A recent case has given guidance on claims for damages when an asset is returned late
In Transfield Shipping Inc –v– Mercator Shipping Inc (The Achilleas)  UK HL 48, the House of Lords considered the case that all lawyers reading this update will remember, Hadley –v– Baxendale (1854) 9 Exch 341. The two strands of recovery set out in that case are basically that a person can recover foreseeable losses which (i) arise naturally from the breach and are reasonably in the contemplation of the parties at the time they entered into the contract as the probable result of a breach, and (ii) the parties would reasonably foresee as arising from a breach due to the special circumstances that were present when the contract was made.
The case involved the late redelivery of a ship that was on charter. The charterers had until 2 May 2004 to redeliver the ship. The owners had arranged a new charterparty for five to seven months that would have started on or before 8 May 2004. The ship was delayed in its final voyage and not redelivered until 11 May. As the ship was delayed, the new charterers agreed to charter the ship for a five to seven month period but at a lower daily rate. The owners claimed some $1.3million because the new charter rate for the period was lower than the original charter rate by some $8,000 per day, as the market for ship charters had dropped in the meantime. The charterers said the owners could only claim the difference between the market rate and the charter rate for the nine days delay (which came to nearly $158,000).
The arbitrators, Commercial Court and Court of Appeal all agreed with the owners. The House of Lords, however, found for the charterers.
The basis of the decision in the House was that the loss had to be foreseeable. This was not just a question of the probability of a loss, but also what the parties had in mind regarding the nature and object of their business transaction. The extraordinary loss that arose out of the change in the charter market was not in the contemplation of the parties.
For lessors, the result is obvious: where equipment is returned late, the likelihood is that, if the lessor has arranged a new lease with a lessee at a premium rental and loses that arrangement due to the late return of the equipment, all that can be claimed as damages is a daily rate for late return until a new lease is arranged.
For operating lessors, active asset management could reduce this risk. By proactively managing the return of the equipment, the chance of delay can be reduced. Also it is more arguable here that what is a foreseeable loss is different. Further, it is arguable that in a short period operating lease or a short term rental the parties must be aware that the lessor needs the equipment back at a specified date as the business of the lessor is repeated hiring out of the equipment and the loss of a profitable contract is reasonable foreseeable.
Lessors who have equipment on longer term operating leases and long funding operating leases would, it is submitted, be more likely to be restricted in their claims.