Note: the decision of the Court of Appeal has been upheld - in a majority decision - by the House of Lords, in a judgment delivered on 28 March 2007. To access the note of the House of Lords decision. click here

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 time charterparty 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 charterparty included an "Outbreak of War ["the War Clause"] clause 33:

"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 or Iraq, both Owners and Charterers have the right to cancel this charter."

The Issues 
This appeal raised a short point of some novelty and difficulty relating to the measurement of damages for repudiatory breach, here by charterers, of a long term time charter. If after an accepted repudiation, an unexpected event occurred which meant that the original charter would not have run its full term, are damages still measured by reference to that full term, or by taking into account that the owners would in fact only have had the benefit of the charter for a shorter term?

The arbitrator, Mr Robert Gaisford, would have measured them by reference to the full term in his award dated 27^th October 2004, had he not felt constrained to take the shorter term by first instance authority (BS&N Ltd. v. Micado Shipping Ltd. (Malta) ("The Seaflower") [2000] 2 Ll.R. 37 (Timothy Walker J). However, on appeal to the Commercial Court, Langley J by judgment and order dated 15^th February 2005 concluded that it was right to take the shorter term as a matter of principle. But he gave permission to appeal to this Court, on the basis that the point was of some general significance.

On the basis of the evidence before him, the Arbitrator had concluded that:

"…. at 17 December 2001, a reasonably well-informed person would have considered war or large-scale hostilities between the United States/United Kingdom and Iraq merely a possibility. I do not consider that such a person would have considered it inevitable or even probable but merely a possibility, although I do accept that the degree of probability would have been higher had that person known as much about the prevailing circumstances then as we do today."

The arbitrator considered that not only were the charterers entitled to the benefit of a presumption that they would, following the outbreak of hostilities in Iraq in 2003, have cancelled the charter had it not already been terminated on account of their repudiation, but also that they would on the evidence have cancelled it anyway (despite an immediate increase in rates brought about by the war) because they were fundamentally disenchanted with the charter.

At the heart of GSC's case was the proposition that damages fall to be measured as at or very shortly after the date of breach, and that subsequent events are irrelevant, at least unless they can be said to have been inevitable, or perhaps probable, at the date of breach. Owners accepted that, where a charter contains a simple option in Charterers' favour, damages are to be measured on the basis of an assumption or presumption that Charterers would, but for their breach, have exercised that option in their favour. But where a charter contains an option which may or may not arise, according to subsequent developments not inevitable or at least probable at the time of breach, Owners submitted that it would be inconsistent with principle and with the requirements of business certainty, if the measure of damages could be affected from time to time by such developments.

GSC relied, amongst other things, on the Court of Appeal’s decision in Maredelanto Co. Nav. S.A. v. Bergbau-Handel GmbH. ("The Mihalis Angelos") [1971] 1 QB 164. In that case, charterers had informed owners, prior to the expiry of the lay/can dates, that they had no cargo to load. The owners accepted this as an anticipatory repudiation of the charter and claimed damages for the losses they would have sustained had the vessel performed the least unprofitable notional alternative voyage. The Court of Appeal held, however, that the owners had suffered no loss because the charterers would beyond doubt have cancelled the vessel when she failed to meet her lay/can dates, which – in the circumstances of that case - she was bound to do.

Lord Denning said at p.196G-H:

"Seeing that the renunciation is itself the breach, the damages must be measured by compensating the injured party for the loss he has suffered by reason of the renunciation. You must take into account all contingencies which might have reduced or extinguished the loss. …. It follows that if the defendant has under the contract an option which would reduce or extinguish the loss, it will be assumed that he would exercise it. ….. In short, the plaintiff must be compensated for such loss as he would have suffered if there had been no renunciation: but not if he would have lost nothing."

However, it was on Megaw LJ's reasoning at pp.209H-210B that, in the present case, GSC placed the most emphasis:

"In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has lost, subject to his duty to mitigate. If the contractual rights that he 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 (emphasis added) 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 events."

Megaw LJ's judgment had also introduced as a relevant consideration the position as it appeared "at the date of acceptance of the repudiation". GSC submitted that this correctly reflected the need to measure damages at the date of breach but the other two judgments in The Mihalis Angelos") did not make any such point, and it is clear that the point was not in issue or argued before the Court.

In The Seaflower (see above) the charterers had repudiated an 11 month charter after some 2 months, claiming that the charter would anyway have come to an end after 4 months, because the vessel would by then have lost - and not regained - a Mobil approval, without which charterers were entitled to cancel under an express charter clause. Timothy Walker J refused to treat Megaw LJ's words in The Mihalis Angelos as introducing a minimum test of predestination, preferring Lord Denning's formulation that the court "must take into account all contingencies which might have reduced …. the loss". He held on the facts that the approval would inevitably have been lost and not regained and that it went without saying that charterers would then have cancelled. Any damages were limited accordingly to the balance of the first four months of the charter.

In the present case, Langley J. had agreed with Timothy Walker J  and his analysis of The Mihalis Angelos, save to say that if Timothy Walker J intended "inevitability" rather than probability to be the test, he (Langley J) would differ. Langley J thus considered that the arbitrator was right in his conclusion despite his reluctance to reach it. It was consistent with the basic compensatory rule for the assessment of damages. He saw no reason why the normal approach to mitigation (that is, taking the cost of any substitute available on the market) should dictate any other result. Accepting the desirability of certainty and crystallisation, he did not consider that they were more obviously achievable via GSC's approach. He pointed out that the charter itself contained the uncertainty of the War Clause (cl.33) and that GSC's approach would lead to the owners recovering more than they had lost.

Judgment
Lord Mance concluded that GSC’s contentions must be rejected. As Langley J had observed, this charter always incorporated the inherent uncertainty of the War Clause. In many circumstances, this uncertainty could be disregarded, for example, if damages were being assessed after the end of the original charter period and no relevant war had occurred, or if damages were being assessed during the original charter period on the basis that there was no significant prospect of any such war. In other circumstances, if damages were being assessed during the original charter period, account might have to be taken of the ‘contingency’ (Lord Denning) or chance that a war might occur, and consideration would then also have to be given to whether or not charterers would in that event probably cancel.

Lord Mance continued that certainty, finality and ease of settlement were all of course important general considerations but the element of uncertainty resulting from the War Clause meant that Owners were never entitled to absolute confidence that the charter would run for its full 7-year period. They never had an asset which they could bank or sell on that basis and there was no reason why the transmutation of their claims to performance of the charter into claims for damages for non-performance of the charter should improve their position in this respect.

Further, as NYKK submitted, the assessment of damages often depends on, or is informed by, subsequent events, and the claim for loss on the spot market from 17^th December 2001 until 1^st April 2002, the claim based on a substitute rate as from 1^st April 2002 and the claim for loss of a profit share, which would surely depend on looking at actual market rates over the balance of the original charter, are all instances applicable in this case. The additional need to take into account the now known fact of the Second Gulf War is simply another instance.

In any event Lord Mance considered that this was a situation where any considerations of the type (certainty, finality, ease of settlement) mentioned above would have, so far as necessary, to yield to the greater importance of achieving an assessment of damages and compensation which more accurately reflected the actual loss which Owners could, at whatever is the date of assessment, now be seen to have suffered as a result of Charterers' repudiation.

Comment
The earlier report of the s.69 appeal in the High Court had focused on the Arbitrator "getting it right" through following The Seaflower and being upheld on a difficult point of law whereas Langley J had taken a step further and reached, correctly as the Court of Appeal has now held, the same conclusion from general principles