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Court of Appeal Solves Shipping Contracts Puzzle

ShipIn clearing up a burning contractual issue that has long puzzled shipping lawyers, the Court of Appeal has ruled that the buyers of a $22 million merchant vessel forfeited their 10 per cent deposit on pulling out of the deal. Disputes over the correct interpretation of part of the standard contract most commonly used in the sale of second-hand vessels had previously given rise to conflicting decisions around the world.

The buyers’ obligation to pay the deposit had arisen when they signed the contract, which was in the form of the Norwegian Shipbrokers’ Memorandum of Agreement and was subject to English law and London arbitration clauses. When the deposit was not paid by the agreed deadline, the sellers treated the contract as having been terminated by the buyers’ conduct. The buyers accepted that the contract had been repudiated.

The sellers claimed to be entitled to payment of the $2,156,000 deposit; however, arbitrators subsequently ruled that, on a proper interpretation of the contract, they were only entitled to $275,000 by way of damages to represent the difference between the contract price and the vessel’s open market value.

A High Court judge subsequently upheld the sellers’ challenge to the arbitrators’ decision and ruled that they were entitled to have the deposit paid to them. In dismissing the buyers’ appeal against the High Court ruling, the Court of Appeal acknowledged that its decision conflicted with the views of the arbitrators and academic writers, as well as the Singapore Court of Appeal, but ruled that the judge was nevertheless correct.

The Court found that the sellers had acquired an unconditional right to the deposit prior to termination of the contract. In the circumstances, the sellers had the accrued right to recover the deposit as a simple debt and to sue for damages for breach of the obligation to pay the deposit. If the latter course were taken, the correct measure of damages was the amount of the deposit.