In the recent decision of Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2009] 1 AC 61 (9 July 2008), the UK House of Lords unanimously overturned previous case law to hold that liability for damages in contract must be founded on the intention of the parties, and within the scope of loss objectively contemplated at the time of entering into the contract. Previous authority held that a party can recover losses which are “foreseeable” and imposed in every contract a requirement to reflect an objective standard. This decision narrows the parameter for damages and provides far greater commercial certainty for parties entering into contracts.

Background

Mercator Shipping Inc (Owners) owned the Achilleas, a bulk carrier ship which they let to the charterers, Transfield Shipping Inc (Charterers). The latest date for redelivery to the Owners was 2 May 2004. By April 2004, market rates had more than doubled compared to the previous year, and the Owners fixed the vessel for a new 4-6 month hire with another charterer, following on from the current charter, at a daily rate of US$39,500. The latest date for delivery to the new charterers was 8 May 2004.

The vessel was delayed in reaching its final destination, and was not redelivered to the Owners until 11 May 2004. The Owners were aware of the journey that the vessel had to undertake, but did not refuse the voyage. By 5 May 2004, it was clear that the vessel would not be available to the new charterers before 8 May 2004, but by that time rates had fallen again. In return for an extension of the cancellation date to 11 May 2004, the Owners agreed to reduce the rate of hire for the new fixture to US$31,500 a day.

The Owners claimed damages for the loss representing the difference between the original rate and the reduced rate for the entire second fixture period. This difference, at $8,000 a day, came to US$1,364,584.43.

The Charterers said the Owners were only entitled to the difference between the market rate and the charter rate for the nine days during which they were deprived of use of their ship. This came to US$158,301.43.

In the first instance, the arbitrators found for the Owners. They held that the damages fell within the first rule of Hadley v Baxendale (1854) 9 Exch 341, because it was:

“of a kind which the [charterer], when he made the contract, ought to have realised was not unlikely to result from a breach of contract”.

Judgment

The House of Lords unanimously overturned the arbitrators’ decision. The key decision is that of Lord Hoffmann, who held that it must be in principle wrong to hold a party liable for risks for which parties entering into such a contract in their particular market would not reasonably be considered to have undertaken.

His Lordship held that the first step in calculating damages is to ascertain whether the type of loss is appropriate, rather than the quantum of loss. He noted that the reasonable charterer would not have understood that he was assuming liability for the risk of the type of loss in question. The general understanding in the shipping market was that the liability was restricted to the difference between the market rate and the charter rate for the overrun period, and any departure from this rule would be likely to give rise to a real risk of undesirable commercial uncertainty.

Lord Hope of Craighead observed that the Charterers did not know, and could not be expected to know, the future conduct of the Owners in engaging new charters or the movement of the market price. The Court held that a party cannot be expected to assume responsibility for something that he cannot control and, because he does not know anything about it, cannot quantify. It is not enough for a party to know in general about what may be possible. A party requires information that will enable them to assess the extent of any liability.

Implications

Although this is an English decision, it is relevant and may influence Australian courts. Courts will be encouraged to give effect to the presumed intention of the parties and consider the commercial context in which the contract was constructed.