(back to preceding text)

82.  I have some difficulties with these passages. There seems to be a gap in reasoning between the bare fact of missing a fixture (an eventuality which would not, in a rising market, occasion any financial loss) and the very heavy financial loss for which the owners claimed (and recovered) damages in this case. Ashington Piggeries was a case of physical damage (the claimant’s pigs died from disease caused by mouldy feed, which was in turn caused by defective feed hoppers). A much closer authority would have been the Victoria Laundry case, in which the Court of Appeal declined to award damages for the loss of unusually profitable dyeing contracts, but indicated that recovery for some loss of profition such contracts would be possible ([1949] 2 KB 528, 543):

“We agree that in order that the plaintiffs should recover specifically and as such the profits expected on these contracts, the defendants would have had to know, at the time of their agreement with the plaintiffs, of the prospect and terms of such contracts. We also agree that they did not in fact know these things. It does not however, follow that the plaintiffs are precluded from recovering some general (and perhaps conjectural) sum for loss of business in respect of dyeing contracts to be reasonably expected, any more than in respect of laundering contracts to be reasonably expected.”

The loss of unusually profitable contracts, unknown to the vendor of specialised equipment at the time of the sale contract, will often be a “serious possibility” or “real danger"; but it was held not to be within the reasonable contemplation of the parties to the sale contract.

83.  So in this case it was open to the arbitrators to conclude that for the owners to miss a fixture was a “not unlikely” result of the delay, but it did not follow from that the charterers were liable for an exceptionally large loss (measured by the entire term of the fixture) when the market fell suddenly and sharply (apparently, from the rates renegotiated with Cargill, by about 20%) between 21 April and 8 May 2004. As Rix LJ said in the Court of Appeal (para 120), “It requires extremely volatile conditions to create the situation which occurred here".

84.  The majority arbitrators referred to a number of authorities, cited by the charterers, to the effect that the normal measure of damages for late delivery is the market rate (if higher than the charter rate) for the period from the latest date for re-delivery under contract until the date of actual re-delivery. They made a passing reference to the discussion of this point by Lord Mustill in Torvald Klaveness AS v Arni Maritime Corpn, (The Gregos) [1995] 1 Lloyd’s Rep 1, 10, on which Rix LJ commented in paras 58-59 of his judgment. The majority regarded these authorities as giving the charterers only very limited assistance. Ultimately they accepted and applied the owners’ submission that “what mattered was that the type of loss claimed was foreseeable” (para 18 of the majority reasons). That was in my opinion too crude a test, and it was an error of law to adopt it. What mattered was whether the common intention of reasonable parties to a charterparty of this sort would have been that in the event of a relatively short delay in re-delivery an extraordinary loss, measured over the whole term of renewed fixture, was, in Lord Reid’s words,

“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 [the defaulting party’s] contemplation.”

Lord Mustill’s dictum in The Gregos indicates that that would not have been the common intention of reasonable contracting parties, and I respectfully agree.

85.  In the Commercial Court Christopher Clarke J relied on the Ashington Piggeries case and (though he made a passing reference to Victoria Laundry) did not consider what was said in that case about loss of extraordinary profit. He found no error in the “foreseeable” test stated in para 18 of the majority arbitrators’ reasons.

86.  Rix LJ did refer to what was said in the Victoria Laundry case about extraordinary profit. In para 89 he cited the passage which I have set out above. But in a later passage he seems to have discounted it, either because the arbitrator had been faced with a choice between two agreed figures (para 106) or because the owners made the Cargill fixture “at an appropriate time” (para 107- the reference to The Pegase should, I think, be to Koch Marine Inc v D'Amica Societa Di Navigazione ARL (The Elena d'Amico) [1980] 1 Lloyd’s Rep 75). No doubt the fixture was made at an appropriate time (Rix LJ did not say of the owners, as he chose to say of the charterers, at para 96, that they were “keen to squeeze the last drop of profit … from what was a particularly strong market": see also para 119, referred to by my noble and learned friend Lord Rodger of Earlsferry). But it was contrary to the principle stated in the Victoria Laundry case, and reaffirmed in The Heron II, to suppose that the parties were contracting on the basis that the charterers would be liable for any loss, however large, occasioned by a delay in re-delivery in circumstances where the charterers had no knowledge of, or control over, the new fixture entered into by the new owners.

87.  For these reasons, and for the further reasons given by my noble and learned friend Lord Hoffmann, Lord Hope and Lord Rodger, whose opinions I have had the advantage of reading in draft, I would allow this appeal.

BARONESS HALE OF RICHMOND

My Lords,

88.  Ship-owners let out their ship for a period of five to seven months, to end no later than midnight on 2 May 2004. The charterers notified the ship-owners that the ship would be back no later than then. The ship-owners therefore contracted to let the ship to new charterers for a period of about four to six months, promising that they could have the ship no later than 8 May 2004. The agreed price of hire was $39,500 a day. The ship was delayed on its last voyage and the owners did not get their ship back until 11 May 2004. The new charterers agreed to take the ship, but by then the market had fallen and they would only take it at a reduced price of $31,500 a day. Are the first charterers liable to pay only for the use of the ship for the number of days that they were late at the market rate then prevailing? Or are they liable to pay the difference between what the owners would have got from the new charter had the ship been returned in time and what the owners in fact got?

89.  My Lords, this could be an examination question. Although the context is a specialised one, the answer has mainly to be found in the general principles to be derived from the well-known authorities to which your Lordships have all referred, principally Hadley v Baxendale (1854) 9 Exch 341, Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 and, above all, C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350. There is no obviously right answer: two very experienced commercial judges have reached one answer, your lordships have reached another. There is no obviously just answer: the charterer’s default undoubtedly caused the owner’s loss, but a loss for which no-one has ever had to pay before. The examiners would surely have given first class marks to all the judges who have answered the question so far.

90.  In common with my noble and learned friend, Lord Hope of Craighead, I was at first inclined to agree with the very full and thoughtful judgments in the courts below which arrived at the second answer. Their careful reviews of the shipping cases show that, although the normal measure of damages is undoubtedly the first, there is no case in which a claim to the second has been rejected. The fact that no-one has thought to make such a claim before now does not mean that it is unfounded. The question was unlikely to arise if the last voyage on which the charterer wished to send the ship was illegitimate, because the owner could then refuse to undertake it and the first charter would come to a premature end (or he might undertake it without prejudice as happened in The Gregos [1995] 1 Lloyd’s Rep 1). And until the decision in The Peonia [1991] 1 Lloyd’s Rep 100 it would not arise if the last voyage was legitimate, because the charterer was not liable at all for delay which was not his fault. So the novelty of the claim is no answer. It is not novel in principle. The object of damages for breach of contract is to put the claimants in the position in which they would have been had the contract been properly performed. Had this contract not been broken in the way that it was, the claimants would have had the benefit of the next fixture at the original rate. Putting them in the position in which they would have been had the contract been performed in accordance with its terms entails paying them the difference. No-one has suggested that it was at all unusual or unlikely for the owners to commit their ship to a new fixture to begin as soon as possible after the ship was free from the first. It was conceded before the arbitrators that missing dates for a subsequent fixture was a “not unlikely” result of late redelivery. Both parties would have been well aware of that at the time when the contract was made. They would also have been well aware that a new charter was likely to commit that particular ship rather than to allow the ship-owner to go into the market and find a substitute to fulfil his next commitment if his ship was late back. Charterparties allowing the owner to substitute a different vessel are unusual. Above all, if the parties wish to exclude liability for consequential loss of this kind then it will be very simple to insert such a clause into future charterparties. It would take a much more complicated piece of drafting, following some complicated negotiations, to impose liability for this sort of loss. To rule out a whole class of loss, simply because the parties had not previously thought about it, risks as much uncertainty and injustice as letting it in.

91.  That argument cuts both ways. We are looking here at the general principles which limit a contract breaker’s liability when the contract itself does not do so. The contract breaker is not inevitably liable for all the loss which his breach has caused. Loss of the type in question has to be “within the contemplation” of the parties at the time when the contract was made. It is not enough that it should be foreseeable if it is highly unlikely to happen. It would not then arise “in the usual course of things": see The Heron II [1969] 1 AC 350, 385, per Lord Reid. So one answer to our question, given as I understand it by my noble and learned friend, Lord Rodger of Earlsferry, is that these parties would not have had this particular type of loss within their contemplation. They would expect that the owner would be able to find a use for his ship even if it was returned late. It was only because of the unusual volatility of the market at that particular time that this particular loss was suffered. It is one thing to say, as did the majority arbitrators, that missing dates for a subsequent fixture was within the parties’ contemplation as “not unlikely". It is another thing to say that the “extremely volatile” conditions which brought about this particular loss were “not unlikely".

92.  Another answer to the question, given as I understand it by my noble and learned friends, Lord Hoffmann and Lord Hope, is that one must ask, not only whether the parties must be taken to have had this type of loss within their contemplation when the contract was made, but also whether they must be taken to have had liability for this type of loss within their contemplation then. In other words, is the charterer to be taken to have undertaken legal responsibility for this type of loss? What should the unspoken terms of their contract be taken to be? If that is the question, then it becomes relevant to ask what has been the normal expectation of parties to such contracts in this particular market. If charterers would not normally expect to pay more than the market rate for the days they were late, and ship-owners would not normally expect to get more than that, then one would expect something extra before liability for an unusual loss such as this would arise. That is essentially the reasoning adopted by the minority arbitrator.

93.  My Lords, I hope that I have understood this correctly, for it seems to me that it adds an interesting but novel dimension to the way in which the question of remoteness of damage in contract is to be answered, a dimension which does not clearly emerge from the classic authorities. There is scarcely a hint of it in The Heron II, apart perhaps from Lord Reid’s reference, at p 385, to the loss being “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” (emphasis supplied). In general, The Heron II points the other way, as it emphasises that there are no special rules applying to charterparties and that the law of remoteness in contract is not the same as the law of remoteness in tort. There is more than a hint of it in the judgment of Waller LJ in Mulvenna v Royal Bank of Scotland plc [2003] EWCA Civ 1112, but in the context of the “second limb” of Hadley v Baxendale where knowledge of an unusual risk is posited. To incorporate it generally would be to introduce into ordinary contractual liability the principle adopted in the context of liability for professional negligence in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191, 211. In an examination, this might well make the difference between a congratulatory and an ordinary first class answer to the question. But despite the excellence of counsels’ arguments it was not explored before us, although it is explored in academic textbooks and other writings, including those cited by Lord Hoffmann in paragraph 11 of his opinion. I note, however, that the most recent of these, Professor Robertson’s article on “The basis of the remoteness rule in contract” (2008) 28 Legal Studies 172 argues strongly to the contrary. I am not immediately attracted to the idea of introducing into the law of contract the concept of the scope of duty which has perforce had to be developed in the law of negligence. The rule in Hadley v Baxendale asks what the parties must be taken to have had in their contemplation, rather than what they actually had in their contemplation, but the criterion by which this is judged is a factual one. Questions of assumption of risk depend upon a wider range of factors and value judgments. This type of reasoning is, as Lord Steyn put it in Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2002] 1 Lloyd’s Rep 157, para 186, a “deus ex machina". Although its result in this case may be to bring about certainty and clarity in this particular market, such an imposed limit on liability could easily be at the expense of justice in some future case. It could also introduce much room for argument in other contractual contexts. Therefore, if this appeal is to be allowed, as to which I continue to have doubts, I would prefer it to be allowed on the narrower ground identified by Lord Rodger, leaving the wider ground to be fully explored in another case and another context.