Claim for unpaid deposit on termination
FIRODI SHIPPING v GRIFFON SHIPPING (CA) [2013]
The Court of Appeal (CA) has upheld the judgment in the High Court (HC) in this case which involved the question of whether a seller’s claim for non-payment of a ‘deposit’ by a buyer was limited to compensation for its actual losses or whether it was entitled to claim the deposit agreed in full. The CA underlined that the main purpose of a deposit is to encourage a buyer to perform and confirmed that a right to a deposit which had accrued before termination of the agreement was not lost due to the termination.
Facts:
- On 28th April 2010 Griffon (the Sellers) agreed to sell a ship to Firodi (the Buyers) for US$22 million. On 1st May 2010 a Memorandum of Agreement (MOA) was signed reflecting this agreement.
- Clause 2 of the MOA stated: “As security for the correct fulfilment of this Agreement the Buyer shall pay a deposit of 10% … of the Purchase Price within 3 … banking days after this Agreement is signed by both parties…”.
- Clause 13 went on to say: “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”.
- The 10% deposit was not paid within the specified timescale which should have been by 5th May 2010.
- On 6th May 2010 the Sellers, in view of the Buyer’s conduct brought the MOA to an end. The Buyers accepted that their failure to pay the deposit was something which entitled the Sellers to do this. The question was what financial compensation the Sellers were entitled to.
- The matter initially went to arbitration where the tribunal preferred the Buyers’ case saying that the Sellers were not entitled to claim the deposit. Their claim was restricted to damages as compensation for their losses, as provided for in Clause 13. This meant the damages recoverable by the Sellers on the conventional measure of the difference between the original contract price and the current market price would have been around US$275,000. This was substantially less than the 10% deposit of US$2.2 million. Interestingly, seemingly there was no dispute that if the deposit had been paid, the Sellers would have been entitled to retain the deposit, even though it would have exceeded the recoverable damages.
- The Sellers appealed to the HC claiming a right to recover the deposit as a debt or as damages for breach of contract on the basis that the right to payment of the deposit had accrued before the MOA was terminated.
- The HC found in favour of the Sellers. The Buyers then further appealed to the CA.
Decision:
The CA essentially reiterated the HC’s reasoning in support of the Sellers:
- Although the MOA was brought to an end and this meant both parties were released from further performance of the MOA, rights which had already been unconditionally acquired were not discharged. Crucially Clause 2 provided that the deposit was "security for the correct fulfilment" of the agreement ie it was meant to be a guarantee that the buyer would perform its part of the contract. The right to receive the deposit was unconditional in that the right to receive it was not conditional upon the contract being performed by the Sellers. As a matter of contract law, once the MOA was signed, this meant the Sellers had an accrued right to receive and sue for the deposit if the Buyers failed to pay it which was not lost because the MOA was terminated – the accrued right survived the termination.
- The right to claim compensation and expenses under Clause 13 was in addition to the accrued right to claim the deposit.
- It is established law that in construing a contract "one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption”. As Clause 13 did not provide clear express words intended to deprive the Sellers of their accrued right to sue for the deposit, the Sellers kept the right to claim for the deposit as an agreed sum which they could simply recover in debt or they could sue for damages for breach of the obligation to pay the deposit, the measure of which was the amount of the deposit.
- The Buyers were therefore ordered to pay the Sellers the full 10% deposit.
Points to note:
- The obligation to pay a deposit is seen as a fundamental term of the contract. It is settled law that the breach of that term allows the seller to terminate the contract and claim the deposit. This applies even if the deposit has not been paid so long as the obligation to pay it has accrued before the termination and provided there is no wording to the contrary.
- A ‘deposit’ is seemingly classified quite differently in law from a payment which is simply ‘part payment of the purchase price’. A deposit, once paid, can be retained and if unpaid can be claimed in full as a debt. This means that any obligation to mitigate loss would also be irrelevant. On the other hand, where a payment is made as ‘part payment’, that part payment can be reclaimed even though the seller will still be entitled to claim damages. An entitlement to damages may ultimately lead to much the same result but will, on occasions, be a much more limited remedy, particularly in circumstances where the buyer fails to complete because it has got into financial difficulties.
- The CA found that there was nothing in the terms or phrases used in the MOA to suggest any loss or surrender of accrued rights, let alone such an important right as conferred by Clause 2 so as to deprive the Sellers of an accrued right to the unpaid deposit. It did not find the language in Clause 13 limiting or restricting and the reference to ‘compensation’ was wide enough to include the value of the deposit where, as here, that right had accrued prior to the breach and therefore represented a part of the Sellers' loss to be compensated. The CA went on to say that much clearer explicit language would have been necessary to deprive an innocent seller of its accrued right to claim and keep the deposit.
- It is important to be clear on whether the parties to an agreement intend the rights and remedies provided under the agreement to co-exist with any other rights and remedies available to them under the general or common law or whether the contractual rights are in place of any rights and remedies provided by law. Unless unambiguous wording is used to exclude common law rights, it seems the Courts will be reluctant to do so.
- Rather strangely in our view there does not appear to have been any discussion in the case as to whether the right to claim the deposit amounted to a penalty at common law. The deposit was clearly not viewed as being compensation paid or to be paid in the event that the Buyer committed a breach and did not proceed with the purchase. The contrast between a ‘deposit’ on the one hand – which is very definitely viewed as having as its prime function to encourage the buyer to perform (or to put it another way, to deter it from not performing) and which is enforceable even if it over compensates – and a ‘penalty’ on the other hand – which if its prime objective is to act as a deterrent against breach and if it overcompensates would render it unenforceable – is an interesting one. We are not sure why this dual classification has arisen.
- Query whether ‘milestone payments’ applicable under any other form of commercial contract would be treated as a form of ‘deposit’ as opposed to part payment and whether contract drafters acting for a seller or service provider ought to be using wording which would assist in the Courts treating the obligation to pay an instalment more like a deposit rather than simply part payment? Another strange fact about the case was that the sale was terminated when payment was only one day late. In the context of other commercial contracts a delay of only one day would almost certainly not be regarded as being sufficiently serious as to justify termination. Again, in this case this aspect does not seem to have been the matter of debate and we wonder why?