Article
What price a breach?
First published: Shipping & Trade Law [1st February 2007]
The Facts
The vessel involved was the ACHILLEAS, a 1994-built bulk carrier of about 36,000 gt,
managed by the not insubstantial Danaos Shipping Co Limited of Piraeus, Greece. On 22
January 2003 she was chartered on amended NYPE 1946 Form to Transfield Shipping Inc, a
major charterer in the dry bulk sector operating out of Hong Kong and specialising in
Chinese business. Initially the charter period was for about five to seven months (exact
period at charterer’s option) and in which the word “about” was defined to mean plus or
minus 15 days. The hire rate was US$13,500 per day and the charterer had to give the owner
approximate notice of the re-delivery date and port of re-delivery at 20 and 15 days and
definite notice of the re-delivery date and port at 10, 5 and 3 days.
An addendum made on 12 September 2003 fixed the vessel in direct continuation of the
charterparty for a further period of a minimum five months; maximum seven months – the
exact period again being at the charterers’ option. The further period commenced on 2
October 2003 which meant that even if the charterer opted for the maximum period, the
extended charterparty must end by 2 May 2004. The hire rate under the addendum was
increased to US$16,750 per day.
As is quite normal, Transfield sub-chartered the vessel to others and the final sub-charterparty
during the charter period concerned the carriage of about 67,000 gt of coal from Quingdao,
China to Tobata and Oita, Japan. On 8 April 2004 Transfield gave the owner 20 days’ notice
of re-delivery, with re-delivery to take place between 30 April and 2 May. On 15 April it
gave 15 days’ notice, again with re-delivery to take place between the same dates. On 20
April, it gave 10 days’ definite notice of re-delivery between the same dates and seven days’
definite notice three days later; again with re-delivery between the same dates and this time
expressing the intention to re-deliver at Oita.
In any event, the owners, no doubt in reliance upon the 20, 15 and 10 days’ notices of redelivery fixed its vessel with Cargill International SA. for a period of about four to six
months, on or about 21 April. The laycan under this fixture was from 28 April to 8 May
2004, therefore enabling actual delivery to take place up to six days after the Transfield
charter should have come to an end and at least six days after the date for which Transfield
had given notice of re-delivery.
The vessel completed loading at Quingdao under the final sub-charterparty on 24 April and
on 26 April Transfield indicated to the owner that discharge at Oita was unlikely to be
completed before the 6 or 7 May. The next day it revised the notice of re-delivery to 4/5
May. The vessel arrived at Oita on 30 April, having already discharged part of her cargo at
Tobata, but once there she experienced delay. The charterer again revised the re-delivery
notice, this time to 8/9 May.
By 5 May, the owner had realised that the vessel would be likely to miss the laycan under the
Cargill charter and sought re-negotiation of the laycan period. Cargill agreed to extend the
laycan until 11 May but only if the daily rate of hire was reduced from US$39,500 to
US$31,500. The owner agreed to these terms. The vessel was re-delivered to them by
Transfield on the morning of 11 May and at the same time they delivered the vessel to
Cargill.
The Claim
It was not in dispute that the actual net loss suffered by the owner as a result of the charterer’s
breach of the charterparty – its failure to re-deliver the vessel by 2 May 2004 – amounted to
US$1,364,584.37. This sum was calculated by taking the difference between the daily rate
of US$39,500 originally agreed with Cargill and the daily rate of US$31,500, subsequently
agreed with the extension of the laycan for whole of the Cargill charter period less the
additional hire earned by the owner under the Transfield charter during the period from 2
May up to actual re-delivery. In the alternative, the owner claimed US$158,301.17, being the
difference between the charterparty hire rate and the market rate for the period from 2 May
until actual re-delivery. The charterer contended that the lower alternative calculation was
the correct measure of damages.
The Law
That the owner’s alternative claim was argued by the charterer to be correct is hardly
surprising. Any marine reference book would have supported it at first sight. For example,
Scrutton, Charterparties and Bills of Lading (20th ed.) states, having dealt with the marginal
tolerance allowed at common law for completion of the final voyage:
“if, through no fault of either side, the voyage does not finish within the tolerance, hire
continues payable at the charter rate until the end of the period of express or implied
tolerance and, in the absence of an exonerating clause, damages representing the market rate
for the period thereafter.”
The editors rely upon Hyundai Merchant Marine Co Limited v. Gesuri Chartering Co
Limited (The “Peonia”) [1991] 1 Lloyd’s Rep. 100 and Chiswell Shipping v. National
Iranian Tanker Co, (The World Symphony and The World Renown) [1992] 2 Lloyd’s Rep.
115. However, neither of these cases involved a situation where a subsequent charter was
either lost or had to be compromised as a result of the late delivery.
In English law the general rule on the quantification of damages, whether those damages are
sought in tort or in contract, is that they should put the injured party in the same position as
he would have been in but for the tort or breach of contract. This rule was first espoused by
Lord Blackburn in Livingston v. Rawyards Coal Co [1880] 5 App. Cas. 25, 39 and it has been
either cited with approval or re-stated in a similar form consistently ever since. Were this
general rule to be the only rule applicable to the quantification of damages then, as the net
loss suffered by the owner as a result of charterer’s breach of contract was agreed to amount
to US$1,364,584.37, that would have been the end of the matter. But life, and legal life in
particular, is never that simple. It was felt that in certain circumstances application of the
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general rule without limitation would be unjust to the paying party. Insofar as damages
arising out of a breach of contract are concerned, the most important case to seek to impose a
limit on the recovery was Hadley v. Baxendale [1854] 9 Ex 341 and it was the interpretation
of the rule in this case which exercised the minds of the arbitrators and then of the High
Court.
The first limb of the rule laid down in Hadley v. Baxendale was that the damages recoverable
by one party following a breach of contract by the other:
“… should be such as may fairly and reasonably be considered either arising naturally i.e.
according to the usual course of things, from such a breach itself, or such as may reasonably
be supposed to have been in the contemplation of both parties, at the time they made the
contract, as the probable result of the breach of it …”.
The second limb of the rule, to the effect that if the damages are not covered by the first limb
but arise from some special circumstances, the Defendant must have had actual or implied
knowledge of those special circumstances for the damages to be recoverable, does not
concern us here, it not being the case that Transfield had actual knowledge of the terms of the
Cargill charter. Although the judgment and the rule in Hadley v. Baxendale remain good law,
Courts have subsequently struggled with the language in which it is expressed and there have
been attempts to re-state the rule, notably by the Court of Appeal in Victoria Laundry v.
Newman [1949] 2 KB 52. In that case, Asquith LJ introduced the “reasonably foreseeable”
test but, in 1969, the House of Lords and Lord Reid in particular were critical of this. In
Czarnikow v Koufos (The Heron II) [1969] 1 AC Lord Reid expressed the view that the
proper test is whether the loss suffered is
‘ … of a kind which the Defendant, when he made the contract, ought to have realised was
not unlikely to result from the breach … the words “not unlikely” denoting a degree of
probability considerably less than an even chance but nevertheless not very unusual and
easily foreseeable.”
The Award and Appeal
The three arbitrators forming the tribunal were Mr Bruce Buchan, Mr. David Farrington and
Mr Christopher Moss. The tribunal reached a majority award that the owner’s claim fell
within the first limb of rule in Hadley v. Baxendale and succeeded in full. Mr. Christopher
Moss dissented. In arriving at the majority award, the tribunal considered that in today’s
market with its ease of communication and a much higher emphasis in trying to keep a vessel
in continuous employment, the loss of or the need to renegotiate a future fixture was a not
unlikely result of late delivery which was known and accepted by those participating in the
charter market. The parties to this charter would have had it in mind as they are active in the
shipping market. It was not disputed that the market rates for tonnage go up as well as down,
sometimes quite rapidly, and this was market knowledge. They went on to say that the type
of loss actually suffered by the owner was within the contemplation of the parties as a not
unlikely result of the breach, and the fact that the loss was greater than anticipated was
irrelevant. The type of loss was foreseeable. The period of the Cargill charter was not
unusual but had it been regarded as an extravagant or an unusual bargain, this may have had
an effect on the quantum of the recoverable claim. Relying upon Lord Reid’s judgment in
The Heron II, they concluded that the type of loss claimed must be taken to have been in the
parties’ contemplation at the time when the addendum to the charter was agreed and that
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therefore the claim fell within the first limb of the rule in Hadley v. Baxendale. Had they not
reached this conclusion they added that, as there was not any actual or implied knowledge of
the Cargill fixture by the charterer at the date of the addendum, the claim could not have been
brought within the second limb of Hadley v. Baxendale.
The charterer appealed to the High Court and the matter came before Christopher Clarke J.
The charterer submitted that there had never been a case where damages had been awarded in
respect of loss of profits caused by late delivery; that it was an established principle that the
measure of damages should be based upon the difference between market rate and the charter
rate in such circumstances and that it was only such damages that fell under the first limb in
Hadley v. Baxendale, loss of profits falling under the second limb. The owner contended that
its actual loss was US$1,364,584.37; that it should be put in the same position as if no breach
had occurred; that the loss of profit suffered was contemplated by the parties as a type of loss
which was a not unlikely consequence of the charterer’s breach; and that there was no rule
that only the difference between the market and the charter rates could be recovered under the
first limb of the rule in Hadley v. Baxendale.
In his judgment, Christopher Clarke J reviewed the authorities on late re-delivery, the text
books and the rule in Hadley v. Baxendale, including the modern approach to the rule
expounded by Lord Reid in The Heron II, in which he had said that he did not think it was
intended that there should be two rules or that two different standards should apply. The
Judge concluded that on the basis of the facts found by the majority of the arbitrators the
owner’s claim was not too remote; that the possibility of missing the cancelling date for a
future fixture as a result of late re-delivery was not very unusual; and that the kind of loss
suffered by the owner was in the contemplation of the parties. He went on to hold that,
contrary to the submissions by the charterer, the majority of the arbitrators had applied the
correct test on foreseeability and were plainly concerned with a result that was or ought to
have been foreseen as not unlikely. A further submission on behalf of the charterer was that
for it to be held liable for the owner’s claim, it was necessary to show that it had accepted
responsibility for a loss of profit on a subsequent charter. In light of this submission, the
Judge considered that if a type of loss for which recovery is sought is a type which the
parties, as experienced persons in the charter market, would, if they thought about it, realise
was a not unlikely consequence of the breach, then the charterer must have accepted the risk
of being liable to compensate the owner if that loss occurred. Further submissions made by
the charterers were: first, where there is an available market for vessels such as the
ACHILLEAS to be chartered in and out, then, unless there are special circumstances, the
owner’s damages are restricted to the market/charterparty rate difference during the overrun
period; and, second, the law does not concern itself with contracts made between owners and
third parties and what the owner chooses to do with his vessel after re-delivery is a matter for
him and can neither increase nor reduce his claim. Counsel also argued that sale of goods
cases were analogous. The Judge, in order to consider these submissions, reviewed the
authorities on premature termination of the charterparty, on non-delivery of goods, on supply
of defective goods, on delayed delivery of goods and on damaged goods. Having done so, he
did not consider that they affected the conclusion he had already reached. Finally, it was
submitted on behalf of the charterer that if the majority award was allowed to stand, then the
assessment of damages would become very complicated, and if the owner’s claim for loss of
profits fell under the first limb of the rule in Hadley v. Baxendale, then the second limb of the
rule in that case would become redundant. The Judge considered that problems in assessing
damages under the award in other circumstances was not a good reason to deprive the owner
of recovery for its loss. With regard to the second limb of the rule in Hadley v. Baxendale,
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the learned Judge found that this would still come into play in a case where the rate under the
subsequent charter was not the market rate, where the period was unusual or where its terms
were very special. He concluded that the claim was not too remote, that it was foreseeable
and that the majority of arbitrators were not wrong in law. He therefore dismissed the
appeal. It is understood that a further appeal has now been lodged with the Court of Appeal.
Conclusion
The question “what price a breach?” has never previously been considered by arbitrators or
the High Court in connection with a breach by a charterer of a re-delivery clause in a
charterparty where such breach resulted in the loss of or need to re-negotiate the terms of a
subsequent charterparty between the owner and a third party
I would submit that, on the facts as found, the majority of the arbitrators and the learned
Judge were right. Before the owner negotiated the subsequent charter with Cargill,
Transfield had given three notices of re-delivery. The original cancelling date negotiated
between the owner and Cargill provided a six-day cushion in the event that Transfield redelivered the vessel late. The period of the Cargill charter was similar to and, in fact, slightly
shorter than that of the original Transfield charter and of the further period agreed by the
addendum. Transfield charter is a major charterer in the dry bulk field, is mentioned almost
daily in the fixture reports and, as such, probably have a better knowledge than most of the
charter market and of the fluctuation in hire rates in that market. For all of these reasons, it
ought to have foreseen as not unlikely that the owner would arrange a subsequent fixture and
that the owner might need to renegotiate that fixture if it breached the re-delivery clause.
If the facts as found had been a little different, then the arbitrators and the Court may have
arrived at another decision. If Transfield’s notices of re-delivery had indicated that it was
unlikely to meet the re-delivery date or if the owner had negotiated a cancelling date with
Cargill on or only slightly later than the re-delivery date in the Transfield charter, would that
fixture still have been foreseeable? Similarly, if the period of the Cargill charter had been,
say, 12 months, or even longer, when most fixtures were being made for shorter periods,
would that have been foreseeable? Finally if, rather than being Transfield, the charterer had
been a relative novice in the charter market, would the fixture to Cargill have been
foreseeable as not unlikely?
The charterer has obtained leave to appeal to the Court of Appeal and it would not be
surprising if a case of this importance ultimately reaches the House of Lords.
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