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Gard News 192, November 2008/January 2009

English law – Late re-delivery under a charterparty – Lost fixture profits not recoverable

 

A recent case decided by the House of Lords has generated enormous interest and concerns the issue of how damages for late vessel re-delivery are to be assessed and, in particular, whether damages for a lost fixture are recoverable.

The article “English law – Charterers liable for loss of future fixture”, which appeared in Gard News issue No. 188, reported on the decision in the ACHILLEAS case, where the English Court of Appeal had recently confirmed that where a vessel was re-delivered later than the contract date through no fault of the owners, charterers were liable for the loss of a subsequent fixture.

The case was subsequently appealed to the House of Lords,1 which found in the charterers’ favour, deciding that damages for a lost fixture are not recoverable, thus overturning the previous decisions of the Court of Appeal, Commercial Court and a London arbitration tribunal.  These decisions allowed the owners recovery of USD 1.36 million from a charter over-run of nine days.  The House of Lords’ decision means that the position prior to the case has been reinstated and that the damages that an owner can recover for later delivery are tied to the difference between any increase in market rate for the overlap period and the charter rate.

The facts
The owners chartered the vessel to Mercator and by an addendum the charter was extended for a 5-7 month period at a daily rate of USD 7,750.  The maximum duration of the charter was 2nd May 2004 and on 20th April 2004 Mercator gave notice of re-delivery.  On receipt of the notice, the owners re-fixed the vessel for four to six months at a daily rate of USD 39,500.  However, the charterers did not re-deliver the vessel until after the laycan which owners had agreed for the new charter.

In seeking an extension of the charter cancellation date, owners were forced to discount the rate by USD 8,000 per day and claimed from Mercator the lost profits for the six month period.  The charterers accepted liability but argued that the damages were limited to the difference between the market rate and the charter rate for the overlap period which produced an admitted liability of USD 158,301.

Arbitration and the Commercial Court
The arbitrators and the Commercial Court held that the starting point for the award of contractual damages was to place the innocent party in financially the same position as if the contract had been properly performed and the claimant could recover such losses as were naturally arising from a breach, or as were reasonably foreseeable.

A reasonable foreseeable result was one which would happen in the great majority of cases or in respect of which, on the facts known or available to the defendant, the chances of its happening were less than even but the occurrence of which would not be very unusual.

Late delivery might result in the vessel losing its next fixture and therefore owners losing profit in the event of a sudden drop in market rates and this was not something surprising or unusual.  In the circumstances, damages for lost profits under a subsequent fixture were recoverable.

The Court of Appeal
The charterers argued that in the shipping industry it was well understood that damages should be confined to the market rate differential for the overrun period and if this changed there would be huge uncertainty.

Lord Justice Rix, in the only judgment, disagreed and held that there was no binding authority that damages for late delivery of a vessel on charter be limited to the overrun period measure. He stated that the fact owners might risk losing a next fixture was commercially obvious and that if the industry could not live with the result, then contract clauses could be created to change the position.

The House of Lords
In Lord Hoffman’s leading judgment in the House of Lords, he restored the traditionally understood position as to the correct (market rate) measure of loss.  The judgment refined the well-established way of assessing damages for breach of contract as held in Hadley v. Baxendale.2

The Lords’ reasoning was that the correct starting point was not to ask what are the claimants’ foreseeable losses, but instead to consider for what kind of loss the claimant was entitled to compensation.  The critical issue was what the charterers ought fairly to have accepted as being the extent of their contractual responsibility and risk.  The Lords found that the arbitrators and courts had applied Hadley v. Baxendale too inflexibly and all foreseeable losses, however large, were not automatically recoverable.  Effect had to be given to the parties’ intentions as to their risk exposure.

Although the type of loss through the loss of the fixture might be foreseeable, charterers would not or should not have reasonably understood that they were assuming responsibility for the risk of loss on the follow-on fixture, over which they had no control or knowledge as to its terms, duration or rate.

Summary
In summary therefore, in late redelivery cases, it is clear that anticipated profits from a lost fixture will not generally be recoverable unless at the time of contracting a charterer had detailed knowledge of an owners’ next fixture and in this case losses could be recoverable as special knowledge and/or be considered an assumed contractual risk on the basis of the ACHILLEAS.  It is clear therefore that charterers would be ill-advised to seek information from owners regarding future plans for the vessel.

Footnotes
1 Transfield Shipping v. Mercator Shipping Inc [2008] UKHL 48.
2  9 Exch. 341, 156 Eng. Rep. 145 (1854). This case set the basic rule for how to determine the scope of consequential damages arising from a breach of contract under English law: the recoverable loss must be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made the contract.

 

Gard News 192, November 2008/January 2009

Any comments to this article can be e-mailed to the Gard News Editor.

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