Court of Appeal rules on damages for late re-delivery

The Court of Appeal’s decision in Transfield Shipping Inc v Mercator Shipping Inc [2007] EWCA Civ 901 marks a significant change in the way that damages are assessed in respect of the late redelivery of chartered vessels.

In the past, damages have been limited to the market-based measure of damages, calculated as the difference between the charter rate and the market rate for the overrun period ie from the due redelivery date until actual redelivery. However in Transfield, the Court allowed the claimant to assess the level of damages by reference to the disadvantageous renegotiation of a subsequent charter.

This appears to be the first case to use an alternative assessment of damages in a late redelivery case and as such may be useful to potential claimants wishing to depart from the traditional assessment method of damages, especially in sale or carriage of goods cases.

In this case the defendant (charterers) appealed against the first instance decision (on appeal from an arbitration award) that the claimant (shipowners) were entitled to the loss of profit from a subsequent charter as damages for late redelivery of a time chartered vessel by the defendant.

The defendant gave the claimant successive notices of redelivery on the time charter (on an amended NYPE 1946 form) and on the strength of these notices the claimant fixed the vessel for a new charter. When it became apparent that the vessel was going to be redelivered later than scheduled (it was re-delivered over 8 days late) the claimant agreed an extension of the cancellation date with the new charterer in return for a reduction in the hire rate of $8,000 per day over the period of the new charter (the market having dropped swiftly in the interim).

The rule in Hadley v Baxendale (1854) 9 Exch 341 is that a claimant may recover damages where the breach of contract is:

(a) “such as may fairly and reasonably be considered either arising naturally i.e. according to the usual course of things from such breach of contract itself” (the first limb); or

(b) “such as may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract as the probable result of the breach of it” (the second limb).

The second limb requires the claimant to prove special knowledge of the loss claimed (not applicable in this case) and the first does not.

In the context of late redelivery damages have previously been limited to the market-based measure of damages, calculated as the difference between the charter rate and the market rate for the overrun period i.e. from the due redelivery date until actual redelivery...

The defendant argued that the claimant should only be entitled to the market-based measure of damages. However the arbitrators held by a majority that the claimant’s loss of the fixure was caused by the defendant’s late redelivery and the claimant’s loss was of a nature which could have been reasonably contemplated by the defendant at the time of contracting and was therefore not too remote under the first limb of Hadley v Baxendale. The Court of Appeal judgement considers the authorities on late redelivery of chartered vessels which included a number of statements by respected commercial judges to the effect that the market-based measure of damages is the appropriate measure. None of those cases involved recoverability of lost profits and could therefore be distinguished from the present case. It was therefore held that the loss of profit due to the renegotiation of the subsequent fixture was recoverable.