Judgments - Transfield Shipping Inc V Mercator Shipping Inc

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56.  In these circumstances the House did not need to deal with the measure of damages in a case of late redelivery. Nevertheless, Lord Mustill said that the obligation of the charterers was to redeliver the vessel on or before the final date or to pay damages for breach of contract. He added [1995] 1 Lloyd’s Rep 1, 5, “On damages, see ... The Peonia....“ - so endorsing, en passant, what Bingham LJ had said in that case.

57.  In the Court of Appeal in The Gregos Hirst LJ had drawn attention to what he described as “the charterers’ windfall damages” under the without prejudice agreement by comparison with the damages which would have been awarded simply in respect of a few days’ late redelivery: [1993] 2 Lloyd’s Rep 335, 348. Lord Mustill said this [1995] 1 Lloyd’s Rep 1, 10:

“At first sight, this apparently anomalous result is a good reason for questioning whether the claim for repudiation was soundly based. On closer examination, however, the anomaly consists, not so much in the size of the damages, but in the fact that damages were awarded at all. Imagine that the without prejudice agreement had not been made, and that the owners, having treated the charter as wrongfully repudiated, had accepted a substitute fixture with Navios. If one then asked what loss had the repudiation caused the owners to suffer, the answer would be - None. On the contrary, the charterers’ wrongful act would have enabled the owners to make a profit. Even if they had not accepted the substitute employment they might very well have suffered no loss, since they would have been in the favourable position of having their ship free in the right place at the right time to take a spot fixture on a rising market. In neither event would the owners ordinarily recover any damages for the wrongful repudiation.”

The implication from this passage is that, ordinarily, the appropriate measure of damages will be that set out by Bingham LJ in The Peonia, since owners will be able to obtain substitute employment for their vessel.

58.  I would enter two caveats. First, it may be that, at least in some cases, when concluding a charter-party, a charterer could reasonably contemplate that late delivery of a vessel of that particular type, in a certain area of the world, at a certain season of the year would mean that the market for its services would be poor. In these circumstances, the owners might have a claim for some general sum for loss of business, somewhat along the line of the damages for the loss of business envisaged by the Court of Appeal in Victoria Laundry (Windsor)Ltd v Newman Industries Ltd [1949] 2 KB 528, 542-543. Because of the agreement on figures, the matter was not explored in this case and I express no view on it. But, even if some such loss of business could have been reasonably contemplated, as Victoria Laundry shows, this would not mean that the owners’ particular loss of profit as a result of the re-negotiation of the Cargill fixture should be recoverable. To hold otherwise would risk undermining the first limb of Hadley v Baxendale, which limits the charterers’ liability to “the amount of injury” that would arise “ordinarily” or “generally”.

59.  Secondly, the position on damages might also be different, if, for example - when a charter-party was entered into - the owners drew the charterers’ attention to the existence of a forward charter of many months’ duration for which the vessel had to be delivered on a particular date. The charterers would know that a failure to redeliver the vessel in time to allow the owners to deliver it under that charter would be liable to result in the loss of that fixture. Then the second rule or limb in Hadley v Baxendale might well come into play. But the point does not arise in this case.

60.  Returning to the present case, I am satisfied that, when they entered into the addendum in September 2003, neither party would reasonably have contemplated that an overrun of nine days would “in the ordinary course of things” cause the owners the kind of loss for which they claim damages. That loss was not the “ordinary consequence” of a breach of that kind. It occurred in this case only because of the extremely volatile market conditions which produced both the owners’ initial (particularly lucrative) transaction, with a third party, and the subsequent pressure on the owners to accept a lower rate for that fixture. Back in September 2003, this loss could not have been reasonably foreseen as being likely to arise out of the delay in question. It was, accordingly, too remote to give rise to a claim for damages for breach of contract.

61.  Rix LJ objects, [2007] 2 Lloyd’s Rep 555, 577, para 119, that such an approach is uncommercial because to demand that, before the charterers are held liable, they would need to know more than they already do in the ordinary course of events, is to demand something that cannot be provided. But that is simply to criticise the long-standing rule of the English law of contract under which a party is not liable for this kind of loss, precisely because it arises out of unusual circumstances which are not - indeed, cannot be - within the contemplation of the parties when they enter into the contract. In any event, it would not, in my view, make good commercial sense to hold a charterer liable for such a potentially extensive loss which neither party could quantify at the time of contracting.

62.  Rix LJ also describes the charterers as “happily [draining] the last drop and more of profit at a time of raised market rates": [2007] 2 Lloyd’s Rep 555, 577, para 119. But, in reality, at the outset the sub-contract and the final voyage amounted to nothing more than a legitimate use of the vessel which the charterers had hired until 2 May and for which they were paying the owners the agreed daily rate. The delay which led to the breach of contract was caused by supervening circumstances over which the charterers had no control. The charterers’ legitimate actions under their contract provide no commercial or legal justification for fixing them with liability for the owners’ loss of profit, due to the effects of an “extremely volatile market” in relation to an arrangement with a third party about which the charterers knew nothing.

63.  I have not found it necessary to explore the issues concerning South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 and assumption of responsibility, which my noble and learned friend, Lord Hoffmann, has raised. Nevertheless, I am otherwise in substantial agreement with his reasons as well as with those to be given by Lord Walker of Gestingthorpe. I would allow the appeal.


My Lords,


64.  In James Finlay & Co Ltd v Kwik Hoo Tong HM [1929] 1 KB 400, 417 Sankey LJ (echoing a submission of counsel) said of the decision of this House in Re Hall Limited’s & Pim (Jr) & Co’s arbitration (1928) 139 LT 30, that it had

“astonished the Temple and surprised St Mary Axe.”

It is now generally regarded as a sound decision on its special facts (see for instance Sir Roy Goode, Commercial Law, 3rd ed (2004) pp 385-386).

65.  In this appeal your Lordships are faced with concurrent judgments of judges of great commercial experience (Christopher Clarke J at first instance and Rix LJ with the agreement of Ward LJ and Tuckey LJ in the Court of Appeal, upholding a majority award by experienced arbitrators) which are said to have upset an old and well-established commercial understanding (see John Weale, [2008] LMCLQ 6; the author suggests that the outcome of the case was influenced by the charterers’ concessions, and the dissenting arbitrator seems to have taken a similar view). The charterers have been the appellants at every stage of the appeal process. While conceding that the point is not squarely covered by precedent, they urge your Lordships to restore the general understanding which has prevailed in the shipping world, so as to uphold commercial certainty. The respondent shipowners concede that there is no clear precedent in their favour, but put this down to the comparatively recent clarification (in Hyundai Merchant Marine Co Ltd v Gesuri Chartering Co Ltd (The Peonia) [1991] 1 Lloyd’s Rep 100) of the law as to a charterer’s liability for damages for delay after a “legitimate last voyage". The shipowners say that the judgments below were correct applications of the general principles laid down in Hadley v Baxendale (1854) 9 Exch 341 and later decisions refining those principles, including Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] KB 528 and C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350.

The rule in Hadley v Baxendale

66.  In these circumstances your Lordships have to revisit some important general issues. These are all aspects of how the rule in Hadley v Baxendale has been developed or modified by 150 years of case law. This topic was reviewed by Robert Goff J in Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] 1 Lloyd’s Rep 175, 181-183. He observed (at p181)

“Although the principle stated in Hadley v Baxendale remains the fons et origo of the modern law, the principle itself has been analysed and developed, and its application broadened, in the 20th century.”

After referring to the Victoria Laundry case and to The Heron II, Robert Goff J stated (at p 182):

“The general result of the two cases is that the principle in Hadley v Baxendale is now no longer stated in terms of two rules, but rather in terms of a single principle—though it is recognised that the application of the principle may depend on the degree of relevant knowledge held by the defendant at the time of the contract in the particular case. This approach accords very much to what actually happens in practice; the courts have not been over-ready to pigeon-hole the cases under one or other of the so-called rules in Hadley v Baxendale, but rather to decide each case on the basis of the relevant knowledge of the defendant.”

67.  The recognition of the rule as a single principle accords with the reality that even under the first limb, the defendant often needs some particular knowledge (for instance Mr Baxendale’s firm had to know, as Lord Pearce pointed out in The Heron II, at p 416, that the article accepted for carriage from Gloucester to Greenwich was a broken millshaft). The degree of knowledge assumed under the first limb depends on the nature of the business relationship between the contracting parties. The different outcomes of Hadley v Baxendale and the Victoria Laundry case depended in part (though only in part) on the fact that the defendant in the latter case was an engineering company supplying a specialised boiler, and not merely a carrier of goods with which it had no particular familiarity.

68.  Another consequence of the (at least partial) assimilation of the two limbs is to raise doubt as to whether the notion of assumption of responsibility (as a precondition for liability for a larger measure of damages) is necessarily confined to second limb cases. That notion appears to be a watered-down version of the proposition (originating in British Columbia Saw Mill Co v Nettleship (1868) LR 3 CP 499, 509 and rejected by Lord Upjohn in The Heron II [1969] 1 AC 350, 422) that the defendant is liable for a larger measure of damages only if that has been made a term of the contract. Diplock LJ in Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, 1448 described this as an implied undertaking given by the defendant to the plaintiff to bear the larger measure of loss, derived from (a) the defendant’s knowledge of special circumstances and (b) the further factor

“that he should have acquired this knowledge from the plaintiff, or at least that he should know that the plaintiff knew that he was possessed of it at the time the contract was entered into and so could reasonably foresee at that time that an enhanced loss was liable to result from a breach.”

69.  It may be that this rather precise formulation of the notion of assumption of responsibility applies (if at all) only to what are recognisably second limb cases. But the underlying idea—what was the common basis on which the parties were contracting?—seems to me essential to the rule in Hadley v Baxendale as a whole. Businessmen who are entering into a commercial contract generally know a fair amount about each other’s business. They have a shared understanding (differing in precision from case to case) as to what each can expect from the contract, whether or not it is duly performed without breach on either side. No doubt they usually expect the contract to be performed without breach, but they are conscious of the possibility of breach. These points are repeatedly made in the authorities: it is sufficient to refer to the much-quoted speech of Lord Wright in Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196, 220-223, and to Robert Goff J in The Pegase at pp 182-183 (part of this passage is quoted by my noble and learned friend Lord Hoffmann in para 16 of his opinion).

70.  The consequence is that although the fundamental principle in Hadley v Baxendale applies to contracts of every sort (at any rate since the abolition in 1989 of the rule in Bain v Fothergill (1874) LR 7 HL 158) particular types of contract in regular use in different areas of commercial, industrial and financial life (such as charterparties, construction contracts, and agreements for the sale and purchase of a controlling shareholding in a large company) have inevitably become specialised subjects. They are dealt with by specialist lawyers acting for well-informed businessmen. Anything that causes surprise in Essex Court is likely to cause surprise in St Mary Axe also. When the majority arbitrators stated in para 17 of their reasons, that a lawyer and “a broker in a commercial situation” would have given different answers to the same question they were in my opinion assuming, incorrectly, that two different questions were the same. I shall come back to this point.

The Heron II

71.  The Heron II [1969] 1 AC 350 calls for close attention because, although decided over 40 years ago, it is the most recent full discussion of Hadley v Baxendale in your Lordships’ House. It was concerned with a charterparty for the carriage of sugar from the Black Sea port of Constanza to the Iraqi port of Basrah, where there was a sugar market. The cargo was delivered late and the charterers claimed (and were awarded) damages for their market loss of about £1.40 per ton on about 3,000 tons of sugar. In dismissing the appeal the Court declined to follow The Parana (1877) 2 PD 118, a decision from what “was still the golden age of sail” (Lord Upjohn, at p 428). But the real importance of the case is in its discussion of general principles.

72.  The House’s decision was unanimous but each member of the Appellate Committee gave a full opinion, and unfortunately none of them in terms expressed either agreement or disagreement with any of the others. Their Lordships treated the decision of the Court of Appeal in the Victoria Laundry case with “varying degrees of enthusiasm” (Donaldson J in Aruna Mills Ltd v Dhanrajmal Gobindram [1968] 1 QB 655, 668). They themselves expressed differing views as to the requisite degree of probability of loss if it was to be recoverable following a breach of contract.

73.   Lord Reid observed, at p 385:

“I am satisfied that the court [in Hadley v Baxendale] did not intend that every type of damage which was reasonably foreseeable by the parties when the contract was made should either be considered as arising naturally, ie in the usual course of things, or be supposed to have been in the contemplation of the parties. Indeed the decision makes it clear that a type of damage which was plainly foreseeable as a real possibility but which would only occur in a small minority of cases cannot be regarded as arising in the usual course of things or be supposed to have been in the contemplation of the parties: the parties are not supposed to contemplate as grounds for the recovery of damage any type of loss or damage which on the knowledge available to the defendant would appear to him as only likely to occur in a small minority of cases.

In cases like Hadley v Baxendale or the present case it is not enough that in fact the plaintiff’s loss was directly caused by the defendant’s breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.”

Here, Lord Reid saw the law as applying an objective test, and one which reflects the realities of the business transaction entered into by the contracting parties.

74.   Lord Reid then considered the Victoria Laundry case and disapproved of it so far as what Asquith LJ had said went beyond previous authorities. Lord Reid stated, at p 389:

“To bring in reasonable foreseeability appears to me to be confusing measure of damages in contract with measure of damages in tort. A great many extremely unlikely results are reasonably foreseeable: it is true that Lord Asquith may have meant foreseeable as a likely result, and if that is all he meant I would not object further than to say that I think that the phrase is liable to be misunderstood. For the same reason I would take exception to the phrase ‘liable to result’ in paragraph (5). Liable is a very vague word but I think that one would usually say that when a person foresees a very improbable result he foresees that it is liable to happen.”

75.  Lord Reid also disapproved of the expressions “a serious possibility", “a real danger” and “on the cards". He said, at p 390:

“If the tests of ‘real danger’ or ‘serious possibility’ are in future to be authoritative then the Victoria Laundry case would indeed be a landmark because it would mean that Hadley v Baxendale would be differently decided today. I certainly could not understand any court deciding that, on the information available to the carrier in that case, the stoppage of the mill was neither a serious possibility nor a real danger. If those tests are to prevail in future then let us cease to pay lip service to the rule in Hadley v Baxendale. But in my judgment to adopt these tests would extend liability for breach of contract beyond what is reasonable or desirable. From the limited knowledge which I have of commercial affairs I would not expect such an extension to be welcomed by the business community and from the legal point of view I can find little or nothing to recommend it.”

76.  Their Lordships were unanimous in disapproving the expression “on the cards” but Lord Morris of Borth-y-Gest, Lord Pearce and Lord Upjohn (at pp 400, 415 and 425 respectively) approved the expressions “real danger” and “serious possibility". Lord Hodson preferred the expression “liable to result". Lord Pearce and Lord Upjohn both expressed the view that Hadley v Baxendale would have been decided the same way on a “real danger” or “serious possibility” test.

77.  The diversity of opinion in the House as to the most appropriate language is no doubt partly a matter of linguistic taste. Lord Reid’s apparent preference for “not unlikely” as against “likely” cannot be ascribed to an uncharacteristic preference for a double negative rather than a simple word. A few years later he made some famous observations in Davies v Taylor [1974] AC 207, 213 (a case concerned with quantification of damages under the Fatal Accidents Acts):

“You can prove that a past event happened, but you cannot prove that a future event will happen and I do not think that the law is so foolish as to suppose that you can. All you can do is to evaluate the chance. Sometimes it is virtually 100 per cent: sometimes virtually nil. But often it is somewhere in between. And if it is somewhere in between I do not see much difference between a probability of 51 per cent and a probability of 49 per cent.”

It would not be a normal use of English to say that an eventuality with a probability of 51 per cent is likely and one with a probability of 49 per cent is unlikely (although in other fields, notably in connection with the civil standard of proof of past events, the law does make such a distinction). In ordinary discourse, there is a middle ground (say, for illustration, between 60 per cent and 40 per cent probability) within which an event would not normally be described as either likely or unlikely. Lord Reid’s choice of language reflects his view (shared by the rest of the House) that the outcome need not be an odds-on chance.

78.  To my mind, however, the diversity of opinion in The Heron II has another and more important significance. Other passages in the speeches show that their Lordships had well in mind (but did not, perhaps, spell out at length) that it is not simply a question of probability. It is also a question of what the contracting parties must be taken to have had in mind, having regard to the nature and object of their business transaction. If a manufacturer of lightning conductors sells a defective conductor and the customer’s house burns down as a result, the manufacturer will not escape liability by proving that only one in a hundred of his customers’ buildings had actually been struck by lightning. The need to take account of the nature and object of the contract is recognised, I think, in the passage (at p 385) from Lord Reid’s speech which I have already quoted; in Lord Morris’s speech at pp 398-399; in Lord Pearce’s speech at pp 416-417 (with the example of the court ceiling collapsing during a sitting); and in Lord Upjohn’s speech at pp 424-425. The need for the loss suffered to be within the horizon of the parties’ contemplation (Lord Pearce at p 416) makes it less important to define its degree of probability with any precision. Arguably a vague expression (such as “real possibility”) is actually preferable, because it is more flexible, once it is understood that what is most important is the common expectation, objectively assessed, on the basis of which the parties are entering into their contract.

79.  My Lords, I had reached this point in drafting my opinion when my noble and learned friend Lord Hoffmann drew to my attention the articles by Adam Kramer, Professor Tettenborn, and Professor Robertson, not cited in argument, that are mentioned in Para 11 of Lord Hoffmann’s opinion. These scholars develop ideas about Hadley v Baxendale which, although differently formulated, share some common ground. They demonstrate that foreseeability by itself is not a satisfactory test, and Kramer and Tettenborn emphasise the importance of what I have rather imprecisely referred to as the nature and object of the contract entered into by the parties. Both refer to a possible analogy with the restriction of damages in tort under the SAAMCO principle (see South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191). Robertson is against approaching allocation or assumption of risk as a matter of contractual interpretation. I have found all these materials very helpful.

The majority arbitrators’ decision

80.  The arbitrators took seriously their task as the fact-finding tribunal, recognising (at the outset of the majority’s reasons) that there were issues of law which might be taken to appeal. The majority identified (para 7) a difference between the parties as to whether, and how far, The Heron II had reformulated the rule in Hadley v Baxendale. The majority did not in terms resolve that difference, but seem to have adopted the “not unlikely” test. In para 8 they stated:

“As [counsel for the charterers] agreed in exchanges with members of the Tribunal the “not unlikely” results arising from the late redelivery of a vessel were not numerous, but would include missing dates for (a) a subsequent fixture, (b) a dry docking and (c) a sale of the vessel.”

They then carried this forward, to my mind out of context, to the discussion in para 17 of the answers that would have been given by a lawyer or by a broker.

81.  In para 9, after a reference to The Rio Claro [1987] 2 Lloyd’s Rep. 173, 175, they continued:

“We consider on the facts that the type or kind of loss suffered by the Owners, i.e. the need to adjust relevant dates for the subsequent employment of the vessel through the revised Cargill terms, was within the contemplation of the parties as a not unlikely result of the breach. The fact that the extent of the loss was greater than anticipated is not relevant: see Hill v Ashington Piggeries [1969] 3 All ER 1496 (Davies LJ at p 1524 F).”

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