Note: the decision in this case was reversed by a judgment of the House of Lords delivered on 9 July 2008. For a note on the House of Lords' judgment, click here

DMC Category Rating: Developed

This case note is contributed by Jim Leighton, BSc, LLB, LLM (Maritime Law), Trainee Solicitor and International Contributor to DMC’s CaseNotes.

Briefly, the appeal raised an issue relating to the damages a time-charterer is liable to pay to a shipowner for the late redelivery of the chartered vessel. The question for decision was whether those damages are limited by the principles of remoteness to the difference between the charter rate of hire and the market rate of hire at the time of redelivery over the length of the overrun period or whether the shipowner can claim damages based on the loss of his next fixture.

There was no binding authority on the courts that decided this issue. On the facts, the answer to the question meant the difference between damages of US$158,301.17 (overrun only) and US$1,364,584.37 (loss of fixture).

The appellant-charterer ("Transfield") argued that cases commonly referred to damages in terms of the overrun only and that the court should not now deviate from this frequent restatement, as it provided clarity, certainty, ease of calculation and fairness. The respondent-shipowner ("Mercator") argued that the arbitrators and Commercial Court judge were right to award damages for the loss of fixture, that the loss had been suffered as a result of the charterer’s breach of charter and that any decision that did not award the actual loss suffered would be contrary to the compensatory principle, which would be arbitrary and unfair.

Judgment
The leading opinion was given by Rix LJ, with whom Ward and Tuckey LJJ agreed.

Rix LJ began by conducting a historic review of the law of redelivery, noting that problems arose due to the diverging interests of a shipowner and a charterer towards the end of a charter period. The cases reviewed included: The "Gregos" [1995] 1 Lloyd’s Rep 1 (HL), Grey & Co v Christie & Co (1889) 5 TLR 577, The "London Explorer" [1972] AC 1, Meyer v Sanderson & Co (1916) 32 TLR 428, The "Dione" [1975] I Lloyd’s Rep 115 (CA), The "Johnny" [1977] 2 Lloyd’s Rep 1 (CA) The "Black Falcon" [1991] 1 Lloyd’s Rep 77 and The "Peonia" [1991] 1 Lloyd's Rep 100 (CA). The review charted the development of the implication of a reasonable time, to represent a reasonable margin of error, within which the vessel must be redelivered, shipowners’ lawyers’ attempts to draft-out such an implication from time charters and the development of the principle of legitimate and illegitimate last voyage orders and the remedies available that resulted from this distinction.

Having dealt authoritatively with the cases cited, Rix LJ repeated what the arbitrators and the Commercial Court judge observed in the present case: that in none of the past cases was the recoverability of damages for the loss of a subsequent fixture actually in issue. However, Rix LJ sought to drive home the point still further: "any issue of damages generally arose in only a very narrow form, and had already been defined and confined in the special case stated in arbitration; and not only was compensation for loss of a fixture not in issue, it usually could not have been in issue on the facts. What is more, it was not until The Peonia [which was reported in 1991] that there was any clear recognition that damages were available for late redelivery upon a legitimate last voyage. As for the consequences of an illegitimate last voyage, the cases demonstrate that they may vary more widely, and also indicate that, for one reason or another, a loss of fixture claim could rarely occur."

Transfield, however, sought to rely on the opinion of Hobhouse LJ (as he then was) in The "Nukila" [1987] 2 Lloyd’s Rep 146 (CA), 152, to the effect that existing authoritative statements of law should only be departed from if they were clearly wrong, whether or not they were strictly binding. But Rix LJ was not convinced that those well-established principles easily applied to the present case. In The "Nukila" the issue of the interpretation of the meaning of ‘latent defect’ in a standard marine insurance clause was being considered, whereas here it was concerning general principles of damages.

Having placed the facts within the proper context of the jurisprudence, Rix LJ went on to consider the arbitrators’ and Commercial Court’s decisions. The approach of the arbitrators was to ask whether or not the loss fell within the first limb of Hadley v Baxendale (1854) 9 Exch 24.¹ It was Transfield’s argument that, in principle, the loss of the fixture was recoverable but that it was under the second limb of the rule, which had not been satisfied here. The majority arbitrators, however, referred to Lord Reid’s reformulation of the rule in Hadley v Baxendale, in The "Heron II" [1969] 1 AC 350, 382/3, to the effect that "not unlikely" losses were recoverable. The majority arbitrators decided that, as "both parties were experienced in the chartering markets" and because Transfield had accepted that "missing dates for … a subsequent fixture" met the "not unlikely" test, the loss of fixture claim was not too remote and was therefore recoverable in principle.

On the facts, the majority arbitrators decided that the loss of fixture claim should be recoverable in the present case because there were no unusual features in the material surrounding circumstances that would require actual knowledge on the part of Transfield at or before the time the contract had been entered into, for the loss to be recoverable. So, the majority arbitrators concluded that the loss of fixture fell within the first limb of Hadley v Baxendale and that there was no special knowledge that brought the claim within the second limb of Hadley v Baxendale.

Before the Court of Appeal, Transfield’s primary submission was that for reasons of authority, principle and pragmatism, the measure of damages for late redelivery of a time chartered vessel should, absent special knowledge of a subsequent fixture going beyond the facts of this case, be limited to loss of current market value during the overrun period, rather than that the majority arbitrators and the judge at first instance had misunderstood or misapplied the rule in Hadley v Baxendale.

In connection with this, it was further argued that Mercator’s transactions with a third party (in this case, Cargill, the follow-on charterer) were "res inter alios acta" (literally ‘a thing done between others’) and therefore matters for Mercator alone, which could not affect Transfield, absent special knowledge at the time of contracting (through which it could be argued that Transfield would then have assumed responsibility for the loss).

Rix LJ noted that Transfield was in no position to suggest that the majority arbitrators had erred in law on any of the key issues in the case and could not now challenge the majority arbitrators’ findings of fact. This left Transfield to argue only that Lord Reid’s reformulation of Hadley v Baxendale did not matter, whatever the findings by the majority arbitrators, and that - without specific information being brought to Transfield’s attention before contracting -Mercator’s loss was simply too remote. This amounted to the arguments a) that the prior non-binding authorities should be followed, b) that the Cargill fixture was irrelevant as res inter alios acta, c) that limiting damages to the difference in rates for the period of the overrun was a matter of principle or policy and d) that any other rule would lead to uncertainty and chaos.

After considering some of the leading cases on remoteness of loss, Rix LJ held that there was nothing in those authorities that detracted from the majority arbitrators’ decision in the present case. To the contrary, Rix LJ stated that the facts in The "Heron II" were not materially dissimilar to the present case; indeed, that the present case had stronger merits because the claimant and defendant were in the same industry, rather than merely co-dependent industries (as was the case in The "Heron II", where the parties were a commodities trader and a shipowner, respectively).

Res Inter Alios Acta
Rix LJ thought the distinctions and submissions of Transfield on this matter were erroneous. Prima facie a loss was to be measured by the relevant market at the relevant date. As regards the sale of goods cases, these were dictated by an assumption that the claimant had mitigated his losses by going into the market and purchasing substitute goods at the then market price. It did not matter if the claimant chose not to buy in or otherwise delayed his purchase – this was his own speculative decision, hence it was res inter alios acta (none of the defendant’s concern).

According to Rix LJ, no complaint could be made about Mercator’s reaction under the circumstances. Mercator acted reasonably in mitigating its loss – in the face of the sharp market rate fall, Transfield’s breach of contact through late redelivery and the likely cancellation of the next fixture – by renegotiating the next fixture in line with the then market rate, rather than face the legitimate cancellation of the charter by the follow-on charterer, Cargill. The analogy with sale of goods cases was good, as the Commercial court judge decided; it simply had to be borne in mind that sale of goods losses were usually on a specific date, whereas the loss for a time charter would occur over the period of the fixture.

The Argument from Authority
In response to Transfield’s arguments on the need for prior knowledge of special facts or a requirement for a specific assumption of responsibility for the loss of a subsequent fixture, Rix LJ considered that neither had merit. He had already largely dealt with the first issue (see above). On the second issue, Rix LJ considered it unnecessary for an express or implied term of the contract to deal with an assumption of responsibility – that submission came from a misunderstanding of the principle that special knowledge must not come casually from a third party for there to be an assumption of responsibility by the defendant.

The Argument from Practicality
Rix LJ considered that the practicality submissions of Transfield deserved serious consideration. This followed from the doctrine of remoteness of loss reflecting the public policy of the law. Such policy was in place to favour the compensatory principle, so as to avoid the relentless pursuit of a complete indemnity, which would be "too harsh a rule" (citing Asquith LJ in Victoria Laundry at p.539). Equally, "although very occasionally", public policy would require the refusal of damages even though they may be said to have been in the parties’ contemplation (citing McGregor on Damages at para.6-178).

In the judgment of Rix LJ, however, this was not such a case. There was no fixed rule or binding authority that damages for late redelivery were limited to the period of the overrun. Even Transfield accepted that the overrun period was only a prima facie rule and that on the right facts damages for loss of a fixture may be available. In terms of a requirement for special knowledge of a follow-on fixture, Rix LJ thought that such a requirement was undesirable and uncommercial. Undesirable, because it put shipowners too much at the mercy of charterers, enabling charterers to take readily the risk of late redelivery for minimal damages when compared to the actual loss of fixture suffered by shipowners under the right market conditions. Uncommercial, because, if charterers were required to know more than they knew in the ordinary course of things, then shipowners would seldom recover damages for loss of fixture, as follow-on fixtures are often only finalised close to the time for redelivery under the then running time charter.

Rix LJ pointed out that if the shipping industry could not live with the result of this case then it was open to the parties to create clauses in their charters to regulate the situation.

Comment
The case note above does not deal with many points of interest and guidance within the Court of Appeal decision. For those interested in the discussion of the facts regarding the "not unlikely" features of the follow-on fixture and examples of potentially unusual factors that could lead to the loss of fixture being too remote, it is recommended that the full opinion of Rix LJ be read. Further comments on the case can be read in the Commercial Court case note and the article in THE ARBITRATOR (for hyperlink, see above)