Note: the Court of Appeal, in a decision dated 6 September 2007, upheld the judgment of the Commercial Court. To access the note on the Court of Appeal decision, click here  
However, in a judgment delivered on 9 July 2008, the House of Lords reversed the decision of the Court of Appeal. For a note on the House of Lords judgment, click here

DMC Category Rating: Developed

Background
This was a claim by way of appeal under s.69 of the Arbitration Act (to set aside an arbitration award) on a point of general public importance to the shipping community – whether loss of earnings under a subsequent fixture is recoverable under the rule in Hadley v Baxendale (1854) 9 Exch 24.¹

The parties to the dispute were Transfield ("the charterer") and Mercator ("the shipowner"). The claim arose because the charterer was late in redelivering the vessel in accordance with the terms of its charterparty with the shipowner ("the Transfield charter"); specifically, a failure to comply with the redelivery dates given in the contractually required notices of redelivery.

The shipowner had already agreed a charterparty with Cargill ("the Cargill charter") which was to commence no later than 8 days after the vessel was expected to be redelivered at the latest on the basis of the redelivery notices given under the Transfield charter. As a result of the late redelivery, the vessel was unable to meet the cancelling date originally agreed in the Cargill charter. As a result, Mercator then had to renegotiate the delivery date with Cargill in return for which Cargill obtained a reduction in the rate of hire.

The shipowner claimed damages from the charterer at the rate of US$8,000 per day, being the difference between the US$39,500 per day rate originally agreed for the Cargill charter and the revised US$31,500 per day rate, against which the shipowner gave credit for the additional sums earned under the Transfield charter by reason of the late redelivery. The Cargill charter was for a period of about 4-6 months. The claim for hire lost over the period of time used within the Cargill charter amounted to US$1,364,584.37.

The parties agreed that the rates originally and subsequently negotiated under the Cargill charter were market rates. The charterer did not suggest that the Cargill charter was in any way unusual or peculiar in its terms or its period. Nor did the charterer suggest that the shipowner had allowed an unusually short gap between the date for redelivery under the Transfield charter and the cancelling date under the Cargill charter.

In the alternative the shipowner claimed damages of US$158,301.17 being the difference between the market rate of hire and the Transfield charter rate during the period from the expected latest date of redelivery in the notices until the actual date of redelivery.

The majority arbitrators (Mr David Farringdon and Mr Bruce Buchan) made an award in the shipowner’s favour, calculated on the former basis. The charterer contended that the award should have been calculated on the latter basis, which was the award that the minority arbitrator (Mr Christopher Moss) would have made.

The majority arbitrators had found on the facts that:

1. to the knowledge of the charterer, it was recognised and accepted as a hazard of late redelivery that the vessel would miss her cancellation date for the next fixture;
2. this was not something that was very unusual but was the kind of result which the parties would have had in mind;
3. rapid variations in market rates in either direction were market knowledge; and
4. the kind of loss suffered by the shipowner – a reduction in the previously agreed rate of hire resulting from the need to adjust the dates for the subsequent employment of the vessel on account of delay in redelivery – was within the contemplation of the parties as a not unlikely result of the breach.

Judgment
Authorities on Late Delivery
The judge was referred to the leading authorities on late delivery: including The "London Explorer" [1972] AC 1, The "Dione" [1975] I Lloyd’s Rep 117, The "Johnny" [1977] 2 Lloyd’s Rep 1 The "Peonia" [1991] I Lloyd's Rep 100 and The "Gregos" [1991] 2 Lloyd’s Rep 40.

The judge noted that there were a number of statements from distinguished commercial judges that the prima facie measure of damages for late redelivery, under the first limb of Hadley v Baxendale,¹ was the difference between the market and charterparty rates for "the overrun period" (i.e. the number of additional days by which the charterparty overran). The Court of Appeal in The "Gregos" also proceeded on an apparent acceptance that it was under the second limb of the rule that loss of a subsequent fixture was recoverable, if at all.

But in none of these cases, highlighted the judge, was the question of recoverability of loss of profit on a subsequent charter actually in issue. Nor were there any findings of fact such as those made by the majority arbitrators. Whilst these cases were authority for the proposition that, absent any such finding, the shipowner is entitled to recover the going market charterparty rate differential, they could not, held the judge, be regarded as deciding that, even with such a finding, recovery of loss of profit on a subsequent fixture could not arise under the first limb or could not be recovered at all.

The Rule in Hadley v Baxendale
Having cited the rule in Hadley v Baxendale,¹ the judge analysed the leading authority of The "Heron II" [1969] 1 AC 350.

The judge helpfully derived the following propositions from the speech of Lord Reid:

"(a) The mere fact that a type of loss is foreseeable is not, of itself, sufficient to make it recoverable; someone may foresee a result that is very remote.

(b) A claimant is, however, entitled to recover damages in respect of a foreseeable result which either (i) will happen in the great majority of cases; or (ii) in respect of which, on the facts known or available to the defendant, the chances of its happening are considerably less than evens but the occurrence of which would not be very unusual.

(c) But a plaintiff is not entitled to recover in respect of an occurrence which, although foreseeable as a substantial possibility will only happen in a small minority of cases and whose occurrence would therefore be very unusual."

The judge also pointed out the limitations of trying to compartmentalise claims within the first or second limb, particularly "as the distinction may not be important for practical purposes", for example, where the claimant will recover for the loss in any event.

Conclusions
The judge held that, on the facts found by the majority arbitrators, the shipowner’s primary claim was not too remote. The shipowner’s loss of profit could, in the light of those findings, legitimately be treated as "arising naturally, that is, according to the usual course of things from such breach of contract itself".

The judge stated:

"In considering the first limb [of Hadley v Baxendale], the court is not constrained to look at what people with not even a minimum knowledge of the shipping trade would contemplate. The court is entitled to look at the ‘general… facts …., known to both parties’: per Lord Upjohn in The "Heron II" at page 424; and ‘such knowledge and information as (the contract breaker), as reasonable men (sic), experienced in its trade, should have had and should have brought to bear in its contemplation’: per Davies LJ in Hill v Ashington Piggeries [1969] 3 All ER 1496, at page 1524 D."

Comment
There is no longer a clear distinction made between the first limb and the second limb of the test for remoteness of loss in contract, following a line of strong authorities that have more fully developed the concept. The limbs are part of a composite whole where the application of the principle depends on the degree of relevant knowledge (reasonably presumed to be or actually) held by the contract breaker at the time of entering the contract in the particular case.

As a result, a major factor in determining whether a loss for the purposes of a contractual claim is too remote now appears to be whether any special, unusual, technical or peculiar information was actually known only to one party and could not reasonably be attributed to the knowledge of the other party at the time of entering the contract.

For an extreme example, knowledge of the need for a continuous pour of concrete in a large civil engineering project to avoid the condemnation of the whole civil structure was beyond the reasonable contemplation of an electricity supplier, where the inability to maintain a continuous pour arose from a power supply failure: Balfour Beatty Construction (Scotland) Ltd v Scottish Power plc (1994) Times, 23 March (HL).

Such losses, from a policy perspective, are considered too remote because had the special, unusual, technical or peculiar information reasonably been brought to the attention of the ignorant party it would have been in a position to appreciate its significance and the not unlikely consequences involved should a breach of contract later occur. That party could then either accept the unusual risks or negotiate terms in the contract to exclude, assign, apportion or limit the consequences.

1. The damages a claimant may recover for breach of contract are "such as may fairly and reasonably be considered either (a) arising naturally i.e. according to the usual course of things from such breach of contract itself or (b) such as may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract as the probable result of it."

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