Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
THE HONOURABLE MR JUSTICE MALES
Between :
LOUIS DREYFUS COMMODITIES SUISSE SA | Claimant |
- and - | |
MT MARITIME MANAGEMENT BV | Defendant |
“MTM HONG KONG”
Mr Michael Collett QC (instructed by Bentleys, Stokes & Lowless) for the Claimant
Mr Steven Berry QC and Mr Yash Kulkarni (instructed by Lax & Co LLP) for the Defendant
Hearing date: 30 July 2015
Judgment
Mr Justice Males :
Introduction
This appeal from maritime arbitrators is concerned with the damages recoverable by a shipowner for repudiation of a voyage charter.
In 1858, when the Court of Exchequer decided the case of Smith v M’Guire (1858) 3 H & N 554, it held that the starting point in ascertaining the shipowner’s loss was “the amount of freight which the ship would have earned if the charter-party had been performed” and that from this amount there should be deducted “the expenses which would have been incurred in earning it” together with “what the ship earned (if anything) during the period which would have been occupied in performing the voyage”. The case was cited in the first edition of Scrutton on Charterparties (1886) as establishing this as the measure of damage in an action against a charterer for not loading a cargo and, with only minor changes of wording, has been so cited in every edition since then. I shall refer to it, together with the refinements developed in subsequent cases discussed below, as the Smith v M’Guire measure.
In the present case damages awarded in accordance with this measure would have resulted in an award in favour of the shipowner of US $478,386.80. However, the damages awarded by the arbitral tribunal consisting of Mark Hamsher and Patrick O’Donovan as the party appointed arbitrators and Christopher Moss as chairman are US $1,212,316.50, almost three times this amount. The appellant charterers, Louis Dreyfus Commodities Suisse SA, contend that in failing to award damages in accordance with the Smith v M’Guire measure, the arbitrators have made an error of law. They appeal pursuant to section 69 of the Arbitration Act 1996 with the permission of Eder J.
The question of law arising from the award for which permission has been given is:
“If a voyage charter is repudiated by charterers in circumstances where the substitute employment begins after the contract voyage would have begun, and ends after the contract voyage would have ended, should damages be assessed by reference to the vessel’s (actual and hypothetical) earnings up to the end of the contract voyage, or such earnings up to the end of the substitute employment?”
Mr Michael Collett QC for the charterers contended that damages should be assessed by reference to the vessel’s actual and hypothetical earnings up to, but not beyond, the date when the contract voyage would have ended. He disclaimed any suggestion that this is necessarily an invariable rule, but said that it constitutes the usual measure, from which there is no justification for departing on the facts of this case. Mr Steven Berry QC for the respondent owners submitted that damages should be assessed in accordance with whichever of the alternatives proposed most fairly compensates an owner on the facts for the loss which it has suffered.
The facts
The charterers chartered the “MTM Hong Kong”, an oil/chemical tanker of 30,350 SDWT built in the year 2000, from the owners, MT Maritime Management BV, by a voyage charter dated 6 January 2011 on an amended Vegoil form. The charter was for the carriage of a cargo of 1-6 grades of crude/refined vegoil from two safe ports/berths within a range of load ports in South America, to one safe berth at 1-4 safe ports in the Gibraltar-Rotterdam range. The vessel’s previous employment had taken her to Boma, an upriver port on the River Congo in the Democratic Republic of Congo, where she suffered a grounding. This led to some delay, and exchanges between the parties, which eventually led to the owners accepting the charterers’ latest message as a repudiatory breach which brought the charter to an end.
The greater part of the award dealt with liability. The arbitrators held that the charterparty was repudiated by the charterers, who were therefore liable for damages. That decision has not been challenged.
The arbitrators made the following findings of fact relevant to the issue of damages:
The vessel completed discharge at Boma and commenced her ballast voyage towards the charterparty loading range in South America on 19 January 2011.
The charterparty came to an end on 21 January 2011.
Thereafter the vessel continued to sail towards South America, which the owners considered to be the most promising area in which to find substitute business.
The vessel arrived at Punta del Este in Uruguay on 2 February 2011.
However, the vessel was not fixed until 24 February 2011, when she was fixed to Glencore for a voyage from San Lorenzo in Argentina to Rotterdam with a cargo of sunflower oil and soya methyl ester.
The substitute fixture with Glencore was completed on 12 April 2011 when the vessel completed discharge at Rotterdam.
If the voyage charter had been performed, the voyage would have taken 43.6 days, completing on 17 March 2011. The vessel would then have carried a cargo of urea ammonium nitrate (UAN) from the Baltic to the United States, followed by a chemical cargo from the United States to Europe.
The owners’ decision to direct the vessel to South America in an attempt to obtain a substitute cargo and to wait there until the Glencore fixture was concluded was reasonable. A case of failure to mitigate was not pleaded, but even if it had been “could not get off the ground”.
Although the award does not spell out two further points, no doubt because they were obvious to all concerned, they are necessarily implicit in the arbitrators’ findings and reasoning. The first is that the North Atlantic chemical trade between Europe and the United States commanded higher freight rates than the vegoil cargoes available in South America. Hence the charterers’ suggestion to the owners’ witness in cross examination, which the arbitrators rejected, that despite the longer ballast voyage (longer by six days) the vessel should have been sent to Europe following the termination of the charter. The second is that the long delay in obtaining a substitute fixture in South America was unexpected. Had it been otherwise, the arbitrators could hardly have found that the decision to go there was reasonable.
The owners’ claim
The owners claimed damages consisting of the difference between (a) the profit which the vessel would have earned if not only the contract voyage but also the next two voyages (UAN to the United States and a chemical cargo back to Europe) had been performed and (b) the profit actually earned on the Glencore substitute charter to Europe. Once again the award does not spell this out, but it is implicit that performance of the contract voyage followed by the next two voyages would have brought the vessel back to Europe at about the same time as the completion of discharge under the Glencore fixture.
The charterers disputed this method of calculating the owners’ damages, contending that it was wrong as a matter of law to take into account the position up to the end of the substitute fixture which had terminated long after the charter voyage itself would have terminated. They argued that the correct approach was to apportion the earnings under the substitute charter so as to reflect the amount earned up to the date on which performance of the voyage charter between the parties would have been completed.
The award
The arbitrators accepted the owners’ case. In so doing they found that the loss claimed by the owners had been caused by the charterers’ breach, that the problems which sometimes arise in determining what a vessel’s future employment would have been did not arise in this case, and (as already noted) that the owners acted reasonably at all times. They determined, therefore, that the loss claimed had actually been suffered by the owners, that damages ought to be awarded accordingly in order to compensate the owners, and that there was no rule of law which prevented the full application of the compensatory principle by limiting damages by reference to the period when the contract voyage would have come to an end. They stated the position in paragraph 121 of the award as follows:
“In principle we agreed with the submission made on behalf of the Owners that there is no rule of law which requires that assessment of the damages due to an owner must be made simply by reference to what would have been earned under the repudiated charterparty and that it is therefore permissible to look beyond the date on which the repudiated charterparty would have ended if to do so enables an arbitration tribunal to more fairly judge the loss actually suffered by the innocent party for the purposes of applying the compensatory principle.”
I should refer to two passages in the award which, according to the charterers, demonstrate a fallacy in the arbitrators’ reasoning. First, in paragraph 109, the arbitrators described the problem with which they had to grapple in the following terms:
“As we have noted, the problem in assessing the Owners’ damages in the present case arose from the fact that following the termination of the charterparty the vessel was idle at Punta del Este from 2nd to 24th February. They [the owners] argued that the compensatory principle required that losses arising from their inability to fix her during this period should be taken into account.”
Second, in paragraph 123 of the award the arbitrators made much the same point, stating that:
“… it seemed to us that the particular problem in the present case posed by the lengthy delay at Punta del Este meant that the application of a compensatory principle left us with no real alternative but to take the longer view involving a hypothetical period of trading.”
These expressions of the arbitrators’ reasoning enabled Mr Collett to submit, correctly, that the usual measure of damages established by the Smith v M’Guire line of authority already compensates an owner for a delay in obtaining a substitute fixture. Thus if there is no substitute fixture obtained during the period which would have been covered by the contract voyage, there is no credit from substitute earnings to be set against the profits which would have been earned by the vessel from performing the contract voyage. Similarly, if a substitute fixture is only obtained towards the end of the period which would have been covered by the contract voyage, only a small proportion of the earnings from the substitute fixture will be attributed to that period and the credit to be given by the owners will be relatively modest. In general, therefore, delay in obtaining a substitute fixture, always assuming that an owner is acting reasonably, will have the effect of increasing rather than reducing an owner’s damages. Why then, asked Mr Collett, was the delay in fixing the Glencore substitute fixture a problem which required the arbitrators to depart from the usual measure of damages? There was no need to search for a way to compensate the owners for idle time at Punta del Este as the usual measure of damages would already provide such compensation. The fact that the arbitrators thought that it was a problem, and that this was the only reason they gave for departing from the usual measure, demonstrated that something had gone wrong.
Mr Berry responded that this was an unfair and ungenerous reading of the award and that it is sufficiently clear that what the arbitrators had in mind was not merely the delay in obtaining a substitute fixture, but the consequence of that delay. That consequence was that the vessel was delayed in returning to the more lucrative North Atlantic market. I accept that submission. It is well established that an award should be read in a fair and reasonable way (it could hardly be otherwise) without endeavouring to pick holes or find faults in the arbitrators’ reasoning: see, for example, the summary in The Pace[2009] EWHC 1975 (Comm), [2010] 1 Lloyd’s Rep 183 at [16]. Despite Mr Collett’s insistence that the arbitrators did not say in terms that they were awarding compensation for loss of the follow on fixtures, it is apparent that this is precisely what they were doing. They were compensating the owners for the loss suffered as a result of the delay in being able to earn the higher rates available in the North Atlantic market. The issue which arises on this appeal is whether this was wrong in law.
The charterers’ submissions on appeal
The charterers relied on the Smith v M’Guire line of authority as establishing the usual or prima facie measure of damages for repudiation by a charterer of a voyage charter. They submitted that the arbitrators had misunderstood or misapplied four principles of law which underpin this measure, namely (a) the compensatory principle, (b) the need to keep loss and mitigation distinct, (c) the need for sufficient proof of loss and (d) the allocation of responsibility under a voyage charter.
Some of these principles may need a word of explanation.
The compensatory principle is the fundamental principle governing the assessment of damages, affirmed by the House of Lords in The Golden Victory[2007] UKHL 12, [2007] 2 AC 353 at [29] as follows:
“The fundamental principle governing the quantum of damages for breach of contract is long established and not in dispute. The damages should compensate the victim of the breach for the loss of his contractual bargain. The principle was succinctly stated by Parke B in Robinson v. Harman 1 Ex 850 at 855 and remains as valid now as it was then.
‘The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed’."
The second principle on which the charterers relied was the need to keep loss and mitigation distinct. Mr Collett submitted that what the owners lost could not exceed the profit which they would have made from performance of the charter, which necessarily had to be assessed by reference to the period when the charter would have been performed and no later. In contrast, a substitute fixture entered into by way of mitigation might extend, as the Glencore fixture did, beyond that period, in which case it would be necessary to find a way (as in cases such as The Noel Bay [1989] 1 Lloyd’s Rep 361, discussed below) of apportioning the profit from the mitigation fixture so that credit need only be given for those earnings attributable to the period when the contract voyage would have been performed. Thus it might be necessary to take account of the vessel’s earnings beyond the contract period in order to determine what credit should be given for successful mitigation, but that provided no justification for extending the calculation of loss beyond that period.
The third principle, the need for proof of loss, arises because as a practical matter it is necessary to draw a line somewhere in assessing the loss caused by a charterer’s breach. A substitute voyage will not necessarily end at the same time or the same place as the contract voyage would have done. If a notional calculation is to be made of what a vessel would have done next if the contract voyage had been performed, there is an obvious danger, as Staughton LJ put it in The Noel Bay, that “one would be involved in calculations to the end of the ship’s working life”. A pragmatic solution is to treat the date when the contact voyage would have been completed as a cut off point for the calculation of loss.
Finally, the charterers submitted that the allocation of responsibility under a voyage charter, established for over 150 years by the authorities and given clear expression in the leading textbooks, was such that the charterers did not assume responsibility for losses after the period when the contract voyage would have been completed. It does not appear that their argument was put in this way before the arbitrators. In their skeleton argument in support of the appeal the argument was put in terms of remoteness, namely that lost profits from employment which would have been performed after the repudiated charter were too remote because the charterers did not assume responsibility for such losses. In oral submissions Mr Collett formulated the argument as an implied term of the voyage charter.
The authorities on damages for repudiation of a voyage charter
It is necessary to examine the authorities and leading textbooks. As will be seen, and as Mr Berry submitted, in none of the cases was a claim advanced for losses extending beyond the date when the contract voyage would have come to an end.
I have already referred to Smith v. M’Guire (1858) 3 H&N 554. At the trial, Martin B directed the jury that:
“the legal damage was the loss which had arisen from the breach of the contract; that from the amount of the freight which the ship would have earned if the charter-party had been performed, there ought to be deducted the expenses which would have been incurred in earning it, and also any profit which the ship earned between the expiration of the lay days and the time when the employment of the ship under the charter-party would have ended.”
This direction was upheld by the Court of Exchequer. Watson B said:
“Then as to the damages. I think that my brother left that question properly to the jury: he left substantially, what would the vessel have earned if the charter had been fulfilled by the defendant, and then deduct from that what she did earn, deducting also the expenses.”
Martin B repeated the view which he had expressed at the trial:
“The real damage is the loss arising from the breach of contract. That is to be ascertained by calculation of the freight to be earned, and deduction of the expenses which the shipowner would be put to in earning it; and what the ship earned (if anything) during the period which would have been occupied in performing the voyage, ought also to be deducted.”
Thus the court, or at any rate Martin B, stated the recoverable loss by reference to the profit to be earned by performing the contract voyage and the credit to be given for mitigation by reference to earnings during the period when the contract voyage would have been performed. However, it does not appear that the owner was claiming losses extending beyond the period of the contract voyage.
Citing this case, the first edition of Scrutton on Charterparties (1886, although it then had the rather less snappy title, The Contract of Affreightment as expressed in Charterparties and Bills of Lading) stated the measure of damage in Article 160 as follows:
“In an action against charterer for not loading a cargo, the measure of damage is the amount of freight which would have been earned under the charter, after deducting the expenses of earning it, and also any net profit the ship may have earned during the period of the charter. It is probable that any freight the ship might have earned by reasonable diligence after the final breach is to be deducted also.”
By the 19th edition in 1984, what had become Article 192 of Scrutton read as follows:
“In an action against a charterer for not loading a cargo, the measure of damage under the older authorities is the amount of freight which would have been earned under the charter after deducting the expenses of earning it, and also any net profit the ship may, or might have earned during the period of the charter on a substitute voyage. If the expense of earning freight on a substituted voyage of the same duration be the same as on the chartered voyage, the same result is arrived at by taking the difference between the charterparty rate of freight and the market rate of freight. And in modern times this would probably be laid down as the primary measure of damage.”
Consistently, therefore, the measure of damages was stated in terms of the profit which would have been earned under the charter less the profit earned during the period of the charter on a substitute voyage. Applying this measure, by definition the loss suffered is confined to the period of the contract voyage, while the credit to be given by way of mitigation is similarly confined. That left unresolved the question of how to deal with a substitute voyage which extended beyond the period for which the contract voyage would have lasted. It was this issue which was addressed in the next two cases.
In The Concordia C [1985] 2 Lloyd’s Rep 55the owners claimed damages for repudiation by the charterers. The owners accepted the repudiation on 2 February and fixed a substitute voyage on the same day. If the original charter had been performed it would have ended on 16 February, while the substitute fixture only commenced on 13 February and ended on 10 March. In order to get to the load port under the substitute fixture, the vessel had to perform a short ballast voyage. The arbitrators calculated the daily net revenue which the vessel would have earned during the period of the contract voyage and the daily net revenue which the vessel did earn under the substitute fixture. They then awarded the difference between those two rates, multiplied by the number of days which the contract voyage would have lasted. Bingham J held that this approach was mistaken. He held first that the applicable principle was the compensatory principle, even if that was not always easy to apply:
“The arbitrators correctly stated the guiding principle that the owners’ damages should be such sum as would put them in the same financial position as if the Rheinoel [i.e. the contract] charter had been performed. But that principle, easy to state, is often very far from easy to apply, and the arbitrators had a perplexing task in trying to give appropriate effect to a substitute charter to a different destination, overlapping for only a short period with the time the Rheinoel charter (if not repudiated) what would have taken to perform.”
The correct application of the principle, following the approach in the then current edition of Scrutton set out above, was to deduct from the net revenue under the contract charter only that part of the net revenue which the owners did in fact earn from the substitute fixture which was attributable to the period for which the contract voyage would have lasted:
“Had the owners been unable to find any employment for the vessel during the period which the Rheinoel charter would have taken to perform, their loss would prima facie have been the net revenue under that charter which they lost, assessed by the arbitrators at $225,143.00. Had the charter been performed the owners would at 08 00 hours on Feb. 16 have had a net profit in their pocket of this sum, plus a free ship. As it was, the owners were able to find employment for the vessel during the tail-end of this period, laytime under this alternative charter beginning to run at 00 01 hours on Feb. 13. To put the owners in the same position as if the Rheinoel charter had been performed, it is accordingly necessary to reduce the net revenue which the owners would have earned under it by the net amount which the owners did in fact earn during its currency. This is what the vessel did earn ‘during the period of the charter on a substituted voyage’ (Scrutton on Charterparties, 19th ed., art. 192).”
Giving effect to this approach, Bingham J held that the credit to be given to the charterers for the net earnings under the substitute fixture was limited to 3.3 days worth of such earnings, representing the period between commencement of laytime under the substitute fixture and the time when the contract voyage would have terminated. However, he added to the resulting damages figure the entire cost of the ballast voyage from Forcados, where the vessel was when the contract charter was terminated, to Kole, the load port under the substitute fixture. In this last respect, his approach was not followed by the Court of Appeal in the next case, The Noel Bay.
Finally Bingham J stated that:
“Had the arbitrators concluded that the [substitute] Marathon charter, extending after Feb. 16, conferred benefits on the owners which they would not have obtained had the Rheinoel charter been performed, that would go to depress the owners' damages but they did not so conclude and their award contains no material to suggest that they could or should have done so.”
I would make three comments on this case. First, it affirms that the guiding principle is the compensatory principle, albeit that the application of this principle may prove complicated. Indeed, the precise way in which Bingham J did apply it was not followed in The Noel Bay. Second, there was no claim for loss extending beyond the date when the contract voyage would have terminated. The issue was how to deal with a substitute fixture which extended beyond this point. Third, although the point did not arise on the facts, Bingham J acknowledged that benefits obtained from a substitute fixture would need to be brought into account to reduce the owners’ damages, and in so stating did not distinguish between benefits obtained before and after the date when the contract charter would have terminated.
The Noel Bay [1989] 1 Lloyd’s Rep 361 also concerned repudiation of a voyage charter by the charterers. The essential facts were similar. If the contract had been performed, there would have been a voyage from Augusta in Sicily to Lavera in the South of France which would have been completed on 9 June. Instead the vessel undertook a ballast voyage to Tuapse in the Black Sea in order to perform a substitute fixture to Banias in Syria which only completed on 17 June. The issue of relevance for present purposes was how to deal with the cost of the ballast voyage. Taking a different approach from that of Bingham J in The Concordia C, the Court of Appeal held that this cost was part of the process of earning freight under the substitute fixture. Accordingly in determining what profit had been made under the substitute fixture, there should be deducted from the substitute fixture freight not only the cost of performing the loaded voyage from Tuapse to Banias but also the cost of performing the ballast voyage to Tuapse. That would give a net profit from the substitute fixture from which a daily rate of profit could be calculated. The owners would then give credit against their claim for loss of profit on the contract voyage at this daily rate for the period of overlap (on the facts, US $3,606 per day for the period up until 9 June when the contract voyage would have been completed).
Staughton LJ stated the applicable principles as follows:
“At first sight the owners’ claim for damages fell to be assessed on well-settled principles, albeit with a good deal of tiresome attention to detail. The owners are entitled to be placed in the same position, financially, as they would have enjoyed if the contract had not been broken. That involves a comparison of the money they would have earned, less expenses, on the contract voyage with the money they in fact earned, less expenses, on the substitute voyage. … But one problem that almost invariably arises, and does in this case, is that the substitute voyage lasts for longer than the voyage under the original charter-party. The solution commonly adopted is to take a proportion of the profits on the substitute voyage to set off against the profits lost on the original voyage; otherwise one would be involved in calculations to the end of the ship’s working life.”
This is the passage on which Mr Collett relied in emphasising the need for sufficient proof of loss.
Staughton LJ continued:
“Another problem is that the vessel may have been better - or worse - placed for future employment at the end of one voyage than at the end of the other. That is commonly a factor which is said to be relevant. But there is nothing to suggest that it has any importance in this case.”
Again I would make three comments. First, although the solution adopted was different from that adopted in The Concordia C, it is clear that here too the guiding principle was the compensatory principle. Second, once again there was no claim for loss extending beyond the date when the contract voyage would have been completed. Third, although it did not arise on the facts of the case, Staughton LJ did at least note the possibility of an additional problem which might have had to be dealt with, namely the positioning of the vessel for future employment. It might be that the vessel would be worse placed after performing the substitute fixture than if the contract had been performed, in which case the question might arise whether that was a loss for which the owners were entitled to be compensated. Alternatively, the vessel might be better placed, in which case the question might arise whether credit for that benefit had to be given. In The Noel Bay, however, these questions did not have to be faced.
The question whether credit had to be given for a benefit obtained from the breach after the date when the contract would have come to an end did arise in The Elbrus[2009] EWHC 3394 (Comm), [2010] 2 Lloyd’s Rep 315, where the contract in question was a time trip charter which, at least for present purposes, can be regarded as equivalent to a voyage charter. If the contract had been performed, the vessel would have been redelivered on 13 May 2005 and (in short) would have missed the laycan on her next employment, a fixture with Navimed at a high rate. As it was, there was no available market for the vessel in West Africa where the contract was terminated, and the owners had time to drydock the vessel (as required by the Navimed charter) and deliver her to Navimed, thereby enabling them to earn the high rate of hire under that fixture. The owners contended that as a matter of law it was necessary to assess their loss under the repudiated charter up to the date when the vessel would have been redelivered and to deduct only what they in fact earned during that period, namely the first few days of hire under the Navimed charter. The arbitrators concluded that credit had to be given for the benefit of being able to perform the Navimed charter earlier than would otherwise have been the case and that (on the facts) the value of this benefit was to extinguish the owners’ claim. Teare J dismissed the owners’ appeal, holding that the arbitrators’ decision did not demonstrate an error of law.
Teare J identified “the essential question” at [31] as being whether it was wrong in law to take into account the vessel’s notional and actual earnings for a period extending beyond the date when contractual redelivery would have taken place. Prima facie, applying the compensatory principle, it was wrong to do so:
“32. Pursuant to the compensatory principle the claimant is entitled to the benefit, expressed in money, of the contractual rights he has lost: see The Golden Victory[2007] 2 Lloyd’s Rep 164 at paragraph 30 per Lord Scott. The contractual right lost by the Owners was a right to the payment of hire from 4 April to 13 May 2005 in return for the use of the vessel and crew. Prima facie the measure of damages for the loss of such right is the hire which would have been earned during that period less the hire which was in fact earned during that period from such alternative employment as the Owners were able to secure. That prima facie measure of damage reflects at least two matters. First, it reflects the duty of the owner to mitigate his loss by finding alternative employment for his vessel. Second, by assessing the value of the benefit obtained from mitigation by reference to the hire received during the period ending with the date on which the original charterparty would have ended, it recognises the difficulty of assessing that benefit over any longer period which, if there were to be a complete assessment of that benefit, would entail a calculation over the whole of the vessel's working life.”
However, as Teare J went on to explain at [33], this was only a prima facie measure from which it would be appropriate to depart “where the substitute voyage confers a benefit upon the owner which he would not have had but for the repudiation of the charterparty” which, depending on the nature of the benefit, might mean that its financial value to the owner had to be calculated “by reference to earnings after the notional date on which redelivery would have taken place under the original charterparty”.
In The Elbrus the arbitrators had found that there was such a benefit consisting of the ability to earn the high rate on the Navimed fixture earlier than would otherwise have been the case. (With respect, that seems somewhat illogical: if the contract had been performed, Navimed would have been entitled to cancel, in which case those high earnings would not have been earned at all; nevertheless, that was the benefit which the arbitrators found to have been obtained). The question, therefore, was whether it was wrong in law for this benefit to be taken into account in assessing the owners’ loss on the ground that the earnings in question arose after the date when the vessel would have been redelivered if the contract had been performed. Teare J held that it was not. It was a benefit which arose from the mitigation action taken by the owners and the assessment of its monetary value was a matter for the arbitrators as the fact-finding tribunal:
“41. Mr Baker [counsel for the charterers] submitted that it was wrong in law to take into account the earnings of the vessel after the date on which the vessel would have been notionally redelivered under the original charterparty. As I have already observed the Owners are to be compensated for the contractual right they have lost and therefore what has to be valued is the value in monetary terms of the right to earn hire up to and not beyond the notional date of redelivery, less such benefits as have been obtained by action taken to mitigate that loss. There is no reason in principle to limit the type of benefit which may be taken into account. The approach of Bingham J in The Concordia C shows that when assessing the monetary value of the benefits obtained as a result of action taken to mitigate the Owners' loss it may be appropriate to reduce the recoverable damages by benefits other than the hire earned on a substitute voyage during the period ending with the notional date of redelivery. That is also shown by the statement of principles by Staughton LJ in The Noel Bay. Where such other benefits have been obtained (e.g. where the vessel is redelivered after the substitute voyage in a location where she is better placed for future employment) it will be a matter for the fact-finding tribunal to assess the monetary value of such benefits. Depending on the nature of the benefit and the approach taken to valuation it may be necessary to take into account earnings after the notional date of redelivery. Thus the mere fact that such earnings have been taken into account does not necessarily mean that the tribunal has erred in law.”
As with the other cases discussed above, The Elbrus involves an application of the compensatory principle together with conventional principles of mitigation. Mr Collett made the point that the case was only concerned with benefits and not with losses, that is to say that the issue was whether credit had to be given for a benefit obtained by way of mitigation after the date when the contract would have come to an end. That is correct. Indeed, in [41] quoted above Teare J described what the owners had lost as being “the right to earn hire up to and not beyond the notional date of redelivery”. On the other hand, there was no claim for losses going beyond that date, while the example of redelivery in a different location given by Staughton LJ in The Noel Bay to which Teare J referred expressly contemplated that the place of redelivery under the substitute fixture might be either better or worse than the place of redelivery if the contract had been performed.
Dicta in other cases (The Sylvia[2010] EWHC 542 (Comm), [2010] 2 Lloyd’s Rep 81 at [68] and The Great Creation[2014] EWHC 3978 (Comm), [2015] 1 Lloyd’s Rep 315 at [57]) were also cited, but in my judgment they do not take the present issue much further.
In light of these decisions, the measure of damage is now stated in the leading text-books in the following terms. In the current 22nd edition of Scrutton on Charterparties, paragraph 19-025states:
“In an action against a charterer for not loading a cargo, the measure of damage is the amount of freight which would have been earned under the charter after deducting the expenses of earning it and any net profit the ship may, or might, have earned during the period of the charter on a substituted voyage. In calculating the net earnings on the substitute voyage, the Court will take account of the expenses of any deviation necessary to perform that voyage. The deduction of the net profit on a substitute voyage reflects the claimant’s duty to mitigate, so there will be no such deduction if there has been no failure to mitigate. Where the substitute voyage is of a longer duration than the charter voyage, no attempt will normally be made to determine the relative positions of the shipowner in the period after the date on which the charter voyage would have been completed, unless there is clear evidence that the shipowner has obtained a benefit by reason of the longer duration of the substitute charter.”
Cooke, Voyage Charters (4th Edition) states as follows at paragraphs 21.96-21.97:
“21.96 The measure of damages recoverable by owners, where a charterer’s breach deprives them of the opportunity to earn the chartered freight, is sometimes defined as the difference between the contract and the market rates of freight, thus reflecting the measure of damages recoverable in the case of a failure to accept and pay for goods for which there is an available market. In practice, however, there is rarely an available market in substitute charters, in the sense of sufficient cargoes to create a market and available for carriage from the same loading port, to the same destination and at the same time as the original chartered voyage; the ship will frequently have to proceed to a different loading port, and the substitute voyage will usually commence later than the original chartered voyage, and will finish later, and at a different port of destination.
21.97 In these circumstances, the damages are normally calculated by making a comparison between the gross profit (namely freight, demurrage and other charges, less voyage expenses) which the owner would have derived from the broken charterparty, and the gross profit which he has earned under the substitute charter or charters, the latter being apportioned so as to reflect the amount earned up to the date when performance of the original charter would have been completed. …”
The paragraph continues by discussing the application of these principles. It concludes:
“At the end of the substitute voyage, the ship may be better – or worse – placed for future employment than she would have been at the end of the chartered voyage. If such is the case, it should be reflected by the giving of an allowance against the damages if the ship is better placed, or by the award of an extra sum if she is worse placed.”
Thus the authors contemplate not only that credit may have to be given for a benefit received after the date when the contract would have terminated (as in The Elbrus), but that there is no rule of law to prevent the award of damages to reflect losses incurred after that date.
Remoteness and assumption of responsibility
A separate line of authority is concerned with remoteness and assumption of responsibility.
Damages for breach of contract will not be recovered where the damage suffered is too remote, that is to say not within the reasonable contemplation of the parties at the time they made the contract: see Hadley v Baxendale (1854) 9 Exch 341 and subsequent cases. Traditionally, therefore, when an issue of remoteness arises, the question has been whether the loss claimed was of a kind or type which would have been within the parties’ reasonable contemplation: see The Sylvia at [23]. More recently, however, a principle of remoteness has been developed to the effect that even if a loss is within the parties’ reasonable contemplation, there may be 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”: see The Achilleas[2008] UKHL 48, [2009] 1 AC 61 at [9].
This development was summarised by Toulson LJ in Siemens Building Technologies Ltd v Supershield Ltd[2010] EWCA Civ 7, [2010] 1 Lloyd’s Rep 349 at [43]:
“Hadley v Baxendale a remains a standard rule but it has been rationalised on the basis that it reflects the expectation to be imputed to the parties in the ordinary case, i.e. that a contract breaker should ordinarily be liable to the other party for damage resulting from his breach if, but only if, at the time of making the contract a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. However, South Australia and Transfield Shipping are authority that there may be cases where the court, on examining the contract and the commercial background, decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties.”
The principle may therefore be regarded as a principle of remoteness, as in The Achilleas itself, or as a matter of construction or implication, as in John Grimes Partnership Ltd v Gubbins[2013] EWCA Civ 37, [2013] PNLR 17 at [24], where Sir David Keene said:
“I too agree with the summary of the law provided by Toulson LJ in Supershield, although I would put it in slightly different language. It seems to me to be right to bear in mind, as Lord Hoffmann emphasised in The Achilleas, that one is dealing with the law of contract, where the situation is governed by what has been agreed between the parties. If there is no express term dealing with what types of losses a party is accepting potential liability for if he breaks the contract, then the law in effect implies a term to determine the answer. Normally, there is an implied term accepting responsibility for the types of losses which can reasonably be foreseen at the time of contract to be not unlikely to result if the contract is broken. But if there is evidence in a particular case that the nature of the contract and the commercial background, or indeed other relevant special circumstances, render that implied assumption of responsibility inappropriate for a type of loss, then the contract breaker escapes liability. Such was the case in The Achilleas.”
As explained by Hamblen J in The Sylvia at [40], such cases are likely to be relatively rare. They will arise “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”. They are, therefore, at least in the usual case, likely to depend on evidence and factual findings.
The applicable principles
Following this review of the authorities, the principles applicable in the present case can be stated as follows.
The fundamental principle in assessing damages is the compensatory principle, namely that the innocent party is so far as possible to be placed in the same financial position as if the contract had been performed. All the cases concerned with repudiation of a voyage charter have expressly applied this principle.
The Smith v M’Guire measure represents the prima facie measure of damages for loss of the profit which would have been obtained by a shipowner from performance of the repudiated charter. As such it reflects and gives effect to the compensatory principle and to the related principles of causation and mitigation. That is the purpose and effect of a prima facie measure, whether the Smith v M’Guire measure or the principle in sale of goods law that damages are prima facie assessed by reference to an available market. Such measures are adopted precisely because in general they give effect to the compensatory principle and are in accordance with the reasonable contemplation of the parties. In most cases, therefore, it will not be necessary and would be wrong to look beyond the damages resulting from the application of the prima facie measure.
However, the Smith v M’Guire measure is only a prima facie measure and, on appropriate facts, it may be necessary to depart from it in order to give full effect to the compensatory principle. An example, as in The Elbrus, would be where the owner receives a benefit arising from mitigation which needs to be taken into account. That will have the effect of reducing the owner’s damages.
It is hard to imagine circumstances where the owner’s damages for loss of the profit which would have been obtained from performance of the repudiated charter could exceed the net freight (and if applicable demurrage) which would have been earned if that charter had been performed. An owner cannot lose more by way of lost profit from a charterer’s repudiation than the freight (and any demurrage) which he would have earned by performing the charter. In that sense the net freight and demurrage represent a cap on the owners’ damages. That is not because of any rule of law but simply because of the nature of the loss. The question then will be, as discussed in the cases, what deductions if any should be made from the freight in consequence of mitigating employment which the owner obtained or ought to have obtained. That question is answered by The Noel Bay.
The position is different if the owner suffers a different kind of loss, that is to say something different from loss of the profit which would have been obtained from performance of the repudiated charter. In such a case, there is in general no reason why such loss should not be recoverable in damages in addition to damages for loss of the profit from performing the charter, subject of course to the principles of causation, mitigation and remoteness. On the contrary, failure to award such damages would be contrary to the compensatory principle.
However, caution will be necessary in considering such claims, bearing in mind that such losses must be sufficiently proved. If proof of such losses requires complex hypothetical calculations about the future employment of a vessel, the tribunal of fact is likely to conclude that they are too speculative to be recovered. The more complex the calculation, the less likely the claim is to succeed.
An example of such a different kind of loss arises when a vessel is redelivered to an owner in the wrong location or when a substitute fixture is completed at a discharge port which is not (or which is some distance from) the discharge port under the contract voyage. The ability of a vessel to earn freight for an owner will depend to a large extent on the vessel being in a place where appropriate cargoes may be had. Cargoes typically shipped from one location may command higher rates of freight than cargoes shipped from another location. Such differences may exist permanently, or only in particular market conditions. These are important commercial considerations which the law of damages needs to recognise. The package of rights for which an owner contracts when concluding a voyage charter includes not only the freight to be earned from performance of that charter but also the right to have his vessel back again and ready for her next employment at the stipulated discharge port or range. The Smith v M’Guire measure of damages compensates the owner for loss of the freight, but does not address any loss which may be suffered if the vessel is less advantageously positioned as a result of the charterer’s repudiation. Apart from Staughton LJ’s brief reference to this in The Noel Bay as a “problem” which may arise, the cases do not address such losses.
The principles applied
In the present case the vessel’s previous employment completed at Boma in West Africa. The owners could have directed the vessel back to the European market where higher freights were available to be earned, but that would have involved a long ballast voyage from which they would derive no earnings at all. Instead they chose to contract with the charterers for a voyage from South America to Europe. This involved a considerably shorter ballast voyage to the vessel’s next load port in South America, followed by a freight earning vegoil cargo voyage to take the vessel back to Europe.
Performance of the contract voyage would not only have enabled the owners to earn the freight payable under the voyage charter, but would have positioned the vessel in Europe without delay, ready to take advantage of the higher freights available in the North Atlantic market. The consequence of the charterers’ repudiation was therefore twofold. The owners lost the charter freight and had to make do with the lesser freight earned under the Glencore charter. But they also suffered a delay in repositioning the vessel in Europe and thereby lost the benefit of the two transatlantic voyages which, on the arbitrators’ findings, the vessel would have been able to perform in about the same time as was taken up by actual performance of the Glencore fixture. These were two distinct heads of loss, both of which were caused by the charterers’ breach.
Once it is recognised that the arbitrators in the present case were awarding damages for the consequence of the vessel’s delay in returning to the North Atlantic market, and that this is a different kind of loss from loss of the profit which would have been earned from performing the contract voyage, the application of the principles summarised above is straightforward. The arbitrators have found that the loss in question was actually suffered by the owners, that it was caused by the charterers’ breach, and that there was no failure to mitigate by the owners. It was not suggested in the arbitration that the loss claimed was too remote. There is no finding, and no reason to suppose, that the damages awarded by the arbitrators constitute an unquantifiable, unpredictable, uncontrollable or disproportionate liability. On the contrary, they consist of damages for loss of employment on the spot market, the same spot market on which the vessel would have been engaged if the contract had been performed. Nor is there any finding that such a liability would be contrary to market understanding and expectations. On the contrary, the experienced arbitrators, three former Presidents of the LMAA, clearly regarded their award as a conventional application of the compensatory principle.
There is therefore no reason in law why damages for the consequence of the vessel’s delay in returning to the North Atlantic market should not be awarded in addition to the loss of the profit which would have been earned from performing the contract voyage. In the absence of any such reason, the compensatory principle requires that such damages should be awarded. The arbitrators have found, in effect, that the damages which they awarded represent appropriate compensation for both heads of loss which the owners sustained as a result of the charterers’ breach.
The charterers’ grounds of appeal
In the light of this analysis, I can now consider the four respects in which the charterers criticise the arbitrators for having misunderstood or misapplied important principles.
The first such principle was the compensatory principle. The charterers submitted that the Smith v M’Guire measure already gives effect to that principle. They submitted that far from justifying a departure from this prima facie measure, the fact that the substitute fixture extended beyond the date when the contract voyage would have terminated is typical. I accept that this will generally be so. However, as explained above, the Smith v M’Guire measure does not represent compensation for losses other than loss of the profit which would have been earned from performing the contract voyage. It does not represent compensation for losses such as those which the owners sustained here.
The charterers’ second criticism was that the arbitrators’ reasoning failed to keep distinct the loss which the owners had suffered on the one hand and the steps taken by them in mitigation which had the effect of reducing that loss on the other. I do not accept that criticism. Once the two kinds of loss for which the arbitrators were awarding compensation are recognised, it is apparent that (broadly speaking) the losses suffered consist of the net freight which would have been earned under both the contract voyage and the two follow-on transatlantic voyages, against which credit needs to be given for the net freight earned in mitigation under the Glencore charter.
The charterers’ third criticism was that by extending the calculation of loss beyond the date when the contract voyage would have terminated, the arbitrators became involved in a comparison of what the vessel actually did and what she would have done if the contract had been performed which was too speculative to provide a secure foundation for the award of damages. They submitted that if the calculation did not end at the date when the contract voyage would have been concluded, there was no other logical end point for the calculation of damages. They referred to the impracticability of performing calculations which might have to be extended until the end of the vessel’s working life. In some cases this would probably be a valid criticism, not least if the vessel’s notional future employment if the contract had been performed was very different from what actually happened to her or was too uncertain to enable findings to be made. The uncertainty and unpredictability of maritime trade would make a valid comparison difficult. In the present case, however, that problem does not arise. The arbitrators found that it was possible to make firm findings as to what this particular vessel would have done if the contract had been performed, given the trading options open to her and the market conditions prevailing at the time. They have found also that the actual and notional performance converged. Thus, after performing the UAN and chemical cargo voyages, the vessel would have been back in Europe at about the same time as she did in fact complete discharge under the Glencore fixture. There was, therefore, no need for calculations extending into the distant future, let alone to the end of the vessel’s working life. The only calculations necessary concerned events about which the arbitrators were able to make findings with (in their words) “some degree of certainty”.
Finally the charterers submitted that the award was contrary to the allocation of responsibility under a voyage charter because the charterers did not assume responsibility for losses after the period when the contract voyage would have been completed. The claims should therefore fail, either because the loss claimed was too remote (citing The Achilleas for the concept of assumption of responsibility as an aspect of remoteness) or by reason of an implied term in the voyage charter (citing the John Grimes case). As already noted, this way of putting the argument was not advanced before the arbitrators. Mr Berry objected that it is therefore not open to the charterers on appeal because the question whether the loss was too remote or was barred by an implied term was not a question “which the tribunal was asked to determine” and therefore could not be the subject of permission to appeal (see section 69(3)(b) of the Arbitration Act 1996). Mr Collett responded that the broader question as to the measure of damages was a question which the arbitrators were asked to determine and that (at any rate) whether a term should be implied was a question of law within the spirit even if not the letter of the permission granted which did not depend on factual findings, citing Cottonex Anstalt v Patriot Spinning Mills Ltd[2014] EWHC 236 (Comm), [2014] 1 Lloyd’s Rep 615, at [19] and [20].
However, whether or not the point is strictly open, it is clear in my judgment that the implied term for which the charterers contend either would not assist them or is far too wide, and that in any event the charterers have not obtained the findings of fact which they would need for their argument to succeed. When I asked Mr Collett to formulate the implied term for which he contended, the term which he proposed was that “the charterer does not assume responsibility for loss of profit on any employment after the period which would have been occupied by the repudiated fixture”. He accepted that another way of formulating this term would be to say that loss of profit damages can never exceed the freight on the repudiated fixture less the expenses of earning that freight. If “loss of profit” here refers to loss of the profit which would have been obtained from performance of the repudiated charter, I would accept that such damages can never exceed the freight on the repudiated fixture less the expenses of earning it. That is not because of any implied term, but simply, as explained above, because of the nature of the loss claimed. However, the damages awarded by the arbitrators are not simply for loss of profit in this sense.
On the other hand, if “loss of profit” is intended to refer also to claims for different kinds of loss, the implication of such a sweeping term would in my judgment be contrary to the compensatory principle and inconsistent with the implied term referred to in the John Grimes case that there is normally “an implied term accepting responsibility for the types of losses which can reasonably be foreseen at the time of contract to be not unlikely to result if the contract is broken”. In principle, loss which is caused by the breach and which is not too remote, i.e. which is within the reasonable contemplation of the parties, should normally be recoverable. There is nothing in the award to suggest that this normal position should not apply here. Moreover, such an unqualified implication would be hard to reconcile with Mr Collett’s acceptance that it is not an invariable rule that damages must be assessed by reference to the vessel’s actual and hypothetical earnings up to, but not beyond, the date when the contract voyage would have ended.
Similarly, if the argument is put in terms of remoteness, there are no findings to suggest that the loss suffered was beyond the reasonable contemplation of the parties. This is not surprising as there was no issue of remoteness in the arbitration, but the onus was on the charterers at least to raise the issue. Nor are there any findings, or reason to suppose, that there is any general understanding or expectation in the shipping trade as to the assumption of responsibility for loss of the kind suffered here which, as explained, is a different kind of loss from that which is dealt with by the prima facieSmith v M’Guire measure. In that respect the position here is rather different from that which was found to exist in The Achilleas.
There is, therefore, no basis in the award on which to conclude that the charterer does not assume responsibility for loss of the kind suffered here. Nor can it be said that, in the absence of relevant findings, such loss is necessarily irrecoverable as a matter of law.
Conclusion
For these reasons I conclude that there is no error of law in the arbitrators’ reasoning and that the charterers’ appeal must be dismissed. I do not think it is possible to give an answer to the question of law for which permission was given which would hold good in all circumstances. Rather, it must be answered in accordance with the principles which I have stated.
Postscript
I must not be taken as deciding that, on facts such as those here, an owner’s claim for loss of employment after the date when the contract voyage would have been concluded will always succeed. Three factors at least have been important to the owners’ success in the arbitration and on appeal.
The first is the finding that the owners acted reasonably in sending the vessel to South America where, as it turned out, there was no employment for the vessel for a considerable period despite the fact that, as the arbitrators found, there is a regular trade in vegoil cargoes out of South America. As already noted, it must follow that this lack of employment was unexpected. Otherwise, it could hardly have been reasonable to direct the vessel to South America instead of returning directly to the more lucrative North Atlantic trade.
The second factor is that although the charterers did contend that the vessel ought to have been directed north, a contention which the arbitrators rejected, there was no suggestion in the arbitration that the losses claimed were too remote, that is to say beyond the reasonable contemplation of the parties. However, I can see at any rate the possibility of an argument (I put it no higher) that a head of loss which was only suffered as the result of a wholly unexpected delay in obtaining substitute employment may have been beyond the reasonable contemplation of the parties.
The third factor is that on the facts here it was possible to predict the vessel’s immediate future employment if the contract had been performed, which employment would have taken the vessel back to the same location at about the same time as completion of the actual substitute fixture, so that the damages claimed could be calculated with a reasonable degree of confidence. That will not always be the case.