Transfield Shipping Inc. v Mercator Shipping Inc. (The Achilleas)

The Achilleas is a single-decker bulk carrier of some 69,000 dwt built in 1994. By a time charter dated 22 January 2003 the owners let her to the charterers for about five to seven months at a daily hire rate of US$13,500. By an addendum dated 12 September 2003 the parties fixed the vessel for a further five to seven months at a daily rate of US$16,750. The latest date for redelivery was 2 May 2004.

By April 2004, market rates had more than doubled compared with the previous September. On 20 April 2004 the charterers gave notice of redelivery between 30 April and 2 May 2004. On the following day, the owners fixed the vessel for a new four to six month hire to another charterer, following on from the current charter, at a daily rate of US$39,500. The latest date for delivery to the new charterers, after which they were entitled to cancel, was 8 May 2004.

With less than a fortnight of the charter to run, the charterers fixed the vessel under a subcharter to carry coals from Quingdao in China across the Yellow Sea to discharge at two Japanese ports, Tobata and Oita. If this voyage could not reasonably have been expected to allow redelivery by 2 May 2004, the owners could probably have refused to perform it: see Torvald Klaveness A/S v Arni Maritime Corpn (The Gregos) [1995] 1 Lloyd's Rep 1. But they made no objection. The vessel completed loading at Quingdao on 24 April. It discharged at Tobata, went on to Oita, but was unfortunately delayed there and not redelivered to the owners until 11 May.

By 5 May it had become clear to everyone that the vessel would not be available to the new charterers before the cancelling date of 8 May. By that time, rates had fallen again. In return for an extension of the cancellation date to 11 May, the owners agreed to reduce the rate of hire for the new fixture to $31,500 a day.

The owners claimed damages for the loss of the difference between the original rate and the reduced rate over the period of the fixture. At US$8,000 a day, that came to US$1,364,584.37. The charterers said that the owners were not entitled to damages calculated by reference to their dealings with the new charterers and that they were entitled only to the difference between the market rate and the charter rate for the nine days during which they were deprived of the use of the ship. That came to $158,301.17.

The arbitrators, by a majority, found for the owners. They said that the loss on the new fixture fell within the first rule in Hadley v Baxendale (1854) 9 Exch 341, 354 as arising "naturally, ie according to the usual course of things, from such breach of contract itself". It fell within that rule because it was 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 [by delay in redelivery]": see Lord Reid in C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350, 382-383. The dissenting arbitrator did not deny that a charterer would have known that the owners would very likely enter into a following fixture during the course of the charter and that late delivery might cause them to lose it. But he said that a reasonable man in the position of the charterers would not have understood that he was assuming liability for the risk of the type of loss in question. The general understanding in the shipping market was that liability was restricted to the difference between the market rate and the charter rate for the overrun period and "any departure from this rule [is] likely to give rise to a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable."

The majority arbitrators, in their turn, did not deny that the general understanding in the industry was that liability was so limited. They said (at para 17):

"The charterers submitted that if they had asked their lawyers or their Club what damages they would be liable for if the vessel was redelivered late, the answer would have been that they would be liable for the difference between the market rate and the charter rate for the period of the late delivery. We agree that lawyers would have given such an answer".

But the majority said that this was irrelevant. A broker "in a commercial situation" would have said that the "not unlikely" results arising from late delivery would include missing dates for a subsequent fixture, a dry docking or the sale of the vessel. Therefore, as a matter of law, damages for loss of these types was recoverable. The understanding of shipping lawyers was wrong.

On appeal from the arbitrators, Christopher Clarke J [2007] 1 Lloyd's Rep 19 and the Court of Appeal (Ward, Tuckey and Rix LJJ) [2007] 2 Lloyd's Rep 555 upheld the majority decision. The case therefore raises a fundamental point of principle in the law of contractual damages: is the rule that a party may recover losses which were foreseeable ("not unlikely") an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses?

Before I come to this point of principle, I should say something about the authorities upon which the understanding of shipping lawyers was based. There is no case in which the question now in issue has been raised. But that in itself may be significant. This cannot have been the first time that freight rates have been volatile. There must have been previous cases in which late redelivery caused the loss of a profitable following fixture. But there is no reported case in which such a claim has been made. Instead, there has been a uniform series of dicta over many years in which judges have said or assumed that the damages for late delivery are the difference between the charter rate and the market rate: see for examples Lord Denning MR in Alma Shipping Corpn of Monrovia v Mantovani (The Dione) [1975] 1 Lloyd's Rep 115, 117-118; Lord Denning MR in Arta Shipping Co Ltd v Thai Europe Tapioca Service Ltd (The Johnny) [1977] 2 Lloyd's Rep 1, 2; Bingham LJ in Hyundai Merchant Marine Co Ltd v Gesuri Chartering Co Ltd (The Peonia) [1991] 1 Lloyd's Rep 100, 118. Textbooks have said the same: see Scrutton on Charterparties 20th ed (1996), pp 348-349; Wilford and others Time Charters 5th ed (2003), at para 4.20. Nowhere is there a suggestion of even a theoretical possibility of damages for the loss of a following fixture.

The question of principle has been extensively discussed in the literature. Recent articles by Adam Kramer ("An Agreement-Centred Approach to Remoteness and Contract Damages") in Cohen and McKendrick (ed), Comparative Remedies for Breach of Contract (2004) pp 249-286 Andrew Tettenborn (" Hadley v Baxendale Foreseeability: a Principle Beyond its Sell-by Date") in (2007) 23 Journal of Contract Law 120-147) and Andrew Robertson ("The basis of the remoteness rule in contract") (2008) 28 Legal Studies 172-196) are particularly illuminating. They show that there is a good deal of support in the authorities and academic writings for the proposition that the extent of a party's liability for damages is founded upon the interpretation of the particular contract; not upon the interpretation of any particular language in the contract, but (as in the case of an implied term) upon the interpretation of the contract as a whole, construed in its commercial setting. Professor Robertson considers this approach somewhat artificial, since there is seldom any helpful evidence about the extent of the risks the particular parties would have thought they were accepting. I agree that cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual, but limitations on the extent of liability in particular types of contract arising out of general expectations in certain markets, such as banking and shipping, are likely to be more common. There is, I think, an analogy with the distinction which Lord Cross of Chelsea drew in Liverpool City Council v Irwin [1977] AC 239, 257-258 between terms implied into all contracts of a certain type and the implication of a term into a particular contract.

It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken.

The view which the parties take of the responsibilities and risks they are undertaking will determine the other terms of the contract and in particular the price to be paid. Anyone asked to assume a large and unpredictable risk will require some premium in exchange. A rule of law which imposes liability upon a party for a risk which he reasonably thought was excluded gives the other party something for nothing. And as Willes J said in British Columbia Saw Mill Co Ltd v...