Loss of bargain damages recoverable without a repudiatory breach

If a seller of a ship misses the delivery date through its own negligence and the buyer cancels, who should benefit from any rise in the ship’s value in the meantime? The Supreme Court’s answer is the buyer.

Recap

As covered in an earlier post, Great Asia agreed to buy a ship from Orion for USD15 million. Orion twice failed to deliver on time through its own negligence, and by the time Great Asia cancelled, the ship was worth USD16.85m. Arbitrators awarded Great Asia the USD1.85m difference as its lost bargain. Orion argued that a buyer can only recover its lost bargain following a repudiatory breach,* which this was not. The Commercial Court agreed with Orion, but the Court of Appeal reversed the judgment and restored the arbitrators’ award. 

The Supreme Court has now upheld the Court of Appeal decision.

The natural meaning of “loss”

The clause in question allowed a buyer to cancel for late delivery due to the seller’s proven negligence. It also required the seller to pay “due compensation to the Buyers for their loss and for all expenses […] whether or not the Buyers cancel this Agreement”.

The Supreme Court held that the word “loss” was used in a broad and unqualified sense, and that loss of bargain damages consequent on terminating a contract are a type of “loss”. For the clause to make sense, “loss” had to mean something different from “expenses”. Further, compensation was payable whether or not the buyer cancelled the contract. The only additional loss suffered on cancellation (and the seller had not been able to point to any other loss either) was loss of bargain. Accordingly, the clause was meant to compensate loss of bargain damages.

Decades of settled practice

The Supreme Court found that courts and textbooks had read the standard form clause, and its predecessors, as including loss of bargain damages since the 1980s. This was the kind of settled understanding, the Supreme Court said, that courts should be, and are, reluctant to disturb.

Commercial sense favoured the buyer

The Supreme Court also thought it would be unjust for a negligent seller to keep a ship that had risen in value simply because the buyer chose to cancel rather than affirm the contract. Similarly, a seller who was behind schedule in a rising market should not be incentivised to delay delivery deliberately, in the expectation that the buyer would eventually cancel.

The causation argument rejected

Orion argued, relying on Financings v Baldock, that it was the buyer’s own choice to cancel, rather than the seller's breach, that caused the lost bargain, so the clause should be read to exclude it. 
In Financings v Baldock, a hire-purchase creditor terminated under an express clause after missed payments. The Court of Appeal (Denning MR) in that case held that as there was no repudiatory breach, the creditor could recover only the arrears due at termination, not its lost future instalments. The Supreme Court in this case disagreed with Orion’s argument. Financings v Baldock might explain why damages stop where a contract is cancelled under a bare cancellation clause with nothing more, but it does not stand for the proposition that there cannot be loss of bargain damages even where parties have included an express compensation clause in their contract.

No need for “clear words”

Orion also argued that clear words are needed before a clause is considered to confer a right to damages beyond what the common law would otherwise allow. The Supreme Court disagreed. The principle of clear words exists to prevent parties unknowingly giving up rights, not to prevent them gaining rights, and there was nothing unusual or unfair about this provision.

The punchline

You can, by drafting, enable compensation for loss of bargain damages even where a breach is not repudiatory.

Judgment: Great Asia Maritime v Orion Shipping

* The Supreme Court helpfully summarises that: “At common law, the right to terminate a contract for breach is triggered in one of three ways: 
•    the defendant commits a breach of a term that is a condition; or 
•    the defendant's breach is of an innominate term (ie a term that is neither a condition nor a warranty) that has sufficiently serious consequences (…it deprives the innocent party of substantially the whole benefit of the contract (or, … goes to the root of the contract)); or 
•    the defendant repudiates the contract (sometimes referred to as a “renunciation”).”
Each is a “repudiatory breach”.