In the case in question, Sub-Charterers commenced arbitration against Charterers alleging an off-hire event arising out of an unlawful refusal to load cargo. Charterers, in turn, commenced arbitration against Head Owners relying on the same grounds. The case was ultimately determined in Sub-Charterers’ favour and thus Charterers claim against Head Owners also succeeded. The Charterers then brought a damages claim against Head owners for the costs liability they incurred to Sub-Charterers as well as a claim for their own costs of defending the Sub-Charterers’ claim.
Charterers contended that since the breach had been established they merely had to satisfy the usual requirements of causation and remoteness. They relied on Hammond v Bussey (1888), in which it was held that a tribunal could award costs incurred in previous proceedings between a claimant and a third party as damages in another set of proceedings, subject to causation and remoteness. Charterers said that the costs liability was a “not unlikely” result of the breach for three reasons, (i) it was foreseeable that Charterers would sub-charter the vessel and that the illegitimate refusal to load would put Charterers in breach of the Sub-charter, (ii) this would lead Sub-charterers to commence arbitration proceedings against Charterers, (iii) Charterers would be found liable to Sub-charterers and incur a liability for their costs.
Head Owners argued that Hammond v Bussey could be distinguished because it was a sale of goods case in which the intermediary buyer seller had no opportunity to detect the defect in the goods and, thus, had no opportunity of establishing whether the goods complied with the contractual description. That was to be contrasted with this case because the Charterers had every means of knowing and deciding the merits of the Sub-Charterers’ claim for themselves – they could make up their own mind as to whether to contest the sub-charter arbitration. Thus, Head Owners argued, the ‘effective and dominant’ cause of the costs liability was charterers’ own informed decision to contest Sub-Charterers’ claim, and not the illegitimate refusal to load cargo.
Head Owners also relied on the “Vakis T” [2004] 2 Lloyd’s Rep. 465 and the reasoning of Langley J who overturned an arbitration award of costs as damages saying:
The reasons why the award cannot stand can be stated shortly. The tribunal appear to have addressed the issue of causation only by reference to whether or not pursuit of the claim against [sub-charterers] did "break the chain of causation". They did not address the question whether or not as a matter of commonsense the breach of contract by [head owners] complained of (unseaworthiness) was the "effective or dominant" cause of the loss by way of the costs incurred and payable in the sub-arbitration.
… In “commonsense” the cause of [intermediate charterers’] costs exposure in the sub-arbitration was [owners’] decision to make the unsafe port/berth allegation and [intermediate charterers’] decision to make the same allegation against [sub-charterers]. Nor do I think this conclusion is affected by the tribunal’s view that safe berth port/berth and unseaworthiness were the obverse of each other. To establish causation [intermediate charterers] must show that the dominant cause of the expense it has incurred on the costs was the breach by [owners] of the seaworthiness obligation. But I agree with [owners’ counsel], that the “real” cause of the expense was that [intermediate charterers] brought a failed claim against [sub-charterers] for breach of a different obligation.
The arbitrator found that Head Owners’ breach did not cause the Charterers to incur a costs liability in the sub-charter arbitration on the grounds that they were in a position to make, and indeed did make, their own informed decision about the legitimacy of the refusal to load and thus could decide for themselves whether to defend the Sub-Charterers’ claim.
In summary, if costs are to be claimed as damages then (i) any such claim should be anchored to a breach of duty – in the context of charteparty claims this will be a breach of contract, (ii) there must be no break in the chain of causation between the costs liability and the identified breach of duty and (iii) the incurrence of the costs liability cannot be too remote. Further, having sufficient information to allow a intermediary party to determine for itself whether a claim being passed up and down a charter chain is bad may break the chain of causation because, in those circumstances, the continued prosecution of a claim that is bad cannot be said to stem from the identified breach.
With thanks to Darryl Kennard of Thomas Cooper for preparing this article.
See also earlier website article: Costs Recovery In Charterparty Chain Arbitrations.
