Citation(2017) 29 SAcLJ 23
Published date01 December 2017
Date01 December 2017


I. Introduction

1 I propose to consider three recent decisions in the UK, one of the House of Lords, and two of the Supreme Court which appear, at any rate to me, to amount to a change of course, or a decision as to the direction to be taken on a largely uncharted sea. They are also illustrative of a feature of the common law which struck me first as a student and has never really left me. One is often faced by a set of circumstances which appear to be sufficiently commonplace that somebody must have decided what answer the law gave to the problem which they threw up; only to find either that there was no guidance or very little, or, at least, that it was more flexible than at first appeared. The three cases also reveal certain hallmarks of significant decisions at the highest level to which I shall refer.

II. Late redelivery

2 In Transfield Shipping Inc v Mercator Shipping Inc1 (“The Achilleas”), the House of Lords was concerned with a bulk carrier called “The Achilleas”. Under her charter she was due to be redelivered on 2 May 2004. She had originally been fixed in January 2003 for five to seven months at a daily hire rate of $13,500; in September 2003 she was fixed for another four to six months at $16,750 per day. By April 2004 market rates were double what they had been the previous September.

3 On 20 April 2004 the charterers gave notice of redelivery between 30 April and 2 May 2004. On 21 April 2004 the owners fixed the vessel to another charterer for a new four to six months' hire following on from the charter which was due to come to an end on 2 May 2004 at a daily rate of $39,500. The latest date for delivery under the new charter was 8 May 2004.

4 With less than a fortnight to run, the charterers fixed the vessel under a subcharter to carry coal from Qingdao in China to two Japanese ports. The vessel was delayed at the second port and was not redelivered until 11 May. Meanwhile between 21 April and 5 May the market fell by about 20% – an unusually short time period for such a fall. In return for an extension of the cancelling date from 8 May until 11 May the owners agreed to reduce the rate of hire for the new fixture by $8,000 – from $39,500 to $31,500. The owners then claimed to recover from the charterers hire at the rate of $8,000 a day over the period of the new fixture. That came to about $1.3m. The charterers said that all that the owners were entitled to recover was the difference between the market rate and the charter rate for the nine days between the date by which she should have been delivered and the date when she was redelivered (2 May to 11 May). That amounted to about $158,000.

5 Who won? The matter was referred to three experienced shipping arbitrators. Two of them held that the owners won. One arbitrator said that the charterers did. The Commercial Court judge agreed with the majority. So did Lord Justice Rix, in the Court of Appeal, with whom Lord Justices Tuckey and Ward agreed. Rix and Tuckey LJJ were themselves previously judges of the Commercial Court. In the end the five members of the House of Lords decided that the charterers' contention was the right one.

6 The majority arbitrators had held that the loss on the new fixture fell within the first rule in Hadley v Baxendale,2 namely, that it arose “naturally, ie according to the usual course of things, from such breach of contract itself” because it was loss of a kind which the charterer when he made the contact ought to have realised to be not unlikely to result from a breach of contract consisting of a delay in redelivery: see Lord Reid in The Heron II.3

7 The dissenting arbitrator did not dispute that the owners would very likely enter into a following fixture during the course of the charter and that late redelivery 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 a risk of the type in question, the general understanding in the shipping market being that liability was restricted to the difference between market and contract rate for the overrun period, ie, the period between the last due date for delivery and the actual delivery date. I will call this “the overrun difference”. To impose liability on the basis claimed would involve charterers bearing responsibility for losses in respect of a fixture of

which at the time of the contract they would have had no knowledge, nor control, as to its duration or terms; it would involve an assumption of risk in relation to which it was difficult to see where a line was to be drawn and give rise to a real risk of serious commercial uncertainty, since the charterers would have no means of assessing the extent of any possible liability in respect of the following fixture.

8 The majority arbitrators appear to have accepted that, if the charterers had asked their lawyers or their Club what damages they would be liable for, the answer would be for the overrun difference. That, however, was said to be irrelevant because a broker would have said that the not unlikely result of late delivery was that the date for a subsequent fixture would have been missed and damages for loss of this type were, therefore, recoverable.

9 Lord Hoffman gave the leading judgment. He held that the rule that a party may recover losses which were foreseeable (“not unlikely”) was not an external rule of law imposed upon the parties in default of provision to the contrary but a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the 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”.4

10 In coming to that conclusion he took into account a number of matters. First, there appeared to be no reported case in which the question in issue had been raised and several in which the dicta suggested that the measure of damages was the overrun difference. Second, he referred to various legal articles (none of which had been referred to in the course of the hearing) which suggested that the extent of a party's liability for damages was founded upon the interpretation of the particular contract as a whole construed in its commercial setting. He held5 that departure from the ordinary foreseeability rule based on individual circumstances would 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 were likely to be more common. It was necessary in every case to decide whether the loss for which compensation was sought was “of a ‘kind’ or

‘type’ for which the contract-breaker ought fairly to be taken to have accepted responsibility”.6

11 As Lord Hoffman held, the parties, contracting against the background of market expectations found by the arbitrators, when considering the extent of the liability that they were undertaking would have considered that losses arising from the loss of the following fixture were not a type of loss for which they were assuming responsibility. The judgments of Lord Hope and Lord Walker were to similar effect.

12 The case involved what I will call Hallmarks 1, 2 and 3 of leading cases. Hallmark 1 is that the end result is not necessarily what you would have expected either before the hearing or at the end of it. The owners' loss was an entirely foreseeable consequence of the charterers' breach which they had brought about by seeking to extract the maximum benefit from a charter on what turned out to be favourable terms. Two arbitrators and four judges had held that the owners should succeed. It is not self-evident that the charterers could not reasonably be regarded as assuming responsibility for the loss suffered on a falling market by owners because they could not fulfil the new charter when that inability was a very likely consequence of the charterers' failure to redeliver by the stipulated date.

13 It seems that at the end of the hearing some members, perhaps a majority, of the court were in favour of dismissing the appeal. Lord Hope said in terms that his impression at the end of the excellent argument from counsel on both sides was that on the facts found the appeal must fail. Baroness Hale said that the issue could be an examination question to which there was no obviously just answer, adding that the examiners would surely have given first class marks to all the judges who had examined the question so far. She had been at first inclined to agree with the judgments below.

14 Hallmark 2 is that the decision qualifies or explains general statements of principle of long standing, such as that the innocent party may recover damages in respect of loss of the same type or kind of loss as the defendant ought to have realised was not unlikely to result from the breach, even if the loss was unexpectedly large. In essence the decision treated assumption of responsibility7 rather than foresight of the factual consequences of breach as the critical question in relation to claims in contract, at least in some cases. Lady Hale expressed herself to

be not attracted by the introduction into the law of contract of the concept of the scope of the duty and said that, if the appeal was to be allowed, “as to which I continue to have doubts”,8 she would prefer it to be on the narrower ground identified by Lord Rodgers to the effect that the parties would not at the time of contracting have had this particular type of loss arising from extremely volatile market conditions in contemplation.9

15 Hallmark 3 is that the decision leaves, as Lady Hale put it, “much room for argument in other contractual contexts”10 and has attracted some degree...

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