As a sequel to our March and April newsletters, we will in this newsletter discuss a recent English case Griffon Shipping LLC v Firodi Shipping Ltd. [2013] EWHC 593 and its appeal to the Court of Appeal (Firodi Shipping Limited v Griffon Shipping LLC [2013] EWCA Civ 1567) (“The Griffon”). This case concerns the interpretation of clauses 2 and 13 of the Norwegian Saleform 1993 (“NSF 1993”) in relation to the sellers’ right to claim deposit, and because of this case the buyers should treat with caution when using Norwegian Saleforms for the sale and purchase of vessels.

Facts
By a memorandum of agreement based on the NSF 1993 dated 1 May 2010 (“MOA”), the Sellers agreed to sell mv Griffon to the Buyers at a price of US$22m (“Purchase Price”).   Clause 2 of the MOA provides that, inter alia, “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 and exchange by fax/mail. This deposit shall be placed in the Sellers’ nominated account with the Royal Bank of Scotland PLC, Piraeus…” The 10% deposit was not paid on time and the Sellers cancelled the MOA according to Clause 13 of the MOA. Clause 13 stipulates that, inter alia, “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.” Both Clause 2 and Clause 13 are substantially the same as those clauses in Norwegian Saleform published in February 2012 (“NSF 2012”).

The Arbitration
The Sellers claimed to recover the deposit as a debt, or alternatively, their right to payment of the deposit had accrued before the MOA was terminated. The Buyers contended that 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. This case was submitted to arbitration. The issue for the arbitral tribunal was whether the Sellers could recover the 10% deposit, amounted to some US$2,156,000 (“the Deposit”), rather than the actual damages, which was said to be US$275,000 and was substantially less than the Deposit. The tribunal found in favour of the Buyers and held that the Sellers were not entitled to recover the Deposit but were restricted to the actual damages in the lesser sum (US$275,000) claimed under Clause 13. 

The Sellers’ Appeal
The Sellers made an appeal to the High Court. The High Court was to consider two main issues, first, whether Sellers’ right to Deposit has accrued unconditionally under Clause 2 and second, whether Clause 13 has the effect of depriving the Sellers of their right to claim deposit which had fallen due before the MOA was terminated. In relation to the first issue, the Court held that Clause 2 expressly described the payment of the Deposit as “security for the correct fulfilment” of the MOA and Clause 2 entitled the Sellers to recover the Deposit as a debt.  This is different from a part payment which may be recoverable after termination of the MOA as the Purchase Price is no longer payable. The Court found that, when the Deposit was due, it was accrued unconditionally before the MOA was terminated.

In relation to the second issue, the Court carefully considered the construction of the MOA, in particular Clause 2 and Clause 13.  The Court ruled that Clause 13 did not contain words which expressly or impliedly deprive the Sellers of the right to payment of the Deposit in circumstances where it was due. In any event, even if the correct construction of Clause 13 excludes the right of payment of the Deposit, the word “compensation” would be wide enough to entitle the Sellers to recover the Deposit. The rights provided in Clause 13 were in addition to the right to claim the Deposit as a debt. Therefore, the Court allowed the Sellers’ appeal and held that the Sellers were entitled to recover the Deposit in addition to the claim for damages under Clause 13. 

The Buyers’ Appeal
The Buyers’ appeal to the Court of Appeal was dismissed. The Court of Appeal upheld the lower court’s decision in which the Deposit was accrued unconditionally and would survive termination of the MOA.  Also, Clause 13 did not deprive the Sellers’ right to claim the Deposit.    

Implications
In reaching this decision, the Court of Appeal took a different view from the views expressed by the authors of two practitioners’ text on ship sales[1] and by the Singapore Court of Appeal in The Anna Spiratou (1998)[2], a case involving a ship sale contract made on Norwegian Saleform 1987 that contains similar terms as NSF 1993. Although not binding on the English Court, the Singapore Court of Appeal held that Clause 13 provides clear intent that sellers should be compensated for their actual losses and costs and not automatically be equated with the amount of deposit.  However, in the Court of Appeal’s view, neither the Singapore Court of Appeal nor the two practitioners sufficiently grappled with the point that clear language would be required to divest the sellers of a right accrued before termination.

The latest version of the Norwegian Saleform published in February 2012 (“NSF 2012”) contains substantially the same wordings in Clause 2 and Clause 13 as the wordings in Clause 2 and Clause 13 of the present case on NSF 1993. Hence, the decision in The Griffon is applicable to those MOA adopting NSF 2012.  The decision enables sellers to claim deposit notwithstanding that the deposit amount may be in excess of sellers’ loss arising from the buyers’ default in paying the deposit.  This is favourable to sellers and offered sufficient protection to sellers’ right to claim unpaid deposit even if they have suffered no loss at all. One can perceive that, in a fast rising second-hand vessel market, the sellers may make a windfall profit. For example, when a buyer failed to pay the deposit on time (even just late for one day or one minute) and a seller triggered Clause 13 to terminate the MOA, the seller might at the same time sell the vessel to another buyer at a much higher price. Thus, for a potential buyer, they should consider very carefully before agreeing to a due date in paying deposit. If a potential buyer is seeking to avoid the result like The Griffon, we suggest that when the Norwegian Saleforms are used, Clause 2 and Clause 13 shall be amended with clear wordings to exclude theseller’s right to claim deposit if the buyers are in default of payment.

[1]    See Sale of Ships 2nd.ed. by Strong and Herring at paragraph 5.10 and Ship Sale and Purchase 6th.ed. by Goldrein, Hannaford and Turner at paragraph 5.50.3. [2]    Zalco Marine Services Pte Ltd v. Humboldt Shipping Co Ltd, (1998) 2 SLR 536

For enquiries, please contact our Litigation & Dispute Resolution Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.