In Golden Strait Corporation v Nippon Yusen Kubishika Kaisha, the House of Lords considered whether events that occurred after a repudiatory breach of contract could be considered in assessing the damages awarded as a result of the breach.

By a majority of three to two, the Lords held that the respondent could rely on an event which occurred after the repudiation of the contract (but before the assessment of damages) which, had the contract still been in force, would have had the effect of significantly reducing its term. As such, the accurate assessment of damages was held to outweigh considerations of certainty and finality.

Case Name and Citation

Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] UKHL 12. Date of hearing 14-15 February 2007

Key facts

A Liberian company, the Golden Strait Corporation, were the owners of the tanker Golden Victory. On 10 July 1998, they entered into an agreement (a ‘charterparty’) to charter the tanker to Nippon Yusen Kubishika Kaisha for a period of 7 years. The terms of the charterparty provided for the payment by the charterers of a minimum guaranteed base charter hire rate per day which was to increase over the term of the charter, but would reduce if market rates should fall below a specified level. In addition, the owners were also to receive a share of the profits earned by the charterers.

Clause 33 of the charterparty provided both the owners and the charterer with the right to cancel the charter if war or hostilities broke out between any two or more of a number of countries, including the United States of America, the United Kingdom and Iraq.

On 14 December 2001, with almost 4 years of the charter to run, the charterers repudiated the contract and redelivered the vessel to the owners. The owners accepted the repudiation on 17 December 2001 and made a claim for damages against the charterers, which was referred to arbitration.

The arbitrator determined the issues in favour of the owners, but on 20 March 2003, before an assessment of the quantum of damages payable by the charterers to the owners had been made, the Second Gulf War broke out. The charterers contended that, had the charter still been in operation on 20 March 2003, they would have exercised their right to cancel it under clause 33 of the charterparty, and that therefore the damages should be assessed based on the period from 17 December 2001 (the date of acceptance of the repudiation) to 20 March 2003 (the outbreak of war). The owners disagreed, and argued that the assessment of damages should be based on the value of their rights under the charterparty as at 17 December 2001, and therefore take into account the entire 7 year term. They suggested that the assessment could take into account the possibility (assessed as at 17 December 2001) that events might occur which would allow either party to cancel the charter under clause 33, but should not take account of the actual occurrence of any events subsequent to 17 December 2001.

The arbitrator decided the issue in favour of the charterers, and the owners appealed on a point of law to the High Court. In February 2005 Justice Langley dismissed their appeal. The owners then appealed to the Court of Appeal, and in October 2005, Auld and Tuckey LJJ and Lord Mance unanimously dismissed the appeal. The owners then appealed to the House of Lords.

House of Lords Decision

The House of Lords upheld the decision of the Court of Appeal by a three to two majority (Lord Bingham and Lord Walker dissenting) and dismissed the owners’ appeal.

The majority held that achieving an accurate assessment of damages based on the losses that actually occurred was more important than considerations of contractual certainty and finality. They considered the well-established principle that damages are intended to put a party who has suffered loss due to a breach of contract in the same position as if the contract had been fully performed. While these damages are usually assessed as at the date of breach, the majority of the Lords held that this was not an absolute requirement.

In this case, since the owners could go out into the market and obtain a replacement charterer for the vessel in order to mitigate their loss, it was held that the charter rate at which the loss was to be calculated should be fixed at, or shortly after, the date of repudiation. However, the inclusion in the charterparty of clause 33 meant that the duration of the charter would always have been uncertain, as it was based on the occurrence (or otherwise) of a war. In this situation, where a contract contains a contingent provision based on future events, it was held that damages should be assessed by considering the course of these events as at the date of the assessment, not at the date of the breach. As Lord Brown stated:

“Must the judge really shut his eyes to the known facts and speculate how matters might have looked at some earlier date? Again, not without compelling reason and none appears to me.” (paragraph 78)

The Lords therefore dismissed the appeal, holding that that the arbitrator had been correct in determining that the relevant period over which to consider damages was from the repudiation on 17 December 2001 to the outbreak of war on 20 March 2003.

The dissenting opinions of Lord Bingham and Lord Walker were given on the basis that certainty was of vital importance in commercial transactions, and that this was undermined by allowing later events to influence the determination of damages. In response to these issues, Lord Scott stated that while certainty was very important, “…it is not a principle and must give way to principle”, while Lord Carswell stated that: “…considerations of certainty and finality have in this case to yield to the greater importance of achieving an accurate assessment of the damages based on the loss actually incurred.”
Commentary and Practical Implications

While this case concerned a shipping charter agreement, its implications are more wide reaching and of general application to the assessment of damages in cases of repudiatory breach.

A point made by Lord Bingham in his dissenting judgment is that had the charterers promptly honoured their obligation to pay damages the matter would have been settled well before the outbreak of the war, with the owners consequently receiving a much larger award than they eventually did. This could perhaps encourage repudiating parties who have a future event contingent provision in their favour to try to delay any proceedings as much as possible in the hope that the necessary set of circumstances arise. In his verdict with the majority, Lord Carswell recognised this danger but stated that “…courts and arbitrators have the ability to prevent such abuse if application is made to them to proceed with dispatch.”
In the light of this case, parties who are drafting contracts with clauses that are conditional on future events must consider that these may have an effect on the assessment of damages in the case of repudiation, even if the repudiation takes place before such events have in fact occurred.