Judicial interpretation of MOA, Clauses 2, 3 and 13 - Norwegian Sale Form (NSF) 1993

A recent decision by the English Commercial Court provides clarity on Sellers’ remedy in the event of Buyers’ default in payment of the deposit. Pursuant to a Memorandum of Agreement (MOA) based on Norwegian Saleform NSF 1993, Sellers agreed to sell the MV GRIFFON to the Buyers at a price of US$22m. 10% deposit amounting to US$2,156,000, was payable within three banking days of contract signing.

Buyers defaulted in the payment of the deposit and the Sellers accepted the Buyers' conduct as a repudiation of the MOA and cancelled the same. The damages recoverable by the Sellers on the conventional measure would be the difference between contract and market price, and in this case, US$275,000, which is, substantially less than the deposit of US$2,156,000.

The Arbitration Tribunal had to decide whether the Sellers could recover the deposit or could only claim damages for the lesser sum. It was common ground that if the deposit had been paid the Sellers would have been entitled to retain the deposit, even though it would have exceeded the recoverable damages.

The relevant terms of the MOA:

“1. Purchase price USD 22,000,000 …less 2% total commission.

2. Deposit

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/email. This deposit shall be placed in the Sellers’ nominated account with the Royal Bank of Scotland PLC, Piraeus and held by them in a joint interest bearing account for the Sellers and the Buyers, to be released in accordance with joint written instructions of the Sellers and the Buyers ………

13. Buyers’ default

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.

Should the Purchase Price not be paid in accordance with Clause 3, the Sellers have the right to cancel the Agreement, in which case the deposit together with interest earned shall be released to the Sellers. If the deposit does not cover their loss, the Sellers shall be entitled to claim further compensation for their losses and for all expenses incurred together with interest.”

Point of contention:

Sellers’ position - that the right to the deposit had accrued before the MOA was terminated and therefore they were entitled to claim the deposit either as a debt or as damages for breach of contract. Buyers’ position - as the deposit has not been paid, Sellers are only entitled to claim “compensation for losses” and not the deposit.

The arbitration tribunal agreed with the Buyers. They held that the first limb of clause 13 excluded any right to claim payment of the deposit as the only right was to “compensation” which was the expressly stated in the first limb of clause 13.

On appeal, Mr. Justice Teare (Commercial Court), adjudged in the Sellers’ favour. He referred to various authorities (including Hyundai v Papadopoulos [1980] 1 WLR 1129, a shipbuilding case) and stated inter alia that:

The question is whether clause 13 of the MOA has the effect of depriving the Sellers of their right to claim the deposit which had fallen due before the MOA was terminated so that, on the true construction of the MOA as a whole, the deposit did not fall due unconditionally.

The right to a deposit is valuable. It is the seller’s “security for the correct fulfilment of this Agreement”. It has long been recognised that a deposit remains payable notwithstanding the termination of the contract…. The court would therefore expect that if the parties intended to exclude such right they would do so by the use of clear words;

However, in my judgment, the wording of clause 2 – “as security for the correct fulfilment of this Agreement the Buyers shall pay a deposit” – so clearly gives rise, absent other words, to an agreement to forfeit that the principle of Gilbert-Ash is applicable.

Clause 13 does not contain words which expressly deprive the sellers of the right to payment of the deposit in circumstances where it has accrued due.

In my judgment the language of the MOA does provide that the Sellers might recover the amount of the deposit in any event. That intention is to be found in clause 2 of the MOA, which expressly describes the payment as a deposit for the purpose of providing security for the correct fulfilment of the MOA.

If, contrary to my view, the construction of clause 13 of the MOA is ambiguous such that there are two possible constructions of it, one which excludes the right of the seller to payment of the deposit pursuant to clause 2 and one which does not but gives additional rights then the latter is the construction more consistent with business common sense. A deposit serves the commercial purpose of providing the seller with security for the performance of the MOA. It would not be consistent with business common sense to enable a buyer to put himself in a better position than he would be in having paid the deposit by adopting the simple expedient of refusing to pay the deposit;

Recently, the Court of Appeal has unanimously affirmed the decision of the Commercial Court.

Reference:

Griffon Shipping LLC v Firodi Shipping Ltd, “mv Griffon [2013] EWHC 593 (Comm)

Griffon Shipping LLC v Firodi Shipping Ltd [2013] EWCA Civ 1567

Comment:

Even though it is now settled, I somewhat prefer the position asserted by Michael Coburn QC, Counsel for the Buyers, as follows:

Whilst Clause 2 might give rise to an expectation that a deposit, once paid, is at risk of forfeiture in the event of failure by the Buyers correctly to fulfil the agreement, Clause 2 does not actually provide in express terms for forfeiture and, importantly, it says nothing about what will happen in the event that the Buyers, in breach of obligation, fail to pay the deposit.

Clause 13, ... deals expressly with the circumstances in which the deposit will be forfeitable and Clause 13, in its first limb, “tells you what happens if the deposit is not paid”. The contrast in treatment between the case where the deposit has been paid, limb 2, and the case where the deposit has not been paid, limb 1, demonstrates a clearly expressed intention that in the event that termination takes place before the deposit has been paid, Sellers’ remedy is compensation for their losses, assessed as did the Singapore Court of Appeal in Zalco on the conventional basis of the difference between the contract and market price, here therefore US$275,000. (Paraphrased by Lord Justice Tomlinson, Court of Appeal at paragraph 7).