Damages for breach of contract: FAQs
What are damages and how are they calculated? This article considers the relevant principles under English law and looks at key shipping issues and case law.
Marcia Perucca
Published: May 29, 2025
What are damages?
Damages are the monetary compensation awarded to the innocent party following a breach of contract by the other party.
In contract, the aim of damages is to put the innocent party in the position they would have been in had the contract been performed as agreed (Robinson v Harman (1848) 1 Ex 850). This is referred to as the compensatory principle.
The nature of damages for breach of contract was explained by Lord Reed in Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 as follows:
“Damages for breach of contract are…a substitute for performance. That is why they are generally regarded as an adequate remedy. The courts will not prevent self-interested breaches of contract where the interests of the innocent party can be adequately protected by an award of damages. Nor will the courts award damages designed to deprive the contract breaker of any profit he may have made as a consequence of his failure in performance. Their function is confined to enforcing either the primary obligation to perform, or the contract breaker’s secondary obligation to pay damages as a substitute for performance…The damages awarded cannot therefore be affected by whether the breach was deliberate or self-interested.”
Are all types of losses recoverable in damages?
To be recoverable, the losses suffered by the innocent party must:
Have been caused by the breach; and
Not be too remote.
How can causation be established?
Causation usually requires an application of the “but for” test, i.e. but for the breach, would the innocent party have suffered a loss?
However, the “but for” test is not always sufficient or appropriate. In cases involving more than one cause, the breach of contract must be the “effective” or “dominant” cause of the loss claimed.
Further, there must not be any subsequent actions which break the “chain of causation”.
What about remoteness?
According to Hadley v Baxendale (1854) 9 Ex 341, the historical leading authority on foreseeability, damages can be claimed under two different limbs:
Losses considered to arise naturally from the breach; and
Losses supposed to have been in the contemplation of both parties at the time of the making of the contract as a probable result of the breach.
The test was redefined in The Heron II [1969] 1 AC 350, where Lord Reid said that the test is whether the loss in question is:
“…of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from the breach… the words “not unlikely” denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable”.
However, the decision of the House of Lords in The Achilleas [2008] UKHL 48 indicates that losses for which the guilty party cannot be regarded as having assumed responsibility cannot be recovered, even if they arise out of circumstances which were “not unlikely” to occur in the usual course of things. Recoverable Damages and The “Achilleas” - A New Approach?
What are consequential damages?
Consequential damages are those that fall under the second limb of Hadley v Baxendale (see above).
For further guidance, see: The Meaning of "Consequential Damages"
What about mitigation?
Mitigation involves three rules:
Avoidable losses cannot be recovered, i.e. a party cannot recover losses which could have been avoided by taking reasonable steps.
Avoided losses cannot be recovered, i.e. where the innocent party takes steps to mitigate the loss suffered, the resulting benefit will be taken into account when assessing the loss.
Losses incurred in the course of taking steps to mitigate can be recovered.
The first rule imposes a restriction on the damages that can be recovered by the innocent party since the damages will be calculated as if the innocent party had acted reasonably to minimise the loss.
As to the second rule, an act or benefit will only qualify as mitigation if they are caused (factually and legally) by the breach. In Globalia Business Travel S.A.U (formerly TravelPlan S.A.U) of Spain v Fulton Shipping Inc of Panama [2017] 1 WLR 2581, where the owner sold the vessel after the charterer’s repudiatory breach, the Supreme Court ruled that the benefit accrued could not be taken into account to reduce the owner’s losses because, inter alia, it was not legally caused by the breach or a successful act of mitigation. The "New Flamenco" - Supreme Court Decision
Separately, the Supreme Court recently ruled in Sharp Corp Ltd v Viterra BV [2024] UKSC 14, that the principle of mitigation is just as important as the compensatory principle when calculating damages. In that case, damages were assessed by reference to the market where the innocent party was likely to take steps in mitigation. Steamship Mutual - Mitigation as a Guiding Principle to Damages
As to the third rule, the innocent party will be able to recover losses and expenses incurred in reasonably attempting to mitigate the losses resulting from the breach, even where the steps are unsuccessful or lead to greater loss.
At what date is the quantification of damages to be made?
The general rule is that damages for breach of contract should be assessed as at the date when the cause of action arose, i.e. the date of the breach.
However, this is not an absolute rule. In cases of repudiation, where there is an available market, the basic rule is that the loss is to be measured at the date of acceptance of the repudiation (Bunge SA v Nidera BV [2015] UKSC 43, [2015] 2 Lloyd’s Rep. 469).
The basic or general rule will not always apply. This is addressed further below in the section dealing with events taking place after the breach.
What is the measure of damages for early termination of a charter?
In a time charter, where the vessel is redelivered early or the charterer repudiates the charter in some other way, the measure of damages due to the owner will depend on whether there is an available market at the date of the termination. An available market means that the terminated fixture can be replaced on similar terms. In the case of period time charters, that means a market in which the vessel can be re-chartered for the balance of the charter period on terms similar to those of the repudiated charter.
Where there is an available market, damages will be based on the difference between the profit that would have been earned under the original charter and the profit under a substitute fixture.
Where there is no available market, the measure of damages will usually be based on a comparison between what the owner would have earned up until the end of the minimum charter period and the actual losses incurred up to the date when the charter would have terminated.
Where a voyage charter is terminated, the prima facie measure of damage is that set out in Smith v McGuire (1858) 3 H & N 554, i.e. it is necessary to deduct from the amount of the freight which the vessel would have earned if the charter had been performed, the expenses which would have been incurred in the performance of the charter and also any profit which the vessel earned between the expiration of the lay days and the time when the employment of the ship under the charter would have ended.
However, the courts will depart from the prima facie measure if they consider that another approach will better implement the compensatory principle.
In Louis Dreyfus Commodities Suisse SA v MT Maritime Management BV, (The MTM Hong Kong), a case involving the repudiation of a voyage charter, the owner was allowed to recover losses up to the end of the substitute fixture even though the substitute fixture ended after the contract voyage would have ended. Voyage Charters - Damages for Delay and Positional Loss.
In The Elbrus [2010] 2 Lloyd’s Rep. 315, all the profits under the substitute fixture, even those arising after the vessel should have been redelivered under the original fixture, were taken into account with the effect that the owner was found to have suffered no loss. Damages for Early Termination
Where the charter is brought to an end by the owner, the measure of the charterer’s damages will also depend on whether there is a market in which to charter a substitute ship and on what the charterer chooses to do. If there is an available market and the charterer proceeds to fix an alternative ship, the measure of damages will be the difference between the cost of the original fixture and the cost of the substitute fixture.
Are events that happen after the breach taken into account when assessing damages?
In Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] UKHL 12, the House of Lords agreed with the lower courts that the basic rule regarding the date for the quantification of damages (see above) had to be disregarded if following it meant that the innocent party would be over-compensated. In that case, two years after the charterer’s repudiation and before the assessment of damages was made, a war broke out which would have reduced the charter period even if the charter had not been repudiated. The effect of that was that the damages awarded to the owner were limited to the shorter charter period. A Blow for Certainty in Commercial Affairs?
In Bunge v Nidera [2015] UKSC, the Supreme Court ruled that the law should take account of “after the breach” events that would have reduced the contractual performance and, therefore, the loss.
However, in Classic Maritime v Limbungan Makmur SDN [2020] 1 Lloyd’s Rep. 178, the Court of Appeal suggested that subsequent events should only be taken into account when assessing damages in the case of an anticipatory breach and not an actual breach of contract. Damned if you don’t perform the contract
What is the measure of damages for late redelivery of a vessel?
The usual measure of damages for late redelivery is the difference between the contract rate and the market rate for the overrun period. The overrun is the period from the latest time at which the ship could lawfully have been redelivered, up to the date on which she was in fact redelivered. The relevant market for the purposes of ascertaining the market rate is the market for period time charters of a length similar to that from which the ship was redelivered late.
In a recent decision (Hapag-Lloyd AG v. Skyros Maritime Corporation and Agios Minas Shipping Company [2024] EWHC 3139 (Comm)), the Commercial Court departed from the usual rule as set out above and awarded only nominal damages to the owner of two vessels that were redelivered late. This was because the owner had entered into separate agreements to sell the vessels to third parties and the terms of those agreements prevented the owner from chartering the vessels again once redelivered. As such, the owner could not have earned the higher market rate even if the vessels had not been redelivered late and no loss had been suffered. Permission to appeal has been granted.
Is the loss of a follow-on fixture recoverable?
There is some inconsistency in the law. As seen above, in The Achilleas, the House of Lords ruled that the loss of a follow-on fixture following the late redelivery of a vessel could not be recovered. In that case, the owners were only awarded the usual measure of damages for late redelivery.
In The “Sylvia” [2010] EWHC 542 (Comm), a charterer was allowed to recover the loss of a follow-on fixture. As a result of the owner’s breach of their due-diligence and maintenance obligations, the vessel was detained by port-state control, which in turn led to the charterer missing the cancelling date on their sub-fixture (which the sub-charterers then cancelled). The substitute employment found post-cancellation was less profitable and the charterer claimed the difference from the owner. In allowing this, it was said that the loss was not “unquantifiable, unpredictable, uncontrollable or disproportionate”. Damages for Loss of Fixture - The “Achilleas” and The “Sylvia”.
What are liquidated damages?
Where damages have been agreed and fixed by the parties in the contract, they are called liquidated damages.
An example of liquidated damages is the compensation given to an owner under a voyage charter when the charterer exceeds the allowed laytime under the charter to load or discharge the cargo. The damages for the charterer’s breach are fixed by reference to the “demurrage rate” stipulated in the charterparty. Recently, the Court of Appeal ruled in The Eternal Bliss that demurrage is all that the owner can recover absent a separate breach. Steamship Mutual - The Eternal Bliss - Demurrage; what does it liquidate?
The right of the parties to fix damages in the contract is subject to the rule against penalties. For more guidance see: Supreme Court shifts tests away from “genuine pre-estimate of loss” but declines to abolish rule against penalties
Are there any other recent decisions to be aware of?
In the recent case of Orion Shipping and Trading Ltd v Great Asia Maritime Ltd (“The Lila Lisbon”) [2024] EWHC 2075, the Commercial Court looked at the losses that can be recovered under Clause 14 of the Norwegian Saleform 2012, one of the most commonly used forms for the sale and purchase of second hand ships.
Clause 14 gives the buyer the right to cancel the agreement if the seller cannot meet the cancelling date.
The Court held that compensation under that clause is limited to recovery of accrued losses and wasted expenses and does not include loss of bargain arising out of the lawful exercise of the right to cancel. Steamship Mutual - MOA – is loss of bargain recoverable?
This decision is under appeal.
Can the parties exclude or limit the right to damages?
At common law, the parties can choose to exclude or limit the right to damages, however the language used to this effect will have to be very clear. The Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015 impose some statutory restrictions on attempts to exclude or limit liability for breach of contract, however these Acts are unlikely to apply in the shipping context.
The question of the measure of damages due to the innocent party in any given scenario is not always straightforward and Members of the Club are encouraged to approach their usual Club claims handler for guidance.
