The Lila Lisbon In The Supreme Court - John Russell KC & Jakob Reckenrich

OVERVIEW

“Due Compensation” in SALEFORM 2012, causation of loss of bargain damages and whether clear words are required to introduce additional rights to compensation.

In The Lila Lisbon [2026]UKSC 23, handed down today, the Supreme Court has held that buyers under a SALEFORM 2012 ship sale contract are entitled to loss of bargain compensation where buyers exercise their cancellation right because sellers are not ready to deliver the ship by the cancelling date where sellers’ failure to be ready is due to sellers’ “proven negligence” even though sellers are not in repudiatory breach. In so finding, the Supreme Court upheld the decision of the Court of Appeal upholding the arbitral tribunal’s award for the difference between the contract price and the market price.

At first instance, Dias J had overturned the award, holding that buyers were not entitled to loss of bargain damages. That decision came as something of a surprise to the industry, and while it had itself been overturned by the Court of Appeal, the judgment of the Supreme Court that loss of bargain damages are recoverable confirms the return to what many considered to be the status quo.

In addition to clarifying an important point on the construction of SALEFORM 2012, the joint judgment of Lord Hamblen and Lord Burrows covers a number of significant points of wider application to the law of contract.

It has been established since at least Financings Ltd v Baldock [1963] 2 QB 104 that where a party exercises a contractual termination right, they are not entitled (except where the contract provides otherwise, as the Supreme Court held it does in SALEFORM 2012) to damages for the loss of their bargain but only to damages that have accrued up to the point of termination. The explanation advanced for this position in Financings was based on causation: where a party chooses to exercise a contractual termination right, it is that choice, not the events giving rise to the termination right, that causes the loss of bargain. By contrast, where a party terminates at common law on the basis of a repudiatory breach “the law treats the repudiatory breach or renunciation as causing the loss of bargain notwithstanding that freedom of choice” (Phones 4U Ltd v EE Ltd [2018] EWHC 49 (Comm) at [75]).

The Supreme Court was not asked to overturn Financings or its causation explanation and noted that this would not have been the appropriate case to do so. Lord Hamblen and Lord Burrows nevertheless expressed some scepticism of the causation analysis, noting that “If the effective cause of the loss of bargain is the innocent party’s choice to terminate (under an express termination clause), it would appear that that choice should equally operate as the effective cause, thereby ruling out damages for loss of bargain, where the innocent party is terminating for a repudiatory breach” (at [65]).

These comments would seem to open the door to future arguments to depart from Financings and to argue that a party terminating a contract on the basis of a contractual termination clause is entitled to loss of bargain damages, as the Canadian Supreme Court held in Keneric Tractor Sales Ltd v Langille [1987] 2 SCR 440, departing from the Financings line of authority.

Thus, while the judgment brings certainty in relation to SALEFORM 2012, it perhaps sows the seeds of uncertainty in relation to the broader principles that apply to contract termination clauses more generally.

Lord Hamblen and Lord Burrows also disapproved dicta in other cases that had suggested that clear words were required to achieve the effect that a party had a right to damages where no such right would have arisen at common law (in effect the converse of the Gilbert-Ash presumption in respect of removing a valuable right, which requires clear words). Their Lordships did accept, however, that clear words were required to confer a right to compensation where a party had not in fact suffered a loss.

John Russell KC and Jakob Reckhenrich, acting on behalf of the sellers, were instructed by Ed Mills-Webb, Ross Attfield and James Stephenson of Preston Turnbull LLP.

To view the full article, click here.