India – Priyanka Shipping Ltd -v- Glory Bulk Carriers Pte Ltd (the “LORY”) – QBD (Comm Ct) [2019] EWHC 2804 (Comm)

 

Factual background

 

Priyanka Shipping Limited (the Buyer) purchased the “CSK GLORY” (the Vessel) from Glory Bulk Carriers Pte Limited (the Seller), the MOA contained the following clause:

 

‘19. The vessel is sold for the purpose of demolition only and the Buyers hereby guarantee that they will not trade the Vessel further nor sell the Vessel to a third party for any purpose other than demolition and will, on completion of demolition, furnish to the Sellers a certificate stating that the vessel has been totally demolished.’

 

The Buyer intended to sell the Vessel for demolition as clause 19 required. However, lack of interest from potential scrap buyers and a fall of prices for scrap metal caused the Buyer to seek to trade the Vessel instead.

 

Permission was requested from the Seller to allow the Buyer to do so, but this was refused. This decision was due to Seller’s policy of scrapping its older vessels with a view to reducing the oversupply of tonnage in the market that impacted on the Seller’s revenues through depressed charter rates.

 

Despite this refusal, the Buyer concluded two fixtures. Upon conclusion of the first of these fixtures, the Seller repeated the terms of clause 19 and reserved its right to damages. This led to proceedings in India.

 

The Buyer then concluded a third fixture shortly before the hearing, with full knowledge that a hearing would be taking place.

 

Legal issues

 

The issues to be determined at the trial were as follows:

 

1. The injunction counterclaim: the Seller's claim for a final injunction enforcing the terms of clause 19 and preventing any further use of the Vessel by the Buyer for trading
2. The damages counterclaims: the Seller's claims for damages at common law, damages in addition to an injunction or damages in lieu of an injunction (excluding quantum issues)
3. The damages declaration: the Buyer's claim for a declaration that the Seller was entitled only to nominal damages for the previous and any future breaches of clause 19 of the MOA

 

The Buyer sought to limit its liability purely to the contractual breach and perhaps absolve it of further breaches, while the Seller’s counter claims worked to increase this liability and prevent any further breach.

 

Both parties had the third fixture in mind.

 

The relief sought by the Buyer included a declaration or declarations that the Seller was entitled to no more than nominal damages for breach of clause 19 of the MOA, whether by way of the first fixture or the second fixture or any further fixture of the Vessel for trading. The Buyer additionally argued that granting an injunction would be ‘unconscionable or oppressive’, and that, again, the Seller should simply be entitled to damages.

 

1. The Injunction Counterclaim

 

The Buyer argued that an injunction should be refused as the Seller’s conduct was vexatious and oppressive, and the Seller had no measurable financial interest in restraining the trading of the Vessel.

 

In unpicking the arguments of the Buyer, it was suggested that, firstly, clause 19 was clear; it contained a negative covenant and the breach could not be represented as a misunderstanding by the Buyer.

 

Additionally, the breaches were deliberate; entered into with full knowledge of the circumstances. The third fixture was considered to emphasise this in light of the timing in relation to the date of hearing.

 

The ordinary position was that the Seller was entitled to an injunction. The Buyer had to satisfy the court that the ordinary position should not apply because it would be unconscionable or oppressive for an injunction to be granted. On the evidence, the buyer came nowhere near that and the injunction was therefore granted.

 

The judge made it clear that the injunction should come into force before the conclusion of the third fixture. The Buyer had entered into the fixture fully aware of the potential consequence of the hearing. The grant of an injunction was a foreseeable outcome.

 

In light of the court’s decision to grant an injunction, it was also decided that damages would not be adequate in place of an injunction. The damages that resulted from the breach were particularly difficult, if not impossible to quantify in that clause 19 related to the Seller’s scrapping policy. This policy created a legitimate commercial impact, so that even though actual damage was limited, there was value in the policy itself. This value however, was unquantifiable. To grant damages would be an unjust and limited remedy.

 

The loss was simply the result of ‘what turned out to be a bad bargain’ on terms that were entered into voluntarily. There were more options to mitigate the loss that did not involve breach, and the actions of the Buyer could not be condoned.

 

2. The Damages Counterclaims

 

The damages counterclaims concerned only the claim for damages in respect of the past breaches, i.e. for the first and second fixtures. The seller had sought ‘negotiating damages’ and the question was whether they were, in principle, available to the Seller.

 

The term ‘negotiating damages’ comes from the recent decision in One Step (Support) Ltd -v- Morris Garner [2018] UKSC 20, [2019] AC 649 (One Step). The Seller was seeking ‘the economic value of the right which had been breached’, and it became a critical question for the court to consider what was appropriate and comparable.

 

The judge suggested that in One Step, Lord Reed JSC had clearly distinguished the nature of a breach of contractual obligation to which negotiating damages could apply. Namely breaches that ‘result in the loss of a valuable asset created or protected by the right which was infringed.’ In essence this referred to, for example, restrictive covenants, intellectual property or confidentiality agreements. These are assets that are distinct from the contractual right itself.

 

This became evident as the Seller argued that by breaching clause 19 the Buyer had unilaterally removed from the Seller the right to trade the vessel. The judge however, made clear that the sale of the Vessel to the Buyer had already had this effect, and the Seller had no right to trade the Vessel itself.

 

So, the Buyer’s use of the Vessel for trading did not involve the Buyer taking or using something in which the Seller had an interest or for which it was entitled to payment, and could not therefore be classed as a distinct asset.

 

Accordingly, the present case was not a case where negotiating damages were available and, instead the court decided the Seller was only entitled to nominal damages.

 

3. The Damages Declaration

 

The judge was prepared to make a declaration that the Seller was only entitled to nominal damages in respect of the past breaches of clause 19 but he declined to make a declaration in respect of any further, future breach that might occur. The court had no knowledge of the circumstances in which any such breach might take place or the effect that it might have on the Seller.

 

Comment

 

This case suggests that discretionary remedies, including negotiating damages explored in One Step, will not be used to condone or grant relief in cases of deliberate breach. It is not for the court to mitigate a bad bargain, more so in cases were other avenues of mitigation are available.