English law - Charterers liable for loss of future fixture

The English Court of Appeal has 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 facts
In January 2002 the owners of the ACHILLEAS entered into a time charterparty for five to seven months at charterers’ option. The charter was subsequently extended for a further similar period. The final date for re-delivery was 2nd May 2004. Towards the end of the charter period the charterers gave approximate notice of delivery between 30th April and 2nd May. The charterers subsequently gave orders for one more voyage, which were accepted by owners. Delays occurred and the charterers indicated that the re-delivery date was to be pushed back to a few days beyond the end of the charter period. Ultimately the vessel was re-delivered nine days late and charterers agreed to compensate the owners for the difference in the market rate and charter rate for the period of the overrun.

Unfortunately, the owners had relied on the initial approximate notice of re-delivery to negotiate a following fixture with a laycan fixed for a period extending almost one week beyond the latest date of expected re-delivery as indicated in that notice. This fixture was entered into at the peak of the market and the rate agreed was more than twice that under the current fixture. It soon became apparent to owners that the vessel would be re-delivered later than anticipated by the charterers and would likely miss the laycan of the recently agreed fixture. In order to avoid losing that fixture the owners re-negotiated the laycan. The market had dropped sharply and owners suffered a penalty in having to revise the daily rate downwards by 20 per cent.

Dispute
Understandably, owners viewed the 20 per cent loss in income over the following charter period (four to six months) as a direct result of the charterers’ breach in failing to re-deliver on time and sought damages to cover these additional losses. The damages, as calculated by the owners, were almost ten times the amount calculated by the charterers.

The issue before the arbitration was whether or not the owners were entitled to recover the loss of profit on the future fixture. By a 2:1 majority the arbitrators decided that yes, the loss of profit on the future fixture was a “not unlikely” result of charterers’ failure to re-deliver on time and so the owners could recover that greater sum.

The charterers appealed this decision to the High Court, where Christopher Clarke J. reviewed the authorities and ultimately agreed with the majority decision of the arbitration tribunal.¹ The charterers appealed again to the Court of Appeal and their judgment has recently been issued.²

The Court of Appeal
The only judgment in the Court of Appeal was given by Lord Justice Rix. He began by reviewing the previous authorities. The charterers had argued that damages for the late re-delivery of a vessel had always been accepted as the difference between the market rate and charter rate for the period of the overrun and that additional damages for a lost fixture had never been awarded.³ Lord Justice Rix reviewed the major cases dating back almost 120 years and agreed that such damages had never been awarded. He also noted (as had Christopher Clarke J. before him) that such damages had never been claimed and were not in issue in any of those cases. The charterers relied in particular on a statement by Lord Justice Bingham in the PEONIA⁴ in relation to an owner complying with an order for an illegitimate last voyage.

He stated: “[the owner] is entitled to payment of the hire at the charterparty rate until re-delivery of the vessel and (provided he does not waive the charterer’s breach) to damages (being the difference between the charter rate and the market rate if the market rate is higher than the charter rate) for the period between the final terminal date and re-delivery”. This, argued the charterers, was the only damages the owners were entitled to. There was no indication in this statement of the law that any further damages would be payable.

The charterers also argued that the damages claimed in respect of the lost fixture would fall for consideration under the second limb of the rule in Hadley v. Baxendale⁵ and would fail for being too remote and not in the contemplation of the charterers at the time the contract was made. They were not made aware of the fixture and so should not be liable in damages for its loss. The charterers would be exposed, they said, to disproportionate damages if they were found liable for losses of this type.

This argument met with little sympathy from Lord Justice Rix. As had been said in the High Court decision and by the majority of the arbitration tribunal, the chartering of ships was the business of the charterers and they were experienced in it. They would know that an owner would seek to engage in a further fixture following as closely as possible to the one coming to an end. Although this was not stated in any of the decisions, it was, presumably, the basis on which the charterers fixed voyage charters during their charter of the vessel. The charterers in fixing a final voyage close to the end of the charter period should be on notice that if the voyage does overrun and re-delivery is late, the owners would be likely to suffer the loss of a following fixture. In ordering the vessel on one more voyage the charterers would be seeking to maximise their profits under the head charter, but at the risk of delivery being late. In the words of Lord Justice Rix, “why should [that risk] fall on the owners?” The charterers chased the profit and it was right and just that they should face the risk of failing to re-deliver on time.

In deciding that the charterers would in this instance be liable in damages for the loss of the fixture this would not necessarily be true in all cases. Lord Justice Rix went on to hold that each case must be decided on its own facts. In this case the owners had acted reasonably in fixing the subsequent charter and had allowed a reasonable time for the laycan under that new fixture – it was not so close to re-delivery or so short in itself as to be unreasonable. The hire rate for the new fixture was at market rates then prevailing and the revised rate was also at the market rate. If any of these facts were different it may be that they would not have been reasonably anticipated by the charterers and so they may not have faced the liability. In this case, however, the owners had acted completely reasonably and there was no peculiar premium or deficit from the market rates prevailing at the relevant times. Also, the new fixture was of a duration similar to the originally fixed charter under discussion and similar to the extended period. The charterers were not able to avail themselves of the argument that the duration of the charter (over which they would be liable in damages) was not reasonably foreseeable by them.

Lord Justice Rix tantalisingly left open the question of whether the duration of damages should face an upper limit. Should a charterer be liable for a loss in rate over a period of several years? There was also discussion of what would be the situation if the owner had entered into a particularly short-term charter at a loss, following which he reaped the benefits of a further surge in rates. Lord Justice Rix left these decisions to be made when the need arose.

A further comment of note is that in the following fixture there was no liberty to substitute the vessel. If there had been, it is likely that the damages calculations would have been different, although arguably the principles to be applied would have been the same.

Comment
To summarise, if a vessel is re-delivered at a date beyond the final date agreed in the contract through no fault of the owners, the charterers may find themselves liable not only for an increased rate of hire for the overrun period but also for the loss of a subsequent fixture. The gamble for charterers is that by seeking a short-term profit they may suffer a much larger long-term penalty. Very careful consideration of the current and anticipated market conditions should be given before deciding whether or not that last final voyage should be ordered.

At the time of writing it is not known whether this case will be appealed to the House of Lords. If it is, the decision will be reported in a future issue of Gard News.