Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd

The Claimants (“Owners”) appeal in respect of questions of law arising out of an arbitration award dated 28 April 2009 (“the Award”) of Messrs Alan Oakley and William Wingate (“the Tribunal”).

The Award concerned various claims and counterclaims made by the Owners and the Respondents (“Charterers”) in relation to a time charterparty on an amended NYPE (1946) form dated 22 February 2000 (“the charterparty”) of the vessel mv “SYLVIA” (“the vessel”).

The Tribunal held that Owners had failed to exercise due diligence and had breached their contractual maintenance obligations, under lines 22-23 and 37-38 of the charterparty, in failing to maintain the steel-work within the cargo holds leading to a delay in readiness of the vessel to load a cargo of wheat at Baie Comeau. As a result a sub-charter made by the Charterers with Conagra Trade Group Inc (“Conagra”) was cancelled when the vessel missed the laycan dates. The Charterers claimed for loss of profit on the cancelled Conagra sub-charter and the Tribunal held that the claim succeeded to the extent of USD 273,706.12. It this part of the Award which is the subject of appeal.

The essential issue which arises on the appeal is the proper approach to damages in these circumstances and in particular whether damages based on the loss of a sub-fixture made are too remote in law. The Owners contended, in reliance upon the House of Lords decision in The Achilleas [2009] 1 AC 61, that the recoverable damages were limited to the difference between the charter and the market rate during the period of delay.

The essential facts as found in the Award are that the Owners chartered the vessel to the Charterers on a period time charterparty dated 22 February 2000. The vessel was a single deck bulk carrier of 22,525 mt dwt, with 5 holds, built in 1981.

The charterparty was initially for 2-4 months +/-15 days, but was later extended. The last extension was made by way of an addendum dated 13 June 2003, under which the charterparty was extended for a further period of minimum/maximum 11/13 months in Charterers’ option at a hire rate of USD 5,900 per day.

On 11 March 2004 the vessel loaded a cargo of green petcoke at Anacortes, Washington, USA, for discharge at Port Alfred, Quebec Province, Canada.

On 30 March 2004, Charterers entered into a sub-voyage charter with Conagra for the carriage of a cargo of wheat from Baie Comeau to Casablanca, with a laycan spread of 14-22 April 2004. On 13 April 2004, Charterers declared the next loadport as Baie Comeau.

The vessel arrived at Port Alfred on 14 April 2004. Discharge commenced at 0010 on 15 April 2004.

On 15 April 2004 a Port State Control (“PSC”) inspection was carried out, which found 3 structures in the holds to be wasted.

Discharge and cleaning of the holds was completed 16 April 2004. On the same day, the Canadian Food Inspection Agency rejected 4 of the vessel’s 5 holds for loading of grain and grain products. In response, Owners appointed contractors (who had cleaned the holds) for de-scaling work.

On 19 April 2004, the vessel arrived at Baie Comeau. The holds were inspected by PSC, who issued a detention order at 1500 that day due to violation of section 19 of SOLAS, recording that “Main Structure wasted in cargo holds Nos 1, 3 and 4”. Repairs were commenced on 22 April 2004.

Also on 22 April 2004, Conagra cancelled the sub-charter. On 23 April 2004, Charterers entered into a substitute fixture for the vessel with York Ltd (“York”) for one time charter trip to Lome, with delivery passing Baie Comeau anchorage outbound between 29 April and 3 May 2004.

Hold repairs were accepted as complete by Class and PSC at 1430 on 26 April 2004.

In relation to breach the Tribunal found that:

In relation to remoteness the Tribunal found that damages associated with the loss of the Conagra fixture were “foreseeable” and “within the first limb of “Baxendale””.

They further found that:

As to the quantum of damages, they found that the Conagra voyage would have taken 23.7467 days and have yielded a net revenue of USD804,222.05, resulting in a time charter equivalent rate of USD33,866.69 per day.

The Tribunal found that earnings made on the substitute charter with York had to be credited against the loss of revenue claimed. The net hire rate under the York charter was USD22,340.62 per day. The difference was therefore USD11,526.07 per day and, on the basis of credit being given throughout the period which the Conagra charter would have taken, they “found the Charterers loss to be: 23.7467 days x US$ 11,526.07 = US$ 273,706.12.”

The law on remoteness of damages in contract has long been based on the judgment of the Court of Exchequer in Hadley v Baxendale (1854) 9 Ex 341 as refined in subsequent cases, and in particular the House of Lords decision in Czarnikow v Koufos, The Heron II [1969] 1 AC 350.

In the classic statement of the rules regarding remoteness Alderson B in Hadley v Baxendale said at p354-55:

In The Heron II Lord Reid clarified the law on the degree of likelihood required in order that a claimant may recover damages for a particular type of loss. In a well known passage he said that the proper test is whether the loss in question is (at p382G-383A):

In the light of the authorities, 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. However, the recent House of Lords decision in The Achilleas has called into question whether that remains a sufficient test.

In The Achilleas a time chartered vessel was delayed during a legitimate final voyage, and redelivered late. The late redelivery was a breach of the contract, which caused owners to fail to deliver the vessel within the laycan spread of the follow on charter. Owners were forced to renegotiate with the new charterers a substantially reduced rate of hire. Owners claimed damages for the difference between the original and renegotiated rates of hire for the entire duration of the follow on charter (4-6 months).

The House of Lords held that owners were not entitled to recover the difference between the original and renegotiated rates of hire; their damages were limited to the difference between the market rate of hire and the rate of hire agreed in the contract which was breached, and it was limited to the period during which owners were deprived of the vessel by late redelivery.

The speeches in the House of Lords disclose two approaches to remoteness of damages: the orthodox approach and the broader approach. The differences between them are highlighted in the speech of Baroness Hale.

The orthodox approach reflects the generally accepted remoteness test based on Hadley v Baxendale and subsequent cases (what Lord Hoffman described as “the ordinary foreseeability rule”). This was the approach adopted by Lord Rodger. He considered the relevant question to be whether at the time of the contract the parties would reasonably have contemplated that an overrun of nine days would “in the ordinary course of things” cause the owners the kind of loss claimed. He concluded that they would not have done (see para. 60):

Baroness Hale stated her understanding of his conclusion in the following terms (para. 91):

She made it clear that she was allowing the appeal only on this narrower ground.

Lord Hoffman, whilst recognising that the orthodox approach will be applicable in the “great majority of cases”, nevertheless considered that it may 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” (para. 9).

He considered that The Achilleas was such a case and that the parties would have considered losses arising from the loss of a follow on fixture as a type or kind of loss for which the charterer was not assuming liability.

As explained by Baroness Hale, this means asking “not only whether the parties must be taken to have had this type of loss within their contemplation when the contract was made, but also whether they must be taken to have had liability for this type of loss within their contemplation then. In other words, is the charterer to be taken to have undertaken legal responsibility for this type of loss?” (para.92).

The particular features in The Achilleas which led Lord Hoffman to conclude that there had been no assumption of responsibility were: (1) that the loss would be completely unquantifiable as the parties would have no idea when the owners would make a follow on fixture or what its length or other terms would be (para. 23); and (2) it would be contrary to what would have been the expectations of the parties (para. 24) because “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” (at least among legal advisers) (paras. 6 and 7) and there had been “a uniform series of dicta over many years in which judges have said or assumed that the damages for late delivery are the difference between the charter rate and the market rate” (para. 10).

Lord Hope also considered that it was necessary to consider whether “whether the loss was a type of loss for which the party can reasonably be assumed to have assumed responsibility” and concluded that it was not.

Lord Rodger stated he had not found it necessary to explore the issues concerning assumption of responsibility and that he was only “otherwise” in substantial agreement with the reasons given by Lord Hoffman. Baroness Hale made it clear that she was not deciding the case on the basis of assumption of responsibility and that she had considerable doubts about its appropriateness in a contractual context.

Two of their lordships therefore decided the case on the orthodox approach, and two of them did so on the broader approach. Lord Walker gave a judgment which contained elements of the reasoning of both approaches and concluded that he was agreeing with the further reasons given by not only Lord Hoffman and Lord Hope but also by Lord Rodger. Given the disparity between the two approaches this has understandably led to some confusion as to what is the ratio decidendi of the House of Lords decision.

One view is that Lord Walker’s agreement with the reasons given by Lord Rodger means that the views of Lord Hoffman and Lord Hope did not command a clear majority so as to make it part of the ratio decidendi. This is the view of McGregor on Damages (18^th ed.) at para. 6-173:

Chitty on Contracts Vol 1 (30^th ed.), on the other hand, takes the view that the decision means that assumption of responsibility for losses of the particular kind suffered as now being an “additional and probably separate requirement of the remoteness rule” (para. 26-110A) and treats assumption of responsibility as being the approach adopted by the majority (para. 26-100G).

I understand Lord Walker’s agreement with the reasons given by both Lord Rodger and Lords Hoffman and Hope to mean that he was agreeing with Lord Rodger that the loss was too remote applying the orthodox approach. However, he was also agreeing with Lord Hoffman and Lord Hope that this was a case in which it was appropriate to consider the issue of assumption of responsibility and that was a further reason why the loss was too remote. I therefore consider the rationale of assumption of responsibility to have had the support of the majority.

In my judgment, the decision in The Achilleas 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.

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 is consistent with the judgment of Lord Hoffman in which he makes it clear that the orthodox approach is the “prima facie” rule which will apply in the “great majority of cases” (para.9) and that “cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual” (para 11).

It is also consistent with the judgment of Lord Hope in which he recognised that where the loss claimed reflects what happens in ordinary circumstances (i.e. is within the first limb of the so-called rule in Hadley v Baxendale) than an assumption of responsibility can be presumed – “That is why the damages that are recoverable for breach of contract are limited to what happens in ordinary circumstances—in the great multitude of cases, as Alderson B put it in Hadley v Baxendale —where an assumption of responsibility can be presumed” (para. 36).

It is also consistent with subsequent authorities which have considered the effect of The Achilleas.

In The Amer Energy [2009] 1 Lloyd’s Rep. 293, 295, para 17 – 19 Flaux J summarised the effect of The Achilleas as follows:

In Classic Maritime v Lion Diversified Holdings [2010] 1 Lloyd’s Rep. 59 Cooke J stated (at p71) that he would be “highly surprised” if The Achilleas established a new test for the recoverability of damages for breach of contract, and noted that Flaux J had been “wholly unpersuaded” that they had done so.

Most importantly, in Supershield Ltd v. Siemens Building Technologies FE Ltd [2010] EWCA Civ 7, [2010] 1 Lloyd’s Rep. Plus 20, the Court of Appeal summarised the position as follows:

The orthodox approach therefore remains the “standard rule” and it is only in relatively unusual cases, such as The Achilleas itself, where a consideration of assumption of responsibility may be required.

In my judgment, it is important that it be made clear that there is no new generally applicable legal 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 recognize or apply the assumption of responsibility test. This results in confusion and uncertainty.

In the vast majority of cases tribunals of fact can and should be able to apply the well established remoteness test with which they are familiar and which, in the vast majority of cases, works perfectly well.

In this connection I note the conclusions of Chitty at para. 26-100G:

The Charterers submitted that remoteness in general and foreseeability in particular is or is essentially an issue of fact – see The Heron II at p397B-D (per Lord Morris); The Achilleas para 25 (per Lord Hoffman).

Whilst I accept that there is a strong factual element to the issue of remoteness, the conclusion of whether or not a loss is too remote is generally recognised as being one of mixed fact and law – see, for example, The Rio Claro [1987] 2 Lloyd’s Rep. 173.

As the decision in The Nema [1982] AC 724 makes clear, on an arbitration appeal there are only limited circumstances in which the court will interfere with a conclusion of mixed fact and law. The Nema appeal itself concerned a question of mixed fact and law, namely frustration. Lord Roskill stated the nature of the review to be as follows:

As stated by Hobhouse J. in The Aegean Dolphin [1992] 2 Lloyd’s Rep. 178 at p184 (where the issue was one of repudiation):

The Tribunal’s consideration of the issue of remoteness is set out in paragraph 8.6 of the Award in which they stated that:

The Owners contended that the Tribunal had misdirected themselves in law for two main reasons. First, they submitted that the Tribunal had wrongly assumed that the Owners were accepting as being foreseeable a loss based on the loss of a prior contract, as opposed to a loss based simply on the market rate during the period of delay, and that that mistaken assumption infected all their findings. Secondly, they said that the Tribunal erred in referring to the remoteness test in terms of simple foreseeability and that they had ignored the requirement that the loss must be of a type “not unlikely” to result.

I reject these criticisms. On the first point, even if the Owners were correct that the Tribunal placed undue or inappropriate reliance on the acceptance assumed to be implicit in Owners’ argument, there is no reason to suppose that this affected the conclusion they drew in the last sentence of paragraph 8.6. This would appear to be a free standing conclusion of the Tribunal. On the Owners’ argument there would have been no need for the Tribunal to add this, still less to say that it was a finding they were “also” making.

On the second point, the Tribunal has expressly found that the loss was within the first limb of “Baxendale”. Although they have not spelt out what that connotes, it is self evident that it involves finding that the loss was “such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract 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.” That is what the first limb of “Baxendale” is and the Tribunal cannot fairly be criticised for not setting this out in full.

Directing themselves by reference to the first limb of the rule in Hadley v Baxendale discloses no error of law by the Tribunal, unless they were further required specifically to consider the question of assumption of responsibility. The Owners did not contend that they were so required and, for reasons set out below, I do not consider this to be one of those “unusual” cases in which it might be said that assumption of responsibility had to be addressed.

As to whether the conclusion they reached was one which on the facts as found no reasonable arbitrators could have reached applying the proper legal test, this is a heavy burden to discharge. Applying the orthodox approach and asking 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, the Tribunal found that it was. They found that the loss of a fixture during the course of a charterparty due to delay in meeting laycan caused by owners’ breach of charterparty is “foreseeable” and “within the first limb of “Baxendale””. In other words the commercial arbitrators viewed it as a loss of a kind which arises naturally and in the ordinary course of things.

There is nothing surprising about this conclusion. A vessel is chartered in order to be traded. The “nature and purpose” of a time charter “is to enable the charterers to use the vessel during the period of the charter for trading in whatever manner they think fit”: The Nanfri [1979] 1 Lloyd’s Rep. 201, 206 col. 1 (per Lord Wilberforce). Under a time charter, such as the Charterparty here, “in return for the payment of hire, [the owner] transfers the right to exploit the earning capacity of the vessel to the time charterers”: The Hill Harmony [2001] 1 Lloyd’s Rep. 147, 156 col. 1 (per Lord Hobhouse).

Trading will frequently involve sub-letting, and time charters will include an express liberty so to do. The trading of the vessel will often involve fixtures for the carriage of specific cargoes, usually by voyage charter but sometimes by a time charter trip. The lifting of such cargoes under the charter will almost invariably involve a laycan or a cancelling date. This is simply ordinary vessel trading. As such, 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.

That lost profits on a sub-charter for a failure to provide the services of the vessel during the currency of a time charterparty may be recoverable in damages is supported by the leading textbook on time charters. As stated in Wilford on Time Charters (5^th ed.) at para. 4.87:

In The Derby damages were claimed in respect of lost profits on a voyage charter which could not be performed because of delay due to owners’ breach of a time charterparty. Hobhouse J. clearly recognised that such a claim could properly be made. As he stated at p644-5:

Where a fixture is lost due to a failure to meet laycan dates there will often be a loss regardless of market considerations. The time charterers as disponent owners will be left with an unfixed vessel in a particular position which they will need to fix promptly in order to minimise their loss. That will frequently result in a distressed rate compared to the position when the vessel is fixed in advance with both more time and more possible cargo and positioning options. Some loss is therefore always likely.

If the market has declined since the time of the original fixture there may also be a market loss. In the present case it is unclear whether the disparity in rates was due to the need to fix prompt, market movements, or both.

A disponent owner who loses a voyage fixture due to owners’ breach is effectively in the same position as a vessel owner who loses a voyage fixture due to charterers’ repudiatory breach. In such a case the damages which are generally recognised as being recoverable are as summarised in Cooke and Young on Voyage Charters (3^rd ed.):

That is the approach to damages which the Tribunal adopted in this case.

The Owners contended that the Tribunal’s conclusion was nevertheless wrong in law because the present case cannot be distinguished from The Achilleas and in particular the orthodox approach to remoteness as applied by the House of Lords in that case.

However, in my judgment there are important differences between the claims made in the present case and in The Achilleas.

Unlike in The Achilleas, there is no finding of a general market understanding or expectation that damages for delay during the currency of a time charterparty are limited to the difference between charter and market rates during the period of delay. On the contrary, as Wilford and The Derby illustrate, the general understanding is that damages can be recovered for loss of a fixture in such circumstances. Moreover, the measure of damages recoverable for a lost voyage fixture is a well recognised measure of damages in charterparty cases.

Similarly, unlike in The Achilleas, this is not a case in which it can be said that the resulting liability is likely to be unquantifiable, unpredictable, uncontrollable or disproportionate. Where a follow on fixture is made at the end of a charter it could be for any period. It is entirely possible that it could be a long term charter lasting years even though the charter breached is for a relatively short term. It is the unpredictable and unquantifiable element introduced by the various possible lengths of follow on charter that makes the potential liability disproportionate and commercially unacceptable. By contrast, loss of a sub-charter during the currency of a time charter can never be for a longer period than the time charter itself. Further, very often, as here, it will be for the loss of the specific charter voyage for which the vessel was fixed. Loss of a voyage fixture within the course of a charterparty will result in a loss within reasonable and fixed confines. It is possible that market movements may mean it is a large loss, but it will be a loss based on a trading voyage.

The Owners placed particular reliance upon the judgment of Lord Rodger in The Achilleas at paragraphs 54 and 60.

At paragraph 54 Lord Rodger stated:

In the present case there is no basis for finding that “the parties would reasonably contemplate that, for the most part, the availability of the market would protect the [charterers] if they lost a fixture”. The Tribunal has made no such finding and the findings they have made are to contrary effect. As already noted, very often the market will not provide immediate protection to charterers for a lost fixture as it may well take some time to find any substitute employment. Nor can this be the thinking behind “dicta to the effect that the appropriate measure of damages … is the difference between the charter rate and the market rate” since there are no such dicta – quite the contrary.

At paragraph 60 Lord Rodger stated that:

The Tribunal’s finding in the present case is that the parties would reasonably have contemplated that a delay in providing the vessel’s services during the course of charterparty would “in the ordinary course of things” cause the charterers the kind of loss for which they claim damages. Further, there is no finding that this was a case involving extremely volatile market conditions, or even that the loss arose due to market conditions as opposed to the need to fix promptly.

In any event, it is apparent from Lord Rodger’s speech as a whole that his conclusion that the loss was too remote was not just based on market volatility. He also relied upon the fact that the parties would reasonably contemplate that the availability of the market would provide adequate protection for owners and the uniform dicta as to the appropriate measure of damages for late redelivery (see, for example, paragraph 54). In many cases volatility of the market will go to the extent rather than to the type or kind of loss suffered, as Cooke J.’s decision in Classic Maritime case illustrates.

Reliance was also placed upon paragraph 34 of Lord Hope’s judgment in which he stated:

However, in the present case there is no finding that it was within the parties’ contemplation that an injury which would generally arise from failing to provide the ship’s services for a period would be loss of use at the market rate compared with the charter rate. Nor are there any findings made as to market understanding or the perceived legal position which might support such a finding. Nor is the fact that the Charterers do not know at the time of contracting the terms of a sub-charter subsequently made a bar to recovery. In Victoria Laundry (Windsor) Ld v. Newman Industries Ld [1949] 2 KB 528, 543, the Court of Appeal held that the claimant laundry could recover for losses it had suffered under “contracts to be reasonably expected”, but not the additional loss suffered under unexpected “particularly lucrative dyeing contracts” - see also The Achilleas at para 82 (per Lord Walker). There is no suggestion, and certainly no finding by the Tribunal, that the Conagra fixture was anything other than a “contract to be reasonably expected” fixed at the market rate.

Finally, for completeness, I would add that, for reasons already stated, the features which made the The Achilleas an “unusual” case are not present here. As such, I do not consider that there was any requirement for the Tribunal specifically to address the issue of assumption of responsibility. Such an assumption of responsibility followed from their conclusion that this was a foreseeable loss arising naturally and in accordance with the ordinary course of things.

For all these reasons I do not consider that the Tribunal’s conclusion on remoteness involves any error of law. They directed themselves correctly in law. In any event, their conclusion was not inconsistent with the application of the correct legal test, still less necessarily so.

The Owners’ appeal accordingly fails and is dismissed.

As is increasingly common, the appeal bundle in the present case did not simply contain the Award but also contained documents and submissions from the arbitration. Indeed reference to this material was made in the Owners’ skeleton argument.

This is inappropriate. As a general rule, the only documents which should be put before the Court on an arbitration appeal are the award itself and the relevant contract. Unless clearly incorporated by reference, other arbitration documents are usually irrelevant and inadmissible. Unless there is a disputed issue as to whether the question of law was one which the tribunal was asked to determine, the same applies to applications for permission to appeal.

As clearly stated by the Court of Appeal in Universal Petroleum Co. Ltd. v Handels Und Transport GmbH [1987] 1 WLR 1178 at p1189:

Although Kerr LJ was there referring to the 1979 Arbitration Act, his statement is equally applicable to the 1996 Act, in which the same language is used. For the purpose of determining an appeal on a question of law “arising out of an award” it is the award itself which has to be considered.