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Deposit remains payable on termination

The case of Griffon Shipping LLC v Firodi Shipping Limited [2013] EWHC 593 (Comm) confirms the established position that a deposit remains payable once it has become due, even if the contract is terminated at a later date.

Facts

The seller of a vessel appealed against the decision of a maritime arbitration tribunal that it could not recover the sum of a deposit that had become payable to the seller before the contract was terminated. The buyer had signed a Memorandum of Agreement (the Agreement) which required the buyer to pay a 10 percent deposit to the seller within 3 banking days. The buyer failed to pay the deposit and the seller accepted the buyer's conduct as a repudiatory breach of the Agreement as well as exercising an express contractual right to cancel the Agreement on this basis.

The buyer accepted that its failure to pay the deposit enabled the seller to terminate the Agreement. The tribunal decided that damages were recoverable by the seller on the conventional measure of the difference between the contract and the market price. This amount was substantially less than the deposit so the seller appealed.

On appeal, the seller argued that its right to payment of the deposit had accrued before the Agreement was terminated and that the seller was entitled to claim the deposit either as a debt or as damages for breach of contract. The buyer sought to rely on a compensation clause in the Agreement which provided that the seller was restricted to its damages claim and this excluded any right to payment of the deposit. 

The Judge considered the appeal with regard to the established principles of contract law. It was already established law that a deposit remained payable, notwithstanding the termination of the contract. The Judge decided that where the deposit had accrued and become due, it did so unconditionally. He also found that the language used in the damages and compensation clause was not sufficiently clear to deprive the seller of its rights to recovery of the deposit.

Decision

The appeal was allowed and the seller was entitled to recover the deposit from the buyer. The Judge held that the deposit served the purpose to provide security for the seller in the event that the contract was terminated due to the buyer's default. This decision was upheld on further appeal by the buyer.

Key Lessons

If a contract is terminated due to a buyer's default, and the deposit has already become due, the seller is entitled to claim for the deposit either as a debt or as damages for breach of contract.

If such a right is to be excluded, the parties must expressly exclude this right with the use of clear wording in the Agreement.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2014. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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