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Enforcing agreements not to trade vessels in scrap sales

30.10.2019 Maritime

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Partner

Ben Moon

Ben Moon Legal Director

The English High Court has recently made it clear that injunctions can be obtained to enforce agreements not to trade vessels sold only for demolition when a buyer ignores the agreement and trades the vessels after the sale. Recovering damages is however more difficult.

Priyanka Shipping Limited v Glory Bulk Carriers Pte Ltd [2019] EWHC 2804 (Comm)

Glory sold the Capesize bulk carrier, CSK Glory, to Priyanka for demolition. Priyanka guaranteed that they would not trade the vessel further nor sell the vessel to a third party for any purpose other than demolition. After delivery, however, the price of scrap fell, freight and charter rates for Capesize vessels rose dramatically. Priyanka began trading the vessel despite Glory declining to give permission to do so.

Glory sought an injunction from the High Court in London to enforce the negative covenant to prevent further trading, and damages.

Priyanka did not dispute that it was in breach of the sale agreement but asserted that the breach was immaterial because it would cause Glory no recoverable loss and that an injunction should be refused. 

Injunction

The High Court decided that this was an appropriate case where the Court could grant a final injunction to enforce the negative undertaking not to trade the vessel. 

There were three obvious and undisputed breaches of the negative covenant not to trade the vessel the third of which concerned a third fixture concluded very shortly before the commencement of the trial in the knowledge that a final injunction was being sought. This being so, the ordinary position was that Glory was entitled to an injunction.  It was for the buyer to satisfy the Court that an injunction should not be granted, where it would be unconscionable or oppressive for an injunction to be granted and where, in the exercise of the Court’s discretion, an injunction should be refused.  Similarly, if the question was whether the Court should award damages in lieu of an injunction, it was for Priyanka to show that it would be oppressive not to do so. However, Priyanka came nowhere near surmounting this hurdle.

Glory had a commercial interest which could be protected by an injunction. Priyanka’s breaches were deliberate and not inadvertent. The conclusion of a third fixture, very shortly before the hearing, was regarded as “cynical”. Priyanka only had itself to blame for any difficulties caused by an injunction preventing further trading in circumstances where they chose to conclude the third fixture less than a day before the hearing. The financial consequences of an injunction would not be so extraordinary as to be unconscionable or oppressive. A bad bargain was not enough to relieve a party from the terms it had agreed voluntarily and there was no good reason to allow Priyanka to load a further cargo nor award damages in lieu of an injunction to enable Priyanka to do so.

Damages

The general principle of damages is that they are restitutionary in nature – to compensate an injured party and put it in the same position as if the contract had been performed, not punish a contract breaker nor deprive the wrongdoer of profit. Here, however, Glory had sold the vessel and had no right or ability to profit from the vessel’s use. Glory, instead, asserted that it had lost the value of its right by which Priyanka guaranteed not to trade the vessel and sought “negotiating damages” to reflect the notional bargain of a reasonable release fee for the relinquishing that valuable right.

The judge observed that the availability of damages or otherwise in such circumstances was recently comprehensively reviewed by the Supreme Court in One Step (Support) Ltd v Morris-Garner [2018] 2 WLR 1353. The judge’s analysis of One Step, however, indicated that negotiating damages were not available for breaches of any contractual right but only where “the defendant has taken something for which the claimant was entitled to require payment” as it was put by Lord Reed in One Step. 

The judge concluded that Priyanka’s breaches “did not involve [Priyanka] taking or using something in which the Seller had an interest, a valuable asset, for which the Seller was entitled to require payment” because Glory had no proprietary or financial interest in the vessel once it had been sold.  The judge, therefore, decided that the nature of the Glory’s right was more analogous to a non-compete obligation for which, the Supreme Court in One Step, decided, negotiating damages were not available. 

Glory was therefore entitled only to nominal damages in respect of the first two voyages but this did not extend to any future breaches because the judge had no knowledge of the effect that such breaches might have on Glory. It was not the Court’s function to assist a party to commit a deliberate breach of contract. Leave to appeal has however been granted on the damages in respect of the first two voyages.

Article authors:

Chris Kidd Ben Moon