Judgments - Transfield Shipping Inc V Mercator Shipping Inc

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29.  The minority arbitrator pointed out that this would be to impose on the charterers a completely unquantifiable risk in what is a relatively common situation - late delivery under a time charter - given the exigencies of the shipping industry. If the test was what a reasonable man in the position of the charterers would have understood at the time of entering into the charter, it was impossible to conclude that they would or should have understood that they were assuming responsibility for the risk of loss of a particular follow-on fixture concluded by the owners. They had no knowledge of or control over the duration of any follow-on fixture which the owners might conclude. The fundamental problem that he had with the owners’ argument was that if damages of this type were recoverable without particular knowledge sufficient to justify an assumption of risk it was difficult to see where a line was to be drawn, and there was a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable.

30.  Both approaches share a common, and as it seems to me an entirely orthodox, starting point. They ask what should fairly and reasonably be regarded as having been in the contemplation of the parties at the time when the contract was entered into. The refinement that, on the facts of this case, the relevant date was the date of the addendum is not of any practical significance. Both parties were experienced in the market within which they were operating. Late delivery under a time charter is a relatively common situation, and it is not difficult to conclude that the parties must have had in contemplation when they entered into the contract that this might occur. Nor it is difficult to conclude - indeed this was conceded by counsel for the charterers - that in a market where owners expect to keep their assets in continuous employment dates late delivery will result in missing the date for a subsequent fixture. The critical question however is whether the parties must be assumed to have contracted with each other on the basis that the charterers were assuming responsibility for the consequences of that event. It is at this point that the two approaches part company.

31.  Assumption of responsibility, which forms the basis of the law of remoteness of damage in contract, is determined by more than what at the time of the contract was reasonably foreseeable. It is important to bear in mind that, as Lord Reid pointed out in The Heron II [1969] 1 AC 350, 385, the rule that applies in tort is quite different and imposes a much wider liability than that which applies in contract. The defendant in tort will be liable for any type of loss and damage which is reasonably foreseeable as likely to result from the act or omission for which he is held liable. Reasonable foreseeability is the criterion by which the extent of that liability is to be judged, and it may result in his having to pay for something that, although reasonably foreseeable, was very unusual, not likely to occur and much greater in amount than he could have anticipated. In contract it is different and, said Lord Reid, at p 386, there is good reason for the difference:

“In contract, if one party wishes to protect himself against a risk which to the other party would appear unusual, he can direct the other party’s attention to it before the contract is made, and I need not stop to consider in what circumstances the other party will then be held to have accepted responsibility in that event.”

32.  The point that Lord Reid was making here was that the more unusual the consequence, the more likely it is that provision will be made for it in the contract if it is to result in liability. Account may be taken of it in the rates that are provided for in the contract. Or terms may be written into the contract to provide for the extent, if any, of the liability. That is the way that commercial contracts are entered into. As Blackburn J said in Cory v Thames Ironworks Co (1868) LR 3 QB 181, 190-191, if the damage were exceptional and unnatural it would be hard on a party to be made liable for it because, had he known what the consequences would be, he would probably have stipulated for more time or made greater exertions if he had known the extreme mischief that would follow from the non-fulfilment of his contract. The fact that the loss was foreseeable - the kind of result that the parties would have had in mind, as the majority arbitrators put it - is not the test. Greater precision is needed than that. The question is whether the loss was a type of loss for which the party can reasonably be assumed to have assumed responsibility.

33.  How then is this question to be addressed? The statement of principle by Robert Goff J in The Pegase [1981] 1 Lloyd’s Rep 175, 183 asks whether, if he had considered the matter, at the time of making the contract, the defendant would have contemplated that, in the event of a breach by him, the facts in question would be taken into account in considering his responsibility for loss suffered as a result of the breach. This depends on the degree of relevant knowledge held by him at the time of entering into the contract. Alderson B in Hadley v Baxendale (1854) 9 Exch 341, 354-355, distinguished between special circumstances that were wholly unknown to the party breaking the contract and the amount of injury which would arise generally and in the great multitude of cases not affected by any special circumstances. Losses in the latter category are losses which the parties may be taken to have in contemplation and to make provision for, in one way or another, in their contract. Losses in the former are losses which the party in breach was unable to contemplate when considering the terms on which he could agree to enter into the contract. These statements direct attention to the extent of the charterer’s knowledge of the facts that are in question in this case.

34.  In this case it was within the parties’ contemplation that an injury which would arise generally from late delivery would be loss of use at the market rate, as compared with the charter rate, during the relevant period. This something that everybody who deals in the market knows about and can be expected to take into account. But the charterers could not be expected to know how, if - as was not unlikely - there was a subsequent fixture, the owners would deal with any new charterers. This was something over which they had no control and, at the time of entering into the contract, was completely unpredictable. Nothing was known at that time about the terms on which any subsequent fixture might be entered into - how short or long the period would be, for example, or what was to happen should the previous charter overrun and the owner be unable to meet the new commencement date. It is true that neither party had any control over the state of the market. But in the ordinary course of things rates in the market will fluctuate. So it can be presumed that the party in breach has assumed responsibility for any loss caused by delay which can be measured by comparing the charter rate with the market rate during that period. There can be no such presumption where the loss claimed is not the product of the market itself, which can be contemplated, but results from arrangements entered into between the owners and the new charterers, which cannot.

35.  In the Court of Appeal [2007] 2 Lloyd’s Rep 555, para 117 Rix LJ observed that the doctrine of remoteness is ultimately designed to reflect the public policy of the law. Developing this theme, he said in para 119 that it would be undesirable and uncommercial for damages for late delivery to be limited to the period of the overrun unless the owners could show that they had given their charterers special information of their follow-on fixture. It was undesirable, he said because this would put the owners too much at the mercy of their charterers at time of raised market rates. That seems to me, with respect, to overstate the position. The owners too are in the market and can at least expect to be compensated at market rates for the period of any delay. But he also said that it was uncommercial, because a new fixture would in all probability not be fixed until at or about the time of the redelivery. So the demand would be for information that the owner could not provide when entering into the contract.

36.  In my opinion the commercial considerations point the other way. This was the crucial point in the case which led the minority arbitrator to dissent from the majority. As he pointed out, a party cannot be expected to assume responsibility for something that he cannot control and, because he does not know anything about it, cannot quantify. It is not enough for him to know in general and on open-ended terms that there is likely to be a follow-on fixture. This was the error which lies at the heart of the decision of the majority. What he needs is some information that will enable him to assess the extent of any liability. The policy of the law is that effect should be given to the presumed intention of the parties. 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, or what arises from special circumstances known to or communicated to the party who is in breach at the time of entering into the contract which because he knew about he can be expected to provide for. This is a principle of general application. We are dealing in this case with a highly specialised area of commercial law. But the principle by which the issue must be resolved is that which applies in the law of contract generally.

37.  For these reasons, which owe much to my noble and learned friends’ careful review of the authorities, I too would allow the appeal.

LORD RODGER OF EARLSFERRY

My Lords,

38.  Mercator Shipping Inc, the respondents in this appeal, were at all material times the owners of the bulk carrier “Achilleas". In January 2003 they entered into a time charter-party in terms of which they let the Achilleas to the appellants, Transfield Shipping Inc (“the charterers”). On 12 September 2003 the charter period was extended for a further five-seven months, the exact period in charterers’ option. In terms of the addendum, the terminal date for redelivery of the vessel to the owners was midnight on 2 May 2004.

39.  In the event, the charterers did not redeliver the Achilleas to the owners until 0815 on 11 May 2004. It is common ground that, by failing to return the vessel by midnight on 2 May, the charterers were in breach of contract and are accordingly liable in the appropriate sum of damages for that breach. The dispute is about what constitutes the appropriate sum of damages. As a result of an agreement between the parties, the arbitrators and the courts have been faced with a stark choice between two fixed figures.

40.  The charterers contend that their liability in damages is confined to the difference between the market rate of hire and the charter-party rate for the period from midnight on 2 May till 0815 on 11 May. That would amount to US$158,301.17. The owners contend that in the circumstances the charterers’ liability extends further, however, so as to include the owners’ loss of profit under a follow-on fixture.

41.  On a date which is not identified by the arbitrators in their award, the charterers sub-chartered the vessel for a final voyage. She was to load a cargo of coal at Quingdao in China for discharge at Tobata and Oita in Japan. There is nothing in the findings made by the arbitrators to suggest that, if all had gone to plan, this final voyage would have prevented the charterers from redelivering the vessel, in accordance with their contractual obligation, by 2 May. In these circumstances, it must be presumed that the final voyage was legitimate.

42.  On 20 April the charterers gave a 10 day estimated notice of redelivery between 30 April and 2 May. After receiving that notice, on or about 21 April the owners fixed a follow-on time charter for about four-six months with Cargill International SA (“Cargill”). Cargill was entitled to cancel that charter-party if the Achilleas had not arrived at the delivery point by 8 May.

43.  By 24 April the vessel had finished loading the coal at Quingdao. On 30 April she reached Oita, having discharged the relevant part of her load at Tobata. At Oita she experienced delays. Previously, on 27 April the charterers had given a revised notice of redelivery on 4/5 May - which, though involving a breach of contract, would still have been in time for the vessel to be delivered to Cargill within the laycan.

44.  By 5 May the owners had recognised, however, that the vessel was going to be redelivered too late for her to be delivered to Cargill by 8 May. They therefore entered into discussions with Cargill to obtain an extension of the cancelling date under their charter. Cargill agreed to extend it to 11 May. At some point between the date when the Cargill charter was fixed (on or about 21 April) and 5 May, the market rate of hire for such vessels had fallen sharply, however. Therefore, in return for the extension of the cancelling date, Cargill insisted on the original rate of US$39,500 per day being reduced to US$31,500 per day. The charterers make no criticism of the steps taken by the owners.

45.  At 0815 on 11 May, when Transfield redelivered the vessel to the owners at Oita, the owners immediately delivered her to Cargill under their charter. Cargill redelivered the vessel to the owners at 0815 on 18 November 2004.

46.  In these circumstances the owners claim damages (agreed at US$1,364,584.17) for their loss of profit as a result of having to reduce the daily rate of hire under the Cargill fixture by US$8,000, when they obtained the extension of the cancelling date which they needed in order to accommodate the charterers’ delay in redelivering the vessel. Clearly, the owners incurred that loss in the wake of the charterers’ breach of contract. Nevertheless, in respectful disagreement with Christopher Clarke J and the Court of Appeal, I have come to the conclusion that the charterers are not liable in damages for the owners’ loss of profit.

47.  Today, as for more than 150 years, the starting-point for determining the measure of damages for breach of contract is the judgment of Alderson B in Hadley v Baxendale (1854) 9 Exch 341. The story is well known. The plaintiff owners of a flour mill in Gloucester arranged for the defendant common carriers (the firm of Pickfords) to take their broken mill shaft to a firm in Greenwich which was to use it as a pattern to produce a new shaft. Unknown to the defendants - as the court held - the plaintiffs had no other shaft and so could not operate their mill until they got the new one. In breach of contract, the defendants delayed in transporting the broken shaft. The plaintiffs sued the defendants for the profits which they lost from being unable to operate their mill during the period of delay. The Court of Exchequer held that they could not recover the loss of profits.

48.  Frequently only one sentence from the judgment of Alderson B is quoted as enshrining the principle with which the case is synonymous. But it is preferable to have regard to slightly more of what Alderson B said, at pp 354-355:

“Now we think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be 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. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract.”

It was by referring back to the language of the third sentence in this passage that Alderson B went on to hold, at p 356, that, in the circumstances, the defendants were not liable for the loss of profits:

“But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred, and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract.”

49.  The entire passage containing the applicable principles was quoted with approval by Viscount Sankey LC in Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452, 474-475. In Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196, 221, Lord Wright identified the distinction drawn by Alderson B as being “between damages arising naturally (which means in the normal course of things), and cases where there were special and extraordinary circumstances beyond the reasonable prevision of the parties...” Like Lord Hodson in C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350, 411A-C, I find guidance in Alderson B’s use of the expression “in the great multitude of cases". In the words of Lord Hodson, it indicates

“that the damages recoverable for breach of contract are such as flow naturally in most cases from the breach, whether under ordinary circumstances or from special circumstances due to the knowledge either in the possession of or communicated to the defendants. This expression throws light on the whole field of damages for breach of contract and points to a different approach from that taken in tort cases.”

50.  The same idea is, of course, to be found, more compactly, in other well-known statements by celebrated commercial judges. For example, in Horne v Midland Railway Co (1872) LR 7 CP 583, 590, Willes J said that, in contract, “damages are to be limited to those that are the natural and ordinary consequences” of the breach, while in Cory v Thames Ironworks Co (1868) LR 3 QB 181, 190, Blackburn J said that the measure of damages is “what might be reasonably expected in the ordinary course of things to flow from the non-fulfilment of the contract, not more than that …”

51.  In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, 539-540, Asquith LJ explained that “Everyone, as a reasonable person, is taken to know the ‘ordinary course of things’ and consequently what loss is liable to result from a breach of contract in that ordinary course.” He went on to say that, for loss to be recoverable, the defendant did not need to foresee that a breach must necessarily result in that loss: “It is in enough if he could foresee it was likely so to result. It is indeed enough, to borrow from the language of Lord du Parcq in the [Monarch Steamship] case, at p 158, if the loss (or some factor without which it would not have occurred) is a ‘serious possibility’ or a ‘real danger.’ For short, we have used the word ‘liable’ to result.”

52.  As Lord Reid pointed out in The Heron II [1969] 1 AC 350, 389E-G, by referring to foreseeability, Asquith LJ cannot have been intending to assimilate the measure of damages in contract and tort. Moreover, there might appear to be a certain tension between the idea that, to be recoverable, a loss must be something which would result from the breach in the ordinary course and the idea that it is enough that the loss is just something which is liable to result. Lord Reid therefore surmised that Asquith LJ might have meant that the loss was foreseeable as a likely result. That appears to be an appropriate way of reconciling the two aspects of Asquith LJ’s opinion. In any event, amidst a cascade of different expressions, it is important not to lose sight of the basic point that, in the absence of special knowledge, a party entering into a contract can only be supposed to contemplate the losses which are likely to result from the breach in question - in other words, those losses which will generally happen in the ordinary course of things if the breach occurs. Those are the losses for which the party in breach is held responsible - the stated rationale being that, other losses not having been in contemplation, the parties had no opportunity to provide for them.

53.  In the present case, the arbitrators found that - as conceded by counsel then acting for the charterers - missing a date for a subsequent fixture was a “not unlikely” result of the late redelivery of a vessel. That concession has been criticised elsewhere, but the House must proceed on the basis that, when they entered into the addendum, the parties could reasonably have contemplated that it was not unlikely that the owners would miss a date for a subsequent fixture if the Achilleas were redelivered late. The majority of the arbitrators also found that, at the time of contracting, the parties, who were both engaged in the business of shipping, would have known that market rates for tonnage go up and down, sometimes quite rapidly. Nevertheless, as Rix LJ himself pointed out [2007] 2 Lloyd’s Rep 555, 577, para 120 - when seeking to combat any criticism that the Court of Appeal’s decision would throw the situation in general into confusion because late redelivery and changing market conditions are common occurrences - “It requires extremely volatile market conditions to create the situation which occurred here.” In other words, the extent of the relevant rise and fall in the market within a short time was actually unusual. The owners’ loss stemmed from that unusual occurrence.

54.  The obligation of the charterers was to redeliver the vessel to the owners by midnight on 2 May. Therefore, the charterers are taken to have had in contemplation, at the time when they entered into the addendum, the loss which would generally happen in the ordinary course of things if the vessel were delivered some nine days late so that the owners missed the cancelling date for a follow-on fixture. Obviously, that would include loss suffered as a result of the owners not having been paid under the contract for the charterers’ use of the vessel for the period after midnight on 2 May. So, as both sides agree, the owners had to be compensated for that loss by the payment of damages. But the parties would also have contemplated that, if the owners lost a fixture, they would then be in a position to enter the market for a substitute fixture. Of course, in some cases, the available market rate would be lower and, in some cases, higher, than the rate under the lost fixture. But the parties would reasonably contemplate that, for the most part, the availability of the market would protect the owners if they lost a fixture. That I understand to be the thinking which lies behind the dicta to the effect that the appropriate measure of damages for late redelivery of a vessel is the difference between the charter rate and the market rate if the market rate is higher than the charter rate for the period between the final terminal date and redelivery: Hyundai Merchant Marine Co Ltd v Gesuri Chartering Co Ltd (The Peonia) [1991] 1 Lloyd’s Rep 100, 108. In that passage Bingham LJ was adopting the approach which had been indicated in earlier authorities: Alma Shipping Corpn of Monrovia v Mantovani (The Dione) [1975] 1 Lloyd’s Rep 115, 117-118, per Lord Denning MR, and Arta Shipping Co Ltd v Thai Europe Tapioca Service Ltd (The Johnny) [1977] 2 Lloyd’s Rep 1, 2, per Lord Denning MR.

55.  More particularly, this understanding of the general position lies behind the observations of Lord Mustill in Torvald Klaveness A/S v Arni Maritime Corpn (The Gregos) [1995] 1 Lloyd’s Rep 1. In that case, when the charterers insisted on proceeding with a voyage which had become illegitimate by the time it was due to commence, the owners refused. The owners began to negotiate a replacement fixture with a concern named Navios, involving a higher rate of freight plus a bonus. In the event, the parties to the original charter-party reached a without prejudice agreement under which the owners would perform the voyage and, if in subsequent proceedings it were held that they had been justified in refusing to perform it, they would be entitled to a sum reflecting the difference between the chartered rate of hire and the more advantageous terms of the proposed substitute fixture with Navios. The sum in question was roughly US$300,000.

 
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