Time Charters. Termination. Damages Last updated 14-May-2015

The availability of a substitute market enables a market valuation to be made of what the innocent party has lost, and a line thereby to be drawn under the transaction.
Dampskibsselskabet "Norden" A/S v Andre & CIE. S.A [2003] EWHC 84 (Comm), per Toulson J at para 42.

Principles and assessment

Damages for repudiation of a time charter assessed on the basis of general principle of restitutio in integrum, within the limits expressed in Hadley v Baxendale, (1854) 9 Exch. 341 and comparable with that of the law for sale of goods: where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver. Sale of Goods Act 1979, s 51(3). (Read more on assessment of contractual damages.)

In cases of owners’ wrongful repudiation a time charter, when there is at the time of the termination of the charter-party or shortly after an available market for the chartering in of a substitute vessel, the normal measure of damages is the difference between the contract rate for the balance of the charterparty period and the market rate for the chartering in of a substitute vessel for that period.

The availability of a substitute market enables a market valuation to be made of what the innocent party has lost, and a line thereby to be drawn under the transaction.
Dampskibsselskabet "Norden" A/S v Andre & CIE. S.A [2003] EWHC 84 (Comm) (30 January 2003), per Toulson J at para 42.

Charterers’ right to damages is qualified by their obligation to mitigate their losses. When mitigating, the charterer, by analogy with the buyer of non-delivered goods, has to decide whether or not to charter in a substitute ship and if he decided not to charter, what he is fully entitled to do, he cannot visit the consequences of that decision upon the shipowner. Acceptance of the market rate at the date of breach is deemed to constitute reasonable mitigation.

The authoritative analysis of legal consequences which follows renunciation of contract by either side, was stated by Lord Carswell in Golden Strait Corporation v Nippon Yusen Kubishka Kaisha (The Golden Victory) [2007] UKHL 12 at para 57:

57. The basic rule in the case of repudiation of a charterparty, where there is an available market, is that the loss is measured as at the date of acceptance of the repudiation. The calculation is made on the basis that the injured party can mitigate his loss by going into the market and obtaining a replacement charter as soon as reasonably possible on the best terms available for the balance of the charter period…
His loss will then be calculated by reference to the extent to which he is worse off in consequence. This will normally be the extra cost of chartering a substitute vessel, if the owner has repudiated the original charter, and any reduction in charter rates if the repudiation was by the charterer. In either case the loss is ordinarily assessed over the remainder of the duration of the original charter.

Two cases Zodiac Maritime Agencies Ltd v Fortescue Metals Group Ltd [2010] EWHC 903 (Comm) and Glory Wealth Shipping Pte Ltd. v Korea Line Corporation (The Wren) [2011] EWHC 1819 (Comm) arose out of the market collapse in 2008 and gave rise to litigation between defaulted charterers and shipowners over measure of damages when there is no available market at the time of breach.

In Zodiac Maritime Agencies Ltd v Fortescue Metals Group Ltd [2010] EWHC 903 (Comm) Steel J amended this rule with analysis of damages available in cases when although there is no market at the time of termination, but a term market thereafter emerges for the outstanding balance of the charter period:

65. The fact that a term market thereafter emerges for the (yet shorter) outstanding balance of the charter period does not in my judgment import with it the proposition that a decision not to take advantage of that market at that later stage becomes a business decision independent of the wrongful termination. The rationale is that acceptance of the market rate at the date of breach is deemed to constitute reasonable mitigation…
66. By this mechanism subsequent market movements are removed from the equation. It is simply a matter of chance when the vessel completes any spot voyages after the termination date. Indeed they may overrun the emergence of an available market. In short I see no basis for requiring the owner to go back into the term market at the end of every spot voyage or for that matter to disregard short time charters in case the market for longer charters emerges in the meantime.

Although revival of the market is relevant for the purpose of establishing whether the owners’ loss is self-induced and flows from his failure to mitigate it does not in itself provide the correct measure of damages. For example in Glory Wealth Shipping Pte Ltd. v Korea Line Corporation (The Wren) [2011] EWHC 1819 (Comm) the question for decision was as to the correct measure of damages for a charterer’s repudiation of a time charter (36 months to maximum 38 months) where there was, at the date of the termination of the charter, no market for the unexpired period and a market for then the unexpired period only revives at a much later date. The new-build vessel was delivered by the owners on 21 June 2008 and redelivered by the charterers in November 2008. The owners employed the vessel on substitute fixtures on the spot market up to January 2009, and after that market revived to the level that they were able to fix vessel for the balance of the charter period from that time.

Though there was no available market at the time of termination the Tribunal supported owners’ view and awarded them damages on what was called a "hybrid basis", i.e. reflecting actual losses on a substitute fixtures the vessel had contracted in the spot market up to January 2009, and applied The Elena D'Amico principle as from the time the market revived for the balance of the charter period from that time.

The judge disagreed with the arbitrators and held that the Tribunal:

30. … [Was] not entitled to assess damages from July 2009 by way of The Elena D'Amico reasoning on the basis only that the market revived at that time. This (in my view) departs from the principle that damages recoverable by the injured party are such as will put him in the same financial position as if the contract had been performed: The Golden Victory [2007] 2 AC 353, Lord Bingham [9], Lord Scott at [29], Lord Carswell at [57], Lord Brown [83]. In my view, in a case such as this the law is correctly stated by Rix J in the passage from The Griparionwhich I have cited above.

31. The question for decision is as to the correct measure of damages for a charterer’s repudiation of a time charter where there is, at the date of the termination of the charter, no market for the unexpired period and a market for then the unexpired period only revives at a much later date. For the above reasons, in such a case my view is that damages are to be assessed by reference to the actual loss of the owner. Assessment of such damages is subject to the usual rules, including the principle that where the owner has unreasonably failed to mitigate its losses, it may not claim its self-induced loss. The revival of the market is obviously relevant in that regard. Mitigation apart, the revival of the market at a later date may be a factor to take into account in calculating future loss if damages fall to be assessed before the end of the contractual period, but the revival of a market for the then unexpired period of the charter does not in itself provide the correct measure of damages.

The learned judge also agreed with the opinion that the overriding compensatory principle that damages awarded should represent no more than the value of the contractual benefits of which the claimant has been deprived. Thus the court confirmed that in cases where at the date of the termination of the charter, there is no market for the unexpired period and a market for then the unexpired period only revives at a much later date:

damages are to be assessed by reference to the actual loss of the owner rather than applying actual losses until an available market came in to existence;

the measure of damage is no more than the sum which would put the Owners in the same financial position as if the charter had been performed.

Quantum. Discount for accelerated receipt of income.

Monetary value of those losses that Owners had not yet sustained at the moment of wrongful repudiation of charterparty by the time charterer is subject to discount. Such discount rate applied to the period between the date of the award (in case of arbitration) or the court decision and the charter termination date. In Zodiac Maritime case it was ascertained as an allowance reflecting the 3 year yield in US Treasury bonds and amounted to 1.5%. Further deduction may cater contingencies that might affect the vessel’s earning capacity between the date of the award and the respective earliest dates of redelivery, including for example, the possibility of the vessels dry-docking if permitted by the charter terms and be also in range of 1.5%.

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