DMC Category Rating: Developed

Case note contributed by Jim Leighton, BSc (Hons), LLB, LLM (Maritime Law), Claims Consultant and International Contributor to DMC’s CaseNotes

Background
By a charterparty of 10 July 1998, the appellants (the owners) and the respondents (the charterers) agreed on a charter of the vessel, Golden Victory, for a period ending on 6 December 2005. The charterparty contained a provision (clause 33) enabling either party to cancel the charter if war or hostilities should break out between any two or more of a number of named countries. The named countries included the United States of America, the United Kingdom and Iraq. The charterers, in breach of contract repudiated the charter on 14 December 2001 when the charter had nearly four years still to run (but subject, of course, to the clause 33 possibilities of cancellation). The owners accepted the repudiation on 17 December 2001 and claimed damages for the charterers' breach of contract. The owners' claim went to arbitration and, after various issues had been determined by the arbitrator, all in the owners' favour, but before the arbitrator had assessed the quantum of the damages payable by the charterers, the outbreak, in March 2003, of the Second Gulf War occurred.

The background to the dispute was neatly summarised by Lord Bingham:

"The dispute between the parties turns on the date at which the quantification of damages is to be made. The shipowners contend that the quantification should be made when, the repudiation having been made and accepted, they charter out (or may reasonably be expected to charter out) the vessel. Events occurring later, not affecting the value of the contractual right which the owner has lost at that time, are irrelevant. The charterers contend that the quantification should be made as of the date on which the damages actually fall to be assessed, taking account of any event which has by then occurred which affects the value of what the owners lost as a result of his repudiation. The maritime arbitrator who was the original decision-maker in this case (Mr Robert Gaisford) would have preferred to accept the owners' contention, but felt constrained by first instance authority to accept the charterers'. His decision was upheld by Langley J in the Commercial Court … and by Auld and Tuckey LJJ and Lord Mance in the Court of Appeal..."

Further background details are available in the Court of Appeal decision case note by following the hyperlink Golden Straight Corp v. NYKK

It was common ground that:

1. if the charter had still been in effect hostilities between the USA and the UK on one side and Iraq on the other side began in March 2003, the charterers would have exercised their clause 33 right to terminate the charter; and
2. as at 17 December 2001, when the shipowners accepted the charterers’ repudiation of the charter, the chance that any hostilities triggering the clause 33 right of termination would break out was no more than a possibility and certainly not a probability.

A single issue was formulated by the parties for determination by the House of Lords:

"Where damages for an accepted repudiation of a contract are claimed, in what circumstances can the party in breach rely on subsequent events to show that the contractual rights which have been lost would have been rendered either less valuable or valueless?"

Given that the Iraq war was not probable at the date of repudiation, the shipowners primarily relied on a passage from Megaw LJ’s judgment in The "Mihalos Angelos" [1971] 1 QB 164, p.210, to justify its approach to limiting the quantification of damages to the information (including probable future events) known as at the date of repudiation. That passage reads:

"If the contractual rights which he [the injured party] has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events."

Judgment
The point at issue in the appeal had never been considered by the House of Lords before and remained open for decision.

Lords Scott, Carswell and Brown dismissed the shipowner’s appeal. Lords Bingham and Walker would have allowed the appeal.

Lord Carswell noted that Megaw LJ’s judgment in The "Mihalos Angelos" was given in the context of it being completely certain, or ‘predestined’, that the contingency on which the charterer was entitled to cancel the contract would occur. As a result Megaw LJ’s judgment was correct but had to be read as limited to that context. Also, in The "Mihalos Angelos", neither Lord Denning MR nor Edmund Davies LJ had gone so far as to tie the consideration of subsequent events to those which could be seen at the date of repudiation as certain to happen. As a result it was doubtful that Megaw LJ intended to enunciate a general rule limiting consideration of subsequent events to those predestined to happen, seen from the date of acceptance of repudiation.

The reading of Megaw LJ’s judgment in The "Mihalos Angelos" in the way favoured by the shipowner had also been rejected in The "Seaflower" [2000] 2 Lloyd’s Rep 37, 44, by Timothy Walker J, where there was some similarity to the facts of The "Mihalos Angelos". [For the facts of The "Seaflower" case, as summarised by Lord Bingham at para.19, see footnote] In The "Seaflower" it was not inevitable or predestined that the shipowner would be unable to satisfy the condition subsequent at the date of repudiation (although it was highly likely), but failure to comply with the condition subsequent did later become inevitable. The result of the judgment in The "Seaflower" was, therefore, that a supervening event was capable of limiting the measure of damages.

In applying the principle of The "Seaflower", Lord Carswell agreed with the statement of Lord Mance in the Court of Appeal in this case, that "considerations of certainty and finality … yield to the greater importance of achieving an accurate assessment of the damages based on the loss actually incurred".

"The duration of the charter," he said, "may in a case such as the present be affected by the contingency of the occurrence of an event which is in the contemplation of the parties and catered for in the terms of the charterparty. While the rate at which the hypothetical new charter is arranged on repudiation of the original one is for good reasons taken to be fixed at the time when the injured party could go into the market to negotiate a replacement, the same considerations do not apply to determination of the duration. The damages can be assessed at the date of repudiation by valuing the chance that the contingency would occur and that the charter would be cancelled, an approach accepted by Lord Mance at para 23 of his judgment, at p 543. That value might lie anywhere on the scale between extreme unlikelihood, which would give the deduction a minimal value, to virtual certainty, which would mean that it would be assessed at a figure very close to that which would be reached if one made the definite assumption that the contingency would occur. This approach is well known and recognised in other areas of the law."

But, on the authority of the House of Lords decision in the case of Bwllfa and Merthyr Dares Steam Collieries (1891) Ltd v. Pontypridd Waterworks Co [1903] AC 426, this principle did not apply in cases where, by the time at which the assessment of damages had to be made, it was already known whether or not the contingency had occurred. It was wrong, in these circumstances, to ignore the facts as they had turned out. Lord Carswell quoted Lord McNaughten in the Bwllfa Colliery case to the effect:

"Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?"

Lord Carswell concurred also with the example given by Lord Brown to illustrate the bizarre result of the shipowners’ approach. Lord Brown said that (on the minority’s view) the inescapable logic was that where war was probable at the time of breach but had not happened when quantification took place "the damages award would have had to reflect a risk which never in fact eventuated - a conclusion in the circumstances, greatly to the owner's disadvantage".

Further, Lord Brown held that the shipowners’ argument sought to extend the effect of the "available market" rule "well beyond its proper scope" and to do so "at the plain expense of Lord Blackburn's fundamental principle: to restore the injured party to the same position he would have been in but for the breach, not substantially to improve upon it." The present situation did not warrant an exception to this fundamental principle.

The judgment of Lord Scott made the same point. He noted that:

 "the underlying principle is that the victim of a breach of contract is entitled to damages representing the value of the contractual benefit to which he was entitled but of which he   has been deprived. [emphasis added]"

While assessing damages at the date of the breach could usually achieve that result it did not always do so. It followed that where an award gave a greater or lesser sum of damages for the benefit of the bargain lost it would fail to provide a just result.

Lord Scott highlighted that a just result was achieved here because 

"the Owners had lost a charterparty which contained a provision that would enable the Charterers to terminate the charterparty if a certain event happened. The event did happen. It happened before the damages had been assessed… The contractual benefit … the Owners … were deprived [of] by the repudiatory breach, was the right to receive the hire rate during the currency of the charterparty. The termination of the charterparty under clause 33 [the war termination clause] would necessarily have brought to an end that right."

Comment
The House of Lords’ decision indicates that, where a repudiatory breach of a period services contract has been accepted, the courts will take into account events that occur subsequent to the repudiation but prior to the assessment of damages, if they materially affect the quantification of damages. To have held to the contrary would have flown in the face of reality by illegitimately over-compensating the injured party, contrary to the fundamental principle behind the payment of damages: to award damages that represents the injured party’s true loss.

The shipowners here sought to justify, on the grounds of commercial certainty, a simplified approach to the quantification of damages, by which events occurring after the breach occurred were to be ignored. But the way that the law has developed, particularly through the complexities of personal injury cases, indicates that the courts prefer a more realistic approach for determining the injured party’s true loss.