In Sylvia Shipping Co Limited v Progress Bulk Carriers Limited the High Court has confirmed that the House of Lords' decision in Transfield Shipping Inc v Mercator Shipping Inc does not create a new remoteness test for damages in contract.  

Background

The law on remoteness of damages is based on the judgments in Hadley v Baxendale and The Heron II. The generally accepted test for remoteness has been whether the loss claimed is of a kind or type which it would have been within the reasonable contemplation of the parties at the time that the contract was made as being not unlikely to result.

The case of Transfield Shipping Inc v Mercator Shipping Inc [2008] (also known as "The Achilleas") called into question whether that was the correct test. In this case, a time chartered vessel (The Achilleas) was delayed during a final voyage and, in breach of contract, was redelivered to the owners late. The owners had already agreed a follow on charter with a third party and, because of the late delivery, they were forced to renegotiate the rate of hire to a substantially reduced rate. The owners sued for breach of contract claiming damages for the difference between the original and renegotiated hire rates for the entire duration of the follow on charter (up to 6 months).

The House of Lords (as it then was) held that the owner's damages were limited to the difference between the market rate of hire and the rate agreed in the contract which was breached for the period during which the owners were deprived of the vessel by late redelivery.

The majority in the House of Lords took a new approach to remoteness of damages, by introducing an 'assumption of responsibility for the loss' element to the Hadley v Baxendale test. The remoteness test applied was whether the parties had the type of loss within their contemplation when the contract was made and also whether they had liability for this type of loss within their contemplation then. In other words, was the charterer to be taken to have undertaken legal responsibility for this type of loss?

Lord Hoffman said that the 'standard' Hadley v Baxendale test would be applicable in the "great majority of cases" but that it would not be sufficient in cases "in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses".

Applying the new test in this case, the House of Lords held that although the loss of profits on the charter were foreseeable, the general understanding in the shipping market was that liability was restricted to the difference between the market rate and the charter rate for the overrun period. The charterer had, therefore, only assumed liability for these losses and the House of Lords awarded damages accordingly.

Since this case there has been some uncertainty as to whether the correct remoteness test is the 'orthodox' test in Hadley v Baxendale or the 'assumption of responsibility' test.

Facts

Sylvia Shipping (Sylvia) chartered a vessel to Progress Bulk Carriers (Progress). Progress sub-chartered the ship to Conagra Trade Group. In breach of contract, Sylvia failed to maintain parts of the ship. This meant that it was not ready to be delivered to Conagra on time. Progress claimed against Sylvia for loss of profit on the cancelled sub-charter. The Arbitral Tribunal made an award in favour of Progress. Sylvia appealed and the issue to be determined by the High Court was whether the Tribunal had applied the correct remoteness test. Sylvia argued that the test in The Achilles should apply whereas the Tribunal had applied the orthodox test in Hadley v Baxendale.

Decision

Mr Justice Hamblin in the High Court held that the Tribunal had applied the correct test. He held that "there is no new generally applicable legal test of remoteness of damages". He said:

"The orthodox approach remains the general test of remoteness applicable in the great majority of cases. However, there may be "unusual" cases, such as The Achilleas itself, in which the context, surrounding circumstances or general understanding in the relevant market make it necessary specifically to consider whether there has been an assumption of responsibility. This is most likely to be in those relatively rare cases where the application of the general test leads or may lead to an unquantifiable, unpredictable, uncontrollable or disproportionate liability or where there is clear evidence that such a liability would be contrary to market understanding and expectations. In the great majority of cases it will not be necessary specifically to address the issue of assumption of responsibility. Usually the fact that the type of loss arises in the ordinary course of things or out of special known circumstances will carry with it the necessary assumption of responsibility."

This case was not an 'unusual' case as there was no general market understanding about what the measure of damages should be and the liability of the owners was not likely to be unquantifiable, unpredictable, uncontrollable or disproportionate. The assumption of responsibility test was not applicable. Applying the Hadley v Baxendale test the loss of profits on the sub-charter were foreseeable and so recoverable by the charterer.  

Comment

This decision confirms that the Hadley v Baxendale test remains the standard rule of remoteness and it is only in relatively unusual cases where a consideration of assumption of responsibility may be required.  

Further reading

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