The limit of contractual damages addressed by the Commercial Court

The recent case of Sylvia Shipping Co Limited v Progress Bulk Carriers Limited [2010] EWHC 542 (Comm) provided the High Court with an opportunity to consider the law on damages and, in particular, whether the law on remoteness had been altered by the House of Lords judgment in Transfield Shipping Inc v Mercartor Shipping Inc (The Achilleas) [2008] UKHL 48 (see post). The judgment of Mr Justice Hamblen in Sylvia Shipping suggests that the courts will approach Transfield as a case that does not alter the law on remoteness, other than in rare and unusual circumstances.

The Facts

The claimant owners chartered a vessel to the defendant charterers on a period time charter. The charterers subsequently entered into a sub-charter with Conagra. The vessel was discovered to be damaged and, as a result of the owners' failure to exercise due diligence and effect repairs in accordance with its contractual obligations, Conagra cancelled the sub-charter in accordance with the terms of the sub-charter. The charterers then entered into a substitute sub-charter with York Ltd, and the vessel was repaired in time for the substitute charter to be fulfilled.

The owners and charterers appeared before an arbitral tribunal to resolve the sums due to the charterers for the owners' breach of contract.  The charterers claimed for loss of profit on the cancelled Conagra sub-charter for the period of that charter, whereas the owners argued that damages should be limited to the market loss during the period of delay.  The tribunal found for the charterers and ruled that the damages associated with the cancellation of the Conagra fixture were foreseeable and fell within the first limb of the traditional Hadley v Baxendale test. Namely, they were losses arising naturally, according to the normal course of things, from the owners' breach of contract. The tribunal went on to find that the Conagra voyage would have taken 23.7467 days and have yielded a net revenue of USD 804,222.05, resulting in a time charter equivalent daily rate of USD 33,866.69. After giving credit for the earnings made by the charterers under the substitute charter with York Ltd for the period of the planned Conagra charter, the tribunal awarded damages of USD 273,706.12 to the charterers.

The owners appealed to the High Court as to the quantum of damages awarded by the tribunal. The owners claimed that the damages awarded for the full period of the substitute charter were too remote, and that the tribunal had erred in law in finding otherwise. Further, the owners argued that the present facts were indistinguishable from those in Transfield and the orthodox approach to remoteness applied by the House of Lords in that case.

Transfield

In Transfield the owners let out their ship to charterers and it was returned late. The owners had to cut the price of a new charter with a third party because the market price had dropped dramatically whilst waiting for the return of the ship. They claimed the difference in price between the whole of the expected and actual charter with the third party. The House of Lords unanimously held that the owners were not entitled to recover the difference between the original and renegotiated rates of hire. Instead, their damages were limited to the difference between the market rate of hire and the contractual rate of hire agreed. Further, damages were only recoverable for the period during which the owners were deprived of the vessel.

Different schools of thought flow from the judgment. Lord Rodger and Baroness Hale applied the foreseeability test in Hadley v Baxendale to the particular facts of the case, in particular the prevailing market conditions (where fluctuating prices were commonplace).

Lords Hoffman and Hope, however, felt that the appropriate test was not simply whether the loss was foreseeable. Rather, it was necessary to ascertain the obligations for which the charterers had and had not assumed responsibility.

Lord Walker gave a judgment which contained elements of the reasoning in both approaches.

The present claim

In considering the law on remoteness, Hamblen J first addressed the confusion which had resulted from what appear to be two approaches to remoteness in Transfield: the orthodox (Hadley v Baxendale) approach and the broader (assumption of responsibility) approach. It appears that in a number of cases, parties had argued that objective assumption of responsibility for risk should be applied as a general remoteness test. Hamblen J considered that position to be incorrect, concluding that there is no new generally applicable legal test of remoteness in damages.

Hamblen J accepted that there may be unusual cases in which the context, surrounding circumstances or general understanding in the relevant market make it necessary to consider whether there has been an assumption of responsibility. That was likely to be in rare cases in which the application of the general test leads or may lead to unquantifiable, unpredictable, uncontrollable or disproportionate liability, or where it would be contrary to market expectations. Hamblen J also considered that, in the great majority of cases, the fact that a loss arises in the ordinary course or out of special known circumstances will imply the necessary assumption of responsibility.

Hamblen J held that the tribunal had directed itself to the correct test in applying the first limb of the rule in Hadley v Baxendale and that its conclusion was not one that no reasonable arbitrator could have reached applying the proper law to the facts.

The owners contended that, nevertheless, the tribunal had erred in law as the present claim could not be distinguished from the orthodox approach adopted in Transfield. Hamblen J disagreed and highlighted several distinguishing factors:

1. Unlike in Transfield, there was no general market understanding or expectation that damages in the present circumstances would be limited to the difference between the charter and market rates during the period of delay. In fact, there was case law and commentary from leading shipping texts to support recovery of damages for the loss of a fixture.
2. Losses incurred during a charter party could never really be unquantifiable in the same way as losses incurred after the charter end date. A post charter fixture could be for a period of years, whereas a sub-charter can never be for a longer period than that of the charter itself, providing a reasonable and fixed limit to any loss.
3. There was no basis for finding that parties would reasonably contemplate that the market would protect the charterers if they lost a fixture. Ship owners are usually able to use the market to minimise losses, whereas charterers (as in the present claim) often cannot.
4. There was no finding of market volatility in the present claim or that the lost fixture was particularly lucrative.

The owners did not argue that assumption of responsibility had to be addressed. However, for completeness, Hamblen J noted that the features that made Transfield unusual (such that an assumption of responsibility test applied to limit damages) were not present.

Comment

This was not a case in which either party had argued that the assumption of responsibility test should apply, and, of course, as a first instance decision, the observations of Hamblen J may not be followed in future cases. However, the judgment endorses the limiting of the assumption of responsibility test to unusual cases. This will restore order for the great majority of cases which, in Hamblen J's view, remain to be decided on orthodox principles of remoteness. Further, Hamblen J's definition of "unusual" cases in which assumption of responsibility should be applied as a stand alone test would limit significantly the use of the assumption of responsibility test. It remains to be seen how rules on remoteness are applied in future cases, but Sylvia Shipping is a step on the road to providing judicial certainty on the correct test for remoteness in a particular case.