Introduction

In Transfield Shipping Inc v. Mercator Shipping Inc. (The Achilleas) in 2008,1 the House of Lords considered remoteness of damage in English contract law in the context of the redelivery of a vessel under a standard form time charter party. In common with many shipping disputes subject to English law, this dispute between owners and charterers was originally dealt with in London maritime arbitration. However, it subsequently went to the English Commercial Court on appeal from the arbitration award and (unlike most appeals to the court) it eventually worked its way up to the Lords. It is rare for commercial disputes to be taken up to the highest court of appeal. This happened in The Achilleas, though, because the relevant principles under review were of significance beyond the shipping industry (and charter party contracts) and went to the recovery of contractual damages under English law as a whole. Whilst The Achilleas was spoken of as a landmark case after the House of Lords decision in 2008, this article seeks to demonstrate that the scope of its application is likely to be limited in extent.2

General principles of assessment of damages

In English contract law, a claimant who seeks to recover damages for breach of contract has to show, on the balance of probabilities, that he has suffered the loss or damage claimed and that that loss or damage was caused by the breach of contract. There should also be no break in the chain of causation. This means that there should be no intervening event between the acts complained of and the loss suffered to which the claimant's loss can reasonably be attributed.

The principle governing the measure of damages for breach of contract is that the damages should be compensatory. In other words, the amount of damages awarded is to compensate the innocent party for his loss, not to punish the party in breach of contract. Applying the principle of compensatory damages in practice means that the innocent party should be put in the position he would have been in if there had been no breach (that is to say, if the contract had been performed properly).

However, the damages recoverable for breach of contract are restricted by the rules on remoteness of damage. Under English law, a claimant cannot recover damages for a loss which is considered to be too remote a consequence of the breach of contract. The rules on remoteness of damage have been established in English case law and have been refined over the years.

The traditional test for remoteness of damages in contract

The case of Hadley v. Baxendale3 introduced a two-limbed test for establishing whether damages were recoverable for breach of contract in English law. According to this test, damages are recoverable by an innocent party:

(i) for losses which may fairly and reasonably be considered as arising naturally i.e. according to the usual course of things; or

(ii) where the losses 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 a breach of contract.

The first limb will cover losses that the party breaching the contract should (when contracting) have regarded as not unlikely results of his breach. For this purpose, the party breaching the contract is assumed to be a reasonable man experienced in the relevant trade. What he is deemed to have known is a factual question.

The second limb covers losses which may be outside the usual course of things in circumstances where the contract breaker may, when contracting, have known of special circumstances that meant he could reasonably have contemplated a particular loss.

In Hadley v. Baxendale, the plaintiffs were millers. A crank shaft of a steam engine at their mill broke. The people who were due to deliver the crankshaft to the engineers for repair delivered it late. The millers sued for the loss of profits that they suffered as a result, but the court disallowed that claim. The carriers were held to be liable only for losses that were generally foreseeable or for losses arising out of special circumstances had the millers warned them about those in advance.

In Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd, 4 the plaintiff launderers wished to expand their business and secure some lucrative dyeing contracts. The boiler they ordered from the defendants was delivered late. As a result, the plaintiffs suffered general losses of profits [Page21:] but they also lost the lucrative dyeing contracts. The court held that they could only recover the general losses of profits but not their losses in respect of the lucrative dyeing contracts because the defendants had no knowledge of the special circumstances relating to those contracts. Those latter losses were therefore irrecoverable. Post-Victoria Laundry, the test for remoteness of damage was said to be whether the loss sustained by the claimant was reasonably foreseeable as liable to result from the breach of contract. This in turn depended on whether the defendant had actual knowledge of special circumstances which would lead a reasonable person to foresee that special or unusual loss.

The traditional test was further refined by the House of Lords in C Czarnikow Ltd v. Koufos (The Heron II)5 as regards the degree of foreseeability required in relation to the damage sustained.

In The Heron II, the vessel carrying a cargo of sugar arrived nine days late on a voyage from Constanza to Basrah, due to having unjustifiably deviated during her laden voyage. During those nine days, the sugar market had dropped sharply and the cargo interests sought damages based on the price they could have obtained had the sugar been delivered on time. Whilst the owners knew there was a market for sugar at Basrah, they did not know that the cargo interests had intended to sell the sugar immediately at Basrah. The owners argued the first limb of the Hadley v. Baxendale rule, namely that the market fluctuations due to unforeseen and unpredictable causes during the nine-day delay were not of themselves according to the usual course of things. They also argued that there were no special circumstances here such as to bring the second limb of the test into play.

Lord Reid in the House of Lords commented that whilst everyone seemed to agree that remoteness of damage in contract had to be determined by applying the rule in Hadley v. Baxendale, different interpretations had been given to the rule in different cases. Having reviewed the judgment in Hadley v. Baxendale, he concluded that the court in that case had not intended that every type of damage which was reasonably foreseeable by the parties when the contract was made should either be considered as arising naturally in the usual course of things or be supposed to have been in the contemplation of the parties. Rather, he said, the Hadley v. Baxendale decision made it clear that a type of damage which was plainly foreseeable as a real possibility but which would only occur in a minority of cases could not be regarded as arising in the usual course of things or be supposed to have been in the contemplation of the parties.

As a result, the traditional test was refined to the following: 'whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realized that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation'. 6 The degree of probability was 'considerably less than an even chance but nevertheless not very unusual and easily foreseeable'. 7

Damages for repudiatory breach of a charter party

Late redelivery

In The Peonia, 8 the vessel was redelivered late by charterers. Prior to this decision, it had been believed that charterers did not breach a time charter by redelivering the ship after the end of the charter period, provided that their final voyage orders were legitimate orders, meaning that when they were given it was reasonably expected that the ship would be redelivered in time. The Peonia ended that belief: the Court of Appeal confirmed that the charterer is bound to redeliver the vessel at the end of the agreed charter period, including any margin or tolerance, unless the failure to redeliver is the fault of the owners.

As to the measure of damages recoverable for the late redelivery, the Court of Appeal held that the owners were entitled to:

(i) payment of hire at the charter party rate until redelivery of the vessel; and (provided that the owners did not waive the charterers' breach)

(ii) damages (being the difference between the charter rate and the market rate if the market rate was higher than the charter rate) for the period between the redelivery date under the charter party and actual redelivery.

Where the charter party rate is below the market rate, then the owner can recover damages for the period of the overrun, calculated as the difference between the two rates (see The Dione). 9 A more difficult question is what market rate should be [Page22:] applied for these purposes. A number of options may be considered appropriate: the market rate for a time charter trip for the voyage in question; the time charter equivalent of the voyage charter rate for that voyage; the daily rate for a period time charter (but for what period and on what terms?).

In The Johnny,10 the Court of Appeal considered the definition of the term the market rate in the Baltime Form (clause 7) and the majority (Lord Denning dissenting) found that the relevant market rate was for a time charter trip for the voyage on which the ship was engaged, or for a time charter for the same period or of a length similar to that from which the ship was redelivered late.

Early redelivery

Where the charterer redelivers a vessel early, the owner will generally be entitled to recover the difference between the contractual hire rate and the available market rate for a substitute fixture from the date of actual delivery to the date when the charterer could have delivered the vessel without breaching the charter party. This is sometimes referred to as the period of 'underlap'.

Where there is no available market for a fixture that exactly matches the terms and unexpired period of the original charter party, then a shipowner who enters into a substitute fixture or fixtures and thereby reasonably mitigates his losses will be entitled to recover the difference between his net profits under the substitute fixtures and those which he would have earned under the repudiated charter party.

The Achilleas - a late redelivery case

Much discussion and debate was generated by the decisions of Mr Justice Clarke, at first instance, and the Court of Appeal in The Achilleas.11 The case eventually found its way to the House of Lords, which delivered its decision on 9 July 2008.12

Background

The Achilleas had been chartered by her owners to the charterers, Transfield, for a five/seven month charter with an option (which was in the event exercised) to extend for a further similar period. The charter rate under the extended charter was US$ 16,450 per day pro rata. On the facts, the latest time for redelivery of the vessel was midnight 2 May 2004. The charterers gave notices of redelivery including a ten-day definite notice on 20 April. In anticipation of such redelivery, on 21 April, the owners fixed the vessel for a four/six month period charter with Cargill at the rate of US$ 39,500 per day with a laycan of 28 April to 8 May.

In the event, the vessel did not load its final cargo until 24 April and was not redelivered until 11 May. In the intervening period, there was a substantial fall in the dry market. On 5 May, when it became apparent to the owners that the vessel was not going to make the cancelling date under the Cargill fixture, the owners approached Cargill in order to obtain an extension of the cancelling date. This was agreed by Cargill only on condition that they were given a US$ 8,000 per day reduction in the hire rate, which reduction was reflective of the market at that time. The vessel completed her last voyage, was redelivered by charterers and delivered to Cargill on 11 May.

The claim

The owners claimed for their loss of profit on the Cargill fixture as result of the charterers' breach of charter party in failing to redeliver the vessel by 2 May. The charterers disputed this, contending that while they accepted they were responsible for the loss during the nine-day overrun period assessed at the difference between the market and charter rate, they should not be responsible for the losses suffered by the owners over the entire Cargill charter period.

The parties agreed quantum between themselves so that, on the owners' case, the damages payable would be about US$ 1,365,000 net (equivalent to about 180 days at US$ 8,000 per day less brokerage, etc.) whereas, on the charterers' case, an amount of about US$ 158,000 would be payable.

The arbitrators

In a 2:1 decision, the London maritime arbitrators ruled in the owners' favour and awarded damages in the amount of US$ 1,365,000. The majority arbitrators held that missing a subsequent fixture was a 'not unlikely' result arising from late redelivery of the vessel, taking the view that in 'today's market' with its ease of communication and higher emphasis on maintaining vessels in almost continuous employment, such 'not unlikely results are known, recognised and accepted hazards of late redelivery'. In addition, the majority arbitrators held that the type of loss suffered by [Page23:] the owners, being compelled to renegotiate the terms of the subsequent fixture, was 'within the contemplation of the parties as a not unlikely result of the breach'.

The Commercial Court

In light of the findings of fact made by the majority arbitrators, Mr Justice Clarke in the Commercial Court concluded that the owners' loss of profit could legitimately be treated as arising naturally from charterers' breach and was, therefore, recoverable in full in the amount claimed under the first limb of the rule in Hadley v. Baxendale.

The Court of Appeal

The judgment of the Court was given by Lord Justice Rix. He took the view that there was no error in the manner in which the majority arbitrators had approached the issue of remoteness of damage. He observed that the nature of the chartering market was at all times 'an open book' to charterers-'it was their business, in which they were experienced'.13 He noted that both the owners and the charterers were in the same business and that a charterer of time chartered tonnage knows that a new fixture is very likely to be entered into by the owner of the chartered vessel so that it follows as closely as possible on the redelivery of the vessel.

In the circumstances, Lord Justice Rix came to the same conclusion as Mr Justice Clarke and the majority arbitrators.

The House of Lords

The Appellate Committee of the House of Lords which heard the appeal was made up of Lords Hoffman, Hope, Roger and Walker and Baroness Hale. All five members of the Appellate Committee gave speeches allowing the appeal (in the case of Baroness Hale, with genuine reluctance) and finding in favour of the charterers. The basis upon which each of their Lordships put the decision was not the same. However, running throughout all five speeches was the consistent theme that the loss of profit for which the owners had claimed was not a loss that could, properly considered, be said to be the not unlikely result of the breach by the charterers in failing to redeliver the vessel on time. Their view was that the loss was of an exceptional or unusual nature and one for which it was not contemplated by the parties that liability would result.

The decision was of potentially wide application to the law of contract and it is worth considering each speech in turn.

Lord Hoffman

Lord Hoffman recognized that there was no authority directly on the point but appeared to view the lack of any authority as being more supportive of the charterers' position, commenting that 'there is no case in which the question now in issue has been raised. But that in itself may be significant . . . Nowhere is there a suggestion of even a theoretical possibility of damages for the loss of a following fixture.'14 He approached the issue by considering that it would be logical to found liability for damages upon the intention of the parties, which was to be objectively ascertained by interpreting the contract as a whole in its commercial setting. He regarded this exercise of interpreting the contract as a question of law.

His explanation for this approach was that because all contractual liabilities are voluntarily undertaken, it would be wrong in principle to hold someone liable for risks which people entering into a contract in their particular market would not reasonably be considered to have undertaken. He had in mind that the view which parties take of responsibilities and risks will impact upon the terms of the contract and, in particular, the price to be paid. He put it in the following way:15

Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought was excluded gives the other party something for nothing.

Lord Hoffman drew on his own speech in the earlier House of Lords case of Banque Bruxelles Lambert SA v. Eagle Star Insurance Co. Ltd, 16which dealt with the proper assessment of damages that flowed from a valuer's negligent valuation of a property. That approach involved asking, as a first step, whether the loss for which compensation is sought is of a kind or type for which the contract breaker ought fairly to be taken to have accepted responsibility. If the answer to that question was yes, the next step would be to ascertain the damages which would put the innocent party, so far as possible, in the same position as if the contract had been performed. [Page24:]

In determining whether or not a loss was of a type or kind for which a contract breaker could be treated as having assumed responsibility, Lord Hoffman considered that the principle to be applied was to determine what would have been reasonable and would have been regarded by the contracting party as significant for the purposes of the risk he was undertaking. Applying this principle to the facts of The Achilleas, Lord Hoffman considered that:

I think it is clear that [the parties] would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility. Such a risk would be completely unquantifiable, because although the parties would regard it as likely that the owners would at some time during the currency of the charter enter into a forward fixture, they would have no idea when that would be done or what its length or other terms would be. If it was clear to the owners that the last voyage was bound to overrun and put the following fixture at risk, it was open to them to refuse to undertake it. What this shows is that the purpose of the provision of timely redelivery in the charter party is to enable the ship to be at the full disposal of the owners from the redelivery date. If the charterer's orders will defeat this right, the owner may reject them. If the orders are accepted and the last voyage overruns, the owner is entitled to be paid for the overrun at the market rate. All this will be known to both parties. It does not require any knowledge of the owner's arrangements for the next charter.17

In conclusion, he found that the 'findings of the arbitrator and the commercial background to the agreement are sufficient to make it clear that the charterer cannot reasonably be regarded as having assumed the risk of the owner's loss of profit on the following charter'18

Lord Hope

Lord Hope acknowledged that he was, at first, inclined to find in favour of the owners, but changed his mind after considering the draft speeches of Lords Hoffman, Roger and Walker. Lord Hope considered that the assumption of responsibility formed the basis of the law of remoteness of damage in contract and that the key question should be 'whether the loss was a type of loss for which the party can reasonably be assumed to have assumed responsibility'19

While Lord Hope recognized that it was within the parties' contemplation that loss would be suffered generally by reason of late redelivery, and that this would be loss of use at the market rate as compared with the charter rate, he considered that the charterers could not be expected to know how the owners would deal with the charterers under any subsequent fixture. This, he considered, was something over which the charterers had no control at the time of entering into the contract and was completely unpredictable. As a result, he considered that there could be no presumption that the party in breach had assumed responsibility for any loss caused by delay where the loss 'is not the product of the market itself, which can be contemplated, but results from arrangements entered into between the owners and the new charterers, which cannot'20. In his view, therefore, assumption of responsibility could not be expected to arise in respect of matters over which a party could have no control and could not quantify. In order for there to be an assumption of responsibility, Lord Hope considered that the contract breaker would need to have 'some information that will enable him to assess the extent of any liability'21

Lord Walker

Lord Walker also appeared to give support to the view that the assumption of responsibility is the critical test but considered the underlying idea to be: 'what was the common basis on which the parties were contracting?'22 He put it in the following terms:23

It is also a question of what the contracting parties must be taken to have in mind having regard to the nature and object of their business transaction.

Lord Walker, in considering the facts of The Achilleas, stated that while it was open to the arbitrators to conclude that for the owners to miss a subsequent fixture was a not unlikely result of the delay, it did not follow that the charterers should be liable for an exceptionally large loss when the market fell suddenly and sharply (explained as being by about 20%). He placed emphasis on a remark by Lord Justice Rix in the Court of Appeal that 'it requires extremely volatile conditions to create the situation which occurred here' 24

In considering the majority arbitrators' decision, he disagreed with their approach of considering that the appropriate test was that the type of loss claimed was foreseeable (in the sense of being a not unlikely result). Indeed, he considered this approach to be an error of law. Instead, in his view, what mattered was 'whether the common [Page25:] intention of reasonable parties to a charter party of this sort would have been that in the event of a relatively short delay in redelivery an extraordinary loss, measured over the whole term of a renewed fixture . . . "was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within . . . contemplation"'.25

Lord Walker, similarly to Lord Hope, appeared to place significance on the fact that the charterers had no knowledge of or control over the new fixture entered into by the owners.

Lord Roger

Lord Roger took a slightly different approach. He considered that, in the absence of special knowledge, a party entering into a contract can be supposed to contemplate only the losses which are likely to result from the breach in question. In his view, it is those losses for which a party in breach would be held responsible, the rationale being that if other losses had not been in contemplation, the parties will have had no opportunity to provide for them.

He, like Lord Walker, noted Lord Justice Rix's remark that it 'requires extremely volatile market conditions to create the situation which occurred'. In Lord Roger's view, this indicated that 'the extent of the relevant rise and fall in the market within a short time was actually unusual' and that the owners' losses stemmed from 'that unusual occurrence'26

In other words, Lord Roger concluded that the unusual occurrence of the extremely volatile fluctuations in market conditions was not a kind of loss that could be said to be the not unlikely result of the breach. He also placed reliance on the fact that the owners' dealings with Cargill were not known by the charterers.

In the course of his speech, Lord Roger did recognize that there might be some instances where charterers might face an exposure for the sort of loss that the owners were claiming. The two examples that he gave were:

1. There could be a situation where a charterer could reasonably contemplate that late redelivery of a vessel of a particular type in a certain area of the world at a certain season would mean that the market for its services would be poor. In such circumstances, Lord Roger recognized that owners might have a claim for some general sums for loss of business, though that would not necessarily mean that a particular loss on a particular contract would be recoverable.

2. There could likewise be a situation where, when the charter party was entered into, the owners had drawn the charterers' attention to the existence of a forward charter of many months' duration for which the vessel had to be delivered on a particular date. In such case, the charterers might face an exposure.

Baroness Hale

The last speech was given by Baroness Hale. She, like Lord Hope, had initially taken the view that the appeal should be dismissed and that the owners should succeed in their claim. However, she was prepared to find in the charterers' favour upon the narrow basis that the loss in question was the result of an extremely volatile market which was unusual. Baroness Hale indicated that she did not necessarily agree with the idea of introducing into the law of contract the concept of the scope of duty (involving notions of assumption of responsibility) which has been developed in the law of negligent professional services. She put it as follows:27

The rule in Hadley v. Baxendale asks what the parties must be taken to have had in their contemplation, rather than what they actually had in their contemplation, but the criterion by which this is judged is a factual one.

In concluding, she said that 'if this appeal is to be allowed, as to which I continue to have doubts, I would prefer it to be allowed on the narrower ground identified by Lord Roger, leaving the wider ground to be fully explored in another case and another context'28

Analysis

Reviewing the speeches of their Lordships as a whole, it seems that they were influenced by two principal factors. The first was that there was a general market expectation that the loss of the sort claimed by the owners was not one for which the charterers would be responsible and that, against that commercial background, it would not be appropriate to impose liability on the charterers. Second, the particular loss had arisen because of an extremely volatile market situation that could be regarded as unusual and not as not unlikely to result from the breach.

As to the first point, the introduction of the concept of assumption of responsibility (by Lords Hoffman and Hope, with some support from Lord [Page26:] Walker) in determining the kind of losses for which a contract breaker will be liable was, perhaps, one that may be regarded as unusual in the context of commercial contracts. This is particularly so where the contractual obligations in question do not involve any obligations akin to a duty of care.

In relation to the second point, it would appear that their Lordships equated the unusual losses in issue with a particularly lucrative contract which could not be said to be within the reasonable contemplation of the parties absent specific knowledge. However, if this were so, it would ignore the fact that the losses in question were the result of movements in the market, and not any particularly special transaction entered into by the owners with their new charterers (the renegotiation of the Cargill charter party rate simply reflected the then market rate). Given their Lordships' acceptance that the parties, being experienced shipping business people, would be aware that the shipping market is a volatile one, the result might have been viewed as surprising, particularly given that they also accepted that, in general, where a kind of loss was foreseeable, it was recoverable even though the extent of the loss may not have been.

Arguably, the decision suggested that a loss due to ordinary market fluctuations is a different kind or type of loss from a loss due to extraordinary market fluctuations and that, on the facts before them, their Lordships were dealing with an extraordinary loss. On that basis, the decision raised some interesting issues (particularly in an uncertain economic climate) as to when an ordinary market fluctuation becomes extraordinary.

Potential consequences of the House of Lords' decision

While the judgments of the lower courts and the decisions of the majority arbitrators may have come as a surprise (in particular to charterers), it seemed, on initial review, that the decision of the House of Lords might introduce a distinct degree of uncertainty in determining the consequences of a breach of contract. There followed much reflection on this decision of the House of Lords and its wider implications.

On its face, the decision seemed likely to have a significant impact in all cases where damages for breach of contract were in issue, and not simply in the narrow case before their Lordships, given the application by some of their Lordships of the concept of assumption of responsibility to the determination of remoteness of contractual damages. On the other hand, there was another view that the decision was one of public policy, which the law of remoteness is intended to reflect, and that it would have a narrow application. The extent of the impact remained dependent, however, on how the House of Lords' decision would be interpreted by the courts in the future, and in particular what would be determined to be the ratio of the decision.

It is therefore worth considering the relevant case law post The Achilleas to establish what impact, if any, the House of Lords' decision has had on the assessment of damages in English law.

Post - Achilleas - The Amer Energy

Background

In The Amer Energy,29 the charterers agreed to provide an associated company with a ship to carry gasoil, which the sister company had agreed to sell. The charterers entered into a voyage charter for this purpose. The vessel arrived late at the port of loading, after expiry of the laycan dates, and the buyers cancelled their order. As a consequence, the charterers' associated company suffered a loss of profit, for which the charterers were liable to indemnify them. The charterers claimed damages for the owners' breach of the charter party.

The arbitrators

The arbitrators' award was published just after the House of Lords' decision in The Achilleas. They found in favour of the charterers and awarded them US$ 750,685.37. It was accepted that the arbitrators had not considered the House of Lords' decision in The Achilleas before publishing their award.

The owners applied to the High Court for permission to appeal on the basis that the arbitral tribunal had not applied the correct test of remoteness as it was required to do under English law as it stood at the date of the award. They argued that The Achilleas laid down a new test of recoverability of loss or remoteness, requiring the loss claimed to be of a kind for which the owners must be taken to have assumed responsibility.

The Commercial Court

Mr Justice Flaux in the Commercial Court disagreed. In summary, he did not consider that the House of Lords (or, at least, the majority of their Lordships) in The Achilleas was intending [Page27:] to lay down a completely new test as to recoverability of damages in contract and remoteness different from the rule in Hadley v. Baxendale.

Furthermore, he observed that the assumption of responsibility test (if a new test at all) was only suggested by one judge, Lord Hoffmann. Lord Hope's analysis, whilst similar, applied established principles of remoteness of damage. In any event, said Mr Justice Flaux, Lord Hoffmann had acknowledged that departure from the normal foreseeability principles would be unusual. Although Lord Hoffman referred to shipping as a market where expectations might more commonly limit the extent of liability, he had not said that the old remoteness of damages rule no longer applied in all shipping cases.

Mr Justice Flaux added that an assumption of responsibility would have been presumed in any event, on the facts of the present case. The losses and the matters giving rise to them were in the usual course of things. They were not unlikely to result from the vessel's late arrival to load, and the owners had actual knowledge of the special circumstances producing the losses, namely that the gasoil was intended for resale and that the associated company would suffer loss if the vessel arrived late.

The decision of Mr Justice Flaux in The Amer Energy suggested, therefore, that there was no new assumption of responsibility test for remoteness of damages laid down in The Achilleas and that The Achilleas was limited to its own facts. This was followed by Classic Maritime Inc v. Lion Diversified Holdings Berhad and another.30

Classic Maritime Inc v. Lion Diversified Holdings Berhad

Background

The defendants in this case were the charterers under a contract of affreightment (COA) and their guarantors. One of the issues arising was the failure of the defendant charterers to perform under the COA. The defendants argued, among other things, that the unexpected collapse in the demand for steel products resulting from the world economic crisis in 2008 had meant that the storage yards at the Malaysian discharge ports named in the COA were too full. The defendants contended that there was nowhere to store the iron ore shipments at those ports, that it had therefore become impossible to perform those shipments under the first two nominated voyages and that the defendant charterers were, consequently, entitled to cancel those voyages.

The owners had applied for summary judgment in respect of their claim but the Commercial Court denied this request and indicated that the disputes relating to the breach of the COA should proceed in arbitration pursuant to the arbitration clause in the COA, whilst the claims under the guarantee should go to a full trial. However, issues relating to the quantum of damages arose in the context of a payment being made into court pending the outcome of the proceedings.

The owners claimed losses on the basis of contract rate against market rate using the Baltic Capesize Index. The defendants contended that The Achilleas had set out a new test of assumption of responsibility. They submitted that because of the extreme volatility of the freight market in late 2008, the charterers could not be held liable for the full extent of the loss claimed by the owners which reflected the entire 95% fall in freight rates. Rather, the defendants argued that the owners were limited to claiming for the loss flowing from a fall in freight rates for vessels of the kind in question, of the magnitude which the parties would have contemplated, at the time of contracting, as being likely to occur in the ordinary course of things.

The Commercial Court

Mr Justice Cooke referred to Mr Justice Flaux's comments in The Amer Energy and observed that it would be highly surprising if the effect of The Achilleas were to limit the owners' damages in this way. His obiter view was that, notwithstanding references to the unforeseen degree of fluctuation in the market, the House of Lords in that case was not saying that, if the type of loss was within the contemplation of the parties or was one for which the party in breach must be assumed to have accepted responsibility, then some of that loss might be irrecoverable because the extent of the loss was unexpected.

The next significant decision post-Achilleas, Supershield Ltd v. Siemens Building Technologies FE Ltd,31 is not a shipping case but is relevant nonetheless for the comments made in the Court of Appeal on the test for remoteness of damage. [Page28:]

Supershield Ltd v. Siemens Building Technologies

Background

The defendant was the claimant's sub-contractor for the purposes of installing a sprinkler system in an office building. When a nut-bolt connection on a float valve that had been installed by the defendant failed, water from a storage tank overflowed into the building basement, causing a flood and leading to extensive damage to electrical equipment. The claimant settled the claim for damages that had been brought by the party directly above it in the contractual chain and subsequently sought to make a recovery from the defendant.

The Technology and Construction Court decision

At first instance, the judge found that the nut-bolt connection between the lever arm and the ball valve probably failed due to lack of sufficient tightening when the ball valve was installed and that the defendant had a contractual obligation to install the ball valve and lever arm and to carry out any necessary adjustments to ensure the ball valve operated efficiently. The judge held that the settlement entered into by the claimant with its contractual counterparty up the chain had been reasonable and that the defendant was liable to the claimant for the settlement amount.

The defendant appealed to the Court of Appeal, contending that the tank room had drains designed to carry off overflowing water and prevent an overflowing tank from causing damage, and that those drains had become blocked. The defendant argued that the parties could not have foreseen the blockage of the drains or that overflowing water would cause such damage, and that it could not have been anticipated that the alarm system installed into the building would be unmonitored at the relevant time. The issue was, therefore, whether the unexpected failure of the numerous protective measures that had been incorporated into the building had made the resulting damage too remote to be recovered.

The Court of Appeal

The Court of Appeal stated that the ball float valve had been installed specifically to control the water flow and that, therefore, the defendant had assumed responsibility for the consequences of any water overflow. The additional protective measures within the office building did not lessen the defendant's responsibility; those measures were designed to act as a back-up rather than to reduce the importance of not allowing water to overflow in the first instance.

Consequently, the Court of Appeal held that the losses caused by the water overflow were within the scope of the defendant's contractual duty to the claimant and were not, therefore, too remote to be recovered, even if the parties could not have predicted them. The appeal judges added that the refined test for remoteness of damage, as stated in The Heron II, remained the standard approach to the recoverability of damages, although the reasonable expectations of the parties might allow the court to depart from the rule:

If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances.32

The Sylvia - no new generally applicable test

In Sylvia Shipping Co Limited v. Progress Bulk Carriers Limited,33 Mr Justice Hamblen in the Commercial Court provided further useful guidance on the measure of recoverable damages in breach of charter party cases. The judge took a similar view to that of Mr Justice Flaux in The Amer Energy and indicated that the orthodox approach to remoteness of damage remained the standard rule and that it is only in relatively unusual cases such as The Achilleas that a consideration of assumption of responsibility may be required.

Background

The dispute between the parties in this case was originally dealt with by arbitration, where the arbitrators held that the owners had failed to exercise due diligence and had breached their maintenance obligations under a time charter leading to a delay in readiness of the vessel to load cargo. The resulting delay caused the charterers to miss the laycan for a sub-fixture, which was subsequently cancelled by the sub-charterers. The charterers re-fixed the vessel [Page29:] but the new sub-charter was less profitable and the charterers claimed the resulting loss of profit from the owners. The arbitral tribunal found that the loss of profit under the sub-charter was recoverable. The owners appealed to the court, relying inter alia on the House of Lords' decision in The Achilleas to argue that the appropriate measure of recoverable damages was limited to the difference between the market and charter rates during the period of delay.

The Commercial Court

Mr Justice Hamblen considered the relevant case law on remoteness of damage, starting with Hadley v. Baxendale and The Heron II. He stated that the generally accepted test for remoteness 'has been whether the loss claimed was 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'34 . He added, however, that the House of Lords' decision in The Achilleas 'has called into question whether that remains a sufficient test'.35

Having reviewed The Achilleas, Mr Justice Hamblen concluded that it 'results in an amalgam of the orthodox and the broader approach. 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.'36

He added that this conclusion was consistent with other recent cases, for example Classic Maritime v. Lion Diversified Holdings, where the judge stated that he would be highly surprised if The Achilleas had established a new test for the recoverability of damages for breach of contract.

Mr Justice Hamblen distinguished The Achilleas from the present case. Whereas a lost follow-on fixture made at the end of a charter could be for any period, a lost sub-charter could never be for a longer period than the time charter itself. It was less likely, therefore, that an unquantifiable, unpredictable, uncontrollable or disproportionate loss would arise in the latter case. Furthermore, there was no finding of a general market understanding that damages arising from delay during the period of a time charter party were limited to the difference between charter and market rates during the period of delay. On the contrary, the judge said, the general understanding is that a lost voyage fixture is a well recognized measure of damages in charter party cases.

As regards the tribunal's findings in this case, the judge found nothing surprising in the arbitrators' conclusion that the loss of a fixture during the course of a charter party due to delay in meeting a laycan caused by the owners' breach of the charter party was foreseeable and was a loss of the kind arising naturally and in the ordinary course of things. Vessels were chartered in order to be traded and trading would frequently involve sub-letting (in fact, time charters would normally include an express liberty to do so). Simple ordinary vessel trading often involved fixtures for the carriage of specific cargo, usually by voyage charter or by a time charter trip and the lifting of these cargoes almost invariably involved a laycan or a cancelling date. In the judge's opinion, therefore, 'one would expect it to be well within the reasonable contemplation of an owner that delay of significance in arriving or being ready to load at the designated load port may result in the loss of a fixture, as the tribunal found. If so, lost profit on such a fixture would equally be well within their reasonable contemplation.'37

Furthermore, in The Derby,38 it was clearly recognized that a claim for lost profits on a voyage charter which could not be performed because of delay due to the owners' breach of a time charter party could properly be made, so long as the loss could be proven. The owners' appeal was therefore dismissed and leave to appeal was also refused.

In a comment that was of particular interest to lawyers, arbitrators, the shipping industry and commerce in general, Mr Justice Hamblen stressed that 'it is important that it be made clear that there is no new generally applicable test of remoteness in damages. It appears that in a number of cases this is being argued and that decisions are being challenged for failing to recognise or apply the assumption of responsibility test. This results in confusion and uncertainty.' 39[Page30:]

Conclusion

More than one legal commentator has queried whether the House of Lords' decision in The Achilleas has changed the law. The fact that no reported English court decisions since The Achilleas would appear to have followed the House of Lords' decision in that case has led some to argue that nothing has changed. Others suggest that it has added a gloss to the traditional test of foreseeability of loss with the consequence that, in very unusual circumstances, losses that would otherwise meet that traditional test will be held to be irrecoverable because the contract breaker could not reasonably be considered to have assumed responsibility for those losses given the prevailing circumstances at the time the contract was concluded.

On the other hand, in certain limited cases, there may be scope for the assumption of responsibility test to come into play and allow for recovery of damages where the traditional test of foreseeability of loss might not otherwise allow such an outcome. In fact, the Court of Appeal in Supershield Ltd v. Siemens Building Technologies FE Ltd raised this possibility by suggesting that, in circumstances where losses were not sufficiently foreseeable, they might nonetheless be recoverable if, construing the contract in its commercial context, the contract breaker could be taken to have assumed responsibility for those unforeseeable losses. Ultimately, the present prevailing view would appear to be that The Achilleas may be confined in the scope of its application or to its facts. In practice, it may not have as significant an effect as it was initially thought to do.

Therefore, from the point of view of those drafting commercial contracts, it remains advisable to negotiate and expressly allocate risks within the written contractual provisions, including setting out the risks that the parties are prepared to assume or alternatively wish to exclude. Some options which might be considered within the contractual context include the following: liquidated damages clauses; force majeure provisions; limitation of liability and exclusion of liability provisions with agreed monetary caps and excluding agreed categories of loss (for example, consequential loss); and allocation of responsibility for taking out insurance cover for specified events.



1
[2008] 2 LLR 275.


2
Readers wishing to explore the subject further may like to consult the following literature: T. Coghlin et al., Time Charters, 6th ed. (Informa, 2008), especially chapter 4 (Duration of the Charter); J. Cooke et al., Voyage Charters, 3rd ed. (Informa, 2007), especially chapter 21 (Remedies for Breach of Charter); P. Herring & H. Clifford, 'Commercial Court Provides Further Guidance on Remoteness of Damage in Breach of Charterparty Cases: Sylvia Shipping Co. Limited v. Progress Bulk Carriers Limited [2010] EWHC] 542 (Comm) (The Sylvia)', Shipping E-Brief (Ince & Co., May 2010); M. Volikas, 'Damages for Late Redelivery - The Achilleas', Shipping E-Brief (Ince & Co., July 2008) 5; D. Foxton, 'Damages for late or early redelivery under time charterparties' [2008] LMCLQ 461; Chitty on Contracts, 30th ed. (Sweet & Maxwell, 2010), vol. 1 (General Principles), part 8, chapter 26 (Remedies for Breach of Contract).


3
(1854) 9 Ex 341.


4
[1949] 2 KB 528.


5
[1967] 2 LLR 457.


6
Ibid. at 462.


7
Ibid. at 462.


8
[1991] 1 LLR 100.


9
[1975] 1 LLR 115.


10
[1977] 2 LLR 1.


11
[2006] EWHC 3030, [2007] 1 LLR 19 and [2007] EWCA Civ. 901, [2007] 2 LLR 555.


12
[2008] 2 LLR 275.


13
[2007] 2 LLR 555 at 573.


14
[2008] 2 LLR 275 at 278.


15
Ibid.


16
[1997] AC 191.


17
[2008] 2 LLR 275 at 280.


18
Ibid. at 281.


19
Ibid. at 282.


20
Ibid.


21
Ibid. at 283.


22
Ibid. at 288.


23
Ibid at 289.


24
Ibid. at 291.


25
Ibid.


26
Ibid. at 285.


27
Ibid. at 293.


28
Ibid.


29
[2009] 1 LLR 293.


30
[2010] 1 LLR 59.


31
[2010] 1 LLR 349.


32
Ibid. at 356.


33
[2010] EWHC 542 (Comm.), [2010] 2 LLR 81.


34
[2010] 2 LLR 81 at 84.


35
Ibid.


36
Ibid. at 85.


37
Ibid. at 88.


38
[1984] 1 LLR 635.


39
[2010] 2 LLR 81 at 86.