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In this briefing, we consider some recent decisions covering: failure to comply with a condition precedent; the meaning of ‘seizure’ in the context of insurance; interpretation of reasonable endeavours and force majeure; and the correct valuation of cargo under GAFTA clauses.
Vessel buyers held unable to benefit from their own failure to comply with a condition precedent
King Crude Carriers SA v Ridgebury November LLC [27.06.2024]
This dispute concerned the contracts of sale for three second-hand tankers, based on amended 2012 Norwegian Sale Form terms. Clause 2 provided that the Buyers were required to send the Sellers the necessary documents to set up an escrow account to receive the 10% deposit (the condition precedent). The Buyers failed to provide the necessary documents, giving the Sellers grounds to terminate the contract.
The Sellers claimed the as yet unpaid deposit in debt before an arbitral tribunal, arguing that the Buyers’ failure entitled them to be put in the position they would have been in had the condition precedent been fulfilled. The tribunal agreed and found in the Sellers’ favour.
On appeal, the High Court held that the Sellers could only seek damages for breach of contract, not debt.
On appeal to the Court of Appeal, the Sellers successfully argued that the Mackay v Dick (1881) principle applied: if the accrual of a contractual obligation to pay a sum of money is subject to a condition precedent, the debtor cannot rely on his wrongful prevention of the fulfilment of the condition precedent (i.e. the Buyer’s failure to provide the necessary documents). The condition will be treated as dispensed or fulfilled and the debt accrued.
Accordingly Court of Appeal overturned the High Court’s decision; and the claim was allowed in debt.
Contacts: Craig Boyle-Smith, Mallory Pradel-Weisz
Geopolitical risks driving judicial scrutiny of the meaning of ‘seizure’
Hamilton Corporate Member Ltd. And others v. Afghan Global Insurance Ltd. and others [12.06.2024]
This Commercial Court case revisited the meaning of ‘seizure’ in insurance context. It ruled that a logistics company which had their warehouse seized by the Taliban could not recover their losses of US$41 million from their political violence policy provided by Lloyd’s reinsurers, due to the “clear wording” of the policy which excluded cover for losses caused by seizure.
This is a timely reminder that ‘seizure’ has an “ordinary meaning in the insurance context which has been the subject of settled judicial decisions for many years at the highest level”.
Although it was emphasised that “actual force is not required” for a seizure to take place, more often than not actual force is used, especially in cases of piratical seizure. With the continuing geopolitical tensions in the Straits of Hormuz and resurgence of piracy in the Gulf of Aden, the concept of ‘seizure’ in a marine insurance context will continue to attract judicial scrutiny.
Contacts: Christopher Dunn, Samantha Butler, Freddie Mehlig
Related content: Geopolitical risks driving judicial scrutiny of the meaning of ‘seizure’
Supreme Court holds that reasonable endeavours in mitigating a loss does not include accepting offer of non-contractual performance
RTI Ltd v MUR Shipping BV [15.05.2024]
This is the first case to consider whether or not force majeure clauses require the affected party to accept an offer of non-contractual performance from the other party. The Supreme Court held that it did not.
As a result of sanctions, RTI (Charterer) had become unable to fulfil its contractual obligation to pay freight to MUR (Shipowner) in US dollars under a charterparty and offered to pay freight in euros and bear any additional cost and exchange rates losses. MUR maintained its right to payment in US dollars and suspended performance under the force majeure clause. RTI claimed damages for the suspension on the grounds that refusal of the offer to pay the outstanding freight in euros constituted failure to exercise reasonable endeavours to overcome force majeure; had this been accepted the shipowner would have suffered no detriment and the same result would be achieved.
The Supreme Court overturned the Court of Appeal’s decision and held that the object of the reasonable endeavours provisions is to maintain contractual performance, not to substitute a different performance. In this case, payment in euros was the non-contractual substitution to the contractual performance obligation of payment in US dollar.
Contacts: Craig Boyle-Smith, Mallory Pradel-Weisz
Valuation of cargo under the GAFTA default clause
Sharp Corp Ltd v Viterra BV [08.05.2024]
The Supreme Court was asked to determine the proper approach to damages under the GAFTA Default Clause, which stipulates for damages to be based on the difference between the contract price and “the actual or estimated value of the goods at the date of default”.
The Supreme Court held that the value of cargo was to be determined on an “as is, where is” basis at the time and place of default.
In this case, the Indian buyer failed to pay for a cargo of peas and lentils so the seller terminated the contract, took back the goods and sought damages for repudiatory breach of contract. However, by this time the goods had been customs cleared subsequent to which , the value of the goods had jumped significantly as a result of import tariffs imposed by the Indian government. The seller commenced GAFTA arbitration successfully claiming from the buyer damages based on the difference between the contract price and the hypothetical cost of buying in a substitute cargo and selling it afloat. However, that approach took no account of the significantly increased value of the cargo, which was back in the seller’s hands, as a result of the recent import tariffs.
The matter ultimately came before the Supreme Court which held that the Default Clause – in much the same way as the common law – encapsulates both the compensatory principle and the principle of mitigation. On that basis, damages were to be assessed on the difference between the contract price and the value of the goods such as could have been realised in the market in which it would have been reasonable for the seller to dispose of them. In this case, that was the local Indian market with its elevated prices.
The effect of the judgment was to deny the seller the windfall that they would have achieved had the reality of the elevated value of the cargo in their hands not been taken into account. As such, the decision and the clarification it brings are to be welcomed.
Contacts: Andrew Purssell and Mallory Pradel-Weisz.
Insurance and reinsurance
Shipping and international trade
Transport and logistics
United Kingdom