A recent High Court case, OMAK Maritime Ltd v Mamola Challenger Shipping Co, has determined a point on which there was previously no binding English law authority; whether the expectancy basis and the reliance basis are entirely different or, alternatively, whether reliance damages are simply a type of expectancy damages.
The reason why the point was important was that the claimant had been successful in mitigating the effects of the defendant’s repudiation of the contract. The claimant’s position following the breach was financially better than it would have been if the contract had been performed, by an amount larger than the wasted expenditure. The question for the court was whether these mitigation efforts were relevant to the claim for wasted expenditure, in the same way as they would have been to a claim for loss of profits.
Teare J in the High Court overturned the arbitrators’ decision. The judge’s ruling was that wasted expenditure damages are a type of expectation damages and are subject to the rule that that claiming party cannot be put into a better position overall than he would have been if the contract had been performed.
The case arose from a long term charterparty. Before the date that the vessel was due to be delivered into the charter, charterers indicated that they would not or could not perform. The owners accepted charterers’ conduct as a repudiatory breach, but had already incurred expense in relation to modifications to the vessel which were required by the charter terms. In addition the vessel had been held idle at Cape Town for an extended period while owners waited for clarification of the charterers’ position.
The issue was whether owners’ wasted expenditure could be recovered as damages, in light of the earnings made by owners after the termination of the charter. The market rate after the termination was higher than the rate agreed in the charter. As a consequence of the termination the owners were able to trade the vessel at the market rates. It was the conclusion of the arbitrators that the owners “more than recuperated” their wasted expenditure by virtue of the earnings generated after the termination.
The view of the arbitrators was that the owners were entitled to recover the expenditure wasted on the modifications, but not entitled to compensation for the time that the vessel was idle at Cape Town. Both parties appealed the arbitrators’ award.
Charterers argued that the arbitrators were wrong in principle and that the proper calculation of damages on the wasted expenditure basis must include assessment of the claimant’s overall position following the termination and comparison with his position if the contract had been performed. Owners argued that the arbitrators were correct in principle, but were wrong to disallow the owners’ claim for compensation for the idle time.
Charterers’ submissions included reliance on:
1. Authorities from the US, Canada and Australia which supported the proposition that the reliance and expectation method of assessment of damages are, in the words of one of the judges in the Australian case, simply manifestations of a single principle.
2. The accepted principle of reliance damages that a party may not recover wasted expenditure if the defendant can show that the contract was a bad bargain and the claimant’s expenditure would not have been recouped even if the contract had been performed.
3. A statement by Ackner LJ in C&P Haulage v Middleton [1983] 1 WLR 1461 that in a wasted expenditure claim it is not the function of the courts to put a plaintiff in a better financial position than if the contract had been performed.
Owners’ arguments included submissions based on:
1. Comments of Lord Evershed MR in Cullinane v British Rema [1954] 1 QB 292 indicating that a wasted expenditure claim puts the plaintiff in the same position as if the contract had not been made;
2. Statements of principle in McGregor on Damages and in an article by Professor Treitel which said that the two methods of assessment are different.
The decision of Teare J was summarised in paragraphs 64 and 65 of the judgment. The relevant section is quoted below:
“I am persuaded that the tribunal’s decision was wrong in law. The tribunal said that
“to take the Charterers’ position and look at the net overall position is to mix this basis of claim with a claim based on the difference between contract and market rates inasmuch as the latter contains within it the concept of what the vessel should have earned overall from substitute employment as compared with what would have been earned under the Charterparty”
The tribunal’s error was to regard a claim for wasted expenses and a claim for loss of profits as two separate and independent claims which could not be “mixed”. But the weight of authority clearly shows that both claims are illustrations of, and governed by, the fundamental principle stated by Baron Parke in Robinson v Harman.That principle requires the court to make a comparison between the claimant’s position and what it would have been had the contract been performed. Where steps have been taken to mitigate the loss which would otherwise have been caused by a breach of contract that principle requires the benefits obtained by mitigation to be set against the loss which would otherwise have been sustained.To fail to do so would put the claimant in a better position than he would have been in had the contract been performed.”
Although the first ruling meant that owners’ appeal failed, Teare J did go on to say that, had it been relevant, he would have overturned the arbitrators’ decision on the idle time claim.
It is not known whether the judgment will be appealed.
Aside from the decision on the point of principle in the case two further points to bear in mind when assessing a damages claim, and which arise from the decision, are summarised below.
The first is that the term “wasted expenditure” is a helpful label for a reliance damages claim, but the decision on the idle time claim shows that it may be a misleading one. The judge’s decision was that a claim in respect of the idle time was in principle perfectly acceptable as part of a reliance damages claim, even though it involves no expenditure by owners and is based instead on lack of earnings in the period in question.
The second is that the summary in the current edition of McGregor on Damages at 2.020 indicating that a reliance damages claim puts the claimant into the position he would have been if the contract had not been made is probably inaccurate.
