In Griffon Shipping LLC v. Firodi Shipping Ltd (The Griffon) Teare J considered, in the context of clause 13 of the standard form Norwegian Sale Form (“NSF”) 1993, where a buyer fails to pay the deposit under a memorandum of agreement, whether the seller’s claim is limited to compensation for its actual losses or whether the seller is entitled to the deposit amount.

The Facts

On 28 April 2010 Griffon Shipping LLC (the “Sellers”), agreed to sell the M/V Griffon to Firodi Shipping Ltd (the “Buyers”) at a price of US$22,000,000. On 1 May 2010, a memorandum of agreement on NSF 1993 (the “MoA”) was signed. Clause 2 of the MoA provided that the Buyers were obliged to pay a deposit of 10% (US$2,156,000) within three banking days of signature (i.e. by 5 May 2010).

The deposit was not paid within three banking days and on 6 May 2010 the Sellers accepted the Buyers’ conduct as a repudiation of the MoA and/or cancelled the MoA pursuant to an express contractual right to do so. The Buyers accepted that their failure to pay the deposit was a repudiatory breach.

The MoA

The relevant terms of the MoA are as follows:

2. Deposit

As security for the correct fulfilment of this Agreement the Buyer shall pay a deposit of 10% (ten per cent) of the Purchase Price within 3 (three) banking days after this Agreement is signed by both parties...

13. Buyers’ default

Should the deposit not be paid in accordance with Clause 2, the Sellers have the right to cancel this Agreement, and they shall be entitled to claim compensation for their losses and for all expenses incurred together with interest.

Should the Purchase Price not be paid in accordance with Clause 3, the Sellers have the right to cancel this Agreement, in which case the deposit together with interest earned shall be released to the Sellers. If the deposit does not cover their loss, the Sellers shall be entitled to claim further compensation for their losses and for all expenses incurred together with interest.

Arbitration

The Sellers claimed to recover the deposit as a debt or, alternatively, as damages for breach of contract on the basis that the right to payment of the deposit had accrued before the MoA was terminated.

The Buyers contended that in the event of non-payment of the deposit, on the true construction of the MoA (and in particular Clause 13), the Sellers were only entitled to claim “compensation for... losses” and that the damages recoverable by the Sellers on the conventional measure of the difference between contract and market price were US$275,000.

Arbitration proceedings were commenced and the tribunal was asked to consider the following preliminary 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 tribunal found in favour of the Buyers and held that the Sellers were only entitled to compensation in the lesser sum (US$275,000), in accordance with the first paragraph of Clause 13.

The Sellers appealed.

The Commercial Court decision

In considering what he termed “a controversial issue”, Teare J reviewed the previous case law. In The Blankenstein[1] the memorandum of agreement was on NSF 1966 (which did not contain a provision similar to that at paragraph 1 of Clause 13 of NSF 1993). In this case, the agreement was never signed, so the deposit was not paid. The sellers claimed the amount of the deposit and, after finding that a binding contract had come into existence (notwithstanding the lack of a signed agreement), the Court of Appeal held by majority that the Sellers were entitled to damages, the measure of which was the amount of the deposit.

In The Anna Spiratou[2] the Singapore Court of Appeal considered the NSF 1983 (a form different to that considered in The Blankenstein but similar to the NSF 1993). Once again, the contract came to an end before the deposit fell due and the sellers claimed the deposit as damages. The Court of Appeal held that the sellers’ only remedy was compensation under the first paragraph of Clause 13 so that damages were limited to their actual loss. The decision in The Blankenstein was distinguished. The leading practitioner texts on ship sale and purchase support the approach taken in The Anna Spiratou.

In a London arbitration in 2011 the tribunal had to consider the NSF 1993. In this case, the deposit had fallen due and had not been paid before the agreement was terminated. The tribunal held that the sellers were entitled to the deposit either because it had fallen due for payment or as damages for breach of the obligation to pay the deposit.

Thus, Teare J was confronted with conflicting decisions from London Maritime arbitrators (i.e. the decision in the 2011 London arbitration and the arbitration decision in the instant case) as to the true construction of Clauses 2 and 13 of NSF 1993.

Allowing the Sellers’ appeal, Teare J held that:

  • Clause 2 of the MoA provides that the payment of the deposit is “as security for the correct fulfilment” of the MoA and as “an earnest of performance”. This is to be distinguished from a part payment which may be recoverable after termination because the purchase price itself is no longer payable.  
  • The Seller’s right to payment of the deposit accrued before the MoA was terminated and had accrued unconditionally. It was a principle of contract law that accrued rights were not lost by reason of the subsequent termination of the contract. Thus, a deposit that had fallen due (but not paid) remained payable notwithstanding the termination of the contract.  
  • The rights provided by Clause 13 of the MoA were in addition to the right to claim the deposit as a debt. If the parties had intended to exclude such right they could have used clear words in order to do so. Clause 13 did not contain such clear words.

Comment

The decision of Teare J enables a seller to claim a deposit notwithstanding that the deposit amount may be (and likely will be) in excess of a seller’s loss arising out of a buyer’s failure to pay the deposit. This runs contrary to the previously held view that Clause 13 of NSF 1993 limited a seller’s claim in such circumstances to “compensation for... losses”.

It is common ground that a buyer who defaults under an MoA, having already paid a deposit, forfeits the deposit to the seller. The position should be no different where the deposit has fallen due, but has not been paid by the buyer. To limit a seller’s claim to “compensation for... losses” in such circumstances would place the buyer in a better position than he would have been if he had paid the deposit; a position which makes no logical sense.

Of course from a buyer’s point of view, a seller will now arguably be unjustly enriched for the buyer’s failure to pay a deposit. Permission to appeal the decision to the Court of Appeal was granted by Teare J, and the Buyers have lodged an appeal. The market will doubtless eagerly await the outcome of this appeal.

Nb. the wording of the new NSF 2012 is, in so far as Clauses 2 and 13 are concerned, identical to that of NSF 1993. As a result, Teare J’s decision has direct application to sale and purchase transactions conducted on the NSF 2012 also. For a review of NSF 2012, please see this article.