Adam Corbin FAAV
Posted on 10 Jan 2020

Breaches of obligations: clawing back the profit

In Priyanka Shipping Limited v. Glory Bulk Carriers Pte Limited (the “Lory”) [2019] EWHC 2804 (Comm), the High Court considered whether or not 'negotiating' damages could be awarded for a breach of contract in an agreement for the sale of a ship. The decision is of broad interest because it illustrates the different approaches the Courts will take depending upon the type of contractual right breached.

In this instance, the High Court did not award damages reflecting the loss of profit caused to the wronged party because the breached contractual obligation was not a proprietary right, or an analogous right, such as intellectual property or rights of confidence. The Court did however uphold an injunction preventing further breaches.

It is important to bear these principles in mind when negotiating agreements intended to protect an interest, which is not proprietary or analogous to that, such as an agreement not to apply for planning permission, restraint of trade, or not to commence competing developments for a specific period of time. There are usually other ways to protect such rights.

The case

Glory Bulk Carriers Limited (Glory), sold a ship (the Lory) to Priyanka Shipping Limited (Priyanka) to be scrapped. The agreement to sell the Lory included an obligation on the part of Priyanka not to "trade" the ship, meaning that Priyanka could not use the ship for moving cargo.

After Priyanka purchased the ship the price of scrap fell, leaving Priyanka in a position where it was not going to make a profit if it scrapped the ship straight away. Meanwhile the market for bulk freight improved, and trading the ship became more attractive.

As such Priyanka used the ship for two passages and had a third booked in to commence the day before the trial, in breach of the agreement.

Glory sought an injunction to prevent further use of the Lory for trade and damages reflecting the loss of bargain (not having had the opportunity to bargain with Priyanka for the release of the obligation).

The law

Damages (ie compensation) for breaches of contracts are usually awarded on the basis of the actual loss suffered by the wronged party. For example, if competing businesses agree not to compete in certain areas, perhaps in the context of a sale of part of a business, but one business does so in breach, the wronged party will have to show the actual losses of profit it has suffered as a result of the breach, and cannot claim the price it would have demanded to release the covenant. The wronged party is entitled to be placed in the position, in which it would have been, if the breach had not occurred.

The High Court Judge pointed out that once the vessel had been sold and delivered, the Seller did not have a proprietary interest in it, “no right or ability to use the Vessel to trade, and no right or ability to profit from the Vessel’s use (and equally no responsibility for any costs or liabilities incurred in relation to the Vessel’s operation)”. The trading of the vessel by Priyanka did not cause Glory any direct loss.

To be entitled to damages based on a hypothetical negotiation, the claimant needs to show that the breach of contract results in the loss of a valuable asset, created or protected by the right, which was infringed. The problem in many circumstances is that there needs to be a valuable asset, which is created or protected by the contractual right, but a promise not to do something is not such a right.

Application

In the case of the Lory, the promise not to trade the ship was not a valuable asset in itself, such as intellectual property or land, so whilst it could be (and was) protected by an injunction, it could not be the subject of damages.

Considered in a wider range of contexts, one can see the problems. Former employees who breach restrictive covenants can be injuncted against, but often the damage has been done and it is often difficult to quantify in damages. This means that it is often better to react quickly to problems, rather than allowing a situation to continue, where the loss may not be recovered. It is also worth mentioning that delay is a negative factor for the court when considering whether or not to grant an injunction.

On the non-contentious side, valuable obligations can often be protected by liquidated damages (a sum which the parties agree will be payable if an agreement is breached) provisions, or performance bonds (a sum of money held as security, payable if an agreement is breached).

As for the Lory, a look at the various internet tracking sites for commercial shipping indicates that she is now meeting her ultimate demise at a scrapyard in the far east, but her legacy may live on, as the High Court unusually granted Glory permission to appeal to the Court of Appeal!