CALCULATING DAMAGES
- RECENT DEVELOPMENTS IN ENGLISH LAW
By
Clive Aston, LMAA Arbitrator
In any dispute involving allegations of breach of a charterparty
contract three broad questions arise:
- Has there been a breach of the charterparty?
- What losses has the innocent party suffered?, and
- What losses may the innocent recover from the "guilty" party?
The first question involves issues of liability while the other
two
relate
to
arbitration,
so-called
questions
of
issues
both
of
quantum.
liability
Usually
and
quantum
in
an
are
in
dispute: sometimes, though, the guilty party may admit liability
but deny that the innocent party suffered the loss claimed or is
entitled to recover the level of damages that they claim.
It is
not, therefore, unusual to see arbitrations consider questions
of quantum only and for these to be argued just as strongly as
any disputes about liability in other cases.
The established "orthodox" approach
English law has always recognised that there must be limits to
the types of loss that an innocent party may recover for a
breach
of
contract.
This
is
not
merely
for
reasons but also for pragmatic, mercantile reasons.
philosophical
Businessmen
or women will not enter into contracts if they fear that their
exposure for any breach of those contracts may be unlimited.
By
establishing limits on the types of loss that may be recovered,
2
therefore, the law creates limits and a degree of predictability
as to the exposure of parties entering into contracts.
does
not,
however,
mean
that
the
position
is
This
entirely
predictable in every case but the approach to each case should
at least be the same. It is probably right, too, that the law
should retain some degree of flexibility to deal with individual
or unique circumstances that may arise in a particular case or
changes in the way in which business is conducted.
The starting
point, though, for the assessment of damages remains the same in
each case, reflecting the orthodox approach to the question:
indeed, until very recently it was the only approach to it.
Until very recently, the two leading authorities on the question
of so-called "remoteness of damage in contract" dated back to
1854 and 1969. This shows just how well established they were!
In the 1854 case of Hadley v. Baxendale the Court held that:
...where two parties have made a contract which one of
them has broken the damages which the other party ought to
receive in respect of such breach of contract should be
such as may fairly and reasonably be considered either
arising naturally, i.e. according to the usual course of
things, from such breach of contract itself, or such as may
reasonably be supposed to have been in the contemplation of
both parties, at the time they made the contract, as the
probable result to the breach of it.
This passage has become known as the "first limb" of the test in
Hadley v. Baxendale.
An innocent party may only, therefore,
recover the losses that may fairly and reasonably be considered
to arise naturally from the breach or to have reasonably been in
the contemplation of the parties as flowing from the breach when
they entered into the contract (note it is not when the breach
occurs).
the
This establishes a practical and realistic limit on
damages
responsible.
for
which
the
"guilty"
party
may
be
held
If, therefore, a loss is totally unexpected the
3
guilty party will not be responsible for it: in this way the
reasonable expectations of the parties at the time they entered
into the contract are protected on both sides.
The Court in Hadley v. Baxendale went on, however, to establish
a "second limb" of damages by stating:
Now, if the special circumstances under which the contract
was made were actually communicated by the claimants to the
defendants and thus known to both parties, the damages
resulting from the breach of such a contract, which they
would reasonably contemplate, would be the amount of injury
which should ordinarily follow from a breach of contract
under
these
special
circumstances
so
known
and
communicated.
But, on the other hand, if these special
circumstances were wholly unknown to the party breaking the
contract, he at the most would only be supposed to have had
in his contemplation the amount of injury which would arise
generally, and in a great multitude of cases, not be
affected by any special circumstances, from such a breach
of contract.
So, if it is made known to one party by the other that a breach
of the contract may lead to special and unexpected damages, the
guilty party's liability may extend to those special damages
because of the knowledge they have of them when entering into
the contract: this was part of the bargain that the parties knew
they
were
establishes
getting
into
when
the importance
of
they
contracted.
expectation and
Again,
this
foreseeability,
the guilty party's exposure being limited only to the special
circumstances of which they have actual knowledge when entering
into the contract.
This
test
of
recoverability
of
damages
obviously
served
merchants well as there was no substantial change or addition to
these principles until the case of the "Heron II" in 1969.
The
House of Lords there held that the proper test is whether the
loss in question is:
4
The kind which the defendant, when he made the contract,
ought to have realised was not unlikely to result from the
breach... the words "not unlikely"... denoting a degree of
probability considerably less than an even chance but
nevertheless not very unusual and easily foreseeable.
Applying this test to the earlier one of Hadley v. Baxendale,
the generally accepted test for remoteness of loss was therefore
whether the loss claimed was of a kind or type which it would
have been within the reasonable contemplation of the parties at
the time the contract was made as being not unlikely to result,
or
which
resulted
from
special
circumstances
known
parties at the time they entered into the contract.
"not
unlikely",
here,
probably
indicates
to
the
The term
prospect
of
occurrence in the region of 20-25% upwards.
This remained the position for the next thirty years until the
case of the "Achilleas" in 2009.
The broader approach
In the "Achilleas" a time-chartered vessel was delayed during a
legitimate final voyage and redelivered nine days late.
The
late redelivery was a breach of contract which prevented the
owners from delivering the vessel within the laycan spread of
the follow-on charter they had for the vessel.
The owners were
forced to renegotiate with the new charterers a substantially
reduced rate of hire.
The owners claimed the damages for the
difference between the original and renegotiated rates of hire
for the entire duration of the follow-on charter (4-6 months).
The owners succeeded in the arbitration, Commercial Court and
Court of Appeal but lost in the House of Lords where it was held
that they were not entitled to recover the difference between
the
original
and
re-negotiated
rates
of
hire
and
that
their
damages were limited to the difference between the market rate
5
of hire and the rate of hire agreed in the contract which was
breached, limited to the nine days during which the owners were
deprived of the use of the vessel by late redelivery.
The speeches in the House of Lords suggested a new, broader
approach to the issue of damages.
In the leading judgment of
the House of Lords, Lord Hoffman, while recognising that the
orthodox approach would apply in the great majority of cases,
nevertheless considered that it may not be sufficient in cases:
"...in which the context, surrounding circumstances or general
understanding in the relevant market shows that a party would
not reasonably have been regarded as assuming responsibility for
such losses.
He considered that the "Achilleas" was such a case and that the
parties would have considered losses arising from the loss of a
follow-on fixture for late redelivery by a mere nine days as a
type or kind of loss for which the charterers were not assuming
liability.
The
particular
circumstances
in
the
"Achilleas"
which led Lord Hoffman to conclude that the charterers had not
assumed responsibility for the type of loss claimed were:
(i)
That the loss would be completely unquantifiable as the
parties would have no idea when the owners would make a
follow-on fixture or what its length or other terms would
be, and
(ii) It
would
be
expectations
contrary
of
the
to
what
parties
would
have
because
been
the
the
general
understanding in the shipping market was that liability for
late redelivery was restricted to the difference between
the
market
rate
and
the
charter
rate
for
the
overrun
period, at least among legal advisors and that there had
6
been
uniform
series
of
findings in previous
cases in
which judges had assumed that damages for late redelivery
would be assessed in this way.
It appears, therefore, that the 2009 case of the "Achilleas"
added a further requirement to those of Hadley v. Baxendale and
the Heron II, namely that the loss claimed be a type of loss for
which the guilty party can reasonably be assumed to have assumed
responsibility.
The implications of the "Achilleas" are potentially great (not
only
in
shipping
cases
but
in
any
case
where
damages
are
claimed) and it has become a standard submission in charterparty
cases to argue that the losses claimed were not ones for which
the guilty party assumed responsibility.
This, of course, may
make it much more difficult and unpredictable for claimants to
recover the losses that would previously have been awarded to
them.
For this reason, the decision in the "Achilleas" has met
with a mixed reception from shipping lawyers and the writers of
leading shipping text books, with some arguing that the case
goes too far by imposing a further restriction on the types of
loss that may be recovered.
After the "Achilleas"
Even
in
the
short
period
judgment
was
given
in
the
of
time
since
"Achilleas",
the
its
House
effect
of
Lords
has
been
considered in a number of English Commercial Court cases.
In
the case of the "Amer Energy" (2009) it was suggested that the
House of Lords in the "Achilleas" were not intending to lay down
some completely new test as to the recoverability of damages in
contract and remoteness different from the orthodox approach and
that the House of Lords itself had acknowledged that departure
7
from the normal principles of foreseeability would be unusual.
In
the
non-shipping
Building
stated
Technologies
that
provides
case
the
FE
orthodox
standard
rule
of
Supershield
Limited
(2010)
approach
that
of
Limited
the
Court
"Hadley
reflects
v.
the
v.
Siemens
of
Appeal
Baxendale"
expectation
of
parties that a contract breaker should ordinarily be liable to
the other party for damage resulting from his breach but only
if, at the time of making the contract, a reasonable person in
his shoes would have had damage of that kind in mind as not
unlikely
to
result
from
breach.
The
Court
of
Appeal
considered the "Achilleas" to be authority for the proposition
that there may cases where the Court, on examining the contract
and commercial background, decides that the standard approach
would not reflect the expectation or intention reasonably to be
imputed to the parties.
These cases have now all been reviewed at length in the case of
the "Sylvia" for which judgement was given on 18th March 2010.
The
case
involved
time
charter
party.
In
March
2004
the
Charterers entered into a sub-voyage charter for the carriage of
a cargo of wheat from Baie Comeau to Casablanca with a laycan
spread
of
14-22
April
2004.
The
vessel
had
discharged
its
previous cargo by 16th April 2004 and sailed to Baie Comeau where
it arrived on 19th April.
There, the holds were inspected by
Port State Control who issued a detention order for structural
wastage in three of the cargo holds.
Repairs began on 22nd April
and were completed on 26th April.
By then, though, the sub-
charterers had cancelled the sub-charter on 22nd April and the
Charterers
were
obliged
to
enter
into
less
lucrative
substitute fixture for a time-charter trip with delivery at Baie
Comeau between 29th April and 3rd May 2004.
The arbitrators found
8
that
the
owners
maintenance
of
had
the
not
exercised
vessel
in
due
breach
under
the
diligence
of
their
in
the
contractual
maintenance
obligations
charterparty
with
the
Charterers.
The dispute was as to whether the loss of the sub-
charter was "foreseeable" within the first limb of Hadley v.
Baxendale.
The
arbitrators
found
that
it
was
and
that
the
Charterers were entitled to damages based on the difference in
earnings under the original sub-charter and substitute one, a
loss of some US$273,706.12.
The Court reviewed all of the case law on the subject at length
in
order
to
"Achilleas"
recovering
determine
applied
the
whether
so
damages
as
the
to
broader
prevent
claimed
for
approach
the
the
of
Charterers
loss
of
the
from
sub-
charterparty because the Owners had not assumed responsibility
for
such
losses.
"Achilleas"
suggested
by
was
It
not
many
as
concluded
that
significant
commentators
and
the
as
effect
first
that
it
of
the
thought
and
resulted
combination of the orthodox and broader approach.
in
The orthodox
approach would remain the general test of remoteness applicable
in the great majority of cases.
However, there may be "unusual"
cases, such as the "Achilleas" itself, in which the context,
surrounding circumstances or general understanding of the market
make it necessary to consider whether there was an assumption of
responsibility.
This would most likely be in those relatively
rare cases where the application of the general test leads or
may lead to an unquantifiable, unpredictable, uncontrollable or
disproportionate liability or where there is clear evidence that
such a liability would be contrary to market understanding and
expectations.
In most cases, though, the broader approach of
the Achilleas would not apply.
important
to
make
it
clear
The Court concluded that it was
that
there
was
no
new
generally
9
applicable legal
test
of
remoteness
in
damages and
that
the
orthodox rules still apply.
With regard to the "Sylvia" itself, the Court found that this
was not one of those "unusual" cases where it might be said that
the assumption of responsibility had to be addressed by applying
the broader approach.
The arbitrators had found that the loss
claimed by the Charterers was within the first limb of Hadley v.
Baxendale as being fairly and reasonably considered as arising
naturally from the breach of contract by the Owners and to have
been within the contemplation of the parties at the time they
made the contract as the probable result of the breach of it.
In upholding the arbitrators' decision, the Court in the Sylvia
found that there was nothing surprising about the arbitrators'
conclusion.
A vessel is chartered in order to be traded.
The
nature and purpose of a time charter is to enable the charterers
to use the vessel during the period of the charter for trading
in
whatever
manner
they
think
earning capacity of the vessel.
fit
in
order
to
exploit
the
Trading will frequently involve
sub-letting and time charters include an express liberty to do
so.
The trading of the vessel will often involve fixtures for
the carriage of specific cargoes, usually by voyage charter, but
sometimes by time charter trip.
The lifting of such cargoes
will almost invariably involve a laycan or a cancelling date.
This is all part of ordinary vessel trading.
As such, the Court
found that it would be well within the reasonable contemplation
of an owner that delay of significance in arriving or being
ready to load at the designated load port may result in the loss
of a fixture and that the profit on such a fixture would be
within the reasonable contemplation of the parties.
10
The Court went on to hold that there was no finding of any
general
market
understanding
or
expectation
that
damages
for
delay during the cancelling of the time charter are limited to
the difference between charter and market rates during a period
of delay.
damages
To the contrary, the general understanding is that
may
be
recovered
for
loss
of
fixture
in
such
circumstances and the measure of damages recoverable for the
lost voyage fixture is a well recognised measure of damages in
such cases.
In addition, this was not a case where the resulting liability
was likely to be unquantifiable, unpredictable, uncontrollable
or disproportionate.
Whereas a follow-on fixture made at the
end of a charter could be for any period, long or short, the
loss of a sub-charter during the currency of a time charter can
never be for a longer period than the time charter itself.
The
loss of a voyage fixture within the course of a charterparty
will, therefore, result in a loss within reasonable and fixed
confines.
It may be that market movements will mean that it is
a large loss but it will be a loss based on a trading voyage.
The Court therefore upheld the arbitrators' award.
Conclusion
As a result of the important judgment in the case of the Sylvia
the effect of the "Achilleas" decision may now be seen in its
proper
perspective
particular
as
applying
circumstances.
In
in
the
only
vast
limited
majority
and
of
very
cases,
therefore, the traditional, orthodox approach to the calculation
of
damages
remains
unchanged
and,
hopefully,
those in the shipping trade such as yourselves.
predictable
to
