Ship sales on terms that the vessel is for demolition and not further trading, remedies in the event of breaches of that provision: The “CSK GLORY”

This case arises out of, in the judge’s words, “a bad bargain”.  The buyer purchased the vessel (a Capesize bulker) initially intending to demolish it in a then very buoyant scrap market.  This collapsed, and the buyer would have made a solid loss on the deal.  To avoid this, they chose instead to trade the vessel.  The problem with this was that the under the express terms of the MOA they had guaranteed they would not do so - it was firmly agreed that the sole purpose of the sale was a scrap venture.  The MOA was subject to English law and jurisdiction.

An interesting feature of the case is that the seller did not, once aware of the buyer’s intentions, immediately apply to the English High Court for an interim injunction seeking to prevent the trading.  Instead, they arrested the vessel in India seeking security and, eventually, damages there.

It was the buyer who took the initiative in England, applying to halt the Indian proceedings (which was, in any event, agreed in due course) and seeking a declaration that the seller would only be entitled to nominal damages.  In this, it would be acknowledged that a breach had taken place but one which led to only very minimal and/or legally unrecoverable loss.

Only at that stage, albeit that the judge found that this had not prejudiced their position, did the seller counterclaim for an injunction.  In addition, they sought a declaration that they were entitled to substantial damages on the basis of what has become called “negotiating damages”

Negotiating damages” is one example where the usual type of recoverable damages has been extended in limited circumstances, and it involves seeking to treat the infringement of a contractual right in terms of an economic value and to consider it as an asset which the innocent party possesses.  It is only, though, if the breach removes that asset that a right to damages arises.  As the judge summarises the position:

“The rationale….is that the claimant has been deprived of an asset– the defendant has taken something for nothing, for which the claimant was entitled to require payment.”

The problem for the seller in this case was that once the vessel was sold, they no longer had any rights of ownership or any financial interest in the ship.  These had gone.  As the judge went on to say:

“The Buyer’s use of the Vessel for trading, though in breach of clause 19, did not involve the Buyer taking or using something in which the Seller had an interest, a valuable asset, for which the Seller was entitled to require payment.”

 It might appear that English law left the seller without redress in circumstances where there had been a clear, undisputed breach of contract.  This leads on to consideration of an injunction as a remedy.

The Buyer’s use of the Vessel for trading, though in breach of clause 19, did not involve the Buyer taking or using something in which the Seller had an interest, a valuable asset, for which the Seller was entitled to require payment.

David Edwards QC

The starting position is that where there has been a breach of a negative covenant, that is to say a contractual term by which one party undertakes not to undertake a course of action, the innocent party is normally entitled to an injunction.  That “ordinary position” remains a matter of discretion and can be displaced.  It is, though for the party committing the breach to persuade the court that it should be.

So, what factors will be taken into account?  The existing authorities look at the question from both sides.  A judge will consider whether the application is “vexatious”In this, it is not enough to show that the applicant will suffer little prejudice if the injunction is not granted.  Rather, it needs to be established that the applicant really has no particular need, or interest, in obtaining an injunction.  In common parlance one might think of asking whether the applicant is being difficult just for the sake of being difficult.

On the other hand, it has to be considered whether the injunction would be “unconscionable” (a clear example is where it would result in something contrary to general public policy) or if it would be “oppressive”That latter term does not mean that the injunction is simply going to be burdensome, rather a sense that it is unduly harsh, tinged, sometimes, with the suggestion that it is not really necessary.

It is here that the question of damages often arises.  If an award of damages would be an adequate remedy, it is one factor which may mitigate against an injunction being granted.  It may, depending on the circumstances, be a very persuasive factor.

The judge also pointed out that the buyer had other options to mitigate their losses.  They could lay the vessel up and wait for the market to improve.  Instead he drew the inference that they were simply intending, by their breaches, to take advantage of rising Capesize freight rates.

The judge, David Edwards QC, sitting as a High Court judge, reviewed these principles at length.  He was clearly unimpressed with the buyer’s arguments that an injunction should not be granted:

“In my judgment, on the basis of the evidence I have read the Buyer comes nowhere near surmounting this hurdle”

The judge started by examining the buyer’s conduct.  They had even entered into a further fixture on the eve of the hearing.  Picking up on existing precedent he pointed out that they had acted in deliberate breach throughout.  Further, the entering into of the final fixture could “properly be regarded as cynical”.

This contrasts with the situation where a breach has occurred innocently or inadvertently and bears directly on the question of whether the granting of an injunction can be opposed.  It is also relevant to the effect it might have on the party in breach.  Would it be “unconscionable” or “oppressive”?  Undoubtedly the buyer would lose money on the deal, but the granting of an injunction was not going to give rise to consequences which were so extraordinary that it should not be granted.  Indeed, in respect of the final fixture they “only had themselves to blame”.

The judge also pointed out that the buyer had other options to mitigate their losses.  They could lay the vessel up and wait for the market to improve.  Instead he drew the inference that they were simply intending, by their breaches, to take advantage of rising Capesize freight rates.

The value of this case is twofold.  Firstly, it looks at a very difficult area of the law of damages and provides a detailed and clear analysis of this.  Secondly, the review of the circumstances in which an injunction will and will not be granted should prove an invaluable addition to case law on the subject

Looking at the seller’s position, it could be said that the seller’s interest was not a purely financial one.  The trading of one extra capesize in a diverse worldwide fleet of over 1,000 might have very little impact on their own profit margins and it might be concluded that the seller was simply being awkward for the sake of being awkward in circumstances where they had little or nothing to lose or gain. The judge showed the weaknesses in this argument.  He pointed out that the seller had a legitimate commercial interest in reducing, if only by one vessel, an oversupplied capesize market.  It helped their cause that the seller could demonstrate they had a clear policy of scrapping their own older vessels.  As such, there was “no reason why a term included in the Seller’s contract with the Buyer to achieve that end should not be enforced.”

Neither, of course, would an inherently difficult to quantify, but likely to be minimal, award of damages be a sufficient and appropriate remedy.

The value of this case is twofold.  Firstly, it looks at a very difficult area of the law of damages and provides a detailed and clear analysis of this.  Secondly, the review of the circumstances in which an injunction will and will not be granted should prove an invaluable addition to case law on the subject.

Priyanka Shipping Ltd v Glory Bulk Carriers PTE Limited (The “CSK GLORY”) [2019] EWHC 2804 (Comm)

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