Bristows’ SnippITs – Bargaining ships: Supreme Court decision on loss of bargain damages

This post is part of the Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond.

Loss of bargain damages have long been associated with repudiatory breach. However, the recent Supreme Court decision of Great Asia Maritime Ltd v Orion Shipping and Trading LLC confirms that loss of bargain damages can be recoverable in the context of contractual termination as well. 

Key takeaways

• Loss of bargain damages may be more widely available than previously thought when a party has terminated a contract following a non-repudiatory breach and where there is an express contractual right to compensation, providing potentially important protections for customers faced with non-performance.
   
• While not common, it is advisable to include express provisions permitting (usually a customer) recovery of damages that arise from a supplier-caused termination of the agreement.  Whether done as a standalone clause or as part of a deemed direct loss provision, the inclusion of such a provision can help neutralise the argument forwarded in this case: that the act of termination breaks the causal chain and therefore damages flowing from termination are not recoverable.

Background 

The Sellers and Buyers entered into an Agreement for the sale of a second hand ship costing $15 million. The Agreement was on amended Norwegian Saleform 2012 terms (the NSF standard terms).

Clause 14 of the Agreement gave the Buyers the right to terminate the Agreement if the ship was not ready to be legally transferred by the Cancelling Date. The same clause gave the Buyers an express right to  recover “due compensation... for their loss and for all expenses together with interest” if the Sellers’ failure in this respect was due to “proven negligence”, “whether or not the Buyers cancel this Agreement”.

The Sellers informed the Buyers that the ship would not be ready for delivery before the Cancelling Date. The Buyers agreed to a new Cancelling Date a few months later, but without prejudice to their rights under the Agreement.

Subsequently, the ship was not ready before the revised Cancelling Date. The Buyers terminated the Agreement pursuant to their right under Clause 14 and sought to claim all losses incurred, including (i) the actual profit it would have made through use of the ship had it been possession of the ship by the original Cancelling Date (approximately $1.65 million); and (ii) the increase in the value of the ship from the contract price ($15 million) to the market price on the termination date ($16.85 million). .

The Dispute

The Dispute concerned what damages were recoverable by the Buyers. The key question to be decided was whether Clause 14 gave the Buyers the additional right to “loss of bargain” damages i.e. the $1.85 million difference between the contract price and the market price of the ship,

The general position in English law is that loss of bargain damages are only available in the case of a repudiatory breach. Therefore, where a party exercises a contractual right to terminate (and the breach is not otherwise repudiatory – as the case was here) that party is generally only entitled to recover damages for the loss it has suffered at the date of termination. One potential justification for this position is that the bargain is lost not because of the breach but because of the party’s decision to terminate.

The Buyers’ position was that Clause 14 displaced this general rule, allowing it to claim in addition the $1.85 million “loss of bargain” damages.

The dispute was initially determined at arbitration. The arbitrators found that the Buyers were entitled to both the $1.65m actual profit that the Buyers would have made under the contract and the $1.85 million “loss of bargain” damages.

Supreme Court decision

By the time the issue appeared before the Supreme Court, the Commercial Court had concluded that the Buyers were not entitled to recover loss of bargain damages and the Court of Appeal had overturned this decision, finding that the Buyers were entitled to loss of bargain damages.

Applying established rules of contractual interpretation, the Supreme Court agreed with the Court of Appeal (and the Buyers). It determined that the natural and ordinary meaning of “loss” in Clause 14 included the loss of the bargain suffered by the Buyers  for the following reasons:

• the word “loss” was general and unqualified;
• loss of bargain is a type of loss;
• loss and expenses were recoverable whether or not the Buyers terminated the Agreement;
• “loss” was therefore wide enough to cover the loss in fact suffered by the Buyers as a result of the termination;
• loss of bargain was the most obvious form of loss suffered by the Buyers in the context of termination and the consequent non-delivery of the ship; and
• unless “loss” included loss of bargain, it was not clear what loss would be covered in the event of cancellation.

This conclusion was also supported by wider contextual considerations as well as past decisions, practice and the established meaning of Clause 14 of the NSF. The Supreme Court further relied on the commercial consequences as an aid to interpretation, finding that if loss of bargain damages were not recoverable then the Sellers would gain from the termination. In these circumstances, the Sellers would retain the ship at its higher market value while the Buyers would be out of pocket $1.85 million when seeking to buy an equivalent ship. Such an interpretation would create perverse incentives in rising markets, where sellers would be encouraged to delay delivery in the hope buyers would terminate.

The Supreme Court considered the general rule that prevented a party recovering loss of bargain damages when there had been no repudiatory breach but found that: (i) this was not a universal rule (and the Supreme Court cast doubt on the apparent justification for such a rule referred to above); and (ii) in any event any general rule applied in the case of a bare termination clause, rather than a clause expressly providing for compensation (as Clause 14 did). It also rejected that clear words were required for a clause to confer a right to loss of bargain damages, rather the task for the court was to construe the contract by ascertaining the deemed intention of the parties.