Termination of Consecutive Voyage Charter - Measure of Damage

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The Commercial Court handed down a decision on 28 April 2010 concerning a high value dispute arising out of the early termination of a consecutive voyage charterparty (CVC) entered into between claimant owners, Zodiac, and defendant charterers, FMG, one of the world’s leading producers of iron ore. The charterparty was a 5-year contract of consecutive voyages for the carriage of iron ore concentrates in bulk from Western Australia to China.

 

Mr Justice David Steel at the Commercial Court had to decide on two issues:

 

1)                   Whether charterers’ conduct and contents of their communications with owners amounted to a repudiation of the charterparty.

 

2)                   If charterers had repudiated the contract, what was the quantum of the damages to be awarded to owners?

 

Turning to the first issue, the judge, found that owners were correct in accepting that charterers’ words and conduct amounted to a repudiatory breach of contract and moreover, that owners had lawfully exercised their right to terminate the CVC as a result. As for the second issue, the judge indicated the appropriate measure of damages was considerable and in the region of US$80 – US$ 85 million.

 

Repudiation- the facts

 

The dispute had unfolded in the latter part of 2008, whilst the storm of the global economic crisis was still brewing. The dispute in question is not dissimilar to other disputes that have recently made the law reports and which arose out of that crisis.

 

Before loading of cargo for the sixth voyage, charterers notified owners that due to the downturn in the market charterers were unable to honour their freight commitments.

 

It was the charterers’ case that due to circumstances beyond their control, they had no other choice but to suspend temporarily or delay performance of the CVC whilst owners, on the other hand, argued that charterers had evinced an intention not to fulfil their obligations under the CVC and were, indeed, unable to do so. 

 

In several email exchanges dated between 23 November 2008 and 2 January 2009 (produced to the court in the course of the proceedings) charterers explained to owners that their customers had cancelled all their freight arrangements. As such, and in order to resolve the situation, charterers then attempted to negotiate a reduction in the agreed freight rate with owners and offered to extend the duration of the CVC.

 

On the facts, the vessel arrived at Port Hedland on 29 December 2009 to perform the sixth voyage under the CVC but charterers were unable to load cargo. Charterers had previously notified owners that due to the downturn in the market they were unable to honour their freight commitments.

 

Finally, on the 9 January 2009 Zodiac accepted charterers’ communications and conduct as a repudiation of the CVC and terminated it with effect from that date. Charterers then argued that owners’ termination was itself repudiatory of the charterparty and charterers accepted it.

 

The judge considered that charterers’ conduct and communications objectively evinced an intention to renounce the charterparty and that owners had rightly interpreted charterers’ intention when accepting the repudiation and treating the charterparty as terminated.

 

 

Quantum

 

Having determined that charterers had committed a repudiatory breach of contract, the next issue to be ascertained by the court was the measure of owners’ entitlement to damages.

 

It is a well established principle of common law that the innocent party is entitled to damages to be put it in the same position it would have been had the contract been performed. In these circumstances, the measure of damages in cases of early termination of charterparty can be described in practical terms as the difference between the contractual rate for the balance rate of the charter period and the market rate. Hence, in order to be able to determine the quantum of damages, Mr Justice Steel had to ascertain whether there was an available market on which the vessel could have been fixed for the remainder of the CVC on or shortly after 9 January 2009 and, if so, what was the market rate for a fixture on the same or similar terms as the charterparty.

 

The judge first focused on the meaning of an “available market” and described this as a highly sensitive issue since, if there was an available market, it must have been for a four and a half year CVC on equivalent terms for the carriage of bulk cargo including iron ore and coal. He further referred to The Golden Victory [2007] 2 AC 353 and considered that for a replacement fixture to qualify as a market substitute, the trading limits should broadly correspond with the existing fixture.

 

Based on the opinion of two experts, the judge held that there was no available market at the termination of the charterparty since there was no demand for period charters for about four and a half years on the prescribed charter route. As a result, the usual measure of damages which was based upon the difference between the contractual rate for the balance of the charter period and the market rate could not be applied. 

 

It was further held that if a market emerged at a later stage, this should not be taken into account when measuring damages. Mr Justice David Steel considered that there was no basis for requiring owners to go back into the term market at the end of every spot voyage.

 

Finally, when assessing the owners’ loss the judge took into account the fact that they had tried to mitigate their losses by renegotiating an earlier long term charter with Guofeng in order to substitute the original vessel with the M/V Kildare. Owners held that those earnings should not be taken into account because charterers’ breach did not cause the negotiation and subsequent nomination of the MV Kildare to perform that charter. However, the judge considered that “as a matter of common sense the cause of the re-negotiation was the termination” and that the earnings under the Guofeng charter should be taken into account.

 

Conclusion

 

In conclusion, the decision serves as a useful reminder of the scale of the claims still surfacing in the courts as a result of the economic crisis and the difficulties faced by charterers and owners alike during the period. In reaching its decision, the court applied well accepted principles to determine that there had been a repudiatory breach by charterers and to calculate owners’ loss in the circumstances.

Zodiac v Fortescue Metals 2010 EWHC 903 (M/V Kildare)

 

 

Update - March 2011

See website article Court of Appeal warns against Hasty Acceptance of Repudiatory Conduct which deals with a related issue.