The litigation in The Ocean Victory1 raised a number of important issues, including whether, if there had been a breach of the safe port warranty by the demise charterer, the provisions for joint insurance in clause 12 of the Barecon 89 form precluded rights of subrogation of the hull insurers and the right of the head owner to recover against the demise charterer in respect of losses covered by hull insurers for such breach. Although the Supreme Court held that there had been no breach of the safe port warranty on the basis that there had been an abnormal occurrence, as the issue relating to the joint insurance provisions of the Barecon 89 charterparty was of general importance, the Court went on to consider it, albeit on an obiter basis.
The Charterparty provisions and factual background
The head owner and the demise charterer were related companies. Under clause 9 of the Demise Charter, the demise charterer had the usual obligation to maintain the vessel in good repair and efficient operating condition and to take immediate steps to have any necessary repairs carried out.
Clause 12 of the Demise Charter provided as follows: “Insurance and Repairs” (a) During the charter period the Vessel shall be kept insured by the Charterers at their expense against marine, war and P&I risks in such form as the Owners shall in writing approve, which approval shall not be unreasonably withheld. Such marine, war and P&I insurances shall be arranged by the Charterers to protect the interests of both the Owners and the Charterers and mortgagees (if any), and the Charterers shall be at liberty to protect under such insurances the interests of any managers they may appoint. All insurance policies shall be in the joint names of the Owners and the Charterers as their interests may appear. 1 Culminating in the decision of the Supreme Court in Gard Marine and Energy Limited v China National Chartering Company  UKSC 35 Page 2 of 31 … The Charterers shall, subject to the approval of the Owners and the Underwriters, effect all insured repairs and shall undertake settlement of all costs in connection with such repairs as well as insured charges, expenses and liabilities (reimbursement to be secured by the Charterers from the Underwriters) to the extent of coverage under the insurances herein provided for. The Charterers also to remain responsible for and to effect repairs and settlement of costs and expenses incurred thereby in respect of all other repairs not covered by the insurances and/or not exceeding any possible franchise(s) or deductibles provided for in the insurances. (b) … (c) Should the Vessel become an actual, constructive, compromised or agreed total loss under the insurances required under sub-clause (a) of clause 12, all insurance payments for such loss shall be paid to the Mortgagee, if any, in the manner described in the Deed(s) of Covenant, who shall distribute the moneys between themselves, the Owners and the Charterers according to their respective interests. The Charterers undertake to notify the Owners and the Mortgagee, if any, of any occurrences in consequence of which the Vessel is likely to become a Total Loss as defined in this clause. (d) If the Vessel becomes an actual, constructive, compromised or agreed total loss under the insurances arranged by the Charterers in accordance with sub-clause (a) of this clause, this Charter shall terminate as of the date of such loss. (e) … (f) For the purpose of insurance coverage against marine and war risks under sub-clause (a) of this clause, the value of the vessel is the sum indicated in Box 27.” 4. Clause 13 of this form of charter provided an alternative insurance clause which had been deleted. Clause 13 was intended for short-term demise charters and envisaged that the demise charterer would become entitled under existing insurance arrangements made by the head owner. It provided for the vessel to be kept insured against marine and war risks by the owner at their expense under a policy in joint names, and against P&I risks by the charterers at their expense. However, in contrast to clause 12, clause 13(a) also expressly provided that: “The Owners and/or insurers shall not have any right of recovery or subrogation against the Charterers on account of loss or any damage to the vessel or her machinery or appurtenances covered by such insurance, or on account of payments made to discharge claims against or liabilities of the Vessel or the Owners covered by such insurance.” Page 3 of 31 5. However, the Barecon 89 form had been amended, deleting the trading limits clause (clause 5), and adding a new clause 29 which contained a safe port warranty. (Clause 5 contained nothing about safe ports, and was headed “Trading Limits”, and stipulated that the vessel was to be employed in lawful trades for the carriage of suitable lawful merchandise within trading limits which may be specified in the schedule which forms Part I of the policy, and that the vessel was not to be employed otherwise than in accordance with the terms of the insurance which was required to be maintained.) 6. The demise charterer then time chartered the vessel to Sinochart, who in turn sub-chartered her to Daiicha for a time charter trip. The subsequent charters contained a similar safe port warranty. 7. Daiicha gave instructions for the vessel to load an iron ore cargo in South Africa and to discharge it at the port of Kashima in Japan. The vessel safely entered the discharge port, but then sought to leave the port during a storm, she allided with the northern end of a breakwater and then grounded. Despite salvage efforts, she broke in two and was then subject to a lengthy wreck removal exercise. One of her hull insurers, Gard, took assignments of the head owner’s and the demise charterer’s rights in respect of the grounding and the total loss. Gard then brought claims against Sinochart, who in turn passed them on to Daiichi. The Minority Judgments 8. The minority on the joint insurance issue consisted of Lord Clarke and Lord Sumption. The latter indicated that it was common ground that where it had been agreed that insurance shall inure to the benefit of both parties to the contract, the parties cannot claim against each other in respect of an insured loss. Lord Sumption went on that the juridical basis was probably best seen as being an implied term of the contract of insurance and/or of the underlying contract between the co-insureds pursuant to which their interests were insured. The implication was necessary because if the co-insureds were both insured against the relevant loss, the possibility of claims between them was financially irrelevant. It would be absurd for the insurer to bring a subrogated claim against a co-insured whom he would be liable to indemnify against having to meet it. 9. However, Lord Sumption emphasised that this reasoning was only relevant to the position as between co-insureds and their insurer, none of the previous cases had raised the question how the principle about co-insurance affects claims against a third party wrongdoer who is Page 4 of 31 not a co-insured and is not a party to the arrangements, where there is no necessity to exclude the claim against the third party and no reason why the co-insured or their insurer should wish to do so. As Lord Sumption stated, the general rule is that insurance recoveries are ignored in the assessment of damages arising from a breach of duty, (the so-called collateral payments exception which is probably based on public policy considerations); such insurance recoveries are a benefit which the injured party has bought and are intended to inure to his benefit alone, not that of third party wrongdoers. The courts have traditionally been concerned to preserve the subrogation rights of insurers against those who are legally responsible for the loss and the effect of the collateral payments exception is that as between the insured and the wrongdoer who has caused the loss, they are not treated as making good the former’s loss or as discharging the latter’s liability. 10. A different question arises with the third party wrongdoer, namely when it is said that one coinsured cannot claim damages against another for an insured loss, is that because the liability to pay damages is excluded by the terms of the contract, or is it because as between the co-insureds the insurer’s payment makes good any loss and thereby satisfies any liability to pay damages? Either analysis will achieve the objective of preventing claims between coinsureds, but they have radically different consequences for claims against third parties. Lord Sumption concluded that the correct analysis must depend on the particular terms of the particular contract. 11. He pointed out that clause 12 was an insurance on property, and the demise charterer is treated as having an insured interest in the property because his potential liability to the head owner as a bailee and time charterer means that he stands in a legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of the insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof (section 5(2) of the Marine Insurance Act 1906). If the ship is lost or damaged, the measure of any liability of the demise charterer will be the same as the measure of the owner’s loss, namely the diminution, partial or total, in the value of the ship. Lord Sumption stated that there is no other basis on which the demise charterer could be entitled to insure on the same basis as the owner. He therefore concluded that when the vessel was lost, the insurers were bound to pay its insured value to the mortgagee for the account of the head owner pursuant to clause 12(c); but the natural legal inference from (i) the fact that the demise charterer is insured for his interest in the ship; (ii) the implied prohibition of claims for damages between co-insureds for loss of or damage to the vessel; and (iii) the avoidance of double recovery, is that the insurer’s payment to the head owner makes good the head owner’s loss not just as Page 5 of 31 between the insurer and the head owner, but as between both of them and the demise charterer. 12. Lord Sumption was of the view that the demise charterer’s liability (if any) for the loss of the ship under the charter had not been excluded: it had been satisfied and it followed that the demise charterer could claim against the time charterer down the line who was not a party to the insurance or any of the contractual arrangements connected with it. He considered that the correctness of this analysis could be tested by asking what would happen if the insurer did not pay for some reason which did not involve a breach of duty by either co-insured, for example due to insolvency of the insurer following the casualty. The charter terminates upon the total loss and the demise charterer’s obligation to insure ceases upon termination of the charter. The result is there is no effective insurance, no default of the demise charterer in there being no effective insurance, and no basis on which the head owner can look exclusively to the insurance proceeds to make good a loss arising from a breach of the safe port warranty. Lord Sumption considered that the demise charterer would have to pay damages, not because he was responsible for the lack of insurance, but because he was liable for the destruction of the ship in breach of the safe port warranty. In the absence of payment, there is no discharge and no bar to a claim between the co-insureds. 13. However, this does also mean that if a solvent insurer delays in paying the claim, the head owner may require the demise charterer to pay the loss at once. 14. Lord Sumption went on to point out that in an unamended Barecon 89 form (i.e. not one with a safe port warranty of the type added to the material charter) it is very difficult to envisage circumstances where an insured loss could arise from a breach of contract by the demise charterer. The charterer’s sole obligation in relation to the physical condition was the maintenance and repairing obligation. The trading warranty in clause 5 did not give rise to an insured loss because it did no more than prohibit the trading of the vessel to places where she would not be insured. He considered that the issue only arose because the parties had added, in clause 29, a contractual obligation not to trade to unsafe ports where the vessel might suffer an insured loss, and in adding that clause to the printed form the parties must have intended that in relation to loss or damage arising from the unsafeness of a port the liability of the insurer and the charterer would co-exist. If the liability of the charterer for such a breach did not extend to damages, the parties must be taken to have included an elaborate trading warranty which was almost entirely redundant; its only effect on this view would be to entitle the head owner to protest if they happened to learn in advance of the intention to visit an unsafe port, but if the charterer persisted, employing as it did the master and crew, and Page 6 of 31 the vessel was lost or damaged, there would be no consequences in damages. Lord Sumption was of the view that this was not a realistic intention to impute to commercial parties in the absence of express words to that effect. 15. Lord Sumption was also of the view that the provisions in clause 12 (c) dealt only with the mechanics of the payment of the insurance proceeds and were not dealing with the substantive rights of the parties: these provisions did not exclude a right to damages for breach of contract. Their purpose appeared to be to protect the position of the mortgagee and to distinguish the position where there was a partial loss when the insurance proceeds would go to the demise charterer by way of indemnity against the cost of repairs. Further, clause 12 (c) required a distinction to be made between insurance payments under the hull policy in respect of the loss of the ship and insurance payments under the P&I insurance representing other elements of the claims such as SCOPIC and wreck removal (it was accepted that the latter, along with loss of hire, would be recoverable as damages). It is very difficult to see why, if the principle underlying clause 12 was that the parties were to look exclusively to the insurance proceeds for compensation for a breach of clause 29, they should have intended this arbitrary distinction between different elements of the loss. 16. Finally, he pointed out that it was striking that when the draftsman of the form wanted to deal with the overlap between the liability of the insurers and that of the demise charterer, he did so in express terms, using language in clause 13 which finds no equivalent in clause 12, albeit that Lord Sumption considered that clause 13 was designed for a very different kind of chartered service. 17. Lord Clarke considered additionally that where the charter contained a specific unsafe port clause, such as clause 29, one would expect any exemption of the demise charterer’s liability in damages for breach to be clearly expressed; there was no code of rights and obligations in clause 12 with regard to insured losses caused by a breach of clause 29; there was nothing in clause 12 which provided that the demise charterer had no liability for breach of the unsafe port clause, and there was no basis for necessary implication of such a term. The Majority Judgments 18. The majority (consisting of Lord Mance, Lord Toulson, and Lord Hodge) concluded that the Court of Appeal had been correct in their analysis that the proper construction of clause 12 was that there was to be “an insurance funded result in the event of loss or damage to the vessel by marine risks” and that, if the demise charterer had been in breach of the safe port clause, it would have been under no liability to the owner for the amount of the insured loss Page 7 of 31 because it had made provision for looking to the insurance proceeds for compensation. In effect, clause 12 as a whole was a complete code governing financial liability for loss or damage to the ship, and the words used in that clause provided for the relief, and the only relief, available as between the head owner and the demise charterer for a total loss, namely insurance was to be in place for the parties’ joint account, and all such insurance payments for such insured losses was to be paid to the Mortgagee, if any, in the manner described in the Deed of Covenant, who was to distribute the moneys between themselves, the owner and the demise charterer according to their respective interests. 19. Lord Mance began his judgment by considering the unamended Barecon 89 form and concluded that clauses 9 and 12 impose on demise charterer a strict responsibility for having all necessary repairs done, but that the charterer may also cause the total loss of the demised vessel in circumstances constituting a breach, and for example clause 5 (which had been deleted in the material charter) imposed various obligations relating to lawful trading and the carriage of suitable lawful merchandise. In his view, clauses 12 and 13 contained a scheme designed to address the possibility of the vessel requiring repairs or suffering a total loss. First and fundamentally, the clauses provided who would take out the marine, war risks and P&I insurance, and the form that would take. Under both clauses the value of the vessel for marine and war risks was to be US$70 million (box 27), while boxes 28 and 29 were to specify whether either or both parties took out additional insurance. Under clause 12, the insurances were to protect both the owner, the charterer and the mortgagees, and were to be in the joint names of owner and charterer as their interests may appear. Clause 13 included the express provision that owner and insurers were not to have any right of subrogation against the demise charterer on account of loss or damage to the vessel covered by the insurance, or on account of payments made to discharge claims against or liabilities of the Vessel or the owner covered by such insurance. Both clauses 12 and 13 made the demise charterer responsible for effecting repairs, securing reimbursement from underwriters to the extent of the coverage, but remaining responsible for all repairs not covered by the insurance. Both clauses addressed the possibility of a total loss (whether actual, constructive, compromised or agreed) and clause 12 (c) provided for the payments for such loss to be paid to the Mortgagee who shall then make the above distribution according to their respective interests. 20. Lord Mance considered that the scheme of clause 12 was intended to be comprehensive and whatever the causes, both repairs and total losses fell to be dealt with in accordance with its terms, rather than by litigation to establish who might otherwise be responsible for undertaking them, for bearing the risk of their occurrence, or for making them good. This was Page 8 of 31 reinforced by the provisions for marine and war risks insurances to be taken out to protect the interests of owner, charterer and mortgagee, and to be in the joint names of owner and charterer, as their interests may appear. Lord Mance also pointed to the fact that it is well established that where it is agreed that the insurance shall inure to the benefit of both parties to a venture, the parties cannot claim against each other in respect of an insured loss. Lord Mance went on that it is reinforced here where the principal co-insureds were in the same group and ultimate beneficial ownership. Hull insurance covers losses whether or not they are due to the fault of any party. 21. Lord Mance pointed out that at the date of her total loss, the vessel was worth considerably more than her insured value, and in his opinion, it was implausible to suggest that having developed this careful scheme for specific protection of their respective interests, it should have been intended that the owner should be able to reopen the scheme by claims of breach, exposing demise charterer to pay damages for the hull loss based on a different alleged value to that which had been agreed amongst themselves. Just as parties must accept a valuation agreed under a marine insurance (section 27(1) and (2) of the MI Act) so here the parties must be taken to have accepted the value they agreed for insurance purposes as conclusive as between themselves. 22. Lord Mance considered that clauses 12 and 13 were effectively mirror images of each other, and the reason why Clause 13 included the express exclusion of any right of recovery or subrogation on the part of owner and/or insurers against charterer, was that this clause was dealing with where the insurance had been taken out by the owner. The reason why no such express term appeared in clause 12 was that it had never occurred to anyone that there could be such claims where insurances were arranged by charterer to cover their own as well as owner’ interests. Lord Mance considered that it was inconceivable that the parties intended fundamentally to alter the incidence of risk by permitting or excluding breach-based claims as between themselves in respect of a hull loss, depending upon whether it happened to be convenient to continue to use hull insurances taken out by owner or to rely on fresh insurances taken out by charterer. 23. He also did not consider that the substitution of printed clause 5 by typed clause 29 altered this basic scheme, and that, in particular, it was most unlikely that the safe port provision which had been introduced in clause 29 had been intended to give rise to a system of recourse for loss of the hull, by way of damages for breach of contract, separate from and potentially counteracting the “no fault” scheme of responsibility and insurance recovery for a hull loss introduced by clause 12. Page 9 of 31 24. Lord Mance concluded that under a co-insurance scheme like this one, it is understood implicitly that there will be no claim by owner against charterer for damages for loss of the hull, and the implied understanding arising from the co-insurance scheme is that there would be no liability for the hull value in the event of a total loss, whether or not the insured value had yet been disbursed. 25. Lord Toulson agreed that in the standard Barecon 89 form, clause 12 deals comprehensively with the risks of loss or damage to the vessel and what is to happen in such event. In summary, the demise charterer was responsible for arranging and maintaining insurance, in a form approved by the head owner, in the name of both parties for an agreed value; the charterer was responsible for effecting all insured repairs; the charterer was responsible for repairs not covered by the insurance, for example, due to use of the vessel outside the terms of the insurance; and in the case of a total loss covered by the insurance, the clause provided for the processing of the insurance moneys. Lord Toulson agreed that Lord Justice Longmore had been correct in the Court of Appeal when he had said that the exclusion of rights of recovery or subrogation in clause 13 was a “confirmation rather than a negation of such exclusion in the more usually adopted clause 12 for the longer term charters when it is the demise charterer who pay the premium.” 26. Lord Toulson then went on to consider the effect (if any) of the substitution of the new clause 29 which introduced the safe port warranty, and the deletion of the standard clause 5. He pointed out that it had become common practice in various industries for the parties to provide for specified loss or damage to be covered by insurance for their mutual benefit, whether caused by one party’s fault or not, thus avoiding potential litigation between them. The question in each case is whether the parties are to be taken to have intended to create an insurance fund which would be the sole avenue for making good the relevant loss or damage, or whether the existence of the fund co-exists with an independent right of action for breach of a term of the contract which has caused that loss. Like all questions of construction, it depends on the provisions of the particular contract. 27. Lord Toulson referred to the decision of the House of Lords in Co-operative Retail Services Ltd v Taylor Young Partnership Ltd2 where the House held that it could not have been the intention of the parties, where they were jointly insured under a contractors’ all risk policy, that they could make claims against one another in respect of damage covered by the insurance, or that insurers could make a subrogated claim, and that the court would, if 2  1 WLR 1419. Page 10 of 31 necessary, hold that there was an implied term to such effect. (The implied term presupposes that the party relying on it has not by his own conduct prevented recovery of the loss under the policy.) In so holding the House agreed that it would be nonsensical if parties who were jointly insured under a contractors’ all risks policy could make claims against one another in respect of damage to the contract works. Lord Toulson concluded that the proper construction of clause 12 was that there was to be an insurance funded result in the event of loss or damage to the vessel by marine risks, and that if the demise charterer had been in breach of clause 29, it would have been under no liability to the head owner for the amount of the insured loss because they had made provision for looking to the insurance proceeds for compensation; and the introduction of clause 29 had not intended to alter the way clause 12 was to operate. 28. Clause 20 of the demise charter allowed for a sub-charter with the owner’ consent (which was not to be unreasonably withheld); the risk existed that the vessel might be directed to an unsafe port, not necessarily by negligence on anyone’s part, so causing peril to the vessel, but the risk of consequential damage to the vessel was catered for by the insurance required to be maintained by the demise charterer in the joint names of demise charterer and head owner. The commercial purpose of maintaining such joint insurance was not only to provide a fund to make good the loss, but to avoid litigation between these parties or the bringing of a subrogated claim in the name of one against the other. Clause 29 set limits on the use of the vessel, breach of which might give rise to loss, but clause 12 dealt with the consequences of loss or damage to the vessel, regardless of whether it resulted from negligence or other fault of the demise charterer or some other sub charterer. 29. Lord Toulson referred to Lord Hope’s judgment in the Co-operative Retail Services case, where Lord Hope distinguished between a provision for insurance which curtails the means of recovering loss whether or not it was caused by a contracting co-insured’s default; and a provision which backs the other party’s other obligations with an insuring obligation but leaves the other obligations enforceable against the other party by other means. Lord Toulson considered that the insurance arrangements under clause 12 of Barecon 89 provided not only a fund but the avoidance of commercially unnecessary and undesirable disputes between the co-insureds. 30. Lord Hodge agreed with Lord Mance and Lord Toulson. Page 11 of 31 The Un-Argued Points 31. It is apparent from the judgments, however, that there were three other possible bases on which the demise charterer’s claim might have been presented, but which were not argued, namely: (a) That the demise charterer had possessory title which gave it a sufficient interest to be able to maintain a claim for the hull loss in its own name, accounting to the head owner for any recovery exceeding its actual loss. The possessory title point arises from the principle in The Winkfield3 whereby a bailee can claim in tort in his own name, without showing that he has any liability to the head owner, but accounting to the head owner for any loss exceeding his own loss4 ; and (b) Under what has sometimes been called “the principle of transferred loss”, which may permit a contracting party to recover substantial damages for breach of contract where the loss is foreseeably suffered by a third party and the latter has no claim against the wrongdoer. The recovery in such a case is held on trust for the third party. In this regard, Lord Mance referred to there being circumstances in contract where a contracting party can claim substantial damages for loss or damage to property, when another person has actually borne such loss. He referred to the fact that, more recently, this possibility has been more widely recognised, by giving special treatment to contracts relating to property where loss due to a breach of contract will be suffered by a holder of the property other than the contracting party. He was referring to the decisions in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd and St Martins Property Corp Ltd v Sir Robert McAlpine Ltd5 , where it was in the contemplation of the parties when the contract was made that the property, the subject of the contract and the breach, would be transferred to or occupied by the third party, who would in consequence suffer the loss arising from the breach. In such a situation, the claimant is seen as suing on behalf of and for the benefit of the injured third party and is bound to account accordingly: see also MacAlpine Construction Ltd v Panatown Ltd6 . (c) The even broader principle which was also suggested by Lord Griffiths in Linden Gardens (p 96F-97D of the judgment), and reviewed inconclusively by Lord Brown-Wilkinson (at pp 111F-112F of the judgment); as well as by the members of the House of Lords in the Panatown case, to the effect that a contracting party might itself have an interest in performance enabling it to claim damages without proving actual loss. 3  P. 42. 4 See also Waters v Monarch Fire & Life Assurance Co (1856) 5 El & Bl 870. 5  1 AC 85. 6  1 AC 518, per Lord Clyde, at pp 530 E-F and 532 D-E. Page 12 of 31 32. It is interesting to note that in his judgment in The Ocean Victory, Lord Toulson only mentioned the potential argument based on The Winkfield and referred to the fact that Gard had at one stage intimated a claim analogous to the claim which such a bailee may bring, but the matter had not been pursued. In the Court of Appeal in The Ocean Victory7 , Longmore LJ had also mentioned that a claim in bailment had not, in the event, been pursued, no doubt because it would require proof of negligence. It appears therefore, that it is the second and third possible lines of argument which are of real interest. The Application of the exception in Dunlop v Lambert in The Albazero 33. In the well-known case of The Albazero8 Lord Diplock referred to various examples of where the common law had allowed a claimant in an action for breach of contract, who had suffered no loss, to recover damages on behalf of a third party who had suffered loss, for example: (a) The doctrine of subrogation where the insurer has paid the assured so that the assured has in fact suffered no loss, but English law allows the assured to recover damages from the wrongdoer and allows the insurer to compel the assured to whom he has paid a total or partial indemnity to bring the action; (b) The right of an assured to recover in an action on a policy of insurance upon goods the full amount of loss or damage to them, on behalf of anyone who may be entitled to an interest in the goods at the time when the loss or damage occurs, provided that it appears from the terms of the policy that he intended to cover their interests; and (c) The rule in Dunlop v Lambert9 that a consignor of goods (who has parted with property in goods before the date of breach) can recover substantial damages against the shipowner for the failure to deliver the goods, if there is privity of contract between him and the carrier for the carriage of goods, although if the goods are not his property or at his risk, he will be accountable to the true owner for the proceeds of this judgment. 34. Lord Diplock went on to state in The Albazero that the only way in which he found it possible to rationalise the rule in Dunlop v Lambert so that it might fit into the pattern of the English law was to treat it: “ … as an application of the principle, accepted also in relation to policies of insurance upon goods, that in a commercial contract concerning goods where it was in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or 7  1 Lloyd’s Rep. 381, 411. 8  A.C. 774. 9 (1839) 6 Cl & F. 600, H.L. Page 13 of 31 damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into.” 35. Lord Diplock emphasised that the exception should not be extended beyond what was justified by its rationale, so far as that could be discerned; and as can be seen from the passage set out above, he appears to have considered that the exception required that the transfer of the proprietary interests had to be “in the contemplation of the parties”; and the exception also further required that it be the “intention of the parties” to benefit a third party, which would then be appropriately “treated in law”. 36. However, Lord Diplock was clearly of the view that the principle in Dunlop v Lambert should still survive and the rule extended to all forms of carriage, including carriage by sea itself where no bill of lading has been issued, and he went on that “there may still be occasional cases in which the rule would provide a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it.” He continued at pages 847-8: “With the passing of the Bills of Lading Act 1855 the rationale of Dunlop v Lambert could no longer apply in cases where the only contract of carriage into which the shipowner had entered was that contained in a bill of lading, and the property in the goods passed to consignee or indorsee named in the bill of lading by reason of the consignment or indorsement. Upon that happening the right of suit against the shipowner in respect of obligations arising under the contract of carriage passes to him from the consignor. Furthermore, a holder of the bill for valuable consideration in exercising his own right of suit has the benefit of an estoppel not available to the consignor that the bill of lading is conclusive evidence against the shipowner of the shipment of the goods described in it. The rationale of the rule is in my view also incapable of justifying its extension to contracts for carriage of goods which contemplate that the carrier will also enter into separate contracts of carriage with whoever may become the owner of goods carried pursuant to the original contract. A charterparty which provides for the issue of bills of lading covering the carriage of particular goods shipped on the chartered vessel is such a contract, whether it be a voyage or time charter. While it is generally the case with a voyage charter that the terms of the charterparty are incorporated in the bills of lading required or authorised to be issued under it by the Page 14 of 31 shipowner, even if the contractual rights of the parties under the charter were identical with those of the parties under the bill of lading, there would be no sensible business reason for inferring that the shipowner in entering into the charterparty intended to accept concurrent liabilities to be sued for the same loss or damage by the charterer and by the consignee or indorsee of the bill of lading. A fortiori there can be no sensible business reason for extending the rule to cases where the contractual rights of the charterer are not identical with those of the bill of lading holder whose goods are lost or damaged; and this must always be the case as respects holders for valuable consideration because of the statutory estoppel to which I have referred. But there may be, and in time charters there often are, considerable other differences between the contractual rights of the charterer under the charterparty and those of the bill of lading holder under the bill of lading. In the absence of a clause paramount in the charterparty, the limit upon the amount recoverable per package under the Hague Rules would not be applicable to claims under the charterparty … The complications, anomalies and injustices that might arise from co-existence in different parties of right of suit to recover, under separate contracts of carriage which impose different obligations upon the parties to them, a loss which one party to one of those contracts alone has sustained, supply compelling reasons why the rule in Dunlop v Lambert … should not be extended to cases where there are two contracts with the carrier covering the same carriage and under one of them there is privity of contract between the person who actually sustains the loss and the carrier by whose breach of that contract it was caused.” 37. Lord Clyde also considered in the Panatown case (as did Lord Browne-Wilkinson) that the justification for the exception is the necessity of avoiding the disappearance of a substantial claim into what has been described as a legal black hole. However, as further discussed by Lord Clyde in the Panatown case, it appears that Dunlop v Lambert might more correctly be described as authority for the proposition that where there is a special contract with the consignor, the consignor can have a right to sue for damage to the goods during carriage, even if he was not the owner; and that the seeds of what grew into The Albazero exception may more truly be found in earlier English cases such as Davis and Jordan v James10 and Joseph v Knox11 (which was actually relied on in Dunlop v Lambert). In Joseph v Knox, Lord Ellenborough took the view that the consignors were entitled to recover the value of the lost goods and “they will hold the sum recovered as trustees for the real owner.” 10(1770) 5 Burr 2680. 11 (1813) 3 Camp 320. Page 15 of 31 38. It should be noted that Lord Diplock’s speech in The Albazero does give rise to the question whether the exception applied in The Albazero is a rule of law or is based upon the intention of the parties. This will be discussed further below. The Building Contract Cases 39. In the Linden Gardens and St Martins cases, Lord Browne-Wilkinson considered that the second appeal (the St Martins case) fell within the ambit of the exception contained in Dunlop v Lambert, as explained in The Albazero, because the relevant contract was for a large development of property which to the knowledge of both parties was going to be occupied, and possibly purchased by third parties and not by the relevant contracting party. Therefore, it could be foreseen that damage caused by a breach would cause loss to a later owner and not merely to the original contracting party. The remedial works had been carried out by the innocent party to the contract but they had been reimbursed by the third party who had taken over the lease of the property. As in the contracts of carriage case, there would be no automatic vesting of any right of action against the contract breaker in the occupier or owner of the property who actually sustained the loss; further the contract had also provided that the rights of action under the building contract could not be transferred to such third parties without the consent of the person who turned out to be the contract breaker. Lord Browne-Wilkinson concluded that, just as in Dunlop v Lambert, it was proper to treat the parties as having entered into the contract on the footing that the relevant contracting party would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who under the terms of the contract could not acquire any right to hold the contract breaker liable for breach. As he said, it was truly a case in which the rule in Dunlop v Lambert provided a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it. As Lord Browne-Wilkinson reiterated in the Panatown case, this exceptional principle does not apply (because it is not needed) where the person who has suffered the loss has a direct remedy against the wrongdoer. 40. As discussed in Chitty On Contracts 32nd Edition at para 18-057, the effect of the Linden Gardens/St Martins case was to extend the scope of The Albazero exception from contracts for the carriage of goods by sea to contracts generally. The St Martins case was consistent with two factors which had restricted the scope of that exception, namely that (a) the loss or damage was caused to property which had been transferred by one of the contracting parties to the third party; and (b) the third party had not acquired any rights under the building contract and it was foreseeable (by reason of the prohibition against assignment) that he would not do so. Page 16 of 31 41. In Darlington Borough Council v Wiltshier Northern Ltd12, Wiltshier, the construction company, entered into two contracts with Morgan Grenfell for the construction of a recreational centre for and on a site owned by Darlington Council. For reasons connected with local government finance, the contracts had been entered into by the finance company, not the Council. As pre-agreed, Morgan Grenfell assigned all its contractual rights and causes of action against Wiltshier to Darlington who then claimed damages for breach of contract relating to building defects. Wiltshier had argued that Morgan Grenfell had not carried out the repairs and had no intention of doing so, they had accordingly suffered no loss and could assign no claim for substantial damages. The Court of Appeal held, extending the rationale of Lord Browne- Wilkinson’s speech in the St Martins case, that as the building contract, to the knowledge of both parties, was entered into for the benefit of Darlington and it was foreseeable that damage caused by breach would cause loss to Darlington, as assignee of Morgan Grenfell’s rights, Darlington could claim substantial damages as if Darlington had been a party to the original contract. 42. However, Morgan Grenfell had never acquired or transmitted to Darlington any proprietary interest in the development. The Court of Appeal did not consider this to be relevant to their decision that the case fell to be decided by application of the rule in Dunlop v Lambert as recognised in the building contract context by the House of Lords in the St Martins case. Dillon LJ considered that it did not matter that the council had had ownership all along, because it had been obvious to Wiltshier throughout that the development was being constructed for the benefit of the Council on the Council’s land. As will be seen, the extension of the St Martins case to a situation in which there had been no transfer of the property affected by the breach from the promisee to the third party was not disapproved of by the House of Lords in the Panatown case, so that, at least in the context of defective performance of building contracts, such a transfer appears to be no longer a necessary condition of the promisee’s right to recover damages in respect of the third party’s loss; although as will be discussed below in a very recent decision of the Supreme Court,13 there appears to have been some (obiter) discussion of whether this is correct. 43. Dillon L.J also pointed out that a claimant who has suffered no loss can also recover damages if he has made the contract as an agent or trustee for the third party, and he is enforcing their rights, there being a fiduciary relationship. In the Darlington case, there was an agreement in one of the relevant contracts entered into at the same time as the building contracts, namely clause 3(4) of a covenant agreement, that Morgan Grenfell should assign 12  1 W.L.R. 68. 13 Swynson Ltd v Lowick Rose  UKSC 32. Page 17 of 31 all its rights as against the Contractors to the Council either at the end of the construction period or whenever called upon to do so. The Council argued that Morgan Grenfell were constructive trustees for the Council of the benefit of any rights under or for breach of the building contracts against Wiltshier and as such Morgan Grenfell would been entitled, but for the assignment, to recover substantial damages for and on behalf of the Council. Accordingly, by the assignment, the Council was seeking to recover a head of loss which would have available to Morgan Grenfell and the burden on Wiltshier was not thereby increased because Morgan Grenfell would have been entitled, but for the assignment, to recover substantial damages as constructive trustees. Dillon L.J. and Waite L.J. held that in the light of clause 3(4) of the covenant agreement, if Morgan Grenfell had, before any assignment, sued in its own name for damages for breach of the building contracts, it would have held any damages as a constructive trustee for the Council and would have been accountable in equity; and Morgan Grenfell could have recovered from Wiltshier the losses of the Council, to whom, it stood, in that respect, in a fiduciary relationship. However, it should be noted that Dillon LJ appears to have considered that the fiduciary relationship arose because of the express provisions of clause 3(4) of the covenant agreement relating to the pre-agreed assignments of rights against the contractors. 44. In the Panatown case, the House of Lords considered the exception in the context of a case where a building contractor had entered into a contract with the employer for the construction of an office block and car park on a site which was owned by another company in the same ownership as the employer. The question was whether the employer was entitled to recover substantial damages from the contractors in respect of serious defects found in the building, notwithstanding that the employer had no proprietary interest in the building. Again, Lord Browne-Wilkinson emphasised that the majority in the St Martins case had extended the reasoning in The Albazero so as to hold that where A enters into a contract with B relating to property and it is envisaged by the parties that ownership of that property may be transferred to a third party, C, so that the consequences of any breach of contract will be suffered by C, A has a cause of action to recover from B the loss suffered by C. However, Lord BrowneWilkinson did not appear to consider the fact that in Panatown there was no transfer of property as undermining the application of the exception, although he had referred to this14 as being part of the basis of the decision in the St Martins case. However, Lord BrowneWilkinson considered the lack of any other remedy as being vital. Likewise, Lord Jauncey15 considered the exception as being one which provided a remedy where no other would be available for breach of a contract in circumstances where it was within “the contemplation of 14 At p 575. 15 At p 568. Page 18 of 31 the parties that breach by one is likely to cause loss to an identified or identifiable stranger to the contract” rather than to the other contracting party. Again, Lord Jauncey did not consider the fact that there had been no transfer of property as being sufficient to remove the case from Lord Browne-Wilkinson’s analysis in the St Martins case, and the same approach appears to have been taken by Lord Clyde. 45. However Lord Clyde and Lord Millett were of the view in the Panatown case that the exception was a solution imposed by the law, and not as arising from the supposed intention of the parties, who may in reality not have applied their minds to the point. Lord Clyde’s view was that the intention of the parties to benefit a third party or foresight that a breach of contract may cause loss to a third party may be unnecessary; and the exception was founded primarily upon a principle of law. In his judgment in the Panatown case16, Lord Clyde said: “The approach under the Albazero exception has been one of recognising an entitlement to sue by the innocent party to a contract which has been breached, where the innocent party is treated as suing on behalf of or for the benefit of some other person or persons, not parties to the contract, who have sustained loss as a result of the breach. In such a case, the innocent party to the contract is bound to account to the person suffering the loss for the damages which the former has recovered for the benefit of the latter.” But Lord Clyde also emphasised that if the parties had deliberately provided for a remedy for a third party, (which was actually the case on the facts of Panatown according to the majority) it can readily be concluded that they have intended to exclude the operation of this rule of law. (It should be noted, that foreseeability may be relevant of course to the question of damages under the rule in Hadley v Baxendale.) 46. In his dissenting judgment in Panatown, Lord Goff considered that the invocation of the rule in Dunlop v Lambert was inapposite and could not apply because there was not the transfer of ownership which the exception appeared to require. In his dissenting judgment, Lord Millett stated that the exception as applied in the Darlington case was now so great as to virtually repeal the usual rule of damages. He went on that he was far from saying that the Darlington case had been wrongly decided, but it is clear17 that he considered cases such as Darlington should be accommodated, if at all, within some wider principle independently of the rule in Dunlop v Lambert. 16 At p.532. 17 At p. 585 Page 19 of 31 Swynson Ltd v Lowick Rose 47. The Supreme Court has very recently considered this principle of transferred loss in Swynson Ltd v Lowick Rose  UKSC 32, a case relating to the making of loans. 48. Lord Sumption (with whom Lord Neuberger. Lord Clarke and Lord Hodge agreed) concluded that it was a limited exception to the general rule that a claimant can recover only loss which he has himself suffered. It applies where the known object of a transaction is to benefit a third party or a class of persons to which a third party belongs, and the anticipated effect of a breach of duty will be to cause loss to that third party. It has hitherto only been recognised in cases where the third party suffers loss as the intended transferee of the property affected by the breach. (This does not appear to be entirely correct: see the discussion of the Darlington case and the Panatown case above.) Lord Sumption pointed out that all the modern case law on the subject emphasised that it was driven by legal necessity 49. Lord Neuberger considered that the principle of transferred loss applied where there is a contract between A and B relating to A’s property which is subsequently acquired by C, and the principle enables A to recover damages for B’s breach of contract which injures the property, even though the loss is suffered by C. Lord Neuberger considered that the principle only applied in defined and limited circumstances, and he considered those to be (i) where at the time of making the contract with A, B would reasonably have anticipated that A would transfer the property to a person such as C and that that person would suffer loss if B breached the contract so that the contract can be seen as having been entered into by B partly for C’s benefit (again this does not appear to be entirely correct: see the discussion of the Darlington case and the Panatown case above); and (ii) there is nothing in the contract or the surrounding circumstances which negatives the conclusion that the principle should apply. 50. Lord Mance emphasised that the exception to date exists where it was in the contemplation of the parties when the contract was made that the property, the subject of the contract and the breach, would be transferred to or occupied by a third party, who would in consequence suffer the loss arising from its breach. (This formulation does appear to be legally correct and takes into account the Darlington and the Panatown cases.) The claimant is seen as suing on behalf of and for the benefit of the injured party and is bound to account. 51. On the facts of the particular case, the relevant duty was owed to X (Swynson) but as (a) the loss which had been suffered by the third party Y was not suffered by Y in his capacity as the owner of property and (b) it was no part of the object of the relevant contractual Page 20 of 31 engagements to benefit Y, the Supreme Court concluded that the exception which had been considered in The Albazero and applied in the later cases could not apply. Application to the facts of The Ocean Victory? 52. How, if at all, can these principles be applied to the facts of The Ocean Victory, assuming that there had been a breach of the safe port warranty? 53. It appears to follow at first sight that the line of authority dealing with the requisite future transfer of proprietary interests seen in Dunlop v Lambert, The Albazero and the St Martins case would not have been applicable on the facts of The Ocean Victory as there was no subsequent transfer of property following either the demise charter or the sub time charter; nor, when considering the Darlington case and Lord Mance’s comments in the Swynson case, was this a case where the property, the subject of the contract and the breach, was being occupied by a third party, who would in consequence suffer the loss arising from its breach. 54. However, the loss was suffered by the hull insurers, who would have gained proprietary rights in the vessel if they had accepted any notice of abandonment. Assuming that they did gain such rights, would it be possible to successfully argue that the exception considered in these cases should be applied or further extended because: (a) The sub time charter was between a disponent owner and a sub time charterer, it provided for a safe port warranty and presumably the sub time charterer must be taken as having contemplated that its breach of the safe port warranty was likely to also cause loss to third parties, including the head owner and the hull insurers of the Vessel? (b) Adapting Lord Browne-Wilkinson’s words as set out in paragraph 39 above, is it therefore proper to treat the parties to the sub-charter as having entered into it on the footing that the disponent owner would be entitled to enforce the contractual rights stemming from the safe port clause in the sub-charter for the benefit of those who suffered from defective performance but who under the terms of the sub charter contract could not acquire any right to hold the contract breaker liable for breach, and that included not only the head owner but also the hull insurers? (c) This remedy should be provided to the insurer because a rational legal system dealing with a string of charterparties containing similar safe port warranties but the type of joint insurance agreement contained in clause 12 of the head demise charter requires it, and the loss to the insurer ought to be compensated by the person who has caused it, namely the subcharterers? Page 21 of 31 55. There are difficulties with such an argument, for example: (a) Although the sub time charterer might expect that a head owner up the chain of contracts would suffer damage due to the breach, normally a sub time charterer would not be concerned with insurance arrangements made by the head owner or the demise charterer, and there is a risk, therefore, that the hull insurer might not fall within the envisaged class. The envisaged class might include a head owner and therefore the demise charterer might be able to sue on behalf of the head owner, but that does not assist, as the head owner had suffered no loss. However, it should be borne in mind that the lack of concern with insurance arrangements normally arises because the wrongdoer cannot invoke the fact that an insurer has paid out on the claim to argue that the claimant has suffered no loss, but where the court is concerned with breach of a safe port warranty, some of the most likely persons who would suffer damage are the hull insurers. (b) Further, it should also be noted, as set out above at paragraph 36, that Lord Diplock had raised the problems which would exist applying the exception in Dunlop v Lambert where there are two contracts of carriage with different terms. At least, on the facts of the The Ocean Victory, the unsafe port clause was the same in both the demise charter and the sub-charter; and although the demise charter provided for the issue of bills of lading (incorporating a Clause Paramount), the breach of a safe port warranty can perhaps be distinguished from Lord Diplock’s comments relating to cargo loss and damage. (c) Even if the insurer obtained proprietary rights by accepting a notice of abandonment, the sub-time charterer may not be considered to have reasonably anticipated that the property would be so transferred at the time of making the sub-charter. (d) Further, if the insurer in fact never obtained a proprietary interest, the argument appears to be well beyond the limits of the exception as presently formulated, as the insurer was never an occupier of the vessel. 56. In any event, a key issue for the Court will be whether there is any other way in which the loss undoubtedly suffered by the hull insurers as a result of the breach of the safe port warranty can be stopped from disappearing down a legal blackhole. Dillon L.J’s constructive trust approach 57. It does not appear possible to argue that the demise charterer entered into the sub-time charter as an agent of the head owner and/or the insurers. However, could it be argued that the demise charterer entered into the demise charter as a trustee of the head owner and/or the insurers, so that prior to the assignment to the insurers, had the demise charterer sued in its own name, it would have recovered damages as it was enforcing the rights of the beneficiary, namely the head owner and/or insurers, but would have held the damages as Page 22 of 31 constructive trustee for the insurers? In the Darlington case, the majority appear to have considered that the constructive trust arose out of the express provisions of clause 3(4) of the pre-existing covenant agreement relating to the assignment of Morgan Grenfell’s rights against the Contractor. However, in the Ocean Victory, there was no such express agreement that the demise charterer would assign its rights against the subcharterer to the head owner or the insurer. (Clause 20 of the demise charter provided only that the Charterers were not to assign the Charter nor sub-demise the Vessel except with the prior consent in writing of the Owners which was not to be unreasonably withheld.) It follows that the demise charterer does not appear to have been the constructive trustee of either the head owner or the insurer under some pre-existing arrangement. Lord Griffiths’ broader ground in the St Martins case 58. In his judgment in the St Martins case, Lord Griffiths proposed a second ground (usually referred to in the authorities as “the broader ground”), namely that the building contractor (B) was liable to the promisee (A) for more than nominal damages even though A did not own the land at the date of the breach, because A had in fact suffered loss, namely the loss of the value to him of the performance of the contract. Lord Griffiths was in favour therefore of a principle that, with contracts for the supply of work, labour and the supply of materials, the recovery of damages for breach of contract was not dependent or conditional on the claimant having a proprietary interest in the subject matter of the contract at the date of the breach. Further, it was irrelevant who actually paid for the repairs and where a tortfeasor’s liability was temporarily discharged by payment by a third party, on the claimant’s behalf, the claimant ought not to be prevented from suing the tortfeasor for damages. However, Lord Griffiths did consider that the court would wish to be satisfied that the repairs have been or were likely to be carried out; albeit that in Ruxley Electronics v Forsyth18 the House of Lords had accepted that the courts were not normally concerned with what a claimant does with his damages. 59. As discussed in Chitty at para 18-056, Lord Griffiths upheld the claim on the broader ground that the employer had suffered financial loss because he had to spend money to give him the benefit of the bargain which the defendant had promised but failed to deliver. The essence of Lord Griffiths’ reasoning is that the promisee recovers damages in respect of the loss which he himself suffers in ensuring that the third party receives the intended benefit; and this broader ground cannot apply where there is no practical possibility of curing the breach and so of securing the intended benefit to the third party. 18  A.C. 344 Page 23 of 31 60. As Lord Clyde put it in the Panatown case, this broader ground approach is based on the analysis that the fact that the innocent party did not receive the bargain for which he contracted is itself a loss. On this view, even though B might not be legally liable to C to provide him with the benefit which the performance of the contract by B would have provided, A has lost his “performance interest” and therefore will be entitled to substantial damages being, in Lord Griffiths’ view, the cost to A of providing C with the benefit. 61. Lord Griffiths was of the view that it should not matter that the innocent contracting party no longer had a proprietary interest in the property, the builders had breached their duty to perform the contract with sound materials and reasonable care and skill, and the innocent party was entitled to recover the cost of remedying the defect in the work as the normal measure of damages. He gave as an example, where the husband does not own the matrimonial house, rather his wife does, but he has all the other assets. Where the husband instructs repairs to the roof which are not properly carried out, it cannot be said that he has not suffered damage because he did not own the house. He placed the contract and he had to spend money to give him the benefit of the bargain which the defendant had promised but failed to deliver. 62. As to the fact that in the St Martins case, the innocent party had actually been reimbursed by the third party, Lord Griffiths considered that the court will wish to be satisfied that the repairs have been or are likely to be carried out, but if they are carried out, the cost of doing them must fall on the defendant who broke his contract. 63. In the St Martins case, Lord Browne-Wilkinson expressed sympathy with Lord Griffiths’ broader approach, but he declined to adopt this broader ground until the possible consequences of so doing had been examined by academic writers. It is also clear from the other judgments in the St Martins case that the rest of the House of Lords did not consider the point had been fully argued. 64. In the Panatown case, Lord Browne-Wilkinson commented that the issue had now been examined by academics, and no serious difficulties had been disclosed. Lord BrowneWilkinson went on to state that to apply the broader ground is to allow that the promisee had lost the value to him of the performance of the contract and this loss of the performance interest entitles the promisee to substantial damages. The critical factor is to determine what interest A (the promisee employer) had in the provision of the service for the third-party C. Page 24 of 31 65. In a dissenting judgment, Lord Goff also wished to apply Lord Griffiths’ broader approach, as did Lord Millett, again dissenting. Both doubted the existence of a general rule that restricts recovery of substantial damages to the party who has sustained actual loss. In summary, Lord Goff considered that the broader ground is concerned with the problem of whether a contracting party who contracts for the benefit of another should himself have an effective remedy: it is not concerned with privity. The necessity to protect the promisee’s performance interest is compelling because the damages are for failure to perform or to perform the contract properly. The promisee has suffered loss because it did not get what it bargained for. Panatown had contracted to have the building constructed to a certain standard and these contractual rights gave rise to a remedy in damages. 66. However, Lord Clyde in the Panatown case was still troubled by the validity of part of Lord Griffiths’ second and broader approach. He stated that: “If the loss is the disappointment at there not being provided what was contracted for, it seems to me difficult to measure that loss by consideration of the cost of repair. A more apt assessment of the compensation for the loss of what was expected should rather be the difference in value between what was contracted for and what was supplied. Secondly, the loss constituted by the supposed disappointment may well not include all the loss which the breach of contract caused. It may not be able to embrace consequential losses, or losses falling within the second head of Hadley v Baxendale. … There is no obligation on the successful claimant to account to anyone who may have sustained actual loss as a result of the faulty performance. Some further mechanism would then be required for the court to achieve the proper disposal of the monies awarded to avoid double jeopardy. Alternatively, in order to achieve an effective solution, it would seem to be necessary to add an obligation to account on the part of the person recovering the damages. But once that step is taken the approach begins to approximate to The Albazero exception. … The loss of an expectation which is here referred to seems to me to be coming very close to a way of describing a breach of contract. A breach … may cause loss, but is not in itself a loss in any meaningful sense. When one refers to a loss in the context of a breach of contract, one is in my view referring to the incidence of some personal or patrimonial damage. …. It seems to me that a more realistic and practical solution is to permit the contracting party to recover damages for the loss which he and a third party has suffered, being duly accountable to them in respect of their actual loss, than to construct a theoretical loss in law on the part of the contracting party, for which he may be under no duty to account to anyone since it is to be seen as his own loss. The solution is required where the law will not tolerate a loss caused by a breach of contract to go uncompensated through an absence of privity between the party suffering Page 25 of 31 the loss and the party causing it. In such a case, to avoid the legal black hole, the law will deem the innocent party to be claiming on behalf of himself and any others who have suffered loss. …” 67. Lord Jauncey was also not keen to encourage further development of the broader ground approach. 68. However, on the facts of the case in Panatown, the majority concluded that C in fact had a cause of action against B under a Duty of Care Deed which was not being pursued for some undisclosed reason, and the majority concluded therefore that whilst C enjoyed that right, A (the promisee employer) had not suffered any damage to its performance interests. 19 Any damage suffered by the third party could be redressed by the third party by his action against the promisor B. (As discussed in Chitty at para 18-061, in view of the existence of the rights under the Duty of Care Deed, the employer had no pecuniary interest in curing the defects in the contractor’s work, hence he had not suffered, nor would he would suffer, any loss of his own, in consequence of the contractors’ breach, and under the broader ground, it is in respect of his own (not of the third party’s) loss that the promisee recovers damages.) It followed that the majority in Panatown concluded that the promisee employer A could not recover damages. 69. As set out above and further discussed in Chitty at para 18-063, Lord Griffiths had been of the view that the promisee would only have the right to recover substantial damages in any event if the repairs had been or were likely to be carried out; or if the promisee had entered into a separate contract with the third party undertaking liability in respect of defects in the contractors’ work. Where neither of these requirements is satisfied, the result of allowing the promisee to recover the cost of repairs as damages for his own loss would be unattractive in that it would enable him to put the money in his own pocket without carrying out or paying for the repairs; the technique of requiring him to hold the damages for the third party applies on the authorities only where damages are recovered (under one of the exceptions to the general rule) in respect of the third party’s, not in respect of the promisee’s own loss. This is an area of considerable legal debate as can been seen from Chitty at paras 18-066 to 068. 70. The Supreme Court gave some consideration to this broader approach of Lord Griffiths in the Swynson case. Lord Sumption summarised Lord Griffiths’ argument as “this is that the developer [A] had in fact suffered the loss because he had his own interest in being able to 19 Note Lord Goff and Lord Millett dissenting Page 26 of 31 give the third party the benefit that the third party was intended to have. He could recover the cost of rectifying the defects because it represented what the developer would have to spend to give the third party that benefit, even though he had no legal liability to spend it. On the broader ground, the principle would not be limited to cases where the loss related to transferred property.” Lord Sumption went on that there was much to be said for the broader approach but it could not apply on the facts of Swynson. 71. Lord Mance (again in the Swynson case) described this approach as being that a contracting party might have an interest in performance enabling it to claim damages without proving actual loss, and he pointed out that the argument had only arisen to date in cases of contract for supply, whether of goods or services. In the St Martins case the suggestion was made where the claimant had actually incurred the costs of repair but was entitled to recover them from the associated company to which the building had been transferred before the breach. In the Panatown case, the property was from the outset owned by an associated company of the company which had entered into the contract, and the defects did not lead to the latter company incurring any outlay. Lord Mance pointed out that potential difficulties about the theory of performance interest are that it cannot prima facie embrace consequential loss suffered by the non-contracting person interested in the quality of the property or services; and that it is not clear whether or on what basis the contracting party may be liable to account to the company actually interested. 72. Lord Neuberger stated in Swynson that it is fair to say that the Panatown decision leaves a number of points open in this difficult area, one of those being the correctness of the broader approach, namely that B could be liable if A retains an interest in B performing his obligations even though A has transferred away the property. Application to the facts of the Ocean Victory? 73. In conclusion, it appears that there are still some judicial concerns about the validity of Lord Griffiths’ broader approach, and if this matter comes before the courts again, it is not easy to predict whether the courts would now adopt the broader principle approach in cases concerning contracts for the supply of work, labour and the supply of materials. 74. Assuming for these purposes that the broader ground is adopted, could the broader ground approach be applied outside the building contract cases to the case of a demise charter between associated companies, where a safe port warranty has been breached by the demise charterer, but the head owner had suffered no loss in respect of the actual hull value because of a joint insurance agreement, on the basis that if the demise charterer contracts Page 27 of 31 with the head owner that the demise charterer will only send the vessel to safe ports, and the demise charterer sends the vessel to an unsafe port and it is lost, the head owner has suffered a loss of bargain or of expectation interest? This argument is unlikely to succeed because of the effect of the joint insurance agreement as found by the majority in The Ocean Victory, namely that it is understood implicitly that there will be no claim by head owners against demise charterer for damages for loss of the hull and that would include loss of bargain or of expectation interest. 75. However, what of the position in the sub-time charter where a safe port warranty has been breached by the time charterer, but the demise charterer had suffered no loss up the line because of joint insurance? Can it be argued that if the demise charterer contracts with the time charterer that the time charterer will only send the vessel to safe ports, and the time charterer sends the vessel to an unsafe port and it is damaged or lost, the demise charterer has suffered a loss of bargain or of expectation interest? As the insurer had taken an assignment of the demise charterer’s claim, there will be no problem about the demise charterer accounting to the insurers. Such an argument might well succeed in the sub time charter claim in respect of repair costs caused by the breach of the warranty which would form part of the demise charterer’s expectation and loss, albeit actually paid by the insurers. But, the argument is far more difficult where as a result of the breach of warranty there is an actual, constructive or agreed total loss of the hull, as recovering the value of the hull does not form part of the demise charterer’s expectation nor his loss; and on the broader ground approach it is the loss of the demise charterer which is being considered. The demise charterer only ever had a repair and maintenance obligation under the demise charter and when the vessel is lost, the demise charter terminates as of the date of such loss. 76. Further, as discussed in Chitty at para 18-056 (see above), the essence of Lord Griffiths’ reasoning is that the promisee recovers damages in respect of the loss which he himself suffers in ensuring that the third party receives the intended benefit, and therefore the editors consider that the broader ground cannot apply where there is no practical possibility of curing the breach and so of securing the intended benefit to the third party. On the facts of The Ocean Victory, where there has been a total loss, it could be said that there is no practical possibility of curing any breach and so of securing the intended benefit to the third party. Page 28 of 31 The decisions in Offer-Hoar v Larkstore Ltd and Landfast (Anglia) Ltd v Cameron Taylor One Limited 77. Further, as discussed in Chitty at paras 18-059, 18-064, 18-065, 19-076, and 19-077, in Offer-Hoar v Larkstore Ltd20, the claimant assignee of a cause of action was allowed to recover damages from the provider of a suitability survey report of land where the assignor landowner (to whom the report had been given) was no longer the owner of the land at the time when the relevant damage caused by a landslip was suffered because the assignor landowner had already sold to the claimant. The surveyors argued that the claimant could recover no more than the loss which could have been recovered as between the original landowner and the surveyors at the time of the assignment and that the landowner at that time had no right to claim substantial damages since he had ceased to own the site before the assignment and before the landslip. The argument was rejected by the Court of Appeal on the ground that the assignor had acquired a cause of action for breach of contract against the surveyor at the time when the report was produced and could have recovered substantial damages for the landslip if the landowner had remained the owner. The principle that an assignee cannot recover more than the assignor did not apply as the purpose of that rule was to protect the debtor from having to pay more to the assignee than he would have had to pay the assignor had there been no assignment. The principle is not intended to enable the contract breaker or debtor to escape all legal liability for breach of contract. As the surveyor’s exposure to the damages claimed was the consequence of the landslip and was not the consequence of the assignment, the assignee standing in the shoes of the assignor could recover substantial damages from the surveyor. 78. It follows applying this reasoning to The Ocean Victory that the cause of action in relation to the breach of the safe port warranty in both the head and the sub-time charter had been assigned to the insurers, and therefore the insurers as assignee would have been entitled to recover (a) those damages which the head owner could have recovered from the demise charterer; and (b) those damages which the demise charterer could have recovered from the sub-charterer if there had been no assignments. However, in respect of (a), the demise charterer had no liability under the head charter to pay for the value of the lost hull. In respect of (b), although, an argument might succeed in the sub time charter claim in respect of any repair costs caused by the breach of the warranty which would form part of the demise charterer’s expectation and loss; the argument is far more difficult where as a result of the breach of warranty there is an actual, constructive or agreed total loss of the hull, as recovering the value of the hull does not form part of the demise charterer’s expectation nor 20  1 W.L.R 2926. Page 29 of 31 his loss. The Court of Appeal in the Offer-Hoar case had said on the facts of that case that, in applying the principle that the assignee cannot recover more than the assignor, one should be asking what damages the assignor could itself have recovered had there been no assignment and had there been no transfer of the land to the assignee: see Chitty at para 19-076. In The Ocean Victory had there been no assignment, the demise charterer had no apparent claim in contract for the value of the hull. 79. In Chitty at para 18-064, the editors consider whether, in the light of the authorities applying and developing The Albazero, the law should take account of the possibility that, unless the wrongdoing contracting party was held liable for substantial damages to the other contracting party, then he might be under no liability at all, and there would be a legal black hole. The editors go on that if the conditions in which the innocent contracting party can recover damages in respect of his own loss under the broader ground are not satisfied, then the lack of any such remedy should be a ground for allowing the innocent contracting party to claim damages in respect of the third party’s loss. The editors state that the need to avoid the legal black hole should generate this remedy, and that this view is also supported by the Offer-Hoar case. They point to the fact that Mummery L.J. justified his conclusion by saying that if the surveyors’ contrary argument had succeeded, then they would have been liable to no-one for its breach, a conclusion which was evidently regarded as reducing that argument ad absurdum. Rix L.J. similarly said that the courts were willing to develop the law to prevent the loss caused by the defendant’s breach from disappearing into the proverbial black hole, and that the courts were “anxious to see, if possible, that where a real loss has been suffered, then there should, if at all possible, be a real remedy which directs recovery from the defendant to the party which has suffered the loss.” Rix L.J. went on that the result of letting the person with the cause of action recover damages in respect of the third party’s loss would also have the advantage of ensuring that these damages were to be held for the third party’s account. 80. Further, Chitty at para 18-059 continues that there is also judicial support for the view that if an assignee C has itself suffered loss as a result of the promisor’s B breach of its contract with the assignor A, then it would be arguable that the assignee C could recover damages from B in respect of that loss, even if no loss had been suffered by A: see the comments of Akenhead J in Landfast (Anglia) Ltd v Cameron Taylor One  EWHC 343 discussing the decision in Offer-Hoar case but only in the context of a summary judgment application. Akenhead J emphasised that in the Offer-Hoar case, the cause of action had been assigned, not an assignment of loss. The assignment included the remedy in damages which was not limited to the loss suffered as at the date of the accrual of the cause of action or at Page 30 of 31 any particular time thereafter. He referred to there being a black hole where the assignor assigns a cause of action but has not suffered loss and where the assignee has suffered the loss in relation to the assigned cause of action. He considered that the Offer-Hoar decision suggested that the assignment of the cause of action, at least in contract, may or may not necessarily carry any accrued losses with it. He went on that the cause of action in the Landfast case was breach of contract, Anglia (the assignee) could argue properly that it had suffered loss, and it seemed to the judge that it was arguably immaterial that Landfast (the assignor) suffered no loss. 81. Applying this approach to the facts of the Ocean Victory, given the joint insurance arrangements in the head charter, the relevant promisor appears to be the sub-time charterer and the relevant assignor is the demise charterer, with the insurer as the relevant assignee. The sub-time charterer is in breach, the cause of action has been assigned to the insurer and the insurer has suffered loss namely paying the assured for the total loss. However, this will then be a case on the facts where the assignee is recovering more from the sub-charterer than the assignor could have done had there been no assignment. But it will also be a case where there is clear legal black hole. Conclusion 82. If Rix LJ’s comments in the Offer-Hoar case that the courts are willing to develop remedies in such circumstances are correct, the only realistic remedy to seek to develop on the assumed facts of The Ocean Victory (whether or not the hull insurers had obtained proprietary rights or not and whether or not the sub-time charterer may be considered to have reasonably anticipated that the property would be so transferred to the hull insurers at the time of making the sub-charter) appears to be as follows: (a) The sub- charter was between a disponent owner and a sub time charterer, it provided for a safe port warranty and the sub time charterer must be taken as having contemplated that its breach of the safe port warranty was likely to also cause loss to third parties, including the head owner and the hull insurers. In this regard, it should be noted that the lack of concern with insurance arrangements normally arises because the wrongdoer cannot invoke the fact that the insurer has paid out on the claim to argue that the claimant has suffered no loss, but where the court is concerned with breach of a safe port warranty, some of the most likely persons who would suffer damage are the hull insurers. (b) It is therefore proper to treat the parties to the sub charter as having entered into the sub charter on the footing that the disponent owner would be entitled to enforce the contractual rights stemming from the safe port clause in the sub-charter for the benefit of those who suffered as a result of its breach but who under the terms of the sub charter contract could Page 31 of 31 not acquire any right to hold the contract breaker liable for breach, and that included not only the head owner but also, where these types of joint insurance measures had been adopted in the head charter, the hull insurers. (c) The breach of a safe port warranty case should be distinguished from Lord Diplock’s comments relating to cargo loss and damage cases where there is also a bill of lading contract. (d) The loss to the hull insurers ought to be compensated by the person who has caused it, namely the sub-charterers (who will pass the claim down the line to the ultimate charterer), because otherwise the claim for an undoubted breach would disappear into the proverbial black hole. This remedy should be provided to the insurer because a rational legal system requires it. 83. The likely outcome of this argument is not easy to predict, particularly in the light of the very recent comments of the Supreme Court in Swynson Ltd v Lowick Rose on the principle of transferred loss, where it was emphasised that there was only a limited exception to the general rule that a claimant can recover only loss which he has himself suffered. However, in all of the leading cases discussed above, the courts have shown themselves to be primarily concerned to avoid legal black holes if at all possible, and the courts might well decide in future cases where these types of joint insurance arrangements occur that the exception should be further suitably extended. © ELIZABETH BLACKBURN QC © ANDREW DINSMORE JUNE 2017 ST PHILIPS STONE BIRMINGHAM | 55 TEMPLE ROW | BIRMINGHAM | B2 5LS LEEDS | 41 PARK SQUARE | LEEDS | LS1 2NP LONDON | 4 FIELD COURT | LONDON | WC1R 5EF [email protected] [email protected]