An important decision for the ship sale and purchase market has confirmed that buyers entering into a standard form Memorandum of Agreement (MOA) (on Norwegian Sale Form (NSF) 1993 terms and similar, e.g., the 2012 terms) do so in the knowledge that they may be liable for the amount of the (unpaid) deposit, if the MOA is then terminated as a result of the buyers’ breach. Revision to the standard form MOA will be necessary in order to avoid such possible result.

On 21 March 2013, Mr Justice Teare handed down judgment in Griffon Shipping LLC v Firodi Shipping Ltd. [2013] EWHC 593, on the claimant Sellers’ successful appeal (under section 69 of the Arbitration Act 1996) of an arbitration award dated 9 July 2012. Reed Smith acted for the Sellers. The Award sought to determine a preliminary issue, as follows:

“Is the effect of the contract and/or MOA [a standard NSF 1993 form] such that, by reason of the failure by Buyers to pay the deposit in accordance with Clause 2 of the MOA, Sellers, having been entitled to, and having terminated the Contract and/or MOA on 6 May 2010, may recover the amount of the deposit as a debt, or by way of damages.”

Mr Justice Teare, in reaching his decision that, given the qualifying factual scenario, such a question could (and should) be answered in the affirmative, considered well-known texts on ship sale and purchase (“Sale of Ships,” 2nd. ed., by Strong and Herring and “Ship Sale and Purchase,” 6th. ed., by Goldrein, Hannaford and Turner), as well as authorities that have provided debate for the past three decades (see the Singapore Court of Appeal decision in The Anna Spiratou [1998] 2 SLR 536, which considered the NSF 1987, and the well-known earlier English Court of Appeal decision in The Blankenstein [1985] 1 WLR 435, which considered the effect of the NSF 1966).

In brief, the Sellers’ case was that the right to payment of the deposit had accrued before the MOA was terminated and accordingly the Sellers were entitled to claim the deposit either as a debt or as damages for breach of contract in accordance with Clause 2 of the MOA:

2. Deposit - As security of 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 and exchange by fax/email. This deposit shall be placed in the Sellers’ nominated account with the [Bank] and held by them in a joint interest bearing account for the Sellers and the Buyers, to be released in accordance with joint written instructions of the Sellers and the Buyers ………

Alternatively, the Buyers’ case was that in the event of non-payment of the deposit the Sellers, on the true construction of the MOA and in particular Clause 13 thereof, were only entitled to claim “compensation for their losses” and not the deposit. Clause 13 was in unamended form and provided:

13. Buyers’ default - Should the deposit not be paid in accordance with Clause 2, the Sellers shall 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 the 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.

Mr Justice Teare held that Clause 13 of the NSF 1993 did not clearly exclude the Sellers’ accrued right to the deposit (Clause 2) [P. 19]. That is Clause 13 provided only an additional remedy, not an exclusion [P.25].

However, on the facts of this case, both The Blankenstein [1985], and The Anna Spiratou [1998] are, in fact, distinguishable [P. 11]. In the former, Clause 13 of the then NSF 1966 form was not the same as the clause in the 1993 form, and in the latter the right under Clause 2 to the deposit had not accrued.

This helpful clarification of the NSF 1993 confirms the general principle that an accrued right under a contract is not lost by subsequent termination, unless there are clear words to the contrary. The relevant wordings in NSF 1987, and 2012 (Clauses 2 and 13) are the same or materially the same as those in NSF 1993.

Mr Justice Teare, [at P.26] also addressed the need for business common sense (see Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900) in considering the purpose of the deposit, which is to provide the seller with security for the performance of a contract. That is, it would not make common sense for the buyer to be able to put himself in a better position than he would have been if he had paid the deposit (see Hinton v Sparkes (1868)3 LR 3 CP 161, Dewar v Mintoft [1912] 1 KB 373, and The Blankenstein [1985]. Permission to appeal the decision to the Court of Appeal was granted by Teare J, and the Buyers have filed an appeal.

Client Alert 13-091