Note: this decision has been upheld by the Court of Appeal, in a judgment handed down on 18 October 2005. For a note on the Appeal judgment, click here

DMC’s Category Rating: Confirmed

This case note has been prepared by Hew Dundas, International Arbitrator, Mediator and Expert Determiner, who is a contributor and sub-editor to this website

Facts
The claimant shipowners, Golden Straight Corporation ("GSC") had chartered their ship, the "Golden Victory" to Nippon Yusen Kubishika Kaisha ("NYKK") for an original term of seven years, under a timecharterparty dated 17 July 1998. In an Interim Award dated 12 September 2002 (see below) the Arbitrator had determined that: (i) the earliest date on which the vessel could be redelivered was 6 December 2005; (ii) NYKK, in repudiatory breach of the charterparty, had redelivered the vessel to GSC on 14 December 2001 and (iii) that GSC had, in a letter dated 17 December 2001, accepted that breach as terminating the charter.

The issue was of the assessment of damages for repudiation of a long-term charterparty. GSC submitted that, where there is an available market, damages are to be assessed once and for all at the date of breach at the charter rate less the market rate for the balance of the term of the charter.NYKK submitted that it was for GSC to prove that the breach had caused that loss and it could not do so if, in the events which occurred after the date of breach, the charterer would have been entitled to terminate, and would have terminated, the charter during the course of its remaining period. For example, if the charterparty had had, say, another 4 years to run when the charterer repudiated it and there had then been an available market, but the charter had contained a "War Clause" which would have entitled the charterer to cancel on the outbreak of war two years after the repudiation, does the owner's claim for charter rate less market rate run for two or four years? In the present case, the charterparty contained a clause (cl.33) giving owners and charterers the right to cancel the charter "if war or hostilities break out between any two or more of the following countries: USA, former USSR, PRC, UK, Netherlands, Liberia, Japan, Iran, Kuwait, Saudi Arabia, Qatar, Iraq…"

In his final award, the Arbitrator, Robert Gaisford, had found that: (i) there had been, at the time of repudiation (17 December 2001), an available market for the charter of vessels such as the "Golden Victory", whether in terms of a spot market or a market for period chartering; (ii) GSC in fact chose to trade the vessel on the spot market; (iii) the second Gulf war – namely the invasion of Iraq by US and UK forces in March 2003, some fourteen months after the repudiation of the charter - was "a war" within cl.33 of the charterparty such as to give either party the right to cancel it; (iv) at 17 December 2001, a reasonably well-informed person would have considered war between the United States/United Kingdom and Iraq "merely a possibility" but not "inevitable or even probable"; (v) NYKK would have cancelled the charterparty relying on cl.33 had the vessel remained on charter to the Company at the outbreak of the second Gulf war.

The shipowners submitted that:

1. the law "prescribes a clear and long-established test" for the assessment of damages in a case of an accepted repudiation of a long-term charterparty where there is (as in this case) an "available market" at the date of repudiation;
2. the test or "rule" is that damages are to be assessed at the date of repudiation as the difference between the contract rate and the market rate for chartering a substitute ship for the balance of the charter period;
3. the rule was established by the decision of Goff.J. in the case of Koch Marine Inc. v. D’Amico Societa di Navigazione ARL (the "Elena D’Amico") [1980] 1 Lloyd’s Rep. 75. The rationale is that the innocent party’s duty of mitigation requires him at the time of breach to go out into the market and obtain a substitute charter for the balance of the charter period;
4. the only exception or qualification to this rule is that where the contractual rights which the innocent party has lost by reason of the repudiation were capable by the terms of the contract of being rendered less valuable or valueless in certain circumstances, then the law permits the damages to be diminished or extinguished, but only if it can be proved that "those events were at the date of acceptance of the repudiation predestined to happen" or inevitably bound to happen or the rights were certain to be diminished or rendered valueless; see per Megaw LJ. in Maredelanto Compania Naviera SA v. Bergbau-Handel GmbH (the "Michalis Angelos") [1971] 1 QB 164;
5. (v) the justification for the rule is the need for certainty, especially in commercial matters, with the concomitant advantages of finality and encouragement of settlement. Crystallisation of the loss at the date of acceptance of repudiation enables parties to know where they are and disenables them from waiting to see if something helpful turns up.

The charterer submitted on the contrary that:

1. the "general principle" for the calculation of damages is that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed; Lord Wilberforce in Johnson v Agnew [1980] AC 367;
2. that principle normally leads to the assessment of damages as at the date of the breach but that is not an absolute rule: "if to follow it would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstance" per Lord Wilberforce in that case;
3. the starting point for an assessment of damages is to determine what has been "lost". In this case what GSC lost was a charterparty with a four-year period to run but subject to the War Clause…;
4. the available market, if there is one, provides the test for what is required of the innocent party by way of reasonable mitigation of his loss. It fixes the maximum claim….. but it remains in principle founded on the requirement to mitigate the loss suffered:
5. there are countless examples in the law where the assessment of damages does take into account subsequent events and the court is exhorted not to shut its eyes to reality. There is no principled reason why damages for repudiation of a long-term contract should be different… ;
6. there is no justification on the authorities or in principle for some higher test of "predestiny" or certainty. The issue is one of causation and should be approached on normal principles of proof;
7. certainty and crystallisation are desirable in every case, not just ones where there is an available market, and not at the expense of justice.

Judgment
On the basis of these arguments and before considering the authorities, the judge held that there was no authority on the matter binding upon him, which would determine the outcome.

But he said that he could find no compelling or persuasive reason why the existence of an available market at the date of the breach, and a principle of mitigation founded upon it, should result in a strict rule applicable to the assessment of damages only in such cases and a rule which ignores normal considerations of actual loss and causation and is subject to a limited exception (that of the inevitability of the future event occurring) which itself does not find a parallel in any other field of the law.

Certainty in the law is, he acknowledged, a real and beneficial target, especially when major commercial decisions are to be taken on the basis of advice or knowledge of rights. But certainty, he said, is not easily achieved. For example, the charterparty in this case contained within it the commercial uncertainty of the War Clause. Why, he asked, should that uncertainty be ignored in the assessment of the loss which follows from the wrongful repudiation of that contract?

He then proceeded to consider the leading authorities, which he identified as the "Mihalis Angelos" and the "Elena D’Amico" – see above – North Sea Energy Holdings v. PTT [1999] 1 Lloyd’s Rep. 483 and B.S.& N. Ltd v. Micado Shipping Ltd. (the "Seaflower" ) [2000] 2 Lloyd’s Rep. 37. He concluded
 "In my judgment the Arbitrator was right in his conclusion despite his reluctance to reach it. Essentially and in summary I think:

1. [the Arbitrator’s] conclusion accords with the basic compensatory rule for the assessment of damages in that had the charterparty not been repudiated but been performed it would have come to an end upon the outbreak of the second Gulf War;
2. I can see no sound reason why the ordinary principles requiring a claimant to prove his loss and that it was caused by the impugned conduct of the defendant should not apply in this case nor why the "normal" approach to assessment of loss derived from the normal approach to mitigation should dictate another result;
3. I also see no sound reason why there should be an "exception" to the rule for which [GSC] contends limited only to a case where at the time of repudiation the loss is predestined - (emphasis added) - to end at a date earlier than the expiry of the charter period;
4. the desirability of certainty and crystallisation is accepted but, I think, no more obviously achievable with, than without, [GCS's] rule and its supposed exception. The fact is that the charterparty itself contained the uncertainty of the War Clause. That was what GSC lost. If [it] were right, [it] would recover more than the charterparty was worth to it and do so without in fact incurring any greater loss."

The judge accordingly dismissed the appeal.

Concluding, GSC has s.69-appealed Mr Gaisford twice and lost twice!