The compensatory principle explored
The High Court of England & Wales has reviewed the application of the standard compensatory principle in common law to voyage charters repudiated by their charterers, in an appeal from an arbitral Award.
The compensatory principle for damages for breach of contract is that the law will attempt to put the injured party back in the position they would have been in, had the contract been performed.
The Court rejected the appeal, confirming the Tribunal's award of damages for loss of profit after the date the original charterparty would have ended, had it been performed.
The vessel "MTM HONG KONG" was chartered by MT Maritime Management BV as Owners to Louis Dreyfus Commodities Suisse SA as Charterers under a Charterparty dated 6 January 2011 on an amended VEGOIL form. The loading port range was South America, and the discharge port range was Gibraltar to Rotterdam in Europe.
The Charterparty was terminated on 21 January 2011 whilst the Vessel was on her way towards the loading range in South America.
The Vessel continued to South America, arriving in Uruguay on 2 February 2011.
The Vessel was only fixed on 24 February 2011, for a voyage from San Lorenzo, Argentina to Rotterdam. This fixture was completed on 12 April 2011.
The Tribunal found that:
Charterers had repudiated the Charterparty on 21 January 2011. The original voyage would have taken 43.6 days to complete, i.e. until 17 March 2011. If that voyage had been completed, the Vessel would have carried a cargo from the Baltic to the USA, followed by a cargo from the USA to Europe.
Owners claimed the difference between:
The profit the Vessel would have earned if the original voyage had been performed, as well as the next two voyages; and The profit actually earned by the Vessel under the replacement fixture from San Lorenzo to Rotterdam.
Charterers argued that Owners were only entitled to profit until the estimated end date of the original voyage.
The Tribunal found in Owners' favour, and Charterers applied for leave to appeal.
High Court Judgment
Charterers were granted leave to appeal against the Award on the following question of law:
"If a voyage charter is repudiated by charterers in circumstances where the substitute employment begins after the contract voyage would have begun, and ends after the contract voyage would have ended, should damages be assessed by reference to the vessel's (actual and hypothetical) earnings up to the end of the contract voyage, or such earnings up to the end of the substitute employment?"
The Court rejected the appeal, and found that damages should be assessed up to the end of the substitute employment, in order to put Owners (as the innocent party) in the same position as if the Charterparty had been performed.
Charterers relied heavily on the 19th century case of Smith v M'Guire, in which damages were limited to the difference between the freight which would have been earned, had the charter been performed, and that which was earned until the employment under the charter would have ended, less any expenses which would have been incurred.
However, the Court held that this was simply the starting position – and that there were three main factors which justified a departure from that position in this case:
Owners had acted reasonably in sending the Vessel to South America, despite the long delay in fixing her; There was no suggestion that the losses claimed were too remote; and It was possible on the facts of the case to predict the Vessel's immediate future employment, had the original charter been performed. As a result "the damages could be assessed with a reasonable degree of confidence".
In coming to its decision, the Court completed a helpful and comprehensive review of the authorities on damages for repudiation of a voyage charter.
However, somewhat disappointingly, the Court was unable to distil any hard set of rules from the authorities. Indeed, the Court was at pains to stress that an owner's claim for loss of employment after the date the original charter would have concluded will not always succeed.
Instead, the decision illustrates the difficulties in calculating how to put a party in the same position as if the contract had been performed, and highlights that such decisions will necessarily depend heavily on the facts of the matter, and the remoteness of the damages claimed.
Finally, a note of caution. The Court rejected Charterers' claim that, if the damages calculation did not end at the date when the contractual voyage would have ended, there would have been no logical end to the calculations. However, that does seem to remain a genuine concern. In this case, the Court may have been constrained by findings of fact in the arbitration Award, on which there had been no appeal (such as that it was possible to say with "some degree of certainty" what the Vessel would have done after the contractual voyage). However, in a case where such factual issues remain up for debate, it is likely that the parties will continue to argue over the appropriate cut-off date for calculation of damages, and whether such damages are too remote to be claimed.
Unfortunately, the Judgment may well have left the waters muddier than before, and it is foreseeable that this issue will be litigated again.