Whether “loss of bargain” damages for the sale of ships requires repudiatory breach under common law - Court of Appeal in Orion Shipping v Great Asia

If a seller fails to deliver a ship by an agreed deadline due to negligence, can the buyer claim damages for lost profits from their lost future deals involving the ship?

Orion Shipping and Trading LLC v Great Asia Maritime Ltd [2025] EWCA Civ 1210 involved a contract for the sale of a bulk carrier, The Lila Lisbon, for $15m between Orion Shipping (Seller) and Great Asia Maritime (Buyer), governed by the construction of Clause 14 of the standard Norwegian Saleform 2012 (NSF 2012) used globally for buying and selling second-hand ships. The Seller negligently failed to deliver the ship by the “Cancelling Date” of 15 October 15 2021. This failure occurred during a period when the shipping market boomed - making the vessel worth significantly more than the $15m contract price. Since the vessel was late, the Buyer cancelled the contract and claimed damages for the “loss of bargain” (approx. $1.85m - profits they missed out on). The relevant clause was:

“14. Sellers’ default

[A] Should the Sellers fail to give Notice of Readiness in accordance with Clause 5(b) or fail to be ready to validly complete a legal transfer by the Cancelling Date the Buyers shall have the option of cancelling this Agreement. … In the event that the Buyers elect to cancel this Agreement, the Deposit together with interest earned, if any, shall be released to them immediately.

[B] Should the Sellers fail to give Notice of Readiness by the Cancelling Date or fail to be ready to validly complete a legal transfer as aforesaid they shall make due compensation to the Buyers for their loss and for all expenses together with interest if their failure is due to proven negligence and whether or not the Buyers cancel this Agreement.”

Nugee LJ accepted the Arbitrators’ finding that the seller’s failure to deliver was due to “proven negligence” which did not constitute a repudiatory breach. His Lordship held that clause 14(B) treated a cancellation resulting from “proven negligence” as equivalent to a non-delivery. This entitled the buyer to the “loss of bargain” damages, even though the breach was non-repudiatory. Thus, the Court of Appeal permitted the Buyers’ recovery.

Repudiatory breach

It’s trite law that if a breach is so serious that it “deprives the innocent party of substantially the whole benefit of the contract”, then the Buyer can accept the repudiatory/anticipatory breach and thereby terminate the contract. The Buyer has the right to claim “loss of bargain” damages compensating their lost benefit of the future value in the overall performance of the contract.

However, if the breach is not repudiatory (i.e. a breach of a warranty or a non-serious breach of an innominate term), or if the Seller affirms the contract, the contract continues. Under these circumstances, the Buyer is normally limited to claim the actual losses flowing directly from that specific breach, while still being bound by the rest of the contract. There can be no “loss of bargain” damages as the contract is still alive.

Thus, Great Asia, the Buyer, needed to show that the Seller’s failure to deliver the vessel, by the “Cancelling Date”, was a breach of a term which entitled them to terminate the contract, and, as such, claim the “loss of bargain” damages.

The nature of the obligation to deliver by the “Cancelling Date” - The Democritos

One of the interesting complications here was the case of The Democritos. It set a precedent that the deadline (the “Cancelling Date”) is not a guaranteed promise from the Seller.

The Democritos entailed a vessel to be delivered ready and fit for cargo service by the “Cancelling Date”. Although the vessel arrived early, a last-minute structural failure meant that she was not in a fit condition upon delivery. The Charterers claimed that the Owners were in breach of an absolute obligation to deliver the vessel in a fit condition by the “Cancelling Date”. The courts ruled that the Owners did not have an absolute obligation to deliver the vessel in a fit condition by the “Cancelling Date”. Instead, there was only an implied term that the Owners would use “reasonable diligence.” 

Mr Alexander Wright, 4 Pump Court, argued (at [57]) that “there was an implied term that Sellers’ delivery obligation was simply to deliver within a reasonable time.” This was a strained interpretation. The question of reasonableness, it seems to me, was focused on the Seller’s efforts (i.e. trying their best, even if they were late) as opposed to the end result (i.e. final delivery time being acceptable).

Nugee LJ clarified (at [59]) that it was “an implied obligation to exercise reasonable diligence to deliver the vessel by the Cancelling Date”. 

The key takeaway here is that the Buyer can only get damages if they can prove the Seller was negligent. The right to cancel the deal (for non-delivery) is separate from the right to claim damages for lost profits. One can get damages by proving breach through negligence.

The chain of causation for damages - whether the Buyers’ choice to cancel the contract caused their loss

In the High Court, Dias J (Orion Shipping and Trading Ltd v Great Asia Maritime Ltd [2024] EWHC 2075 (Comm)) appeared to have argued that the Buyer’s own election to cancel was an intervening act and the legal cause of the loss of the entire bargain - and not the Seller’s initial and less severe breach.

Her Ladyship argued (at [45]) that the exact nature of “the breach for which damages are recoverable is Sellers’ failure to … be ready to complete a legal transfer by that date … [and] only those losses and expenses caused by that specific failure.” Hence, the breach is the delay, and damages only coverable for losses resulting from that delay itself.

Moreover, Her Ladyship implicitly argued (at [47]) that the Seller should not be liable for the loss of bargain as the Buyers’ election was an intervening act:

“In circumstances where Buyers would otherwise recover no damages at all, I see no great injustice in limiting recovery to accrued losses and wasted expenses. On the contrary, it is difficult to see why, in circumstances where Sellers are not in breach of condition, they should nonetheless be liable for the loss of the entire bargain when Buyers have a choice whether to cancel or not.” (Emphasis added)

It is interesting that Nugee LJ appeared to have rebuked Dias J for reaching a conclusion about the extent of the “loss of bargain” damages on the basis of an intervening act without, as it seems to me, properly explaining her rationale:

“It may be that the Judge was making a different point, which is that if Buyers cancel, the loss of the contract, although factually caused by Sellers’ lack of readiness, is not legally caused by it. That would be to regard Buyers’ decision to cancel as something that broke the chain of causation (a new intervening cause). I could understand such reasoning in principle; but that is not (or not explicitly, at any rate) the reasoning applied by the Judge. And if that were the basis for the Judge’s decision, one would have expected more discussion of the principles which apply when considering whether an innocent party’s reaction to a default by the other party does or does not count as a new intervening act.” (Emphasis added)

Speaking for myself, I had trouble piecing together aspects of her judgment to identify her assertions on legal causation. 

Nugee LJ’s view (at [84]) on causation was that: “given that the scheme of the contract is that Sellers are given a contractual window in which to get themselves ready, failing which Buyers are given a right to cancel. If they do cancel, I do not see why that was not caused by the failure to meet the window…”. 

In the end, I think Nugee LJ’s view has to be the correct and sensible answer. It seems ridiculous to me to argue that the Buyer’s decision to cancel was some unforeseeable and independent event. As Nugee LJ appears to argue, it was the very “scheme of the contract” – it was a direct and entirely predictable consequence of the Seller’s own breach (i.e. failure to be ready).

The extent of the right to the “loss of bargain” damages - the Baldock principle

Dias J’s ruling (at [45(iii)]) relied on the common law Baldock principle (from Financings Ltd v Baldock [1963] 2 Q.B. 104). This principle holds that if a party terminates a contract via a specific contractual right for a non-repudiatory breach, they are generally entitled to accrued losses up until the moment of cancellation. This was another basis on which Her Ladyship held that the Buyers were not entitled to loss of bargain damages.

Nugee LJ rejected the Baldock principle’s application to this case. He argued (at [118-119]) the Baldock principle generally applies to long-term contracts (e.g. leases or hire purchase agreements) which are intended to span a period of time and generate future income. His Lordship contrasted this with single-transaction contracts (like buying a ship) which were concluded at a given time. I find this logic very persuasive. The Baldock protection is surely designed to protect the breaching tenant against an unscrupulous landlord seeking future rents.

His Lordship also argued that the contractual remedies regime of the contract, agreed between the parties, displaced the default common law restrictions, like the Baldock rule. Furthermore, relying on The Solholt [1981] (at [139-141]), Nugee LJ argued that the shipping industry had a long-held understanding that this type of clause in the Saleform granted the Buyer full compensation.

All-in-all, a persuasive argument by Nugee LJ on why the Baldock principle has no relevance in this case.

Whether foreign judgments must be “recognised” in the English courts before instituting insolvency proceedings - Court of Appeal’s judgment in Servis-Terminal v Drelle

In Servis-Terminal LLC v Drelle [2025] EWCA Civ 62, the Court of Appeal considered whether a foreign debt – which had not been subject of recognition proceedings – could form the basis of a bankruptcy petition. Or, in other words, whether a foreign judgment which had not been recognised could be regarded as creating a “debt” for insolvency purposes in this jurisdiction?

Servis-Terminal LLC obtained a Russian court judgment against Mr Drelle. Servis served Mr Drelle (who was resident in London) a statutory demand under the Insolvency Act 1986 on the basis of the Russian judgment. Servis later presented a bankruptcy petition against Mr Drelle which was granted by ICC Judge Burton.

Newey LJ giving the leading judgment (with Popplewell and Snowden LJJ concurring) held (at [55]) that a bankruptcy petition could not be presented in respect of a foreign judgment which had not been recognised or registered in England and Wales.

Territorial competence over debts

Mr Mark Phillips KC of South Square Chambers, appearing for Servis, had a very difficult task. Charles Samek KC of Littleton Chambers appeared for Mr Drelle. Phillips KC submitted that section 267 of the Insolvency Act 1986 did not specify that a debt needed to be enforceable at common law, or even subject to a judgment. 

Newey LJ reiterated that a foreign judicial decision has no direct effect in our domestic jurisdiction. This is basic law. Under Dicey, Morris & Collins, rule 45 explains that: “A judgment of a court of a foreign country ... has no direct operation in England but may: (i) be enforceable by claim or counterclaim at common law or under statute ...” 

The rationale for the common law’s approach was explained (at [41]) as being bound-up in the notion of territorial sovereignty: “the common law’s aversion to enforcing a foreign exercise of a sovereign power.” Snowden LJ held that the “judgment and order is the result of the exercise of sovereign power by the judicial organs of the Russian state.” Professor Adrian Briggs was quoted as explaining that judicial adjudication necessarily entails the exercise of sovereign power. Thus, the foreign court is expressing the sovereignty of the foreign state. This cannot, and should not, be recognised by an English court unqualifiedly under the common law. Therefore, Newey LJ’s approach, in my view, is the only sensible and consistent one.

Moreover, it is trite that a foreign tax order does not give rise to liability under the English courts (falling under the peculiar province of an expressly sovereign power). As such, and since section 267 does not preclude foreign tax liabilities as being regarded as “debt”, it must logically stand that section 267 was not to be interpreted or understood autonomously. Newey LJ held that it was thus not necessary for an express carve-out to that effect under section 267. His Lordship argued (at [44]) that “the 1986 Act does not exist in a vacuum and does not purport to provide comprehensive explanations.” Thus, it was intended to sit harmoniously within the broader common law rules of private international law. Phillips KC (at [68]) appeared to argue that a formulation which departed from these rules was justified on the basis of “the special nature of bankruptcy and corporate insolvency proceedings.” It seems to me that the English courts are, once again, declining to permit the side-stepping of the common law rules for the supposed priorities of insolvency practitioners. 

Phillips KC sought to argue that the Dicey, Morris & Collins rule 45 could be displaced on the basis that a bankruptcy petition was “not enforcement by execution of the debt”; but rather a “wider legal proceeding available for the collective enforcement of the admitted or proved debts of the company”. This was a hopelessly pedantic point that missed the bigger picture. While Newey LJ acknowledged that insolvency proceedings were not a form of “direct execution”, they still formed part of enforcement since the judgment was being used as a “sword”.

Interestingly, Newey LJ commented obiter that it seemed inappropriate for the service a statutory demand in respect of an unrecognised foreign judgment given that, in the eyes of English law, there was no “debt” to be pursued.

Declaratory relief and the scope of res judicata by merger - Supreme Court’s judgement in Nasir v Zavarco

In Nasir v Zavarco Plc [2025] UKSC 5, the Supreme Court considered whether a party seeking declaratory relief (to establish whether it has a cause of action) is barred from a subsequent claim of relief that may flow from obtaining a favourable declaration. In other words, does a judgment of declaratory relief create “an obligation of a higher nature” which necessarily engages the doctrine of merger?

Zavarco Plc was an English public company. On incorporation, it allotted 30% of its issued share capital to Mr Nasir under a commitment to invest €36 million. Mr Nasir did not pay in cash, but transferred shares in another company to Zavarco. Mr Nasir argued that the transfer amounted to consideration for the shares. But, Zavarco maintained that he was still obliged to pay €36 million. Zavarco sought declarations that the shares were unpaid and that it was entitled to forfeit them. At trial, the court granted the declaration sought in favour of Zavarco. Under the articles of association, a member whose shares were forfeited remained liable to pay for them, and Zavarco issued fresh proceedings seeking payment from Mr Nasir. Mr Nasir disputed the court’s jurisdiction on the basis that the claim for payment had merged into the declaratory judgment (in the first action) and had been extinguished as a matter of law.

Lord Hodge (with whom Lord Hamblen, Lord Leggatt, Lord Stephens and Lady Rose agreed) held that the doctrine of merger does not extend to a declaratory judgment. Thus, a declaratory judgment does not create “an obligation of a higher nature.” 

Clarification of the doctrine of merger

Res judicata is the principle of law that a party is precluded from bringing new proceedings if a court of competent jurisdiction has already adjudicated on the matter. His Lordship (at [31]) confirmed that “the doctrine of merger and the various rules and concepts of res judicata is to support the good administration of justice by promoting finality of litigation and preventing the duplication of actions both in the public interest and in the interests of the parties.”

Lord Hodge explained (at [17]) the underlying difference between merger and cause of action estoppel. While the cause of action estoppel “prevents the contradiction of an earlier judgment as to the existence or non-existence of a cause of action,” merger is slightly different. It describes the legal transformation to a cause of action when a court gives judgment. His Lordship argued that its purpose – in promoting finality in litigation – is “designed to make a litigant seek his or her remedies in one action.”

Lord Hodge’s historical assessment largely confirms the orthodox conceptual framework recently articulated by Lord Sumption in Virgin Atlantic v Zodiac Seats [2013] UKSC 46. The doctrine of merger replaces the claimant’s original cause of action (such as a debt claim) with rights granted in the judgment. The “higher nature” of the court’s judgment, once recorded, takes on a “higher” legal status than the original cause of action. Henceforth, the claimant’s enforceable rights are under the judgment as opposed to the contract.

Whether declarations engage the doctrine of merger

Mr Paul Downes KC of Quadrant Chambers - for the appellants - submitted that the doctrine was designed to prevent more than a single claim being litigated between the parties over the same “subject”. Indeed, according to Lord Sumption (at [17] in Virgin Atlantic), merger was a substantive rule of English law which “treat[ed] a cause of action as extinguished once judgment has been given on it” per se. As such, in the appellant’s formulation, it would be inherently objectionable, as a matter of law, for the claimant not to have sought both declaratory and coercive relief in their earlier claim.

Lord Hodge (at [39]) explained that, in the historical context, there had been no authority of English law with respect to declaratory judgments engaging the doctrine of merger. As such, his Lordship had to consider the issue afresh on conceptual and policy grounds. I.e. were there good reasons for extending the merger doctrine?

Lord Hodge ultimately held that there were reasons against extending the scope of merger to declaratory relief.

The most important reason related to the analysis vis-a-vis (1) inherent nature of declaratory relief, and (2) its separate historical development apropos the the doctrine of merger. 

Lord Hodge argued that the case law involving merger (such as, Broome v Wooton (1605) Cro Jac 73 in an action for damages for the taking of property, or King v Hoare (1844) 13 M & W 494; 153 ER 206, claim for debt from the sale of goods) all seemed to hinge on the concept of a judgment given to secure a payment of monies or secure property rights. They had an “executory or coercive effect”, in the language of Spencer Bower and Handley: Res Judicata. Lord Hodge called these “coercive judgments” and held (at [49]) that Spencer Bower and Handley had been correct to confine merger to coercive judgments and exclude it from declaratory judgments. 

Lord Hodge (at [46]) also illustrated that the doctrine of merger and declaratory relief arose in the law with their own special considerations. Declaratory relief was a relatively recent “remedy” provided under English law whereas the merger doctrine was borne out of the common law’s writ system with their specialised remedies. As recent as Virgin Atlantic, these two threads appeared not to have crossed.

The most critical issue of analysis arose in the dictum of Birss J (at [26] in Zavarco Plc v Nasir [2020] EWHC 629 (Ch)). He noted that he could not “see how a declaration which declares to exist the right which the claimant already had before judgment was given, could be said to extinguish that pre-existing right. It does the opposite” (my emphasis). Similarly, Sir David Richards, in the Court of Appeal (at [37] in Zavarco Plc v Nasir [2021] EWCA Civ 1217) held that a “declaration is a quite different remedy from judgment for a debt or damages.”

In my view, the analysis of Birss J and then Lord Hodge has to be the preferred approach. Not only is it plain common sense, but it strikes at the very essence of “a higher remedy” that it necessarily grants the claimant some immediate execution. It would make no sense for the law to transfigure rights under a cause of action (“the inferior remedy”) into a judgment that granted none. Rather, a declaration imposes no obligation on parties. Against a defendant, a claim would have absolutely no executory (or “coercive”) effect. As Briss J correctly distilled, the declaratory relief merely confirmed claimant’s rights existed, and therefore cannot be said to have extinguished it.

Lord Hodge gave further reasons against expanding the remit of res judicata by merger to declaratory relief. Among those, His Lordship held (at [51]) that, as a policy issue, there “may be justifiable reasons for a litigant to seek a declaration before pursuing a claim for a coercive remedy.” This is also an important policy consideration especially in the context of international litigation. His Lordship also held (at [53]) that excluding purely declaratory judgment would not give rise to duplicative or vexatious litigation. This is because in the second action, the legality of right would not be open to contradiction under issue estoppel.

These are sounds practical reasons which confirm the court’s conceptual approach against expanding the remit of res judicata by merger to declaratory judgments as being correct.

Whether “transactions defrauding creditors” applies to a debtor transferring assets through a company - Supreme Court’s judgment El-Husseini v Invest Bank

In El-Husseiny v Invest Bank PSC [2025] UKSC 4, the Supreme Court considered whether section 423 of the Insolvency Act 1986 extended to a transaction involving a company owned by a debtor transferring a valuable asset for no consideration or at an undervalue.

The bank sought to enforce Abu Dhabi judgments against Mr El-Husseini, the debtor, in the UK for around £20 million in respect of credit facilities granted by the Bank to two companies connected with him. The bank alleged that Mr El-Husseini had arranged for assets (including a property at 9 Hyde Park Garden Mews) in the UK to be transferred to one of his sons (Ziad El-Husseini) in order to put them beyond the bank’s reach, or to reduce the value of his shares in the companies which owned them. Legal and beneficial title to the property was transferred to Ziad for no consideration. As such, Mr El-Husseini’s shareholding was correspondingly reduced in value, and the bank’s ability to enforce the judgments was adversely affected to the tune of £4.5 million. 

The bank sought a remedy under section 423. This grants wide discretionary powers in respect of a individual who enters into transactions at an undervalue (or no value) for the purpose of putting assets beyond the reach of their creditors or other persons who are making, or may make, a claim against it. Unlike most of the vulnerable transaction measures (e.g. transactions at an undervalue and preferences), this remedy applies regardless of whether a company is in administration or liquidation, or not.

The issue on appeal was whether the transfer of the assets - belonging to, and effected by, the company owned and controlled by Mr El-Husseini - cannot be a “transaction” within the meaning of section 423(1) due to the separate legal personality. 

Lady Rose and Lord Richards dismissed the appeal (with whom Lord Hodge, Lord Hamblen and Lord Stephens agreed). The Supreme Court held that there can be a “transaction”, under section 423, even though the assets were not beneficially owned by the debtor. Thus, it can extend to a type of transaction in which the debtor arranges for a company owned by him to affect the transfer for no consideration or at an undervalue.

In my view, this was an easy appeal. The approach of Lady Rose and Lord Richards (hereafter Lady Rose) was the preferred approach. Mr Daniel Warents, appearing for the appellants, had a very difficult take. He produced creative arguments focusing on minutiae which were ultimately specious for failing to account for the bigger picture and Occam’s razor.

The plain language of section 423

As a matter of statutory construction of the language of section 423, Lady Rose had no difficulty in finding that Mr El-Husseini’s transfer was within the broad definition of a “transaction” under section 423(1). Section 436(1), in turn, made clear a very broad conception vis-a-vis a “transfer”. It also did not help counsel of the appellants - including Mr Graham Virgo - that there was no express requirement for the debtor to dispose of property belonging to him. Furthermore, Lady Rose held (at [37]) that section 423 had to be understand in light of the mischief being addressed. 

To my mind, it was very straightforward that the interpretation would be inconsistent with the appellant’s appeal, both purposive and textual. Afterall, the transfer did plainly prejudice the creditor’s ability to enforce the judgment (s. 423(3)(b)) and/or put the assets beyond the reach of the bank (s. 423(3)(a)).

The three textual contortions within sections 423—425

Mr Warents submitted three interesting textual analysis arguing the section 423 required the disposal of property belonging to the debtor.

Firstly, Mr Warents - relying on Spellman v Spellman [1961] 1 WLR 921 - sought to argue that the scope of “transaction” under section 423 ought to be understood as (1) a “person making a gift”; and, consequently, (2) like a gift, involved the transfer of a proprietary interest by the debtor. This was a difficult submission to make. 

Lady Rose held (at [43]) that narrowing the concept of a “transaction” to a gift (giving rise to its particular legal significance) was a strained reading which was unsupported by authority or academic commentary. In my view, Her Ladyship was right to point out that there was no sense to forcing the notion of a “transfer” within the conceptual framework of gifts in law. Indeed, Her Ladyship noted that the reality was precisely the opposite. Relying on Goode and Rebecca Parry’s Transaction Avoidance in Insolvencies, Her Ladyship (at [43]) noted that ”while a gift, by definition, involves the transfer of an asset, transactions which provide for the debtor to receive no consideration do not necessarily entail the transfer of an asset”. This is plainly correct. The surrender of an interest in property must be a transaction too. 

Secondly, Mr Warents then submitted that section 423(1)(a) can only properly operate in circumstances whereby property belonging to the debtor, as the subject matter of the transaction, was being transferred. He submitted that the operation of that section entailed a situation in which the property transfer did not “provide for him” to have received any consideration. This, he submitted, meant that “consideration” under this section could not apply in the general contractual sense (apropos good consideration provided to third parties). Thus, section 423(1)(a) was said to only operate if there was no consideration moving to the debtor which, in turn, required property only belonging to the debtor as being the subject of the transfer.

Lady Rose held (at [47]) that a “transaction” under section 423(1) may include unenforceable promises (agreeing slightly with Mr Warents). Therefore, Her Ladyship rationalised that the undertaking by Mr El-Husseini to transfer the property to Ziad for no consideration, as an unenforceable promise, was consideration (for the purposes of section 423).

Thirdly and finally, Mr Warents then submitted that the bona fide purchaser defence under section 425(2) necessarily entailed an assumption that the relevant transaction involved the transfer of an asset by the debtor. This is because the defence was limited to (1) an interest in property acquired “from a person other than the debtor” (s. 425(2)(a)) and (2) to a person who was not “a party to the transaction” with the debtor (s. 425(2)(b)). This presented a logical conundrum in the instant case. On the facts, Ziad could, if he had paid full value, have relied on the bona fide purchaser defence because Mr El-Husseini did not pass the property. And yet, as the most proximate person to the original transfer, it was submitted that the provision could only logically operate under the assumption that it required a transfer of asset by the debtor. 

This was a subtle and clever argument. However, Lady Rose noted (at [52]) that if such an assumption was entertained by the drafter, then it would have been made expressly. To my mind, this seems to sidestep a lacuna. Her Ladyship did recognise that it “put a third-party recipient in a more favourable position than someone who receives property directly.” Yet, on the other hand, if full consideration were rendered, then the bank would have secured the value of the shares held by Mr El-Husseini against his debt. Those shares would reflect the property sale on the balance sheet. Therefore, as Her Ladyship pointed out (at [52]) “given that Ziad did not pay anything for the house, he is not in any position to mount a defence under section 425(2).” Perhaps not much of a lacuna then?

The purpose of section 423

With respect to the purpose under section 423(3), it must be shown to either (a) put “assets beyond the reach of a person who is making ... a claim against him”, or (b) “prejudicing the interests of such a person in relation to the claim”. Mr Warents read into section 423(1) an implied restriction to its purpose apropos the mischief being targeted. Lady Rose noted, (at [60]) the appellant’s statements of case initially “required a transfer of an asset beneficially owned by the debtor.” 

With respect to the necessity of assets being transferred as a purpose, it was “diluted”, in the words of Lady Rose (at [60]), in respect of “the release of debt owed to the debtor or the surrender of an interest in property, whether gratuitously or at an undervalue” despite not being “property”. This has to be plainly correct.

With respect to the need of a transfer of property belonging to the debtor as a purpose, Lady Rose accepted Mr Paul McGrath’s KC submission on this point. The purpose had to account for the diminution in the value of assets available for enforcement of claims against the debtor (i.e. his shareholding). The plain reading of sections 423-425 did not expressly stipulate property belonging to the debtor as a prerequisite, and the fact that most cases will invariably entail such a transfer was not sufficient reasoning to justify a limitation in respect of all cases. 

The purpose can easily be satisfied in a transaction which does not dispose of the debtor’s own property - but has that effect. Why should the law not realise that? Such a statutory approach is similarly reflected in the common law’s balancing of the corporate personality. In Prest v Petrodel [2013] UKSC 34, the “evasion principle” was held to justify the piercing of the corporate veil. Under that exception, the individual debtor is under an existing legal obligation or liability which they deliberately evade or whose enforcement they deliberately frustrate by interposing a company under their control.

The ambit of “reasonable endeavours” in force majeure clauses - Supreme Court’s judgment in RTI v MUR Shipping

In RTI Ltd v MUR Shipping [2024] UKSC 18, the Supreme Court considered whether - on the interpretation of a force majeure clause - reasonable endeavours required non-contractual performance to “overcome” the impact of a performance impediment.

In 2016, MUR (as shipowner) entered into a contract of affreightment with the charterer RTI. The contract involved the carriage of bauxite over a 2-year period and stipulated payment of freight in US dollars. The contract also contained a force majeure clause. In 2018, RTI became subject to US sanctions. This caused difficulties with respect to timely payments of freight under US dollars. MUR then served notice invoking the force majeure clause. RTI rejected it and offering (1) to pay in euros instead and (2) to bear any additional expense associated with conversion of euros into US dollars. The owners refused affirming their right to suspend performance.

The force majeure clause was as follows:

36.3. A Force Majeure Event is an event or state of affairs which meets all of the following criteria:
(a) It is outside the immediate control of the Party giving the Force Majeure Notice;
(b) It prevents or delays the loading of the cargo at the loading port and/or the discharge of the cargo at the discharging port;
...
(d) It cannot be overcome by reasonable endeavors from the Party affected.

The issue was whether MUR were entitled to reject the offer of an alternative non-contractual performance and thus rely on the force majeure clause. 

Lords Hamblen and Burrows (Lords Hodge, Lloyd-Jones and Richards agreeing) held, on principle, that the exercise of reasonable endeavours to overcome a force majeure event did not require acceptance of non-contractual performance from the counterparty.

In the realm of interpretation?

Lords Hamblen and Burrows (abridged henceforth as Lord Hamblen) agreed with MUR that clause 36.3(d) was (1) commonly found in force majeure clauses in similar terms, and (2) that its interpretation should be “addressed as a matter of principle”. As such, the word “overcome” should mean no more and no less than its equivalent usage and understanding under the general law.

To my mind, the approach of Lord Hamblen is correct. The particular clause is entirely boilerplate. In fact, the same word “overcome” is used exactly as in Chitty on Contracts. There are no distinct or unconventional phrases which suggest that parties had intended their force majeure provision to be governed other than in the usual standard way under English law.

However, Lord Hamblen took a view of interpretation (at [25]-[26]) which appeared to sidestep the customary post-Wood “unitary” approach. Only Newey LJ in the Court of Appeal (at [78]) cited Wood v Capita Insurance [2017] UKSC 24 and ICS v West Bromwich [1998] 1 WLR 896. The Supreme Court did not identify what the reasonable person would have understood the provision to mean, considering the contract as a whole, while checking each suggested interpretation against its consequences. 

Lord Hamblen could have adopted a logic comparable to Lord Sumption’s argument (in the 2017 Harris Society Annual Lecture) vis-a-vis “properly drafted language [having] an autonomous meaning.” Lord Hamblen could have drawn a distinction between generic and commonplace provisions in which parties are presumed to have intended them to be interpreted under the general principles of contract law, and those which do not. Alternatively, His Lordship could have fastened his interpretation, admittedly somewhat, on Lord Hodge’s qualification (in Wood at [13]) that contextualism could be sidelined (and textualism taking precedence) if both parties were represented by lawyers and the contract appeared well drafted. (Although, even then, the courts can adopt a purposive contextualism).

Either way, the Supreme Court should have made its rationale plain with respect to the circumstances when the court will adopt an interpretation that yields to general contractual legal principles over the particulars of a given case.

Causation as the object of reasonable endeavours provisos

Lord Hamblen held (at [38] agreeing with Mr Nigel Eaton KC) that “force majeure clauses in general, and reasonable endeavours provisos in particular, concern the causal effect of impediments to contractual performance.” The force majeure event was the banking delay caused by US sanctions. MUR would have been excused from performance unless it could be shown that it could have reasonably prevented the failure of performance. 

Lord Hamblen’s reasoning was that MUR’s acceptance of payment in euros would have had no causal effect on the impediment. The banking delay, arising from US sanctions, would have remained in place despite payment in euros. 

To my mind, Lord Hamblen’s analysis on the centrality of causation vis-a-vis the purpose of reasonable endeavours provisos has to be correct. The corollary net effect would be that reasonable endeavours provisos (which act as an exception to the blanket-rule of excusing performance) would allow the affected party to find ways around the impediment to secure the contractual performance by not securing that performance. As Lord Hamblen held (at [38]) “the object of the reasonable endeavours proviso is to maintain contractual performance, not to substitute a different performance.”

The Gilbert-Ash principle

Lord Hamblen emphasised (at [44]) the importance of parties making it clear (expressly or by necessary implication) that they intend to forego valuable rights. This is so even in the face of reasonable performance to circumvent a problem (as per authorities cited; Bulman & Dickson v Fenwick [1894] 1 QB 179 etc.)

However, His Lordship made interesting obiter comments about the Gilbert-Ash rule (Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689). That rule was regarded as a presumption that if a party elects to surrender some particular remedies, clear words are needed to that effect. That used to mean statute, or tortious rights, or the general law of remedies that apply irrespective of what parties agreed. However, Lord Hamblen (at [45]) held, albeit obiter, that it may extend to valuable contractual rights (within the broader contract as a whole):

We do not think it greatly matters whether the applicable principle is that set out in Gilbert-Ash or an analogous principle applicable to valuable contractual rights.

This is interesting because it seems to be a new rule introduced by analogy. It suggests that parties to a contract with valuable rights in a given section need to bear in mind the need to expressly forgo them in a different section.

Freedom of contract and certainty

Lord Hamblen’s emphasis on party autonomy and certainty are a salutary and valuable reminder of the much preferred approach to contract law. As His Lordship held (at [42]) that the “freedom not to contract includes freedom not to accept the offer of a non-contractual performance.” It is interesting that this critical point of non-contractual obligations eroding party autonomy was not made in the Court of Appeal or by Jacobs J.

With respect to certainty, MUR’s approach was crystal-clear. In contrast, RTI’s two-limb test would involve an assessment of whether (1) acceptance of non-contractual performance involved no detriment to the party seeking to invoke force majeure, and (2) achieved the same result as the contractual performance. 

Lord Hamblen sensibly noted the inherent uncertainty and vagueness in these tests. What counts as detriment? How much detriment? Over what time scale of detriment (i.e. long-term consequential losses)? What if there are more than one result or purpose to an obligation? Is it the main or the dominant purpose which we are concerned with? These are difficult questions of evaluation which hinder parties ability to predict reasonably where they stand in the event of force majeure. 

The scope of contextual analysis in contractual interpretation - Supreme Court’s judgment in Sara & Hossein v Blacks Outdoor

In Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2, the Supreme Court considered, and extended, the ambit of contextual analysis in contractual interpretation to advance a meaning that was not advocated by either party. 

Blacks rented retail premises from Sara & Hossein (“S&H”). The dispute concerned the interpretation of the service charge provision in the commercial lease. Each year, S&H should provide Blacks with “a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive” (under paragraph 3 of Schedule 6). In particular, the clause stated that the certificate would be “conclusive” as to both amounts. Other relevant paragraphs under Schedule 6 include:

• paragraph 6 which stipulates the method of expert determination as it relates to disputes concerning the proportionate allocation of service charges between tenants; and
• paragraph 8 which gives tenants the right to inspect invoices and receipts for the period of 12 months.

The issue before the courts was whether the certificate was “conclusive” as to (1) the costs incurred by S&H, and (2) the sum payable by Blacks.

Lord Hamblen, leading the majority, introduced a novel approach to construction. Considering the contextual factors, His Lordship formulated a “middle ground” construction which favoured S&H’s interpretation, but which granted Blacks a means of contesting the extent of their liability at a later point following payment.

Lord Hamblen’s approach is highly problematic and is emblematic of a difficulty in the development of the law as it relates to contractual interpretation. There have been a multitude of cases going all the way to the Supreme Court and Court of Appeal in the past two decades. We can probably expect more in the future now. 

The two approaches to contractual interpretation

Since ICS v West Bromwich [1997] UKHL 28, the prevailing theory of contractual interpretation is that the meaning of a provision may be discoverable by reference to its context (as opposed to the quondam literal approach). Following West Bromwich, there are now two rival approaches to modern contractual interpretation with respect to contextual evidence. For the purposes of this analysis, I have described these as either the “textualism-focused” approach in Arnold v Britton [2015] UKSC 36 or the “unitary” approach in Wood v Capita Insurance [2017] UKSC 24.

The “textualism-focused” approach starts, as Lord Neuberger explained in Arnold (at [15]), by “focussing on the meaning of the relevant words” such that the “clearer the natural meaning the more difficult it is to justify departing from it” (at [18]). This is because, as Lord Sumption explained (in the 2017 Harris Society Annual Lecture), “the language of the parties’ agreement, read as a whole, is the only direct evidence of their intentions which is admissible.” Once the courts have weighed the viability of the parties’ competing constructions vis-à-vis the plain meaning of a provision, then the courts will consider the three contextual factors. In Arnold, Lord Neuberger (at [15]) listed the factors in a specific order to assess the objective intention of parties. They include (1) the contractual context (i.e. other provisions and overall object), (2) the factual context (i.e. the surrounding circumstances) and (3) commercial common sense. Indeed, Lord Neuberger noted in Arnold (at [17]) that “commercial common sense and surrounding circumstances ... should not be invoked to undervalue the importance of the language of the provision which is to be construed.”

The “unitary” approach in Wood postulated that ascertaining the objective intention required both the plain meaning and the contextual factors to be considered together (i.e. not sequentially) and their weight and importance was dependant on the particular case. In Arnold, Lord Hodge explained (at [76]) that contractual interpretation was “not a matter of reaching a clear view on the natural meaning of the words and then seeing if there are circumstances which displace that meaning.” As such, Lord Hodge held, in Wood (at [13]), that “textualism and contextualism are not conflicting paradigms in ... the field of contractual interpretation”. They were, His Lordship argued (at [13]), simply “tools to ascertain the objective meaning.”

The problems in the Blacks judgment

It was accepted by Richards LJ (as he then was) in the Court of Appeal (in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] EWCA Civ 1521) and Lord Briggs in his dissent in the Supreme Court that S&H’s interpretation was the natural and ordinary meaning. This seems a plain and obvious conclusion. Indeed, Richards LJ commented (at [21]) that the strained formulation of Black’s meaning required “express words to that effect or a necessary implication”. Under Arnold, the court would have assessed the meanings advanced by the parties, and only then balance the contextual considerations (if necessary). Since the weight of the contractual agreement and language used has been relegated post-Wood, a meaning need not necessarily be advanced by the parties. In my view, this is a logical corollary.

This in turn raises a number of problems.

Firstly, it is not at all clear that something has gone wrong in the drafting. In Blacks, Lord Hamblen argued (at [48]) that the language of the relevant provision was inconsistent with paragraphs 6 and 8. However, it is fallacious to assume that the mere existence of a dispute resolution mechanism in respect of the apportionment of the service charges among tenants would necessarily entail a similar mechanism for everything else in the landlord’s certificate. This point was made by Lord Briggs (at [67]) in his dissent in Blacks, and Lord Hamblen never engaged with that argument in explaining why that assumption was correct or appropriate. A further purported inconsistency by Lord Hamblen (at [48]) was that it would “be most surprising for the parties to agree that they could be determined conclusively by the landlord without representation or recourse.” However, it is not at all “surprising” when one considers, as Lord Briggs explained (at [69]), that “it is not at all uncommercial that the landlord should have wished, and insisted, on limiting the available grounds for such disproportionate litigation.” Richards LJ made a similar point in the Court of Appeal (at [24]) that “a tenant would be well advised to consider very carefully before agreeing a lease in these terms.” Instead, Lord Hamblen simply wrote-off S&H’s approach as being uncommercial (at [48]). It is worth recalling a point made by Lord Sumption (in his Harris Society Annual Lecture) that what the courts regard as commercial common sense can merely be the court’s formulation of fairness:

... judges’ notions of common sense tend to be moulded by their idea of fairness. But fairness has nothing to do with commercial contracts. The parties enter into them in a spirit of competitive cooperation, with a view to serving their own interest. Commercial parties can be most unfair and entirely unreasonable, if they can get away with it.

Another point made by Lord Sumption is that the words of a provision can have autonomous meanings. This point is worth bearing in mind because the search for inconsistencies and an arbitrary conception of commercial common sense makes the line between rewriting the bargain very hard to pinpoint. This case seems to demonstrate that a party can, under the guise of contextual considerations, invoke possible meanings as genuine “rival” interpretations to rewrite the bargain. 

Secondly, Lord Briggs criticised the majority approach of Lord Hamblen for adopting a meaning to paragraph 3 that was not advocated by either party. The problem here is that respecting party autonomy (and, thus, the objective intention) requires taking the parties’ purported intentions seriously as the logical starting point in the analysis. That is why the obligations in the written contract are so important. As Lord Briggs pointed out (at [61]) the court otherwise acts “carte blanche simply to make up a solution of its own.” In my view, the post-Wood “unitary” approach makes it much easier for the court to rewrite the bargain.

Thirdly, certainty and predictability are undermined if parties cannot be confident their bargains will be given effect - particularly with ingenious counsel. Furthermore, this evaluative process risks turning the approach to construction into a subjective assessment. In Blacks, the Court of Appeal adopted one meaning, and then the Supreme Court adopted an entirely different meaning.

Fourthly, in the Supreme Court, there was a division as to the commercial common sense factor. Lord Hamblen associated it with cash-flow exigencies for the landlord. Whereas Lord Briggs recognised the desire to avoid costly litigation instead. Lord Briggs argued that what Lord Hamblen held was uncommercial was in fact plainly commercial common sense. Since judges cannot agree on what constitutes commercial common sense, Neuberger LJ admonition in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732 is apposite:

Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood.

In conclusion, the dissent of Lord Briggs was the more preferable approach. Overall, the law is overdue a return to the methodology articulated in Arnold. It provided a more considered theoretical structure between textualism and contextualism.