Damages for late redelivery: CA says No change

Background

The “SKYROS” and the “AGIOS MINAS” were on long term charterparties to Hapag-Lloyd (“the Charterer”). The latest date for redelivery was 30th May 2021 and 31st May 2021 respectively.

On 22nd April 2021 and 23rd March 2021, the owners entered into MOAs agreeing to sell the vessels. In breach of the charterparties, both vessels were redelivered late by the Charterer: SKYROS by about two days and AGIOS MINAS by about seven days. By the time the vessels were redelivered, the market rates were higher than the charterparties rates.

Under the terms of the MOAs, the owners had agreed that once the vessels were redelivered by the Charterer, they would not enter into further fixtures. Instead, the vessels would be delivered to the buyers.

The Awards

The parties asked the arbitrators to determine, as a preliminary issue, whether the owners were entitled to recover (i) substantial damages, compensation, remuneration or other monetary relief (as the owners alleged); or (ii) only nominal damages (as the Charterer alleged).

The Charterer alleged that to award substantial damages would be contrary to the fundamental compensatory principle in contract that where a party sustains loss by reason of a breach, it is, so far as money can do it, to be placed in the same situation as if the contract had been performed (Robinson v Harman (1848) 1 Exch 850, 855. Even if the vessels had been timely redelivered, the owners could not have chartered them out and, therefore, could not have earned the higher market rates.

The Tribunal disagreed and found that the owners were entitled to substantial damages on the following basis:

1. The owners were entitled to a quantum meruit. There was an implied request by the Charterer for services outside the scope of the charterparties (i.e. for the use of the vessels during the periods of the overrun), coupled with an implied agreement to pay for those services at the current market rate.
2. Alternatively, the owners would be entitled to recover user damages (to compensate for the loss of their right to use the vessels), again consisting of the difference between the contract rate and the market rate prevailing during the overrun periods. The fact that the owners would not have chartered out the vessels, and would instead have delivered them to their buyers, should be disregarded as being too remote or res inter alios acta (literally ‘a thing done between others’), a principle that establishes that a transaction or contract which is separate from the main transaction and often involves other parties should not affect the position of the parties to the main dispute.  
3. Further in the alternative, the arbitrators found that the owners would have been entitled to negotiating damages, i.e. what would have been agreed in a hypothetical negotiation between the parties.

The Commercial Court ruling

The first instance judge disagreed with the arbitrators on all three grounds (quantum meruit, user damages and negotiating damages) and held that the owners were entitled to nominal damages only. Having discussed the principles applicable to the assessment of compensatory damages, including remoteness and res inter alios acta, he found that the normal measure of damages for late redelivery in a case where the market rate is higher than the contract rate is the difference between the market rate and the contract rate for the period of the overrun.

However, there is no scope for the recovery of such damages if the owners have not lost the opportunity to take advantage of the market rate during the period of the overrun. Applying the Court of Appeal’s decision in Slater v. Hoyle & Smith, the judge considered that the doctrine of res inter alios acta did not apply in this case because the onward contracts, i.e. the MOAs, were for the same specific goods as those delivered under the main contract, i.e. the charterparties. Accordingly, they had to be taken into account when assessing damages.

Permission to appeal was given on two issues only: (1) whether the owners are entitled in principle to recover user damages; and (2) whether the owners’ contracts for the sale of the vessels must be disregarded in assessing any damages.

The Court of Appeal decision

Delivering the Court’s judgment, Lord Justice Males said that it had been clear for over a century that in the event of late redelivery under a time charterparty, the owners are entitled to recover damages in respect of the overrun period consisting of the difference between the market rate and the contract rate in circumstances where the market has risen above the contract rate. He cited a long line of authority including The Paragon [2009] 2 Lloyd’s Rep 688 and The Achilleas [2008] UKHL 48, [2009] 1 AC61 [https://www.steamshipmutual.com/publications/articles/achilleashl0908]. There was no mention in the authorities or the textbooks that the owners’ entitlement to this normal measure of damages was dependent on whether the owners would in fact have entered the market to conclude a new fixture on the latest redelivery date.

The Court of Appeal found that whereas the remoteness principle is at play when assessing how much of the alleged loss can be recovered depending on the “reasonable contemplation” test associated with Hadley v Baxendale, the res inter alios acta principle operates even before that, when determining what the claimant has in fact lost by comparing the financial position in which the claimant would have been if the contract had been performed and the financial position in which the claimant finds itself as a result of the breach. According to this principle, some aspects of the claimant’s actual financial position should be disregarded because they arise independently of the circumstances giving rise to the loss. This is so regardless of whether the effect of disregarding such matters is to increase or decrease the loss. Lord Justice Males said at para 49:

In my judgment it is the res inter alios acta principle which applies in the present case. The particular arrangements which the owner may have made for the further employment of its vessel after redelivery – or in this case, for the sale of the vessels – arise independently of the circumstances giving rise to the breach and are therefore ignored by the law for the purposes of assessing damages. The result is that the owner is entitled to damages for late redelivery in accordance with the normal measure, that is to say to recover the difference between the contract rate and the market rate for the period of the overrun, regardless of any arrangements which it has in fact made for the future use of the vessel. The charterer is simply not concerned with such matters.

As for user damages (a type of damages available where there has been an invasion of the claimant’s rights to property, but no pecuniary loss or physical damage to the property in question), he said the principle should not be extended to late redelivery cases. Although late redelivery can to some extent be characterised as a wrongful use of property, it is in one sense a use to which the owners have agreed. He concluded that there was no justification for introducing into the law of damages in contract a novel basis of recovery.

Comments

Lord Justice Males said that his findings promoted certainty because otherwise a charterer would never know the extent of its liability without investigating what the owner had arranged for the future use of the vessel. That may be so. However, the Commercial Court and the Court of Appeal reached opposite views on the application of the res inter alios acta principle, and it remains to be seen if the matter will be appealed to the Supreme Court . Whether or not there is an appeal, the decision underlines the principle that when assessing damages for late delivery it is the difference between the market and charterparty rates that is key.