Assessing Losses for Late Redelivery

February 2007

In TRANSFIELD SHIPPING INC v MERCATOR SHIPPING INC [2006] EWHC 3030 (Comm) Mr Justice Clarke heard an appeal by Charterers against a London arbitration award holding Charterers liable to shipowners for damages in the sum of US$1,364,584.37 arising out of late redelivery by a nine day period.

Charterers redelivered the vessel late by a mere nine days. Owners had fixed the vessel for her subsequent business with a provision in the fixture allowing for an extension of the cancelling date against a reduction in the hire rate of US$8,000 per day. Owners sought to recover losses by reference to the US$8,000 loss per day for the whole period of the subsequent fixture and the majority of the Tribunal agreed and so awarded.

Charterers appealed and contended that the correct measure of damages was the difference between the market rate and the charter rate for the overrun period only in accordance with the first limb of damages in the Hadley v Baxendale rule. Charterers asserted that the damages actually awarded must have been founded on the second limb of damages in the Hadley v Baxendale rule. That would have required them to have known of the subsequent fixture and to have assumed responsibility for its loss due to late redelivery.

In essence, the principle set out in Haldey v Baxendale provides that the innocent party can recover damages which can fairly and reasonably be considered as arising naturally, in other words in the usual course of things, from the breach (the first limb) or such damages as are reasonably supposed to have been in the contemplation of both parties at the time they made the contract as a probable result of the breach (the second limb).

Mr Justice Clarke disagreed with Charterers and upheld the award. He held that Hadley v Baxendale did not intend to set two tests. The innocent party was entitled to recover damages actually caused by the breach which the defaulting party should have contemplated would flow therefrom (The Heron II [1967] 3 All ER 686). The test for remoteness did not require the Owners to show that the Charterers ought to have contemplated the actual extent of the loss even if much greater that anticipated. 

Charterers recognised and accepted that a hazard of late redelivery was missing the cancellation date on the subsequent fixture. This was exactly the result the parties would have in mind; variations in market rates were also accepted and the kind of loss Owners suffered the need to adjust dates against a reduction in hire was within the parties contemplation as a not unlikely result of the breach.

Owners loss of profit could legitimately be treated as arising within the first limb of Hadley v Baxendale as arising naturally from the breach of charter and there was no additional requirement for Owners to show that Charterers had assumed responsibility for loss of profit on the subsequent fixture. The Charterers must accept the risk of being liable to compensate Owners given that the compensation sought was of a type they would realise was a not unlikely result of the breach.