A contractual right to terminate gave rise to loss of bargain damages even where there was no repudiatory breach

Speed read

The Supreme Court upheld an award for loss of bargain damages, despite there being no repudiatory breach which deprived the innocent party of substantially the whole benefit of the contract. The Buyers exercised a contractual right to terminate for the Seller’s failure to meet the agreed delivery date. A clause expressly providing for “due compensation” for “loss and for all expenses” entitled the Buyers to loss of bargain damages upon their election to terminate the contract.

Why is this significant?

A critical consideration prior to terminating a contract is what the financial impact of the termination will be.

What are loss of bargain damages?

Under common law, loss of bargain damages are generally only available if a party terminates for repudiatory breach. In its widest sense, loss of bargain damages put the innocent party in the position as if the contract was performed as agreed.  They cover losses that are consequent on the termination of the contract and are intended to compensate for profits that would have been earned during the remainder of the contract term (after deducting saved costs and overheads).

In contrast, damages recoverable on termination for a non-repudiatory breach of contract are often limited to the loss suffered at the date of termination, rather than the whole term of the contract, absent an express provision to the contrary.

What was interesting about this case?

In this case, the Buyers exercised their right to terminate following a delay in delivery of the vessel of 2 months and argued that they were entitled to the difference in value of the amount they had paid for the vessel as compared to the value of the vessel now.  The Seller disputed this on the basis that a damages award for loss of bargain for the value of the whole contract is a significant remedy where the breach is a relatively short delay and where time for delivery was not stated to be of the essence.

This decision confirms the possibility of post-termination loss of bargain damages when exercising a contractual right to terminate, however this is ultimately a matter of contractual construction.

The decision

Under a Memorandum of Agreement (‘MOA’) on amended Norwegian Saleform 2012 terms, the Sellers agreed to sell a vessel for US$15 million but failed to have it ready for delivery on the original or revised cancelling dates (20 August and 15 October 2021). On 18 October 2021 the Buyers applied to arrest the vessel, claiming entitlement to cancel the MOA and recover all losses.

Clause 14 of the MOA entitled the Buyers to:

1. cancel the MOA if the vessel was not ready by the cancelling date; and
2. “due compensation…for their loss and for all expenses together with interest if [the Sellers’] failure is due to proven negligence…whether or not the Buyers cancel this Agreement”.

The arbitrators found that the delay in delivery resulted from the Sellers’ proven negligence and that the arrest application constituted the Buyer’s termination of the MOA. They awarded US$1.85 million: the difference between the contract price and the vessel’s market value (US$16.85 million) at the time of termination.

The Sellers appealed the arbitrator’s decision on the following question of law: is a party that elects to terminate the MOA, due to the Seller’s proven negligence, entitled to recover loss of bargain damages absent an accepted repudiatory breach?

The High Court found that the Buyers were not entitled to loss of bargain damages.  On further appeal the Court of Appeal and Supreme Court held that they were.

The Supreme Court provided the following reasoning:

1. “Loss” that was recoverable in this context was wide enough to cover loss factually suffered by the Buyers as a consequence of termination. Loss of bargain was the most obvious form of loss, being loss consequent on termination of the MOA. The Buyers did not get the vessel they had contracted for and, at the time of cancellation, the vessel was worth US$1.685m more than they had contracted to pay.
2. The words “due compensation” meant “appropriate compensation using the common law principles of causation, remoteness and mitigation”. There was no good reason or justification for reading in further limitation to the loss recoverable.
3. Unless “loss” covers loss of bargain, it is unclear what loss would be covered in the event of cancellation in this context.
4. This interpretation was supported by wider contextual matters such as the parallel wording of clause 13 (Buyers’ default), the normal measure of damages for non-delivery of goods in the Sale of Goods Act 1979, the clause’s established meaning within the industry, and the commercial consequences: in this scenario the Sellers would otherwise benefit from the cancellation, whereas the Buyers would be out of pocket in paying the new market price for an alternative vessel.

The Supreme Court rejected the Sellers’ argument that “loss” could not include “loss of Bargain” because clear words to that effect were not used - whilst clear language must be used to restrict valuable rights arising at common law, that principle did not apply to additional rights being conferred.

The Supreme Court also distinguished the decision in Financings Ltd v Baldock [1963] 2 QB 104, on which the Sellers relied, on the basis it related to a “bare” termination clause only, not one which was coupled with an express compensation clause entitling the Buyers to the claim for loss of bargain.  In this case the Sellers’ breach caused the Buyers to cancel the MOA: the exercise of the right to terminate did not break the chain of causation between the breach and the loss of bargain.

Learning points

• A party terminating under a “bare” termination clause for a non-repudiatory breach may be limited to recovery of losses accrued before termination. In this case, the claim for loss of bargain damages arose as a result of the express compensation clause. 
• Parties wishing to limit or exclude loss of bargain damages on termination should say so expressly, e.g. by confining recovery to accrued losses and wasted expenses, or by capping damages. 
• Pairing an express termination clause with an express compensation clause (specifying recoverable “loss”) provides a clearer route to full recovery than relying on a bare termination right alone. 
• It is important to remember that a repudiatory breach has no effect unless and until it is accepted by the innocent party . A repudiatory breach may also be capable of remedy .
• Where an industry standard form has an established judicial interpretation, courts will be slow to depart from it. Parties using standard forms are deemed to have contracted on the basis of that established meaning.
• Ultimately, the recoverable losses that flow as a consequence of termination will turn upon the wording of the contract and the factual context.

Useful links

• Practical guide to termination
• Termination pitfalls – further guidance from the Supreme Court
• Terminating without express terms: implied rights and reasonable notice