Case Summary: The “Griffon” 10 December 2013

The “Griffon” – 10 December 2013

 

Key Points

Buyers failed to pay the 10% deposit under clause 2 of an MOA based on the Norwegian Saleform 1993(“NSF93”)

Sellers accepted the Buyers’ conduct as a repudiation of the MOA and/or cancelled the MOA.  Buyers accepted that their failure was a repudiatory breach.

Held that on a proper construction of clause 2 and clause 13 of the NSF93, Sellers are entitled to claim the deposit separately and in addition to their actual loss suffered as long as their right to the deposit has accrued before the contract was terminated.

 

Norwegian Saleform 1993

This matter involved the construction of the following clauses of the NSF93 standard form:

2. Deposit

As security for the correct fulfilment of this Agreement the Buyers shall pay a deposit of 10 % (ten per cent) of the Purchase Price within… banking days from the date of this Agreement.

13. Buyers’ default

[1st Limb:] Should the deposit not be paid in accordance with Clause 2, the Sellers shallhave the right to cancel this Agreement, and they shall be entitled to claimcompensation for their losses and for all expenses incurred together with interest. 

[2nd Limb:] Should the Purchase Money not be paid as aforesaid, the Sellers have the right to cancel this contract, in which case the amount deposited together with interest earned, if any, shall be forfeited to the Sellers. If the deposit does not cover the Sellers’ losses, they shall be entitled to claim further compensation for their losses and for all expenses incurred together with interest.

 

Facts

The parties agreed to the sale and purchase of the MV Griffon for US$22 million (less 2% commission) and signed an MOA based on the NSF93 on 1 May 2010.

Clause 2 provided that a deposit of 10% (US$2,156,000) was payable within three banking days of signature – i.e. by 5 May 2010.

However, in the event, the Buyers failed to pay the deposit by that date.  On 6 May 2010 Sellers accepted the Buyers’ failure to pay as a repudiatiory breach of the MOA and/or cancelled the MOA pursuant to an express contractual right to do so and thereby brought the MOA to an end. The Buyers accepted that their failure to pay the deposit constituted a repudiatory breach.

The Sellers actual loss resulting from the Buyers’ breach (calculated as the difference between the contract and market price) was said to be US$275,000 – significantly less than the deposit.

The Sellers therefore sought to recover the deposit amount as a debt or by way of damages.

 

Arbitration

The matter was submitted to arbitration where the Tribunal was asked to determine the following issue:

“Is the effect of the Contract and/or the MOA such that, by reason of the failure by Buyers to pay the deposit in accordance with Clause 2 of the Contract and/or Clause 2 of the MOA, Sellers, having been entitled to, and having terminated the Contract and/or the MOA on 6 May 2010, may recover the amount of the deposit as a debt, or by way of damages.”

The Buyers contended that the Sellers were only entitled to claim compensation for their actual losses rather than the deposit under the 1st Limb of Clause 13 of the NSF93.

The Sellers argued that their right to payment of the deposit had accrued before the MOA was terminated.  Accordingly, they should be entitled to claim the deposit either as a debt or as damages for breach of contract.

The Tribunal held that the Sellers were restricted to their claim in damages in respect of the losses they actually suffered and they were not entitled to the deposit stating that:

“[had] the draftsman of NSF 1993 or the parties in the present case so chosen they could easily have expressed an intention – mirroring that of the second limb of clause 13 – that, upon cancellation for a breach of clause 2, the sellers might recover the amount of the deposit in any event, and any additional compensation for losses in excess of that amount. In our view there is, quite simply, nothing in the language of the MOA to suggest that was its intention.”

In other words, the Tribunal considered that Clause 13 permitted the Sellers to terminate the contract where the deposit has not been paid [1st limb] or where the purchase price has not been paid [2nd limb].

Where the contract is terminated in accordance with the 2nd limb, because the Buyers have failed to pay the purchase price, the Seller would be entitled to the deposit even if it exceeded their actual loss.

However, where contract is terminated because the Buyers have failed to pay the deposit then the Sellers are only entitled to compensation for their actual losses because there is no specific reference to forfeiture of the deposit in the 1st limb of Clause 13.

 

Appeal

Hamblen J granted the Sellers permission to appeal pursuant to section 69 of the Arbitration Act 1996.

The question for consideration by the Commercial Court was “whether clause 13 of the MOA has the effect of depriving the sellers of their right to claim the deposit which had fallen due before the MOA was terminated so that, on the true construction of the MOA as a whole, the deposit did not fall due unconditionally.”

The Appeal was heard before Mr Justice Teare who stated that:

“…the right to a deposit is valuable. It is the seller’s security for the correct fulfilment of this Agreement. It has long been recognised that a deposit remains payable notwithstanding the termination of the contract…

… Clause 13 does not contain words which expressly deprive the sellers of the right to payment of the deposit in circumstances where it has accrued due…. Nor do I consider that clause 13 impliedly deprives the sellers of the right to payment of the deposit in circumstances where it has accrued due.”

Contrary to the Arbitration Tribunal, Tear J held that the 1st limb of Clause 13 assumes that the deposit has not been paid (which explains why there is no reference to its forfeiture or release) and the 2nd limb of Clause 13 assumes that the deposit has been paid (which is why there is express reference to the deposit).

In either scenario, Clause 13 permits the Sellers to recover the amount of the deposit if it has accrued due.  Tear J justified this on the basis that Clause 2 describes the deposit as paid ‘as security for the correct fulfilment of this Agreement’.  Therefore, when the deposit accrued due (on 5 May) it did so unconditionally.

The Buyers were granted leave to appeal.

 

The Court of Appeal

On appeal the Buyers submitted that the 1983 amendment to the NSF (which added the current first limb to clause 13) had the effect of depriving the sellers of the ability to recover and retain the unpaid deposit.   It was contended that the right to receive the deposit had not been unconditionally acquired by the sellers because the NSF93 demonstrated by its terms that the deposit was neither payable nor, a fortiori, forfeitable if unpaid before termination of the contract.

The appeal was refused.

The Court of Appeal held that the first limb of clause 13 did not prescribe what was to happen if the deposit was unpaid.  Instead it conferred upon the sellers a valuable contractual remedy over and above the remedy which they already enjoyed at common law.

The 1st Limb of Clause 13, either looked at in isolation or read together with the 2nd limb, has no effect on the proper construction and effect of Clause 2 which provides, “security for the correct fulfilment” of the agreement.

The Sellers’ right to receive the deposit, once it has accrued, is not in any other sense conditional and would survive subsequent termination of the contract resulting from the Buyers’ failure to pay the deposit.  The Sellers retain the right to sue for the deposit as a debt or by way of damages.

The Court of Appeal also held that:

""compensation” in limb 1 of Clause 13 is apt to embrace recovery by Sellers of compensation for failure by the Buyers to pay the deposit, the measure of which, by analogy with the position at common law, will be at least the amount of the deposit itself.” 

The common law position referred to is that set out in The “Blankenstein”  In that case the Buyers failed to sign the MOA and pay the deposit within the agreed time limit.  The Court of Appeal held that there was a binding contract of which the provision for payment of the deposit was a fundamental term. The Buyers were found to be in repudiatory breach and the Sellers were entitled to recover the amount of the deposit by way of damages for breach of contract even though the amount of the deposit exceeded the amount of the general damages.

A point of clarification to note regarding the Court of Appeal’s comments on the common law position is that in The “Blankenstein” it was held that the Sellers were, at the time they accepted the repudiation, already entitled to a vested right to sue the Buyers for damages for breach of their obligation to sign the memorandum, the measure of damages for which was held to be the amount of the deposit.

 

Implications

The construction of Clause 2 and Clause 13 of the NSF93 has received desirable clarification.

The Norwegian Shipbrokers Association’s Norwegian Sale Form Memorandum of Agreement 2012 which was introduced in February 2012 contains identical wording at Clause 13 to the 1993 version.  Therefore, the same considerations also apply to the 2012 form.

Buyers should consider very carefully before agreeing a due date for the deposit.  Parties may also wish to amend the standard Saleform in order to expressly clarify what they intend the consequences of Clause 13 to be.

If a Buyer is seeking to limit a Seller’s potential claim in the event that it fails to pay the deposit then clear wording would have to be used to amend the standard form.

An example of an attempt at this can be seen in the Singapore Ship Sale Form at Clause 12 which states that:

“in the event of failure by the Buyers to pay the agreed Deposit… Sellers have the right to cancel this Agreement and they shall be entitled to claim compensation for their losses and expenses (but with no automatic right to compensation in the amount of the Deposit)”

From a Seller’s perspective the standard wording of the NSF93, as currently clarified, should provide it with sufficient protection and security to enter into the contract.

Of course, the precise wording required will always depend on the circumstances and the parties’ respective commercial positions.

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