Transfield Shipping v. Mercator Shipping (HofL)

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Transfield Shipping Inc v Mercator Shipping Inc (The "Achilleas")
House of Lords: Lords Hoffmann, Hope, Walker, Rodger and Baroness Hale: [2008] UKHL 48: 9 July 2008
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Dominic Kendrick QC and Benjamin Parker (instructed by Swinnerton Moore LLP) for the Charterer
Simon Croall QC and Ruth Hosking (instructed by Bentley Stokes & Lowless) for the Shipowner

In allowing the Charterer’s appeal the House of Lords held:
Lord Hoffmann’s [wider ground] assumption of responsibility for the type of loss – whether the shipowner could recover damages for loss of profit on its following charter was a question of law – in considering what the parties, contracting against the background of market expectations found by the arbitrators, would reasonably have considered the extent of the liability they were undertaking, it was clear that they would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility.

Lord Rodger’s [narrower ground] reasonable contemplation of the type of loss – whether the shipowner could recover damages for loss of profit on its following charter was a question of fact – the fact that the freight market at the time of the late redelivery was extremely volatile was sufficient to make this an "unusual" circumstance that would not have been in the "reasonable contemplation of the parties" at the time they entered the contract, because that situation was sufficiently "unlikely" that it would not "happen in the ordinary course of things".

DMC Category Rating: Reversed and Developed

Case Note contributed by Jim Leighton, BSc (Hons), LLB (Hons), LLM (Maritime Law), Trainee Solicitor and International Contributor to DMC's CaseNotes

The background facts can be read in detail by following the hyperlink to the case note of the
High Court’s judgment or in brief by following the hyperlink to the case note of the Court of Appeal’s opinion.

The paragraph numbers below correspond to those in the House’s speeches, which the writer considers give a flavour of the thinking behind the House’s unanimous decision to allow the charterer’s appeal.

Lord Hoffmann said:

[6] "The arbitrators, by a majority, found for the owners. They said that the loss on the new fixture fell within the first rule in Hadley v Baxendale (1854) 9 Exch 341, 354 as arising ‘naturally, that is, according to the usual course of things, from such breach of contract itself. It fell within that rule because it was damage ‘of a kind which the [charterer], when he made the contract, ought to have realised was not unlikely to result from a breach of contract [by delay in redelivery]’: see Lord Reid in … The Heron II [1969] 1 AC 350, 382-383."

[9] "The case … raises a fundamental point of principle in the law of contractual damages: is the rule that a party may recover losses which were foreseeable ("not unlikely") an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal 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?"

[10] "There is no case in which the question now in issue has been raised. But that in itself may be significant. This cannot have been the first time that freight rates have been volatile. There must have been previous cases in which late redelivery caused the loss of a profitable following fixture. But there is no reported case in which such a claim has been made. Instead, there has been a uniform series of dicta over many years in which judges have said or assumed that the damages for late delivery are the difference between the charter rate and the market rate… Nowhere is there a suggestion of even a theoretical possibility of damages for the loss of a following fixture."

[12] "It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken."

[13] "The view which the parties take of the responsibilities and risks they are undertaking will determine the other terms of the contract and in particular the price [that] is paid. Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought was excluded gives the other party something for nothing."

[16] "…the consequences for which the contracting party will be liable are those which ‘the law regards as best giving effect to the express obligations assumed’ and ‘[not] extending them so as to impose on the [contracting party] a liability greater than he could reasonably have thought he was undertaking’." (Citing South Australia Asset Management Corpn v York Montague Ltd) [1997] AC 191, 212, hereafter SAAMCO)

[21] "It is generally accepted that a contracting party will be liable for damages for losses which are unforeseeably large, if loss of that type or kind fell within one or other of the rules in Hadley v Baxendale: see, for example, Staughton J in … The Rio Claro [1987] Lloyd's Rep 173, 175 and Jackson v Royal Bank of Scotland plc [2005] 1 WLR 377. That is generally an inclusive principle: if losses of that type are foreseeable, damages will include compensation for those losses, however large. But the [SAAMCO case] … shows that it may also be an exclusive principle and that a party may not be liable for foreseeable losses because they are not of the type or kind for which he can be treated as having assumed responsibility."

[22] "What is the basis for deciding whether loss is of the same type or a different type? It is not a question of Platonist metaphysics. The distinction must rest upon some principle of the law of contract. In my opinion, the only rational basis for the distinction is that it reflects what would have reasonable have [sic] been regarded by the contracting party as significant for the purposes of the risk he was undertaking. In Victoria Laundry … [1949] 2 KB 528, where the plaintiffs claimed for loss of the profits from their laundry business because of late delivery of a boiler, the Court of Appeal did not regard ‘loss of profits from the laundry business’ as a single type of loss. They distinguished (at p 543) losses from ‘particularly lucrative dyeing contracts’ as a different type of loss which would only be recoverable if the defendant had sufficient knowledge of them to make it reasonable to attribute to him acceptance of liability for such losses. The vendor of the boilers would have regarded the profits on these contracts as a different and higher form of risk than the general risk of loss of profits by the laundry."

[23] "If, therefore, one considers what these parties, contracting against the background of market expectations found by the arbitrators, would reasonably have considered the extent of the liability they were undertaking, I think it is clear that they would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility. Such a risk would be completely unquantifiable, because although the parties would regard it as likely that the owners would at some time during the currency of the charter enter into a forward fixture, they would have no idea when that would be done or what its length or other terms would be. If it was clear to the owners that the last voyage was bound to overrun and put the following fixture at risk, it was open to them to refuse to undertake it. What this shows is that the purpose of the provision for timely redelivery in the charterparty is to enable the ship to be at the full disposal of the owner from the redelivery date. If the charterer's orders will defeat this right, the owner may reject them. If the orders are accepted and the last voyage overruns, the owner is entitled to be paid for the overrun at the market rate. All this will be known to both parties. It does not require any knowledge of the owner's arrangements for the next charter. That is regarded by the market as being, as the saying goes, res inter alios acta [a thing done between other people]."

[24] "The findings of the majority arbitrators show that they considered their decision to be contrary to what would have been the expectations of the parties, but dictated by the rules in Hadley v Baxendale as explained in The Heron II [1969] 1 AC 350. But in my opinion these rules are not so inflexible; they are intended to give effect to the presumed intentions of the parties and not to contradict them."

[25] "The owners submit that the question of whether the damage is too remote is a question of fact on which the arbitrators have found in their favour. It is true that the question of whether the damage was foreseeable is a question of fact: see Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196. But the question of whether a given type of loss is one for which a party assumed contractual responsibility involves the interpretation of the contract as a whole against its commercial background, and this, like all questions of interpretation, is a question of law."

[26] "…the implication of a term as a matter of construction of the contract as a whole in its commercial context and the implication of the limits of damages liability seem to me to involve the application of essentially the same techniques of interpretation. In both cases, the court is engaged in construing the agreement to reflect the liabilities which the parties may reasonably be expected to have assumed and paid for. It cannot decline this task on the ground that the parties could have spared it the trouble by using clearer language. In my opinion, the findings of the arbitrators and the commercial background to the agreement are sufficient to make it clear that the charterer cannot reasonably be regarded as having assumed the risk of the owner's loss of profit on the following charter. I would therefore allow the appeal."

Lord Hope delivered a speech in concurrence with Lord Hoffmann and also Lord Walker.

Lord Rodger said:
[52] "… amidst a cascade of different expressions, it is important not to lose sight of the basic point that, in the absence of special knowledge, a party entering into a contract can only be supposed to contemplate the losses which are likely to result from the breach in question - in other words, those losses which will generally happen in the ordinary course of things if the breach occurs. Those are the losses for which the party in breach is held responsible - the stated rationale being that, other losses not having been in contemplation, the parties had no opportunity to provide for them."

[53] "In the present case, the arbitrators found that - as conceded by counsel then acting for the charterers - missing a date for a subsequent fixture was a ‘not unlikely’ result of the late redelivery of a vessel. That concession has been criticised elsewhere, but the House must proceed on the basis that, when they entered into the addendum, the parties could reasonably have contemplated that it was not unlikely that the owners would miss a date for a subsequent fixture if the Achilleas were redelivered late. The majority of the arbitrators also found that, at the time of contracting, the parties, who were both engaged in the business of shipping, would have known that market rates for tonnage go up and down, sometimes quite rapidly. Nevertheless, as Rix LJ himself pointed out [2007] 2 Lloyd’s Rep 555 577, para 120 - when seeking to combat any criticism that the Court of Appeal's decision would throw the situation in general into confusion because late redelivery and changing market conditions are common occurrences – ‘It requires extremely volatile market conditions to create the situation which occurred here.’ In other words, the extent of the relevant rise and fall in the market within a short time was actually unusual. The owners' loss stemmed from that unusual occurrence."

[57] "… ordinarily, the appropriate measure of damages will be that set out by Bingham LJ in The Peonia [which is for the loss of use during the overrun period at the charterparty rate or higher market rate], since owners will be able to obtain substitute employment for their vessel."

[58] "I would enter two caveats. First, it may be that, at least in some cases, when concluding a charter-party, a charterer could reasonably contemplate that late delivery of a vessel of that particular type, in a certain area of the world, at a certain season of the year would mean that the market for its services would be poor. In these circumstances, the owners might have a claim for some general sum for loss of business, somewhat along the line of the damages for the loss of business envisaged by the Court of Appeal in Victoria Laundry [1949] 2 KB 528, 542-543. Because of the agreement on figures, the matter was not explored in this case and I express no view on it. But, even if some such loss of business could have been reasonably contemplated, as Victoria Laundry shows, this would not mean that the owners' particular loss of profit as a result of the re-negotiation of the Cargill fixture should be recoverable. To hold otherwise would risk undermining the first limb of Hadley v Baxendale, which limits the charterers' liability to ‘the amount of injury’ that would arise ‘ordinarily’ or ‘generally’."

[59] "Secondly, the position on damages might also be different, if, for example - when a charter-party was entered into - the owners drew the charterers' attention to the existence of a forward charter of many months' duration for which the vessel had to be delivered on a particular date. The charterers would know that a failure to redeliver the vessel in time to allow the owners to deliver it under that charter would be liable to result in the loss of that fixture. Then the second rule or limb in Hadley v Baxendale might well come into play. But the point does not arise in this case."

[60] "… I am satisfied that, when they entered into the addendum in September 2003, neither party would reasonably have contemplated that an overrun of nine days would ‘in the ordinary course of things’ cause the owners the kind of loss for which they claim damages. That loss was not the ‘ordinary consequence’ of a breach of that kind. It occurred in this case only because of the extremely volatile market conditions which produced both the owners' initial (particularly lucrative) transaction, with a third party, and the subsequent pressure on the owners to accept a lower rate for that fixture. Back in September 2003, this loss could not have been reasonably foreseen as being likely to arise out of the delay in question. It was, accordingly, too remote to give rise to a claim for damages for breach of contract."

[63] "I have not found it necessary to explore the issues concerning [the SAAMCO case] and assumption of responsibility, which … [Lord Hoffmann has raised]. Nevertheless, I am otherwise in substantial agreement with his reasons as well as with those to be given by Lord Walker …"

Lord Walker delivered a speech in concurrence with Lord Hoffmann; he also agreed with Lord Rodger.

Baroness Hale said:
[89] "this could be an examination question. Although the context is a specialised one, the answer has mainly to be found in the general principles to be derived from the well-known authorities to which your Lordships have all referred, principally Hadley v Baxendale, Victoria Laundry and, above all, … The Heron II ... There is no obviously right answer: two very experienced commercial judges have reached one answer, your lordships have reached another. There is no obviously just answer: the charterer's default undoubtedly caused the owner's loss, but a loss for which no-one has ever had to pay before. The examiners would surely have given first class marks to all the judges who have answered the question so far."

[90] "In common with … Lord Hope … I was at first inclined to agree with the very full and thoughtful judgments in the courts below ... Their careful reviews of the shipping cases show that, although the normal measure of damages is undoubtedly [for loss of use], there is no case in which a claim [for loss of profit on the following fixture] has been rejected. The fact that no-one has thought to make such a claim before now does not mean that it is unfounded. …To rule out a whole class of loss, simply because the parties had not previously thought about it, risks as much uncertainty and injustice as letting it in."

[91] "That argument cuts both ways. We are looking here at the general principles which limit a contract breaker's liability when the contract itself does not do so. The contract breaker is not inevitably liable for all the loss which his breach has caused. Loss of the type in question has to be ‘within the contemplation’ of the parties at the time when the contract was made. It is not enough that it should be foreseeable if it is highly unlikely to happen. It would not then arise ‘in the usual course of things’: see The Heron II [1969] 1 AC 350, 385, per Lord Reid. So one answer to our question, given as I understand it by … Lord Rodger … is that these parties would not have had this particular type of loss within their contemplation. They would expect that the owner would be able to find a use for his ship even if it was returned late. It was only because of the unusual volatility of the market at that particular time that this particular loss was suffered. It is one thing to say, as did the majority arbitrators, that missing dates for a subsequent fixture was within the parties' contemplation as ‘not unlikely’. It is another thing to say that the ‘extremely volatile’ conditions which brought about this particular loss were ‘not unlikely’."

The headline for this decision would appear to be (1) Lord Hoffmann’s wider approach rules out damages for loss of profit on a follow-on voyage as a matter of law, whereas (2) Lord Rodger’s narrower approach rules out damages for loss of profit on the follow-on voyage on the facts of the case. The final result (on both grounds) is that the House allowed the charterer’s appeal unanimously.

But, given that these leading speeches give contradictory results of principle (as the recoverability of loss of profit on a follow-on fixture is either a question of law or a question of fact), it is disappointing to note that an analysis of who agreed with whom and on what ground does not appear to provide the clear (thus definitive) majority decision one would hope for on such a critical and previously undecided issue.

As Lord Walker highlighted, John Weale in [2008] LMCLQ 6 suggested that the outcome of the case (prior to reaching the House) was influenced by the charterer’s concessions.

It may therefore be argued that the present decision should very much be limited to its own peculiar circumstances even though the assumption of responsibility ground has much wider implications. In order to curtail the wider ground from excluding all claims for loss of profit on a follow-on charter following late redelivery it is also perhaps best to read it as limited to the first limb of Hadley v Baxendale only (even though the English courts have tried to discourage an artificial distinction between the two limbs). This would leave scope for special circumstances to be brought to the attention of the charterer before entering the contract, so leaves scope for the scenario of Lord Rodger at [59] and perhaps in some other limited circumstances too.

A further argument in favour of the narrower ground is that it treads with care on new territory (which has wider general application in the law of contract) by finding the one factor in the factual matrix of all the material circumstances that dictates the outcome in the present case – namely that the actual size of the loss could be deemed to be sufficiently unusual to be an unlikely result given the freak fluctuations in the freight market at that time. Those familiar with the work of Dr Martin Stopford of Clarksons Research (see for example Maritime Economics, Routledge (1997), and The Handbook of Maritime Economics and Business, LLP (2002), Chapter 10) can appreciate that sharp freight rate fluctuations happen from time to time but are in no way frequent or readily predictable, so could in the round be deemed sufficiently unusual or special circumstances that such losses of profit that result from them are of a category of loss in line with the unusual high profit loss identified in the Victoria Laundry case.

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