The Achilleas: Custom and Practice or Foreseeability?

Date01 January 2010
Published date01 January 2010
Pages47-61
DOI10.3366/E1364980909000900
INTRODUCTION

In January 2003 the Baltic Exchange Dry Index of freight rates stood at about 1,700. The war in Iraq began in March and, between then and the end of August, rates climbed steadily, if not spectacularly. In early October there was a sudden sharp rise which took the index to about 5,600 in early February 2004, but it fell back to 2,400 by the end of May. Freight rates therefore showed some volatility during 2003-2004, although nothing like the degree of volatility seen more recently.1

Between June 2006 and June 2008 the index rose from 2,300 to over 11,000 and then, in a matter of four or five months, fell back to less than 1,000.

The movements in freight rates during the first half of 2004 are the background to the case of the Achilleas,2

Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48, [2009] 1 AC 61.

decided by the House of Lords in July 2008

The Achilleas was a 69,000 tonne bulk carrier, fixed under a time charter in January 2003 which had been extended in September 2003 at the rate of $16,750 a day for a further five to seven months at the charterers’ option, the last date for redelivery being 2 May 2004. On 20 April 2004 the charterers gave notice of redelivery between 20 April and 2 May. Next day the owners fixed the vessel to another charterer, on a falling market, for four to six months at $39,500 a day. The last date for delivery to the new charterers was 8 May, which gave the owners six days clearance. Unfortunately, through no fault of the charterers, the vessel was delayed in port during her last voyage and was not redelivered until 11 May. That meant that, with the market still on the slide, the new charterers were entitled to cancel. However, as they still wanted the ship, they agreed on 5 May not to cancel in return for a reduction of the hire to $31,500 a day; in other words, 20% less than they had agreed two weeks earlier.

The owners claimed, as damages for late redelivery, the difference between what the ship would have earned at the original rate during the minimum period of the new charter and what it earned at the lower rate they had been obliged to accept. That came to $1,364,584.37. The charterers said that damages for late redelivery were always the difference between the charter rate and the market rate for the number of days the ship was late. For nine days delay, that came to $158,301.17. The difference between the parties was unbridgeable and the dispute went to arbitration.

The arbitrators, by a majority, said that the question was governed by the first rule in Hadley v Baxendale.3

(1854) 9 Exch 341.

Did the damage arise “naturally, i.e., according to the usual course of things, from such breach of contract itself?”4

At 354 per Alderson B.

That meant, according to Lord Reid in The Heron II,5

Koufos v C Czarnicow Ltd v Koufos [1969] 1 AC 350 at 382-383.

was the damage “of a kind which the [charterer], when he made the contract, ought to have realised was not unlikely to result from a breach of contract causing delay in delivery”? The majority arbitrators said that anyone in the shipping market would realise that the owners were very likely to have fixed the ship under a new charter to follow more or less immediately on the old one and that late redelivery could cause them to miss the cancelling date. As shipping rates go up and down, it was not unlikely that a substitute fixture, whether with the same charterer or a different one, would have to be at a lower rate

That appeared to be an impeccably orthodox application of the standard test for remoteness of damage and was upheld by Christopher Clarke J in the Commercial Court6

[2007] 1 Lloyd's Rep 19.

and by a unanimous Court of Appeal7

[2007] 2 Lloyd's Rep 555.

which included Tuckey and Rix LJJ, two very experienced commercial judges. The only thing unusual about it was that it appeared to be the first case in which damages for the whole profit on a following fixture lost on account of late redelivery had ever been awarded. Yet late delivery in a falling market is something that must happen from time to time. Although there was no authority which positively said that such damages could not be awarded, all the previous cases had said or assumed that the damages would be the difference between the charter rate and the market rate during the period of delay.8

For example, Alma Shipping Corp of Monrovia v Mantovani (The Dione) [1975] 1 Lloyd's Rep 115 at 117-118 per Lord Denning MR; Arta Shipping Co Ltd v Thai Europe Tapioca Shipping Service Ltd (The Johnny) [1977] 2 Lloyd's Rep 1 at 2 per Denning MR; Hyundai Merchant Marine Co v Gesuri Chartering Co (The Peonia) [1991] 1 Lloyd's Rep 100 at 118 per Bingham LJ.

So did the textbooks.9

S C Boyd et al, Scrutton on Charterparties and Bills of Lading, 20th edn (1996) 348-349 (now 21st edn, 2008); M Wilford et al, Time Charters, 5th edn (2003) para 4.20 (now 6th edn, 2008, by T Coghlin et al).

The arbitrators agreed that shipping lawyers in the City would have so advised. This worried the dissenting arbitrator, who said that a departure from the previous understanding of the law was “likely to give rise to a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable.” The uncertainty is caused by the fact that, although a charterer who redelivers late takes his chance on having to pay damages in respect of a rise in market rates, that, under the previous law, had been a manageable risk. The charterer knows the market rates at or about the time he orders the ship on the last voyage and has some idea of what the period of delay might be if things should go wrong. The ship is under the control of the owner, who can refuse an order for a last voyage if it appears bound to overrun.10

Torvald Klaveness A/S v Arni Maritime Corporation (The Gregos) [1994] 1 WLR 1465.

So the risk is within relatively narrow bounds. On the other hand, the charterer has no idea of what the market rates were when the owner made the following fixture or for how long that fixture is to run. So he can only guess at the financial risk involved in late redelivery

There was thus a good deal to suggest that the decision of the arbitrators and the lower courts in the Achilleas had come as a surprise to the shipping community. Instead of the charterer being able to make a simple calculation of what he owed and write a cheque, his liability was now open-ended and could involve quite complicated questions about whether the terms of the following fixture could reasonably have been foreseen. Nevertheless, that result seemed to follow inexorably from Hadley v Baxendale as interpreted in The Heron II. Two members of the Appellate Committee openly acknowledged in their opinions that they left the committee room thinking that the appeal would have to be dismissed, so I do not think it is giving away any secrets to say that, despite excellent argument by counsel on both sides, we were all either of that opinion or at something of a loss to explain why we were not. How, then, did we eventually come to a unanimous decision that the appeal should be allowed? We arrived there by different routes and I think that both courts and academic writers will be asking what the ratio decidendi was and whether the differences in reasoning make any difference.

THE ORTHODOX APPROACH Foreseeability

I will start with Lord Rodger, who adopted the most orthodox approach. He examined various judicial statements which attempted to pin down more precisely what Baron Alderson had meant in Hadley v Baxendale by saying that the damage must have arisen “according to the usual course of things” and “in the great multitude of cases”.11

(1854) 9 Exch 341 at 355-356.

The loss must, said Lord Rodger, have been “foreseeable as a likely result”.12

[2009] 1 AC 61 at para 52.

In the Court of Appeal Rix LJ had remarked that it had required extremely volatile market conditions to cause the substantial loss which occurred.13

[2007] 2 Lloyd's Rep 555 at para 120.

Normally, if an owner lost a following fixture because the ship was redelivered late, he could go into the market and find another one. Of course, said Lord Rodger, “in some cases the available market rate would be lower, and in some cases higher, than the rate under the lost fixture”. But “for the most part”, the availability of the market would protect the owners if they lost a fixture. Therefore, in the normal case, the difference between the charter rate and market rate would more or less compensate the owners for the period when the ship was not at their disposal.14

[2009] 1 AC 61 at para 54.

The charterers had conceded before the arbitrators that missing a subsequent fixture was a “not unlikely” consequence of late delivery. It was also hard to deny that the parties would have known when contracting that market rates for tonnage go up and down, “sometimes quite rapidly”, as Lord Rodger said.15

Para 53.

But in his opinion neither party would reasonably have contemplated that “in the ordinary course of things”, a nine-day overrun would have caused the owners the kind of loss for which they now claimed damage. It was only because of the extremely volatile market conditions

Lady Hale said that if the appeal was to be allowed, as to which she had doubts, she preferred the narrower ground on which Lord Rodger had based his decision to that adopted by the other three members of the Committee.

Some difficulties

What this approach illustrates, I think, is the high degree of indeterminacy which a pure foreseeability test creates. It is not altogether clear whether the lower courts were reversed because they had misapplied the law, setting the test for foreseeability too low, or because they had misunderstood the facts, not appreciating quite how volatile the market had been. As to the law, the lower courts adopted Lord Reid's test in the Heron II...

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