Golden Strait Corporation v Nippon Yusen Kubishika Kaisha "The Golden Victory"

This is an appeal by Golden Strait Corporation (GSC) Owners of the “Golden Victory” and the Claimant in an Arbitration to which Nippon Yusen Kubishika Kaisha (NYKK) was the Respondent. The appeal is against an Award dated 27 October 2004 made by Mr Robert Gaisford as sole arbitrator. The arbitration arose out of a Charterparty (and related agreements) dated 17 July 1998. NYKK were the Charterers. The appeal is on a point of law under Section 69 of the Arbitration Act 1996. The parties agreed that an appeal to this court could be brought on any point of law arising out of the Award and therefore GSC did not require permission to appeal: Section 69(2)(a) of the Arbitration Act 1996.

The issue is one of the assessment of damages for repudiation of a long-term charterparty. GSC submits that where there is an available market damages are to be assessed once and for all at the date of breach at the charter rate less the market rate for the balance of the term of the charter. NYKK submits that it is for GSC to prove that the breach has caused that loss and it cannot do so if in the events which occurred after the date of breach the charterer would have been entitled to and would have terminated the charter during the course of its remaining period. To put the matter squarely: if the charterparty has, say, another 4 years to run when the charterer repudiates it and there is then an available market, but the charter contains a “War Clause” which would have entitled the charterer to cancel on the outbreak of war 2 years after the repudiation, does the owner’s claim for charter rate less market rate run for 2 or 4 years?

The Charterparty was for a period of 7 years with 1 month more or less in NYKK’s option. In an Interim Award dated 12 September 2002 the Arbitrator decided that the earliest date on which the vessel could be redelivered was 6 December 2005.

Clause 33 of the Charterparty provided:

“if war or hostilities break out between any two or more of the following countries: USA, former USSR, PRC, UK, Netherlands, Liberia, Japan, Iran, Kuwait, Saudi Arabia, Qatar, Iraq, both Owners and Charterers shall have the right to cancel this charter ….”

The references to the countries of Liberia through to Iraq were added as a typed variation. The Special Clauses included (Clause 69) an option for NYKK to cancel if the vessel was off-hire for 30 days. The charter rate included a profit commission.

The Interim Award also determined that NYKK in repudiatory breach of the Charterparty redelivered the vessel to GSC on 14 December 2001 and that GSC accepted that breach as terminating the charter in a letter dated 17 December 2001.

The relevant preliminary issue on quantum addressed in the Award under appeal was:

“Did the events (described as the outbreak of the second Gulf War) in March 2003 place a temporal limit on the recoverability of damages by the Owners for the Charterers’ repudiation of the Charterparty and, if so, what limit?”

Following an oral hearing in September 2004, the Arbitrator found that the second Gulf war did place a temporal limit on the damages recoverable by GSC in that no damages were recoverable after that date. The actual dates (as found) were: the Charterparty came to an end on acceptance by GSC of NYKK’s repudiatory breach on 17 December 2001; it then had a period of just less than 4 years to run; the second Gulf war began in March 2003, some 14 months after the repudiation and some 32 months before the period of the Charterparty would have expired.

The Arbitrator found that:

The same counsel who appeared before this Court conducted the Arbitration. The submissions were plainly very similar to those I heard. Mr Hamblen QC, for GSC, says (rightly) that he won the argument but lost the case. The Arbitrator preferred Mr Hamblen’s submissions to the effect that in law the second Gulf war was irrelevant to GSC’s claim which was to be assessed at the difference between the charter rate and the (lower) market rate for the whole of the remaining 4 year period of the Charterparty. But the Arbitrator said he was constrained by the decision of Timothy Walker J in B.S.&N. Ltd v Micado Shipping Ltd (The “Seaflower”) [2000] 2 Lloyd’s Rep 37 to decide otherwise.

Mr Hamblen’s submissions, in my summary, were to the following effect:

Mr Young QC’s submissions, again in my summary, were the following:

These submissions were well presented and cogent. There is, it is agreed, no authority on the matter binding upon me which determines the outcome. However, and before considering authority, I can see no compelling or persuasive reason why the existence of an available market at the date of the breach, and a principle of mitigation founded upon it, should result in a strict rule applicable to the assessment of damages only in such cases and a rule which ignores normal considerations of actual loss and causation and is subject to a limited exception which itself does not find a parallel in any other field of the law. Certainty in the law is, of course, a real and beneficial target, especially so when major commercial decisions are to be taken on the basis of advice or knowledge of rights. But certainty is not easily achieved. For example, the Charterparty contained within it the commercial uncertainty of the War Clause. Why should that uncertainty be ignored in the assessment of the loss which follows from the wrongful repudiation of that contract?

Although I have been referred to a considerable number of authorities and text books, and an article by Professor Waddams in the 1981 Law Quarterly Review, the key authorities are, I think, The Mihalis Angelos, The Elena d’Amico, North Sea Energy Holdings v PTT [1999] 1 Lloyds Rep 483 and The Seaflower.

Before turning to those authorities, I propose simply to summarise what in my judgment is the relevant effect of the other authorities and sources to which I have been referred:

The case concerned a voyage charterparty. The charterer was entitled to cancel should the vessel not be ready to load at Haiphong on or before 20 July 1965. On 17 July the vessel was at Hong Kong. On that day the charterers purported to cancel on the ground of force majeure. The owners accepted this conduct as a repudiation of the charter and claimed damages for loss of profit. The damages issue arose on the charterers’ case (found as a fact by the arbitrators) that had the vessel proceeded from Hong Kong to Haiphong she would not have been ready to load there until after 20 July and the charterers would “beyond doubt” have exercised their option to cancel for that reason. Mocatta J (on a special case stated by the arbitrators) held that the owners were nonetheless entitled to substantial damages and the finding that the charterers would have cancelled the charter was irrelevant. On appeal, the charterers succeeded on the basis that they were entitled to terminate the charter on 17 July but the court also addressed the damages issue on the basis that there was a repudiatory breach. The Court held that because the charterers would have cancelled the charter on arrival of the vessel in Haiphong the owners would have suffered no loss from the repudiation and would only have been entitled to nominal damages. Thus the decision itself is an example of the normal measure of damage being overridden by proof that repudiation of the charter caused no loss.

Each member of the court delivered a short judgment on the issue. The submissions of Robert Goff QC for the Owners are, as Mr Young pointed out, of some significance. The salient points can be found at page 190G to 191B. They were that:

“(7)

In the present case, the finding of fact that the charterers would have cancelled the charterparty under clause 11, if the contract had not previously been determined, is irrelevant in point of law. A valid cancellation of the charterparty under clause 11 would not be a breach of contract; and since the owners have anticipated an actual breach of contract by the charterers, the latter must be regarded as though they would have committed an actual breach when the time came for them to perform.

(8)

It follows that the present case must be decided on the basis that the vessel would have proceeded to Haiphong and the charterers would then in actual breach of contract, have failed to do what they then had to do. All matters relevant to the assessment of damages on this basis are relevant, but no other matters. Thus if, for example, the charterparty gave the charterers an option as to the amount of cargo to be shipped, such an option would have to be taken into account by the court in assessing damages where that breach has been anticipated. Again, any relevant event subsequent to the time of the actual breach which would have had the effect of reducing the damages which would otherwise have flowed from the actual breach (even an event which would thereafter have frustrated the adventure) must be taken into account in assessing damages where the breach has been anticipated ….”

Thus the submission was not that events subsequent to the breach were irrelevant but only that events between anticipated breach and actual breach were irrelevant. The submission failed at the outset because the court decided that an accepted anticipatory repudiation was itself a breach.

Lord Denning MR at page 196G to 197B said:

“Seeing that the renunciation itself is the breach, the damages must be measured by compensating the injured party for the loss he has suffered by reason of the renunciation. You must take into account all contingencies which might have reduced or extinguished the loss. That is made clear by the very first case in which the doctrine of anticipatory breach was established, in Hochster v De la Tour itself (1853) 2 E. & B. 678, 686-687. It follows that if the defendant has under the contract an option which would reduce or extinguish the loss, it will be assumed that he would exercise it. Again, if it is reasonable for him to take steps to mitigate his loss, he must do it. And so forth. In short, the plaintiff must be compensated for such loss as he would have suffered if there had been no renunciation: but not if he would have lost nothing.

Seeing that the charterers would, beyond doubt, have cancelled, I am clearly of opinion that the shipowners suffered no loss: and would be entitled at most to nominal damages. On this point the two experienced arbitrators (one on each side) were quite agreed. I agree with them. I would allow the appeal and restore the award, which adjudged that the claim of the owners failed.”

Edmund Davies LJ at page 202G to 203C, having commented that there must surely be something wrong with Mr Goff’s submission, continued:

“But the true test in a case of anticipatory breach is: “What would the position of the parties have been if the defendant had not wrongly announced his refusal to fulfill his part of the contract when the time for performance arrived?” One must look at the contract as a whole, and if it is clear that the innocent party has lost nothing, he should recover no more than nominal damages for the loss of his right to have the whole contract completed.

The assumption has to be made that, had there been no anticipatory breach, the defendant would have performed his legal obligation and no more. “A defendant is not liable in damages for not doing that which he is not bound to do”: per Scrutton LJ in Abrahams v Herbert Reiach Ltd. [1922] 1 KB 477, 482, cited with approval by Diplock LJ in Lavarack v Woods of Colchester Ltd. [1967] 1 QB 278,293. In the light of the arbitrators’ finding, it is beyond dispute that, on the belated arrival of the Mihalis Angelos at Haiphong, the charterers not only could have elected to cancel the charterparty, but would actually have done so. The rights lost to the owners by reason of the assumed anticipatory breach were thus certain to be rendered valueless. It follows from this that, in my judgment, the arbitrators were right in holding that, in the circumstances, the claim of the owners for damages should be dismissed.”

Finally, Megaw LJ, having expressed agreement with both the conclusion and reasons of the arbitrators (“the owners are only entitled to be put in the position of having their ship on a charter, which, as soon as she got to Haiphong, could legally have been, and would have been cancelled: and are entitled to nominal damages accordingly and no more”) said at page 209H to 210B:

“In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost, subject to his duty to mitigate. If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events.”

I have underlined the words in Megaw LJ’s judgment on which Mr Hamblen founds his submission. They establish, he submits, that the only exception to the “rule” that where there is an available market damages must be assessed at the difference between charter rate and market rate at the date of breach is the extreme case where it can be proved “beyond doubt” (Lord Denning) “beyond dispute” (Edmund Davies LJ) or as a matter of “predestiny” (Megaw LJ) at the date of acceptance of the repudiation that the charter rate would not in fact have been earned.

In my judgment, this analysis of The Mihalis Angelos is to be rejected:

The Elena d’Amico concerned a three-year charterparty. The vessel was delivered on 10 January 1972 and traded for 14 months. The owners then failed to repair the vessel and (so it was held) thereby repudiated the charterparty. The repudiation was accepted by the charterers on 30 March 1973. The charterers did not charter another vessel. The damages issue was whether or not the charterers were entitled to claim the loss of special charter rates applicable to Italian coastal trade or could only claim the difference between the charter rate and the general market rate (on the evidence, nil). The judge (Robert Goff J) held that there was an available market to charter in a substitute vessel and that was the proper measure of loss.

There is, to my mind, little in this decision which assists the resolution of the present issue. The case is (further) authority for the well established proposition that the “normal” or “usual” measure of damages where there is an available market at the time of termination of a charter is “generally” the difference between the contract rate for the balance of the charter period and the market rate for chartering in a substitute vessel for that period. That is not in issue between the present parties. The effect, in the Elena d’Amico, was to diminish the claim by the innocent party. In that case, as this, the court was addressing circumstances in which a substitute vessel had not been chartered in. Mr Hamblen made a strong submission that it would be unfair if the innocent party did charter in for (say) 4 years and then found (say) two years later that his claim ended then because of a war. He also submitted that the “rule” operated on the basis that there was a deemed charter in. I see the force of that. It is not this case. It is of course at least possible, if not probable, in this case that any charter in would also have had a War Clause applicable in the event of the second Gulf war. It may also be arguable in a case where an actual charter is entered into that the loss is to be founded on that charter as a reasonable act of mitigation regardless of such a subsequent event.

In any event, Goff J, at page 87, acknowledged that the “normal measure” is only “a prima facie rule” and the “governing principle” remains that the measure of damage is the loss directly and naturally resulting, in the ordinary course of events, from the breach of contract. A loss which is not in fact incurred cannot, I think, be so described albeit it may fix the maximum available claim by operation of the principles of mitigation as it did in The Elena d’Amico and in Norden v Andre [2003] EWHC 84 (Comm). A minor illustration of the fact that it is the operation of mitigation principles which gives rise to the “normal” rule is to be found in Woodstock Shipping Co v Kyma Compania Naviera SA (The “Wave”) [1981] 1 Lloyd’s Rep 521 at 532 in which Mustill J expressed “the principle” to be that “the applicable measure of damages is the difference between the hire which would have been payable in accordance with the fixture and the hire which the plaintiffs would have had to pay if they had entered into a kindred fixture on or shortly after the date when the contract was repudiated”. The underlined words were added to reflect the possibility that it might take some time to obtain a replacement vessel even acting reasonably. In this case, it was GSC’s claim that a new fixture would only have commenced earning, following negotiation, on 1 April 2002. It follows, therefore, that even the usual measure of damages may only apply from a date after the date of breach.

The dispute involved a contract for the supply of oil over a five-year period. Both parties alleged the other had repudiated the contract. The claimant sellers (“MSH”) sought damages on the basis that they had a source of oil at a particularly good price alternatively for the loss of profits which would have arisen on a normal market purchase. The judge held that no loss had been proved on either basis. In the course of his judgment, reported at [1997] 2 Lloyd’s Rep 418, Thomas J, at page 432, referred to the well-known principle where a repudiatory breach has occurred that the innocent party was not required to prove that he was then ready and willing to perform his side of the bargain. Mr Hamblen placed some reliance on this in his submissions but, in agreement with Mr Young, and as Mr Hamblen acknowledged, the principle is one which is material to liability not to the measure or amount of loss.

The decision on appeal is relied upon by Mr Hamblen because of the emphasis in Waller LJ’s judgment (with which the other members of the court agreed) upon the judgment of Megaw LJ in The Mihalis Angelos. The decision of the Court was that MSH had indeed failed to establish both that it could supply oil under the contract and that such failure was due to any breach by PTT. That was sufficient to dispose of the appeal. At the end of his judgment, at page 496, Waller LJ characterised the submissions on behalf of MSH as coming close to those “emphatically rejected” in The Mihalis Angelos, referred to the judgments of both Lord Denning and Edmund Davies LJ and then said that Megaw LJ had “put the matter succinctly” quoting the passage from Megaw LJ’s judgment which I have quoted. Waller LJ then concluded his judgment by stating that:

“At the time of the repudiation found by the Judge it was predestined that without the information as to the ports of discharge no confirmation could be obtained from the original supplier. Indeed it was predestined that no oil could be delivered by MSH without the information. It was also predestined at that time that PTT would not supply that information. Only if PTT were in breach of contract for failing to do so could MSH succeed on a claim for damages.

In the context of the issues in the case that was a sufficient approach. The contract between MSH and PTT could not, on those findings, ever have been performed by MSH because MSH could not supply the oil and so MSH had suffered no loss even if PTT had repudiated the contract.

I do not think that Waller LJ was intending to endorse the “rule” for which Mr Hamblen contends or treating Megaw LJ’s dictum as a rule. It should also be noted that the Court approached the question of proof as proof on the balance of probabilities as might be expected: Waller LJ at page 496.

In The Seaflower the defendant owners let the vessel to the claimant charterers for a period of 11 months maximum 12 months at charterers’ option. The charter contained “a major approvals clause” requiring the vessel to be acceptable to a number of major oil companies, including Exxon and Mobil, and that loss of any one approval must be reinstated within 30 days failing which charterers were to be at liberty to cancel.

After some 2 months, on 30 December 1997, the charterers claimed they were entitled to terminate the charter for breach of condition in relation to Exxon approval. Timothy Walker J determined that the charterers did not have an automatic right to terminate on that basis. But the charterers also argued, and Timothy Walker J held, that the charter would in any event have come to an end on 26 February 1998 as the vessel would inevitably have lost and would not within 30 days have regained Mobil approval by that date.

Timothy Walker J decided that on those findings the owners’ claim was limited to the period up to 26 February 1998. Reference was made to each of the judgments in The Mihalis Angelos and in particular to the “broad approach” adopted by both Lord Denning and Edmund Davies LJ. Timothy Walker J continued:

“I must follow the formulation of the majority of the Court of Appeal. In any event, I see no reason why in the case before me the approach should be constrained in the way suggested by Lord Justice Megaw. If the contract would inevitably have come to an end earlier than its due date anyway, it is right that the damages should be limited accordingly, regardless of whether or not that event was predestined at the date of repudiation. As Lord Denning said the Court “must take into account all contingencies which might have reduced … the loss”.

Counsel for the owners also relied upon the fact that Lord Justice Megaw’s formulation was cited with approval by Lord Justice Waller in North Sea Energy Holdings NV v Petroleum Authority of Thailand, [1999] 1 Lloyd’s Rep. 483 at 496, col. 2. However, on the facts of that case no issue arose as to whether or not the event was predestined, so that the Court of Appeal did not need to explore the precise ambit of the test.

I therefore ask myself the simple question, would this contract inevitably have come to an end on Feb. 26, 1998, because the owners would have lost (and been unable to regain in time) the Mobil approval? It of course goes without saying in this context that had the charterers acquired a liberty to cancel under the major approvals clause, they would have used it.”

It will be apparent from what I have already said in this judgment that despite the more extensive submissions made to me I agree with Timothy Walker J save that if “inevitability” rather than probability was intended to be a test I would differ.

In my judgment the Arbitrator was right in his conclusion despite his reluctance to reach it. Essentially and in summary I think:

I derive at least some comfort for these conclusions from the learned editors of Voyage Charters (2001) 2^nd Edition at paras 21.6 to 21.15. It follows that in my judgment this appeal must be dismissed. I will hear the parties on any consequential matters when this judgment is formally handed down.