Transfield Shipping Inc (Appellants) v Mercator Shipping Inc (Respondents), [2008] UKHL 48

Wed, 09 Jul 2008 08:11:00 GMT

The Achilleas is a single-decker bulk carrier. By a time charter dated January 2003, the owners let her to the charterers for five to seven months at a daily hire rate of US$13,500 and then again in September 2003 for a further five to seven months at a daily rate of US$16,750. The latest date for redelivery was 2 May 2004.

By April 2004, market rates had more than doubled compared with the previous September. On 20 April 2004 the charterers gave notice of redelivery between 30 April and 2 May 2004. On the following day, the owners fixed the vessel for a new four to six month hire to another charterer, following on from the current charter, at a daily rate of US$39,500. The latest date for delivery to the new charterers, after which they were entitled to cancel, was 8 May 2004.

With less than a fortnight of the charter to run, the charterers fixed the vessel under a subcharter to carry coals from China to discharge at two ports in Japan. If this voyage could not reasonably have been expected to allow redelivery by 2 May 2004, the owners could probably have refused to perform it but they made no objection. The vessel was delayed and was not redelivered to the owners until 11 May.

By 5 May it had become clear to everyone that the vessel would not be available to the new charterers before the cancelling date of 8 May. By that time, rates had fallen again. In return for an extension of the cancellation date to 11 May, the owners agreed to reduce the rate of hire for the new fixture to $31,500 a day.

The owners claimed damages for the loss of the difference between the original rate and the reduced rate over the period of the fixture. The charterers said that the owners were not entitled to damages calculated by reference to their dealings with the new charterers and that they were entitled only to the difference between the market rate and the charter rate for the nine days during which they were deprived of the use of the ship. The difference between these two bases was approximately $1.2m.

The arbitrators, by a majority, found for the owners. They said that the loss on the new fixture fell within the first rule in Hadley v Baxendale (1854), as arising “naturally, ie according to the usual course of things, from such breach of contract itself". It fell within that rule because it was damage “of a kind which the [charterer], when he made the contract, ought to have realised was not unlikely to result from a breach of contract [by delay in redelivery]".

The dissenting arbitrator did not deny that a charterer would have known that the owners would very likely enter into a following fixture during the course of the charter and that late delivery might cause them to lose it. But he said that a reasonable man in the position of the charterers would not have understood that he was assuming liability for the risk of the type of loss in question. The general understanding in the shipping market was that liability was restricted to the difference between the market rate and the charter rate for the overrun period and “any departure from this rule [is] likely to give rise to a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable.”

The majority arbitrators, in their turn, did not deny that the general understanding in the industry was that liability was so limited. But the majority said that this was irrelevant. A broker “in a commercial situation” would have said that the “not unlikely” results arising from late delivery would include missing dates for a subsequent fixture, a dry docking or the sale of the vessel. Therefore, as a matter of law, damages for loss of these types was recoverable. The understanding of shipping lawyers was wrong.

The Court of Appeal upheld the majority decision.

The case therefore raises a fundamental point of principle in the law of contractual damages:

“is the rule that a party may recover losses which were foreseeable (“not unlikely”) an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses?”

The House of Lords held that the findings of the arbitrators and the commercial background to the agreement were sufficient to make it clear that the charterer could not reasonably be regarded as having assumed the risk of the owner’s loss of profit on the following charter. The majority arbitrators’ decision was based on an error of law and that the view of this case that was taken by the minority arbitrator was right. The appeal was allowed.

Maritime

Transfield Shipping Inc (Appellants) v Mercator Shipping Inc (Respondents), [2008] UKHL 48