Voyage Charters. Damages. Last updated 16-Oct-2015

Within the port limits

Damages. General principles.

[T]he legal damage was the loss which had arisen from the breach of the contract; that from the amount of the freight which the ship would have earned if the charter-party had been performed, there ought to be deducted the expenses which would have been incurred in earning it, and also any profit which the ship earned between the expiration of the lay days and the time when the employment of the ship under the charter-party would have ended.
In Smith v. M'Guire (1858) 3 H&N 554, per Martin B.

Breach by one of the party to contract of obligation or obligations mentioned in Owners’& Charterers’obligations chapter triggers secondary duty to pay damages. As a legacy of common law duties many obligations in modern charters are strict or absolute. For example the charterers under a strict obligation to pay freight to the owners under a voyage charter. This obligation is not qualified by such external factors as financial difficulties, drop in freight rates, market conditions, etc. In such cases, as Lord Edmund-Davies noted in Raineri v Miles [1981] AC 1050 at 1086, there is no doubt that the charterers are liable:

It is axiomatic that, in relation to claims for damages for breach of contract, it is, in general, immaterial why the defendant failed to fulfil his obligation, and certainly no defence to plead that he had done his best.

The general rule of the law of damages formulated by Lord Wright in Monarch S.S. Co v Karlshamn [1949] AC 196 at p 220, that a party injured by the other party’s breach of contract is entitled to such money compensation as will put him in the position in Which he would have been but for the breach.

The party in breach is under an obligation to pay damages related both to breaches committed before rescission and to losses suffered as a result of the defaulting party’s repudiation of future obligations.


Repudiatory breach

51. Whatever test one adopts, it seems to me that the starting point must be to consider what benefit the injured party was intended to obtain from performance of the contract. …
52. The next thing to consider is the effect of the breach on the injured party. What financial loss has it caused? How much of the intended benefit under the contract has the injured party already received? Can the injured party be adequately compensated by an award of damages? Is the breach likely to be repeated? Will the guilty party resume compliance with his obligations? Has the breach fundamentally changed the value of future performance of the guilty party’s outstanding obligations?
Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577 per Lewison LJ at paras 51-52:

What happens when one party is unable or unwilling to perform its duties? In Universal Cargo Carriers Corpn v Citati [1957] 2 All ER 70, [1957] 2 QB 401, [1957] 2 WLR 713, affd CA, [1957] 3 All ER 234, [1958] 2 QB 254, Devlin J. defined several main principles as below:

A renunciation can be made either by words or by conduct, provided it is clearly made.  It is often put that the party renunciating must "evince an intention" not to go on with the contract.  The intention can be evinced either by words or by conduct.  The test of whether an intention is sufficiently evinced by conduct is whether the party renunciating has acted in such a way as to lead a reasonable person to the conclusion that he does not intend to fulfil his part of the contract …
Since a man must be both ready and willing to perform, a profession by words or conduct of inability is by itself enough to constitute renunciation.  But unwillingness and inability are often difficult to disentangle, and it is rarely necessary to make the attempt.  Inability often lies at the root of unwillingness to perform.  Willingness in this context does not mean cheerfulness; it means simply an intent to perform. To say "I would like to but I cannot" negatives intent just as much as "I will not".
 …If a man says "I cannot perform", he renounces his contract by that statement, and the cause of the inability is immaterial.

Decision in Zodiac Maritime Agencies Ltd v Fortescue Metals Group Ltd [2010] EWHC 903 (Comm) confirms that there is no half way when one party to contract stops to perform its contractual obligations in a whole or in its substantial part on pretention of suspension due to temporarily financial difficulties. Once an injured party elects to rescind the contract, the contract is determined and the party in fault is liable in damages.

Read also Law of Contract: Repudiation. Positive Election.


Measure of damages

It is hard to imagine circumstances where the owner’s damages for loss of the profit which would have been obtained from performance of the repudiated charter could exceed the net freight (and if applicable demurrage) which would have been earned if that charter had been performed. An owner cannot lose more by way of lost profit from a charterer’s repudiation than the freight (and any demurrage) which he would have earned by performing the charter. In that sense the net freight and demurrage represent a cap on the owners’ damages. That is not because of any rule of law but simply because of the nature of the loss.
Per Males J in Louis Dreyfus Commodities Suisse SA v MT Maritime Management BV [2015] EWHC 2505 (Comm) at para 60.

The base of the measure of damage is the compensatory principle, which was set in Smith v M’Guire (1858) 3 H&N 554. It stated that owner entitled to the amount of the freight which the ship would have earned if the charter-party had been performed, minus the expenses which would have been incurred in earning it, and also any profit which the ship earned between the expiration of the lay days and the time when the employment of the ship under the charter-party would have ended.

The question was further expanded in the nineteenth century in cases where duration of substitute fixture overlapped duration of the originally contracted voyage. Complexity of calculation of damages was underlined by Bingham J in The Concordia C [1985] 2 Lloyd’s Rep 55, where the learned judge noted that while compensatory principle is easy to state, it is often very far from easy to apply. In The Concordia C substitute voyage overlapped only 3.3 days of original one and the judge held that had the owners been unable to find any employment for the vessel during the period which the original charter would have taken to perform, their loss would prima facie have been the net revenue under that charter which they lost. Since the owners were able to find employment for the vessel during the tail-end of this period, it was accordingly necessary to reduce the net revenue which the owners would have earned under the original charter by the net amount which the owners did in fact earn during 3.3 days of overlapped period on a substituted voyage.

In The Noel Bay [1989] 1 Lloyd’s Rep 361, Staughton LJ described typical problems and solutions as the following:

But one problem that almost invariably arises, and does in this case, is that the substitute voyage lasts for longer than the voyage under the original charter-party. The solution commonly adopted is to take a proportion of the profits on the substitute voyage to set off against the profits lost on the original voyage; otherwise one would be involved in calculations to the end of the ship's working life.

Although it was of no importance in that case, the learned judge recognized as a factor w"hich is said to be relevant" that at the end of substitute voyage the vessel may have been better - or worse - placed for future employment than at the end of the original one.

In The Elbrus [2009] EWHC 3394 (Comm), [2010] 2 Lloyd’s Rep 315, basic compensatory principle was amended with conventional principles of mitigation. The court held that if vessel is redelivered after the substitute voyage in a location where she is better placed for future employment, then the monetary value of this benefit may be necessary to take into account earnings after the notional date of redelivery. Thus in The Elbrus the court supported the Tribunal’s award where the arbitrators concluded that due to better placement for the next employment, credit had to be given for the benefit of owners being able to perform the next charter earlier than would otherwise have been the case.

While additional benefits will reduce owners’ claim for damages, the position is different if the owner suffers an additional loss as a result of charterers’ repudiation. In Louis Dreyfus Commodities Suisse SA v MT Maritime Management BV [2015] EWHC 2505 (Comm) an example of such losses was described by Males J in the following words:

An example of such a different kind of loss arises when a vessel is redelivered to an owner in the wrong location or when a substitute fixture is completed at a discharge port which is not (or which is some distance from) the discharge port under the contract voyage. The ability of a vessel to earn freight for an owner will depend to a large extent on the vessel being in a place where appropriate cargoes may be had. Cargoes typically shipped from one location may command higher rates of freight than cargoes shipped from another location. Such differences may exist permanently, or only in particular market conditions. These are important commercial considerations which the law of damages needs to recognise. The package of rights for which an owner contracts when concluding a voyage charter includes not only the freight to be earned from performance of that charter but also the right to have his vessel back again and ready for her next employment at the stipulated discharge port or range.

In such cases the owners loss will be twofold: they not only lose the charter freight and had to employ vessel on substituted fixture with the lesser freight rate, but also suffered a delay in repositioning the vessel at advantageous location and thereby lost the benefit of the forthcoming voyages.

Accordingly the learned judge held in Louis Dreyfus, dismissing charterers’ appeal, that performance of the contract voyage would not only have enabled the owners to earn the freight payable under the voyage charter, but would have positioned the vessel in Europe without delay, ready to take advantage of the higher freights available in the North Atlantic market. These were two distinct heads of loss, both of which were caused by the charterers’ breach.

The charterers contended on appeal that uncertainty and unpredictability of maritime trade would make a valid comparison difficult in such cases. They submitted that if the calculation did not end at the date when the contract voyage would have been concluded, there was no other logical end point for the calculation of damages. This argument was rejected on the grounds of positive findings by the arbitrators as to what this particular vessel would have done if the contract had been performed, given the trading options open to her and the market conditions prevailing at the time. They have found also that, after performing the originally contracted voyage, the vessel would have been back in Europe at about the same time as she did in fact complete discharge under the substitute fixture. There was, therefore, no need for calculations extending into the distant future.

Some legal practitioners note that the judgment appears out of synch with general commercial belief that such a head of loss is not actually recoverable because (a) it was not a loss that was foreseeable at the time of contract; and (b) matters connected to a specific vessel’s positioning is often information known only to the owner.

Squire Patton Boggs commented on this decision, that the issues in connection with foreseeability and remoteness were not canvassed in the arbitration and Mr Justice Males was bound to address only the issues pleaded earlier. It is also suggested that in the interest of certainty and commercial regularity, it may be appropriate that in instances where leave of appeal has been granted and a court judgment arising from an arbitration award is made public, that powers be vested in the court to publish an arbitration award in full.


Case-law

Smith v M’Guire (1858) 3 H&N 554

Monarch S.S. Co v Karlshamn [1949] AC 196

Universal Cargo Carriers Corpn v Citati [1957] 2 All ER 70, [1957] 2 QB 401

Raineri v Miles [1981] AC 1050

The Concordia C [1985] 2 Lloyd’s Rep 55

The Noel Bay [1989] 1 Lloyd’s Rep 361

The Elbrus [2009] EWHC 3394 (Comm)

Zodiac Maritime Agencies Ltd v Fortescue Metals Group Ltd [2010] EWHC 903 (Comm)/p>

Louis Dreyfus Commodities Suisse SA v MT Maritime Management BV [2015] EWHC 2505 (Comm)


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