Termination clauses in contracts often set out the circumstances in which each party will be able to terminate including non-performance, failure to meet a deadline, or insolvency.
If an agreement is terminated because of a breach of contract, the court can award so-called ‘loss of bargain damages’ to compensate the innocent party for lost profit which might, for example, have arisen because of a post-termination increase in the value of a product or service that had not been delivered, the costs of obtaining the same product or service from a third party or commissioning remedial work to fix a defect. In each case, the claimant looks to recover economic loss caused by the breach and resulting termination.
In Great Asia Maritime Limited -v- Orion Shipping and Trading LLC, Great Asia contracted to buy a ship, the M/V Lila Lisbon from Orion Shipping for $15 million. The contract entitled Great Asia to withdraw from the purchase if Orion Shipping could not provide a certificate confirming that the ship would be ready by 20 August 2021 which was extended, by agreement between the parties, to 15 October 2021. If the ship could not be delivered by the deadline and this breach was due to Orion Shipping’s negligence then Great Asia would be entitled to what the contract described as ‘due compensation’.
Orion Shipping could not confirm that it would deliver the M/V Lila Lisbon by the revised deadline and this prompted Great Asia to terminate the contract. Due to changes in the shipping market, the value of the ship increased by $1.85 million following termination, which meant that Great Asia had been deprived of the opportunity to acquire the ship for a lower price.
Great Asia sought to recover $1.85 million but Orion Shipping argued that it should not be ordered to pay any compensation because it had attempted to deliver the ship before the deadline and could not be said to have committed a fundamental or repudiatory breach of contract which, it argued, had to be proved before the court could order it to damages for loss of bargain.
The Supreme Court decided that the reference to ‘due compensation’ in the contract was wide enough to allow Great Asia to recover loss of bargain damages. No reference to ‘loss of bargain’ or further description of the recoverable losses was needed to allow the increase in the ship’s value to be recoverable in circumstances where Orion Shipping’s negligence was clear because it had missed the delivery deadline.
Parties looking to negotiate or exercise a termination clause in a contract should be aware that a reference to ‘loss’ might include loss of bargain damages, even where there has not been a fundamental/repudiatory breach and the types of recoverable loss are not described in detail. In order to avoid any potential uncertainty about the types of losses that could be recovered by the innocent party following termination for breach, the contract could include one or more of the following:
- Additional wording to describe the different types of losses (i.e. lost profits, replacement costs and wasted expenditure) that are recoverable and whether any non-specified but foreseeable losses will also be recoverable;
- Loss of bargain damages could be expressed to be recoverable only in relation to fundamental/repudiatory breaches;
- If the parties are contracting on industry-standard terms (like Great Asia and Orion Shipping) they should check whether a court or tribunal has ever awarded loss of bargain damages;
- Each party’s liability to pay damages could be capped at a specified amount.
We can assist by reviewing the drafting of termination provisions, serving notice to terminate contracts and advising on interpretation and any dispute which arises. Please contact us on 0345 646 0406 or fill in our online enquiry form and we will be more than happy to help.