured the construction that allowed loss of bargain damages. Otherwise the breaching party would gain from the termination (as it would then be able to sell the vessel at the higher market price), and the innocent party would be “out of pocket” (as they would have to go back into the market to buy a replacement vessel at the higher market price).
On this basis, the Supreme Court’s strong prima facie conclusion was that loss of bargain damages were recoverable. It then went on to address – and reject – two arguments advanced by the sellers to try to displace that prima facie conclusion.
The causation principle
First, the Sellers argued for what they called a "causation principle" derived from the Court of Appeal's decision in Financings Ltd v Baldock [1963] 2 QB 104: namely, that where a party terminates under an express termination clause without a repudiatory breach, it is the innocent party's own election to terminate, rather than the breach, that is the effective cause of the loss of bargain.
The sellers submitted that as it was common ground that the phrase "due compensation" in clause 14 incorporated the common law principles of causation, remoteness and mitigation, that must also include the Financings causation principle.
The Supreme Court rejected this submission. It expressed some scepticism about whether there was in fact a “causation principle” from Financings, given that even in a repudiatory breach situation the contract does not automatically terminate – the innocent party has to choose whether to accept the repudiatory breach or not. In this sense, the innocent party’s choice is just as much a cause of the contract terminating as it is when a party decides to terminate by using an express contractual right.
Nevertheless, the Supreme Court said that, even assuming in the sellers' favour that there was a Financings causation principle, it would not apply here. Where the parties have drafted not only an express termination clause, but also an express compensation clause, it would defeat the purpose of that express compensation clause if it had to be interpreted in line with the Financings causation principle. It would be possible for parties to agree an express compensation clause that ruled out loss of bargain damages, but there were no such words in clause 14.
The Supreme Court also pointed to an internal inconsistency in the sellers' argument: if the causation principle applied, it would logically exclude compensation for wasted expenses as well as loss of bargain – but the sellers rightly accepted that expenses were recoverable given the express reference to "expenses" in the clause.
The clear words principle
Second, the sellers argued that, because (on the buyers' case) clause 14 was said to confer a right to loss of bargain damages that would not arise at common law, clear words were required; and the words "due compensation to the buyers for their loss" were not sufficiently clear to achieve that effect.
The Supreme Court acknowledged that clear words are required if a clause is to be interpreted as taking away or excluding a party's rights or remedies. However, the court said this is a different situation: the question here was not whether rights or remedies had been taken away, but whether additional rights had been conferred. Clear words are not needed to confer additional rights.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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