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The Court of Appeal in London has recently had to decide the above question in relation to a time charter for seven years that was terminated early by the charterers.1

The facts
The vessel was let to charterers in 1998 for a period of seven years, but in breach of charter the charterers sought to redeliver the vessel in December 2001. It was not disputed by the charterers that they were to pay damages to the owners for the early redelivery, and there did not appear to be any real dispute as to the manner in which the damages should be calculated: the difference between the charter rate and the lower market rate should be paid to the owners. However, the dispute centred on the period in respect of which those damages should be payable.

Charterers’ arguments
Charterers argued that the outbreak of war between Iraq and the United States of America and other nations in March 2003 would have given them the right to terminate the charterparty in any event under the terms of the contract. It seems to have been accepted by the parties (or at least by the arbitrator hearing the case at first instance) that if the charterers had not redelivered in 2001 they would have terminated the charterparty under the war cancellation clause in any event when the war commenced.

In consequence, said the charterers, they should only be liable in damages to the owners for the period leading up to the outbreak of war. Owners would not have suffered any loss in respect of the period after the outbreak of war as no hire would have been payable to them in any event following the cancellation of the charterparty on the outbreak of the war.

Owners’ arguments
Owners relied on the fact that the usual measure of damages for early redelivery under a time charter was the difference between the charter rate of hire and the market rate, applied over the remaining term of the charter period. This would enable an early assessment of the damages payable and provided a measure of certainty for both sides.

Owners agreed that in certain circumstances it was accepted for the general measure of damages to be varied. However, these circumstances should be limited, according to the owners, to situations where there is an option for charterers to repudiate the charter if a certain event occurs and that event is certain to happen. Owners relied on the judgment in The MIHALIS ANGELOS2 where charterers had repudiated the charterparty before the vessel had arrived at the intended load port. It was held that the vessel would not have been able to arrive before her cancelling date in any event. Although charterers were in breach by repudiating the charter before they were legally entitled to do so, the Court of Appeal decided that the owners had suffered no loss – the charterers were certain to cancel the charter when the cancelling date was reached.

The decision
The Court of Appeal was sympathetic to the owners’ arguments but ultimately agreed with the charterers’ approach. The Court of Appeal stated that although certainty and finality were important considerations in awarding damages, it was important also not to over-compensate a wronged party. Ultimately, the Court of Appeal took the view that the owners did not have the benefit of a seven-year charterparty, only of a seven year charterparty that could have been terminated in the event of war breaking out between certain nations.

On this basis, the Court of Appeal has decided that when assessing damages for wrongful repudiation of charter (and indeed breach of any contract) it will be acceptable to take into account events occurring after the date of breach, even if those events were not expected to occur at the time of the breach.

The future of damages assessments
This case raises a number of issues with regard to the assessment of damages, not least of which is the encouragement it gives to a defaulting party to delay the resolution of disputes in the hope that some event arises that will reduce the damages payable.

The case is subject to an appeal to the House of Lords. Gard News will report further when that decision is given.

1 Golden Strait Corporation v. Nippon Yusen Kubishika Kaisha (The GOLDEN VICTORY) [2005]2 Lloyd’s Rep. 747.
2 Maradelanto Compania Naviera S.A. v. Bergbau-Handel GmbH (The MIHALIS ANGELOS) [1970]2 Lloyd’s Rep. 43.

 

Gard News 183, August/October 2006

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Gard News is published quarterly by Gard AS, Arendal, Norway.