Halani Lloyd, an Associate, and Matt Evans, a Trainee, both in our Dry Shipping Group, comment on a recent LMAA arbitration, in which the Tribunal was asked to consider two principles fundamental to English contract law: the minimum performance principle and the duty to mitigate loss.

The case concerned a Contract of Affreightment (“COA”) where Charterers failed to provide two cargoes within the required shipment periods. Charterers did not dispute liability but claimed that the quantum of their liability was far below that alleged by Owners.

The Minimum Performance Principle

The parties accepted that Owners’ losses (ie their profits lost on each shipment) were to be calculated by taking the difference between the COA freight rate and the market rate for each shipment. This raised two critical questions: against which voyage and which dates were Owners’ losses to be assessed? The charterparty provided options for both load and discharge ports and also required Charterers to nominate a laycan spread within each shipment period.

Charterers argued that the minimum performance principle dictated the answers to these questions. By way of example, in Kaye Steam Navigation v Barnett (1932) 48 TLR 440, Owners’ damages were assessed on the basis that the cargo owner, who was in breach, would have opted to discharge at the port that would have put Owners to the greatest expense pursuant to the minimum performance principle. Applying the same principle here, Charterers said that Owners’ losses should be assessed on the basis that Charterers would have nominated the voyage and laycan period for each shipment that was least favourable to Owners.

Ultimately, the minimum performance principle was held to determine which voyage Owners’ losses should be assessed against. A less straightforward issue was whether the principle also applied to the question of dates. Owners argued that the principle did not apply because Charterers did not have any optional methods of performance but simply one obligation: to nominate a laycan within the shipment period. Alternatively, Owners argued that the relevant time to assess damages was the time of Charterers’ breach on each shipment. It was at that time, Owners contended, that they as Owners had to go into the market to find a replacement cargo and mitigate their losses. The Tribunal preferred Owners’ submissions.

Mitigation

The mitigation aspect of the case arose as a result of the following facts. After Charterers failed to declare one shipment, Charterers proposed a possible alternative fixture to Owners requiring, however, a short extension to the laycan. Evidence was given that the market freight rate was much lower at that time than the COA rate, although the market was rising. However, Owners refused the extension sought.

Charterers argued that Owners had thereby failed to mitigate their losses. Had they accepted Charterers’ proposal, Charterers contended that Owners would have sustained minimal, if any, losses in respect of the shipment. Owners alleged that their refusal of Charterers’ offer was reasonable given the volatility of the market at the time. Owners further argued that Charterers’ proposal had been too vague and was not in fact one of mitigation but of substitution or settlement.

The Tribunal rejected these arguments, finding that Owners had indeed failed to mitigate their losses. The Tribunal noted that if Owners had really been concerned with the volatility of the market, they could have fixed “on subjects”. In the event, Owners’ losses on the shipment were calculated by deducting the freight that Owners would have earned had they accepted Charterers’ offer from the profits that Owners would have earned had Charterers performed the shipment under the COA.

Conclusions

This arbitration follows a number of recent, high profile cases on damages issues such as The ACHILLEAS [2007] All ER (D) 32 and The GOLDEN VICTORY [2007] 2 Lloyd’s Rep 164. The decision reinforces, first, the need to consider carefully and cautiously any alternative offers put by a contractual counterparty in breach. Of greater interest, particularly in light of the paucity of authority directly on point, is the question as to the relevant time for assessing damages where charterers fail to nominate a shipment within the required spread; in particular, what application, if any, the minimum performance principle will have in this context. No doubt this issue is one to watch in future cases.