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04 February 2015
The Norwegian Saleform 1993 has long been the most popular of the pro forma contracts used for the sale of second-hand vessels and offshore units and was succeeded by a new version in 2012.
The provisions of the Norwegian Saleform 1993 have been the subject of detailed consideration in the English courts. However, London arbitrations and previous court rulings had led to uncertainty in terms of the interpretation of Clause 13 and, in particular, as to the extent of amounts recoverable in circumstances where a buyer had failed to pay the deposit in accordance with Clause 2.
The recent Court of Appeal case of Griffon Shipping LLC v Firodi Shipping Ltd provides further guidance on this point, as it was held in this case that Clause 13 of the Norwegian Saleform does not exclude a seller's right to claim the deposit as a debt.
Pursuant to a memorandum of agreement based on the Norwegian Saleform, Griffon Shipping LLC agreed to sell the vessel Griffon to Firodi Shipping Ltd for $22 million. The memorandum was governed by English law.
Clause 2 (Deposit) of the memorandum provided that a deposit of 10% of the purchase price (just over $2 million) was payable within three banking days of signature. However, the buyer failed to pay the deposit within the contractual timeframe. Consequently, the seller deemed the buyer's conduct as a repudiatory breach of contract and cancelled the memorandum pursuant to an express contractual right to do so. The buyer accepted that its conduct amounted to a repudiatory breach of contract.
The seller sought to claim the deposit as a sum due and payable before termination of the memorandum, but the buyer argued that the seller was entitled only to claim compensatory damages for the loss it actually suffered.
The damages that would have been recoverable by the seller under the conventional measure of damages, being the difference between the purchase price under the contract and the market price of the vessel, was accepted to be $275,000 – substantially less than the deposit. It was this significant difference in the amounts claimed that formed the basis for the dispute.
The buyer's argument was based on Clause 13, Paragraph 1 of the memorandum which stated that:
"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."
Against this background, the seller referred the dispute to arbitration and claimed the deposit from the buyer. In doing so, the seller contended that pursuant to Clause 2 of the memorandum, the right to payment of the deposit had accrued before the memorandum was terminated and the seller was accordingly entitled either to claim the deposit as debt or, alternatively, to claim the amount of the deposit as damages for breach of contract.
In response, the buyer submitted that, upon the true construction of the memorandum (and with particular reference to Clause 13), in the event of the buyer's failure to pay the deposit, the seller was entitled only to claim compensation for losses – and not the deposit – as the clause demonstrated a clear intention that if termination took place before payment of the deposit had been made, the only remedy available to the seller was compensatory damages.
At the hearing, the tribunal ruled in favour of the buyer and held that Clause 13, Paragraph 1 made it clear that the seller was not entitled to the deposit (whether as a debt or in damages), and was entitled only to claim for its actual loss of $275,000.
The seller appealed to the Commercial Court, where the decision of the arbitration tribunal was overruled. In considering what he considered to be a "controversial issue", the judge held that Clause 13, Paragraph 1 did not intend to exclude the seller's accrued right to the deposit granted to it under Clause 2, but determined that the paragraph simply provided an additional remedy to the right already enjoyed by the seller under Clause 2 (ie, its right to claim the deposit).
Unsurprisingly, the buyer subsequently appealed. In upholding the judgment of the Commercial Court, the Court of Appeal stated that the correct approach required two questions to be considered:
In answering the first question the Court of Appeal held that the deposit was "security for the correct fulfilment of the contract" and that the right for the seller to receive it was unconditional. Consequently, on the day on which the deposit was due, the seller was vested with an accrued right to receive and claim for the deposit as an agreed sum, forfeitable in the event of failure by the buyer to correctly fulfil its contractual agreement. As regards the second question, the court was of the view that rights unconditionally acquired by the seller before termination survive termination.
Therefore, the Court of Appeal concluded that the nature of a deposit is to encourage a party's performance of a contract, not to compensate the seller for more loss than it suffered. In describing its decision as being consistent with business common sense, the court highlighted the point that the deposit served the commercial purpose of providing the seller with security for the buyer's performance under the memorandum.
The judgment has surprised some observers, as it enabled the seller to claim a deposit in excess of the actual loss it suffered. It has also attracted some criticism from commentators, who have questioned whether the same decision would have been made had the deposit been a higher percentage of the purchase price. However, if nothing else, this is a welcome clarification on this particular point of law for both buyers and sellers using the Norwegian Saleform.
For further information on this topic please contact Joe McGladdery, Henrik Hagberg or Oddbjørn Slinning at Wikborg Rein by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Wikborg Rein website can be accessed at www.wr.no.
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