UK: Buyers Beware: Sellers’ Right To Claim For An Unpaid Deposit

Last Updated: 6 February 2014
Article by Paul Herring and Anna Devereaux

Firodi Shipping Ltd v. Griffon Shipping Llc (Griffon) [2013] EWCA Civ 1567

In a judgment handed down in December 2013, the Court of Appeal upheld the decision of Mr Justice Teare in the Commercial Court in Griffon Shipping LLC v. Firodi Shipping Limited. The decision confirms that the sellers' remedy under clause 13 of the Norwegian Sale Form 1993 (NSF 93) where buyers fail to pay the deposit is a claim for the unpaid deposit and they are not limited to a claim for damages based on the difference between the market and contract price of the vessel. This has the effect of dramatically increasing the quantum of the sellers' claim in such circumstances and heralds a departure from the previously held view regarding the operation of clause 13.

The background facts

Clause 13 of the NSF93 provides as follows:

"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."

Clause 2 of the Memorandum of Agreement (MOA) for the sale of the Griffon provided for a 10% deposit (USD2,156,000) to be paid within three banking days from signature of the MOA. The deposit was not paid within time and the Sellers cancelled/terminated the MOA.

The dispute was referred to arbitration in London and the Tribunal held that the Sellers were not entitled to recover the full deposit but were limited to a claim for damages in the amount of approximately USD275,000.

The Commercial Court decision

Leave to appeal was granted and Mr Justice Teare considered the various contradictory decisions made by maritime arbitrators on the true construction of clauses 2 and 13 of the NSF. He concluded that as clause 2 made provision for payment of a deposit as "security for the correct fulfilment" of the MOA, the right to payment of the deposit had accrued under common law before the contract was terminated and had accrued unconditionally. Although the first limb of clause 13 of the NSF 93 does not expressly refer to a seller being able to claim the deposit and merely refers to a claim for "compensation" in circumstances where a deposit is not paid, due to the legal nature of a deposit, liability for which accrues before the termination of the contract, a seller has the right to claim the deposit in addition to a claim for any additional compensation under clause 13.

The Court of Appeal decision

The Buyers appealed to the Court of Appeal. The leading judgment was delivered by Lord Justice Tomlinson and confirmed the decision reached by Mr Justice Teare concerning the nature of a deposit and the accrual of rights under common law before termination of the contract.

"The rights unconditionally acquired by the Sellers prior to termination survive termination. Accordingly, I agree with the judge that the Sellers retain the right to sue for the deposit as an agreed sum which they may simply recover as a debt. Alternatively, the Sellers have an accrued right to sue for damages for breach of the obligation to pay the deposit, the measure of which is the amount of the deposit."

Comment

This decision is contrary to the decision of the Singapore Court of Appeal in the Anna Spiratou (1998) and the view contained in the published text on ship sale and purchase.

Buyers who now choose not to proceed with a purchase of a vessel after signature of an MOA should appreciate that they will likely face a claim for the full amount of the unpaid deposit which may dramatically increase the quantum of any claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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