In NKD Maritime Limited v. Bart Maritime (No 2) Inc (Shagang Giant) [2022] EWHC 1615 (Comm), Bart Maritime (No 2) Inc (the seller) has been engaged to sell the VLOC Shagang Giant to NKD Maritime Limited (the buyer) by means of a memorandum of understanding dated March 5, 2020. The buyer was an intermediary specializing in the acquisition of tonnage for demolition and/or recycling on behalf of a shipyard.

Ship scrap/recycling sales are obviously very different from used sales, and no form of standard contract has been widely adopted. Although not expressly stated in the judgment, the memorandum of understanding was almost certainly drawn up on a broker’s bespoke form.

The two relevant clauses of the Memorandum of Understanding are as follows:

1) 2. Delivery

a. Place of delivery

The vessel is to be delivered and safely picked up afloat at Alang Outer Anchorage on the West Coast of India which will be the ‘Delivery Place’.

If, upon arrival of the Vessel, the Place of Delivery is inaccessible for any reason, including but not limited to port congestion, the Vessel will be delivered and collected by the Buyer as close as it can safely get to a safe and accessible berth or anchorage to be designated by the Buyer, always provided that such berth or anchorage is subject to the approval of the Seller which will not be unreasonably refused. If the Buyer does not designate this place within 24 (twenty-four) hours of arrival, the place where it is customary for the ship (sic) to wait will constitute the Place of delivery. Delivery of the Vessel in accordance with this paragraph shall constitute full performance of Seller’s obligations and all other terms and conditions of this Contract shall apply as if delivery had taken place. »

2) Clause 10 of the MOA included a force majeure provision which stated: “If the seller is unable to transfer title to the vessel or the buyer is unable to accept the transfer of the vessel at a time in accordance with this contract due to … governments restriction … then either Buyer or Seller may terminate this Contract on written or telegraphic notice from one party to the other without any liability for the either party and the Initial Payment referred to in Clause 1.b hereof shall be remitted to Buyer.”

Complications of covid
The seller asked the buyer to designate another place of delivery, but the buyer did not. The buyer then sought to terminate the MOA by invoking the force majeure clause.

The buyer claimed that the Covid-19 restrictions imposed by the Indian government constituted a “government restriction” and had prevented the seller from being able to transfer title to the vessel in accordance with the MOA. This meant that the necessary permits could not be obtained, so the ship did not reach the place of delivery.

Consequently, the notice of preparation could not be filed and no transfer of ownership in accordance with the memorandum of understanding was possible. The buyer therefore had the right to terminate under clause 10 of the memorandum of understanding and was entitled to the return of the deposit.

The seller argued that clause 10 of the memorandum of understanding was not applicable. The seller had not been unable to transfer title in accordance with the memorandum of understanding. The transfer of ownership did not require the “delivery” of the vessel. In any event, even if delivery was a necessary condition of the transfer of ownership, the seller had not been unable to deliver the vessel due to the Force Majeure Event, i.e. the Governments withholding . The vessel had arrived at the place of delivery, or as close as safely possible. The place where the vessel had anchored was therefore deemed to be the place of delivery and its delivery there constituted full performance of the seller’s obligations under the memorandum of understanding.

Decision of the commercial court
The court considered the interpretation of MOA Clause 10 and concluded that “delivery” was not a necessary requirement of “transfer of title”. The terms “delivery” and “transfer of title” are both used in the Memorandum of Agreement and are not synonymous. Clause 10 obviously did not refer to ‘delivery’ but deliberately used the phrase ‘transfer of title to vessel’.

The “transfer of ownership” only requires the payment of the price, the delivery of the deed of sale and the removal from the register of the vessels concerned. There was no condition precedent to the transfer of ownership that there be a delivery and acceptance protocol and physical delivery.

The force majeure clause of Article 10 could therefore not be invoked when the transfer of ownership was possible.

Moreover, the place where the vessel anchored was not the “outer Alang anchorage”. The ship was therefore not at the place of delivery provided for in the memorandum of understanding. The question then was whether there had been a substituted place of delivery under clause 2(a).

The court held that the vessel was required to come as close as possible to the specified place of delivery, given the situation which made this place of delivery inaccessible. The vessel had come as close as possible to the outer anchorage of Alang, subject to the fact that it did not have permission to enter the Khambat VTS zone, which made the delivery location inaccessible.

The reason the ship had not been cleared to the outer Alang anchorage, and could not have been boarded by officials, was due to Covid-19 restrictions. These can be described as “government restraint”. The key question then was whether this position made the seller “unable” to transfer title.

“Inability” is significantly different from impediment or delay. Whether there is “inability” to perform for the purposes of Term 10 due to a temporary restriction by governments depends on whether the likely period of such restriction will materially impair the business venture. In assessing this, the court indicated that similar considerations would apply to those that apply when determining whether a contract is breached.

On the facts, the court did not consider the delay to constitute an “inability” on the part of the seller to perform the memorandum of understanding for the purposes of clause 10. The vessel was sold for demolition and not for trade , and some delays to the grounding of the vessel was unavoidable given her size. The temporary nature of the specific restrictions linked to Covid-19 did not seriously compromise the commercial adventure either.

The buyer was found guilty of wrongfully terminating the memorandum of understanding. The seller was entitled to retain the $4.2 million deposit, but was not entitled to further damages, as the deposit more than adequately compensated them for their losses.

The judgment also contains useful guidance on the construction of similarly worded force majeure clauses and, in the context of MOA construction, offers guidance on the distinction between “delivery” and “transfer of title”. This is particularly useful in the context of scrap metal sales, where sellers may face problems (and renegotiation requests) following an attempt to deliver under unexpected local rules and practices in the home port of the end buyer.

Finally, the decision confirms that the Covid-19 restrictions did indeed constitute a “restriction of governments”, which is common wording in force majeure and exception clauses. However, Covid-19 restrictions will not automatically exempt part of the execution, particularly where Covid-19 delays are only temporary in nature and do not materially compromise the business venture.
Source: Baltic Stock Exchange