In two recent cases the House of Lords has addressed questions regarding the assessment and quantum of damages in repudiated charterparties. On both occasions, they have found in favour of the charterers. In doing so, it seems that the Lords have narrowed the test for assessment of contractual damages, and, as a result, there is a real concern amongst shipowners that their charterparties may not afford them the level of protection they had previously expected.  

Golden Strait Corporation v Nippon Tusen Kubishka Kaisha [2007] UKHL 12 (The Golden Victory)

The issue: should subsequent events impact on damages?  

In The Golden Victory the issue to be determined by the House of Lords was: “Where damages for an accepted repudiation of a contract are claimed, in what circumstances can the party in breach rely on subsequent events to show that the contractual rights which have been lost would have been rendered either less valuable or valueless?” Following the general rule of English law that damages for breach of contract are assessed as at the date of breach, the usual reaction to this question is a resounding no. However, by a majority of three to two, the House of Lords found that the respondent charterers could rely on a subsequent event to show that the appellant shipowner’s contractual rights had been rendered less valuable.  

The background facts

The parties entered into a charterparty in July 1998 for a period of seven years. The charterparty contained a clause which afforded the parties liberty to cancel should hostilities break out between any two of the countries listed, which included the US, the UK and Iraq. In December 2001, for commercial reasons the charterers repudiated the charterparty and tendered redelivery of the vessel, which the owners accepted. The matter proceeded to arbitration over the amount of damages payable by the Charterers. The arbitrator found that the earliest date for contractual redelivery would have been 6 December 2005, and therefore damages should be calculated up to that date. Following an unsuccessful appeal of the arbitration award, the charterers offered to take redelivery of the ship for the remainder of the charterparty term and pay damages for the repudiation period. The owners rejected this offer and the matter returned to arbitration, where it was determined that the commencement of hostilities against Iraq on 20 March 2003 would have allowed either party to terminate the charterparty, and therefore no damages were recoverable by the owners for the balance of the charter period, after 21 March 2003.  

‘Windfall’ amounts excluded from damages

The owners appealed on the issue of whether, when damages for an accepted repudiation of a contract were claimed, the loss could be measured at a date as near as practicable to the acceptance of repudiation where there was a suspensive condition (i.e. - the right to terminate on outbreak of war) which might affect the ultimate duration of the charter, but where it could not be forecast with any certainty whether or when it would operate. The Lords found in favour of the charterers and held that the owners’ claim for compensation up to December 2005 offended the compensatory principle, as it was seeking compensation exceeding the value of the contractual benefits of which it was deprived. The compensatory principle states that the injured party should only be put back into the position he would have been in had the charterparty been performed and he should not receive ‘windfall’ amounts as damages. Consequently, had the charterparty been performed as agreed, it would have terminated in 2003, on outbreak of war, and the owners would not have been rewarded for their performance between that date and the end of the charterparty term. Accordingly, any award for damages could not include such a sum.  

What does this mean for shipowners?

Have shipowners considered suspensive clauses in their charterparties in this light before? One would assume not, as such clauses are negotiated with an entirely different purpose in mind; namely the distribution of risk where situations arise that are outside the parties’ control. Allowing a party in repudiatory breach to use such a clause to his advantage by narrowing the assessment of damages offends the principles of certainty and finality long upheld by English law.  

Chartering a new course?

Previous decisions have considered the effect of subsequent events on damages. One exception to the traditional rule was upheld in The Mihalis Angelos1, where the charterers were given the option to cancel the charter if the vessel was not at the loading port, on a certain date. Three days prior to the date the vessel was required to be at the loading port the charterers gave notice cancelling the charter as it was clear that it was impossible that the vessel would arrive on time as it had been delayed elsewhere. The Court of Appeal held that although the charterers were in repudiatory breach, the owners had not suffered any damage because it was clear that they too would have been in breach of contract before the date that the vessel was required in port, i.e. it was inevitable that the supervening event was going to happen. However the minority distinguished this case from the facts in The Golden Victory, as it only applied where subsequent events were, at the date of crystallisation, inevitable or predestined. In December 2001 there was only a mere possibility that the Second Gulf War would become a reality, so the same cannot be said in respect of The Golden Victory.  

What will the decision mean in practice?

This decision will encourage parties who are in repudiatory breach to attempt to delay the assessment of damages in the hope that a suspensive condition in the contract might come into operation. This “golden opportunity” for charterers presents a real risk for shipowners.  

Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48 (The Achilleas)

A claim for late redelivery

The decision in The Achilleas concerned a claim for late redelivery under a charterparty. The Lords considered whether the owners were entitled to recover damages in respect of the entire period of a subsequent fixture which had to be renegotiated at a less advantageous rate as a result of the late delivery under the new fixture. At both first instance and in the Court of Appeal the loss was considered to be a “not unlikely” consequence of the charterers’ breach of contract, following the well known principles of remoteness established in Hadley v Baxendale2, Victoria Laundry3 and The Heron II4. As both parties were in the same business this reasoning seems logical: the time charterer of a vessel knows that a new fixture is very likely to be entered into by the shipowner to follow on as closely as possible from the termination of the preceding fixture. However, the Lords took a different view and held that the loss was too remote to recover.  

The background facts

The parties entered into a charterparty in January 2003 for a period of five to seven months, extended by an addendum in September 2003 for a further five to seven months. The latest date for redelivery was 2 May 2004. By April 2004 charter rates had more than doubled compared with the previous September. The charterers gave notice of redelivery in April 2004, and as such (and as is quite normal) the owners fixed the vessel for a new four to six month charterparty with another charterer. However, the charterers failed to redeliver the vessel on time as it was delayed under a subcharter. As the owners were in breach of the delivery date under the few fixture, the shipowners had to renegotiate rates as by this time the market had fallen sharply. The owners claimed damages based on the difference between the rate originally agreed with the new charterers and the renegotiated rate (in the amount of US$1.365 million).  

Should the general rules apply?

A sense of logic suggests that the owners should be within their rights to recover such damages because this loss was undoubtedly caused by the charterers’ failure to redeliver on time. Furthermore, under English law there is a general rule regarding the quantification of damages: they should put the injured party in the same position as he would have been in but for the breach of contract. Were this general rule to be the only rule applicable to the quantification of damages then, as the net loss suffered by the owners as a result of charterer’s breach of contract was agreed to amount to US$1.365 million, that would have been the end of the matter. But, as we shall see, the matter was not so straightforward.  

Quantum of damages not to be unjust to paying party

The arbitration tribunal, the Court of First Instance and the Court of Appeal found that in the shipping market it was a known, recognised and accepted hazard of late redelivery that shipowners might be placed in breach of subsequent fixtures, and that market rates go up and down quite rapidly. Therefore, the recovery of the lost profits complained of fell squarely within the remit of Hadley v Baxendale. However, the Lords unanimously allowed the appeal brought by the charterers because, in certain circumstances, application of the general rule on quantification of damages without limitation would be unjust to the paying party. They found that the test which the tribunal applied was too crude, as the parties were held not to have intended that a relatively short delay in redelivery should expose charterers to the extent of the losses claimed.  

A new approach to remoteness?

Lord Hoffman and Lord Hope appeared to propose a new approach to the remoteness test by asking whether the defendant had “intended to assume responsibility” for the particular type of loss in question, which takes into account the commercial background of the case. On this basis the loss of profits claimed were held not to be “in the ordinary course of things” as a result of the late redelivery, because the charterers would not have contemplated that the owners would incur the loss of profits claimed by the owners. In fact such loss was regarded as being the result of extremely volatile market conditions which would have been regarded by “objectively reasonable parties” as being an “unusual occurrence”, and therefore outside the scope of recovery laid down in Hadley v Baxendale.  

Should shipowners bear the risk?

It is certainly arguable whether or not the Lords reached the right decision, particularly as it is notoriously difficult to ascertain the precise intentions of the parties in every circumstance at the time of execution of a contract. Even so, why should it be shipowners that bear the risk of losing out on profits where the charterers are partially to blame? Not only is it a principle of law that damages should seek to put the injured party in the same position as he would have been in but for the breach of contract (subject to the rules on remoteness), but it is also a principle of law that the amount of the loss should not preclude it from being recoverable. In fact, it is the type of loss, rather than the extent of loss, which must be foreseen with the requisite degree of likelihood5.  

Shipowners would obviously maintain that parties entering into charterparties are well aware of the risk of breach of subsequent fixtures as a result of redelivery: it is common (and logical commercial) practice for shipowners to arrange subsequent fixtures towards the end of a current charterparty. Volatility in rates is also not unknown in shipping markets. Therefore, the type of loss claimed by the shipowners should be recoverable, regardless of whether market conditions exaggerate this loss. If market conditions were poor, the shipowner would be at the mercy of those markets in organising a follow on charterparty and would have to accept this. Why, therefore, should they lose out on a good bargain when the cause of the loss is the default of the charterer?  

Certainty of principle

The law now has a conclusive stance on this issue in that it considers that the loss of a follow on fixture (or a loss incurred due to a renegotiation in rates) is not recoverable; rather, damages are limited to the difference between the market and the charter rates for the period of the overrun. In this sense a long established principle has been restated and the law in this area therefore retains some certainty. However, it should not be overlooked that this may well give rise to circumstances where shipowners will be confined to a recovery which is significantly less than their true loss.  

Conclusion

Taking an overarching view of both decisions it seems that the House of Lords has failed, to the detriment of shipowners, to take a consistent approach to the assessment of damages. On the one hand the Lords have upheld an established principle of law, favouring legal certainty rather than straying into unchartered territory (The Achilleas). Whilst on the other hand they have elected to allow certainty to yield to the greater importance of achieving an assessment of damages and compensation which more accurately reflects actual loss (The Golden Victory). Where difficult questions in relation to quantification of damages arise, shipowners should be aware that the principles developed by the Courts lean towards protecting the charterers. Owners will therefore need to take more care to ensure that their charterparties actually protect them in circumstances where they had previously expected to be fully protected and more accurately reflect the loss they expect to be protected should the Charterers breach a charterparty.