The question considered by the English court in the MTM HONG KONG1 was: if a voyage charter is repudiated by charterers, is an owner’s claim for lost profits limited to either:

  1. The duration of the repudiated charter period.
  2. The duration of the repudiated charter period plus other losses, such as positional losses, which may be incurred beyond the repudiated charter period?

Facts

The MTM HONG KONG was voyage chartered to carry vegoil from a range of loadports in South America to a range of ports in the Gibraltar-Rotterdam range. Immediately prior to the contractual voyage the vessel grounded at Boma, central Africa. This caused delays and eventually resulted in the termination of the charter.

When the vessel eventually left Boma, the owners ordered her to proceed in ballast to South America, which they considered to be the most promising area for substitute business. After some time, the owners fixed the vessel for a voyage from San Lorenzo to Rotterdam. This substitute fixture was completed on 12 April 2011.

It was impliedly accepted that if the contractual voyage had been performed, it would have been completed on 17 March 2011. The vessel would then have performed a voyage from the Baltic to the United States and one back to Europe. It was also accepted that all three voyages would have been completed about the same time as the substitute fixture – 12 April 2011.

In arbitration, the owners succeeded in recovering from the charterers damages totalling just over US$1.2 million, equivalent to the difference between the profit actually earned on the substitute fixture, and the profit which would have been earned had the contract voyage plus the two following transatlantic voyages been performed.

Appeal to the High Court

The charterers appealed to the High Court arguing that owners’ recovery should be limited to US$478,386 on the ground that damages should be calculated by reference to the vessel’s actual and hypothetical earnings only up to the date when the contract voyage would have ended. They argued that this followed from the long established measure of loss set down in Smith v M’Guire2 - that damages were to be assessed by deducting from the net freight and demurrage any earnings from a substitute voyage. Therefore the correct approach was to apportion the owner’s earnings under the substitute charter to reflect the amount earned up to the date the contract voyage would have completed, namely 17 March 2011.

In dismissing the appeal, the judge found that the performance of the contract voyage would not only have enabled the owners to earn the freight payable under the contract charter, it would also have positioned the vessel in Europe to take advantage of higher freight rates in the North Atlantic. Thus, in addition to loss of profit on the repudiated charter, the owners were also entitled to recover their loss as a result of delay in repositioning the vessel in Europe, namely positional loss - the two follow-on transatlantic voyages. It was important, however, that loss of the two follow-on voyages could be calculated with a reasonable degree of confidence.

Comments

At first blush, this decision appears to be at odds with a line of authorities beginning with Smith v M’Guirewhich established that damages for a repudiated charter are limited to those incurred up to the final date of the charter period. However, the judge emphasized this was only on the face of it the measure of damages, and it may be necessary to depart from it in order to give effect to the compensatory principle. The reasoning in this judgment demonstrates a holistic outworking of the compensatory principle, which takes into account all the circumstances of the case and the commercial realities.

The upshot of this judgment is that an owner is not limited to a claim for lost profits calculated by reference to the duration of the repudiated charter alone, but may also be entitled to claim other losses incurred beyond the repudiated charter period, for example positional losses – provided these can be proven. It is submitted that this outcome accords with fairness and is to be welcomed.