DMC Category Rating: Developed

This note is based on a paper first delivered in July 2008 by Vasanti Selvaratnam QC, who appeared as Counsel for "The Vicky 1" in this appeal

Background
This case arose out of a relatively minor collision which occurred at Balikpapan on 12^th December 2002 when the Vicky 1 collided with a VLCC, the Front Ace, which was at anchor awaiting a ShipToShip transfer operation. However, the Owners of the Front Ace suffered a very large financial loss when the ship lost a lucrative fixture with Chevron because her collision repairs were not completed in time. The substitute fixture which the Claimants entered into with Vitol was for a much lower time charter equivalent rate because the market had fallen. It was also for a much longer duration than the original Chevron fixture. The Owners of the Vicky 1 admitted liability but the assessment of damages was referred initially to the Admiralty Registrar.

The arguments that the Defendants presented before the Admiralty Registrar in an attempt to minimise their liability fell into two main groups. The first group was designed to show that the effective cause of the loss of the fixture was the Claimants’ own conduct. This issue was determined in the Claimants’ favour, both before the Registrar and on appeal, and is not further considered in this note. The second group focussed on quantum, on which alone this note focuses.

The lost Chevron fixture involved a ballast leg from Cilacap in Indonesia (the Front Ace’s last discharge port) to Mina Saud followed by a laden leg from Mina Saud to Singapore ending on 20 January 2003. The substitute Vitol fixture involved a ballast leg from Cilacap to West Africa and a laden leg from West Africa to Cilacap where discharge was completed on 18 March 2003.

The profit generated by a tanker voyage is usually expressed in terms of Time Charter Equivalent (TCE) earnings. This is simply the difference between the income generated by the voyage and those costs directly incurred as a result of performing the voyage. These costs are predominantly the cost of the vessel’s bunkers consumed during the voyage, port charges incurred on the voyage and charterparty commissions. This difference is then divided by the duration of the voyage to calculate a daily TCE. The daily TCE under the Chevron voyage using this approach was approx US$62,000 while that under the Vitol substitute voyage was just over US$35,000.

While the calculation of voyage income is straightforward, the calculation of loss resulting from an interruption in the vessel’s trading is more complicated. The Claimants’ market expert, Colin Pearce, identified two main competing methodologies.

The first is the ballast/laden method. Under this method, both the theoretical Chevron voyage and the actual Vitol voyage are defined as starting on completion of discharge under the previous voyage (i.e. Cilacap in Indonesia, where discharge completed on 19^th December 2002) and finishing on completion of discharge on the subject voyage (viz Singapore in the case of the Chevron fixture and Cilacap in the case of the Vitol fixture). This means that each voyage consists of a ballast leg followed by a laden leg – hence the name ballast/ laden. A theoretical TCE is then calculated for the Chevron voyage and then compared to the actual TCE achieved on the Vitol voyage for the period over which the voyage dates coincide, that is, 19 December 2002 to 20 January 2003. On the facts, this resulted in a difference of US$1.147 million.

Whilst this ballast/laden method is widely used in the industry, it has certain flaws.

The first of these concerns the vessel’s position following discharge on the subject voyage. The VLCC market has well defined loading areas, with the Arabian Gulf/Red Sea being overwhelmingly dominant. It is in the shipowners’ interest to discharge as closely as possible to these zones as it limits the next ballast leg. (Singapore is 450 nautical miles closer to the Arabian Gulf than Cilacap – but this is not taken into account by the ballast/laden method).

The second flaw of the ballast/laden method is that it fails to take account of different voyage lengths. Different voyages have different voyage times and the only accurate method of comparison is to equalise the time period over which the analysis is conducted.

In order to address this second flaw, Mr Pearce developed what has become known as the "time equalisation" method. To achieve this "equality", an assumption has to be made about the employment of the vessel over a 57 day period between 20 January (the date on which the Chevron fixture would have come to an end) and 18 March (the actual date on which the Vitol voyage was completed).

It was agreed between both experts that the likely earnings of the Front Ace in this 57 day period averaged US$3.5 million. This figure represented the average earnings derived from a huge selection of all likely voyages and voyage combinations which the Front Ace would have been able to perform in the relevant period.

Applying the time equalisation method, the loss resulting from the Claimants’ inability to perform the Chevron fixture increased from the US$1.14 million figure under the ballast/laden method to US$2.3 million applying the time equalisation method. The reason for the considerable difference in outcome is because the ballast/laden method wholly ignores the loss suffered in the 57 day period between 20 January (when the Chevron fixture would have ended) and 18 March (when the Vitol fixture in fact ended).

Time equalisation as a method for assessing loss flowing from loss of a fixture has not featured in the law reports to date. In the Argentino (1889) 14 App Cas 519, a House of Lords case of some antiquity, it was assumed (without argument to the contrary) that the ballast/laden method was an appropriate method to be applied to the calculation of the loss.

However, the Claimants advanced two main reasons why that old authority should not dictate the application of the ballast/laden method in all cases.

Firstly, the object of an award of damages in tort is to place the victim, so far as is possible, in the same financial position that he would have been in if the tort had not occurred. On the facts in the Front Ace, it was established that if the collision had not occurred, the vessel would have earned US$5.5 million in the period from 19 December 2002 to 18 March 2003. She in fact earned US$3.2 million in that same period under the Vitol substitute fixture. The loss for which it is the object of an award of damages to compensate therefore amounted to US$2.3 million.

The second reason relates to the law on mitigation. The Vitol substitute fixture was entered into by the Owners of the Front Ace in order to mitigate their loss. It is well established that losses suffered as a result of acts of mitigation are recoverable as damages. By entering into the Vitol fixture, the Front Ace suffered an additional loss in the period 20 January to 18 March which has to be compensated for under ordinary mitigation principles. The Argentino did not concern such a situation; in that case, there was no substitute voyage and, accordingly, no additional loss arising out of acts of mitigation. It does not therefore compel a court to apply a methodology which disregards the principle that losses flowing out of acts of mitigation are recoverable as damages.

In the hearing before the Admiralty Registrar, the Registrar adopted time equalisation as the correct methodology. However, he arbitrarily decided to reduce the quantum of the figure which had been assessed on that basis by 20 percent as he considered that this was a loss of a chance type case. The Owners of the Vicky 1 appealed to the Court of Appeal on the issues of causation and mitigation, and on the methods of calculating the loss of profit. The Owners of the Front Ace cross-appealed against the 20 percent reduction in damages.

Judgment
The judgment in the Court of Appeal was delivered by the Master of the Rolls, Sir Anthony Clarke. He had no hesitation in approving the time equalisation methodology for assessment of the loss. He said this (at paras 60 and 61):

"I agree with the Registrar that the statement by Lord Herschell in the Argentino is not binding authority for the proposition that the ballast/laden or loss of use/loss of profit basis is the appropriate methodology to be adopted in all cases where a claimant loses a fixture as a result of a collision. The House of Lords was not saying that as a matter of principle that is the only method of assessing loss of profit. It was simply concerned with whether the loss advanced by the claimants was recoverable. As I see it, the question for decision in every such case is simply what, if any loss of profit was incurred as a result of the collision. The underlying principle is of course that the claimants are entitled to restitutio in integrum, no more and no less. How their loss of profit is to be calculated will depend upon the facts of the particular case…..As the Registrar observed, the ballast/laden method may be appropriate in a particular case but it may not. All will depend on the circumstances."

As for loss of a chance, the Master of the Rolls accepted the Claimants’ submissions that this was not a loss of a chance type case. On the contrary it was a case in which the Owners of the Front Ace had proved on the balance of probabilities that they would have employed the vessel profitably in the 57 day period between the end of the Chevron fixture and the end of the Vitol fixture and that the average net earnings would have been US$3.5 million. The averaging process used to calculate that figure ensured that there would be no over compensation. In these circumstances, there was no room for a deduction of 20 percent on the basis that that the vessel only had an 80 percent chance of obtaining a fixture or fixtures yielding net earnings of US$3.5 million.

The Master of the Rolls gave some welcome clarification on the issue of the application of loss of chance principles to assessment of damages for loss of profit. He said this (paras 71-73)

"This is not a case where the Claimants’ loss depends upon a chance of making a particular contract. The exercise upon which the experts were engaged was to find the appropriate market rate for the use of the vessel in the relevant 57 days in circumstances in which it was established that she would have been profitably employed during that period….

There are many cases in which courts or arbitrators have to determine what rate of profit would have been earned but for a tort or breach of contract. As I see it, in a case of this kind, where the court has held that the vessel would have been profitably engaged during the relevant period, where there is a relevant market and where the court can and does make a finding as to the profit that would probably have been made (and lost) there is no place for a discount from that figure to reflect the chance that the vessel would not have been employed. It has not in my experience been suggested in the past that any such discount should be made. This situation is to be contrasted with a case in which it is not shown that the vessel would have been profitably employed but she might have been. It may be that in those circumstances it would be possible to approach the problem as a loss of a chance. However, I would not wish to express a firm view on that question in this case where it does not arise on the facts…"

Comment
The Defendants’ application for leave to appeal to the House of Lords on the issue of causation, namely, whether it was the collision that in fact caused the Front Ace to lose the Chevron fixture, or whether the fixture was lost because of some delay in her arriving at her repair port, has been refused.

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