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Norwegian Sale Form – sale cancelled prior to payment of deposit – buyers held liable for deposit irrespective of the extent of sellers’ loss

The Facts

A deposit of 10% of the sale price was payable within 3 banking days of signature of the agreement. 

Sellers cancelled the agreement one day after the due date for the payment of deposit on the basis of repudiatory breach.

On the date of breach, the difference between the market price and the sale price i.e. the conventional measure of damages for breach of contract, was substantially less than 10% of the sale price i.e. the stipulated deposit. 

Clauses 2 and 13 read as follows:

“2. Deposit

As security for the correct fulfilment of this Agreement the Buyer shall pay a deposit of 10% (ten per cent) of the Purchase Price within 3 (three) banking days after this Agreement is signed by both parties and exchange by fax/email. This deposit shall be placed in the Sellers’ nominated account with the Royal Bank of Scotland PLC, Piraeus and held by them in a joint interest bearing account for the Sellers and the Buyers, to be released in accordance with joint written instructions of the Sellers and the Buyers ………

13. Buyers’ default

Should the deposit not be paid in accordance with Clause 2, the Sellers shall have the right to cancel this Agreement, and they shall be entitled to claim compensation for their losses and for all expenses incurred together with interest. ”

Sellers claimed payment of the deposit.


 London Maritime Arbitrators, Ian Kinnel QC and John Tsatsas found in favour of the buyers.

 Teare J, on appeal, held that the terms of the agreement entitled the sellers to the deposit; alternatively in the event that the agreement was ambiguous, commercial sense dictated that the sellers were entitled to the deposit.

 He was upheld by the Court of Appeal (Sir Brian Leveson, Tomlinson and McFarlane LJJ – judgement by Tomlinson LJ)


 The favoured interpretation of clause 13 (replicated in another award by Dominic Kendrick QC and Clive Aston) does violence to the language and is inconsistent with the “compensatory principle” emphasized in the Golden Victory.

 The doctrine on forfeiture of a deposit is set out in Howe v Smith (1881) 27 Ch D 89,101 where Fry LJ said “Money paid as a deposit…creates by fear of its forfeiture a motive in the payer to perform the rest of the contract”.

 McLaughlan (2002 NZ L Rev 1 2002) presents an unanswerable argument for regarding forfeiture of a deposit as penalty in terrorem.

 The facts of this case were an ideal opportunity to set this area of the law on a principled path.


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