Voyage Charters - Damages for Delay and Positional Loss

October 2015

PDF Version

010 VoyageCharter shutterstock 32676697

The recent High Court case of Louis Dreyfus Commodities Suisse SA v MT Maritime Management BV, (The MTM Hong Kong) has considered the principles applicable to a claim for damages following repudiation of a voyage charterparty.  

Background of the case

The vessel, an oil/chemical tanker, was chartered to load a vegoil cargo in South America with discharge to be in the Gibraltar/Rotterdam range.  Under its preceding fixture, the vessel had been at Boma, upriver on the River Congo where it suffered a grounding. Delays then followed and correspondence was exchanged between the parties culminating in Owners accepting Charterers’ messages as a repudiatory breach and bringing the charter to an end.  Given the vessel was steaming offshore from West Africa at that stage, Owners decided to continue to proceed towards South America to seek their next fixture.   It was accepted that rates there were lower than in the North Atlantic trade, but the intention was to take advantage of a shorter ballast leg to South America and then fix business for a voyage into that more profitable North Atlantic region.

The Owner claimed damages for Charterers’ repudiatory breach and started arbitration in London.

The Arbitral Award

The arbitrators found as a matter of fact (i) that after arriving in the Uruguayan port of Punta del Este on 2 February 2011 the vessel had to wait until the 24 February 2011 before the anticipated North Atlantic fixture for a voyage to Rotterdam materialised; (ii) the mitigation fixture was completed on 12 April 2011 whereas the contract voyage would have taken 43.6 days if performed, completing on 17 March 2011 and the vessel would then have performed two short but lucrative voyages from the Baltic to the United States, followed by a voyage back to Europe; and (iii) if the contract voyage plus those two voyages had been performed, the vessel would have arrived back in Europe at approximately the same time as completion under the mitigation fixture, namely on or about 12 April 2011.

In the arbitration it was conceded in argument that Owners had behaved reasonably in their mitigation strategy. The arbitrators held the charterparty was repudiated by the Charterers, who were therefore liable for damages, which they calculated until the end of the substitute charter at just over US$1.2 million.

Appeal to the High Court

The tribunal’s award was appealed by Charterers and the question of law posed was:

“If a voyage charter is repudiated by charterers in circumstances where the substitute employment begins after the contract voyage would have begun, and ends after the contract voyage would have ended, should damages be assessed by reference to the vessel’s (actual and hypothetical) earnings up to the end of the contract voyage, or such earnings up to the end of the substitute employment?”

Mr Justice Males dismissed the appeal on the basis that if the contract voyage had been performed as intended, this would have enabled Owners to earn the freight payable and also would have positioned the vessel in Europe without a delay period, enabling the vessel to take advantage of the higher rates in the North Atlantic market.   The consequent delay in arriving in Europe had been caused by the breach and by extension, the positional element was considered as a separate but recoverable head of damages from the loss of profits on the lost charterer.

The compensatory principle is fundamental to the analysis of such a claim and broadly, this states that “where a party suffers loss arising from a breach, they are to be placed in the same financial position as if the contract had been performed.” The question in this case was whether compensation should be awarded for loss of the follow on fixtures or only for the period up to when the contract voyage would have come to an end i.e. 17 March.  

In the case of Smith v M’Guire (1858) 3 H&N 554 it was decided that the starting point for arriving at a shipowner’s loss was “the amount of freight which the ship would have earned if the charter-party had been performed” and to then deduct “the expenses which have been incurred in earning it” whilst taking into account “what the ship earned (if anything) during the period which would have been occupied in performing the voyage”. By so limiting damages to the end date of the original charter period and applying solely that measure to the facts of the case, the result would have been an award of damages at the considerably lower level of just under US$480,000. However, in Smith v M’Guire losses extending beyond the end of the contract voyage were not claimed and, therefore, the case did not deal with profits that would have been earned after the date on which the contract voyage, if it had been performed, would have come to an end.

This issue was considered in the 2010 Elbrus  case in relation to a trip time charter in which, when assessing damages for Charterers wrongful termination of the charterparty, it was held Owners had to give credit for a benefit obtained after the date when the charterparty would have come to an end but for Charterers early termination. In the same way there is no rule of law to prevent a claim for damages for losses arising after the end of a contractual charter period.

This issue can also be analysed in terms of foreseeability and assumption of risk, but it can readily be appreciated that it is difficult to formulate a workable rule barring Charterers’ assumption of responsibility for loss of profit on employment occurring after the repudiated fixture, or indeed why such losses should not, at least in principle and subject to remoteness be recoverable. Loss that is in the reasonable contemplation of the parties at the time when a contract is agreed should normally be recoverable [1].

Where damages are to be based over a longer timescale, this has to be balanced against the need to avoid complex, hypothetical calculations, perhaps even as submitted by Charterers’ counsel and in previous cases, extending ‘to the end of the vessel’s working life’. However, such concerns did not arise on the facts of this case which enabled the arbitrators to have made their findings with ‘some degree of certainty’.

Summary

The Judge in this matter was careful to make clear that an Owners’ claim for loss of employment relating to the period after the date when the contract voyage would have concluded will not always automatically succeed.   As here, the reasonableness of Owners’ acts in mitigation and that the losses claimed fall within the reasonable contemplation of parties are important factors. The extent to which losses are predictable and can be calculated with a degree of confidence and certainty are also relevant.

Whilst previous case law had tended to calculate damages to the end of the contract voyage, there was no error of law in the original award. The guiding principle remains the compensatory principle and the key decision continues to be that of the House of Lords in the Golden Victory where the prima facie position is that damages are assessed at the point and date of breach, and that events which follow can be taken into account as required by justice in each case.

Following this case Charterers may have to consider their liability for consequences of terminating/repudiating a voyage charter or trip time charter that go beyond their intended contract period, but can take some comfort that such liability will not result in complex endless calculations.

Whilst this may be seen as increasing the scope of damages in terms of both time and the vessel’s position at the expense of a degree of legal certainty, the case makes it clear that this would only apply where calculations can be made with reasonable predictability and that the rules on remoteness of loss still need to be applied.

Article by Jeff Cox, Syndicate Associate

1] See The Achilleas http://www.steamshipmutual.com/publications/Articles/AchilleasHL0908.html and http://www.steamshipmutual.com/publications/Articles/Sylvia0810.html