Gard News 192, November 2008/January 2009
01 NOV 2008
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.
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
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
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
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.