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Damages for repudiation of voyage charters: Lessons learned from The Mtm Hong Kong

Figure 11.16

The claim brought by Owners was for damages of US$1,212,316.50 as compensation for Charterers’ repudiatory breach of contract. That sum represented the difference between (i) the profit the vessel would have earned under the Contract Charter and the two subsequent fixtures (from the Baltic to the US and from the US to Europe), and (ii) the profit actually earned under the Substitute Charter. The Owners therefore sought to recover not only the lost profit under the Contract Charter but also the lost profit that, they argued, would have been earned if the vessel had been properly placed, after the Contract Charter, to perform the follow-on fixtures.

The Charterers accepted that the Owners were due a sum in compensation. However, they argued the correct sum was no more than US$478,386.80 according to the principle established in Smith v M’Guire7 that the starting point in determining the Owners’ loss consequent upon a breach of a voyage charterparty was (a) the amount of freight the ship would have earned if the charterparty had been performed, less (b) the expenses which would have been incurred in earning it, plus the vessel’s earnings during the period which she would have been occupied in performing the original voyage.8 In short, the Charterers argued that the correct measure of damages was the difference between the profit that would have been earned under the Contract Charter and the profit actually earned by the vessel under the Substitute Charter apportioned up to the end of the Contract Charter, i.e. up to and no later than 17 March 2011.9 This difference of approach between the parties was financially significant in that the Charterers would be liable for an additional US$733,929.70 if the Owners were entitled to claim the profit lost from the two follow-on fixtures after the end of the Contract Charter.

The tribunal found in favour of the shipowners and awarded US$1,212,316.50 in compensation for profit that would have been earned under the Contract Charter and the loss of the two follow-on fixtures.10 It accepted that these Owners’ losses had been caused by Charterers’ repudiatory breach, and that the Owners acted reasonably in mitigation of their loss by continuing to proceed to South America after the Contract Charter came to an end on 21 January 2011. In addition, the arbitrators accepted the Owners’ contention that there was no rule of law requiring damages to be artificially limited by reference to the date on which the Contract Charter would have naturally come to an end.11 It followed that full effect could be given to the compensatory principle by taking into account losses that had occurred after the end of the Contract Charter and which had flowed from, and been caused by, the Charterers’ repudiatory breach.

Crucially, and as will be addressed further below, the tribunal also found that this was not a case where there was some uncertainty or undue complexity about the vessel’s follow-on fixtures after the end of the Contract Charter.12

11.2.2 The Charterers’ arguments on appeal

The Charterers subsequently obtained permission to appeal the tribunal’s award from Eder J pursuant to s 69 of the Arbitration Act 1996. The question of law the Charterers sought to have determined was phrased as follows:

If a voyage charter is repudiated by Charterers in circumstances where the substitute employment begins after the contract voyage would have begun, and ends after the contract voyage would have ended, should damages be assessed by reference to the vessel’s (actual and hypothetical) earnings up to the end of the contract voyage, or such earnings up to the end of the substitute employment?

In other words, the Charterers asked the court to determine whether the Smith v M’Guire principle was effectively a rule to be applied in cases such as the present, in order to guillotine the relevant period for calculating damages at the date on which the Contract Charter would have come to an end, or whether the tribunal was entitled to look beyond that time in order to calculate Owners’ actual losses pursuant to the compensatory principle. The Charterers made four arguments in support of their position. In summary, they argued that (i) the calculation they contended for gave effect to the compensatory principle; (ii) the tribunal’s award had failed to keep distinct the concepts of ‘loss’ and ‘mitigation’; (iii) the Owners’ calculation of lost profit was too speculative; and (iv) the lost profit under the follow-on fixtures that the Owners sought to recover was too remote. Males J rightly dismissed all these arguments. Each will be addressed in turn. The compensatory principle argument Nature of the compensatory principle

As noted at the outset of this paper, the compensatory principle is the fundamental principle governing the quantum of damages for a breach of contract.13 Where a party sustains loss by reason of a breach of contract, he must – insofar as money can do so – be placed in the same position as if the contract had been performed.14 At its heart, the compensatory principle therefore seeks to reflect, by way of damages, the nature of the bargain the innocent party has lost as a result of the repudiation of the relevant contract.15 However, whilst that principle is relatively easy to express, it is not necessarily easy to apply to the facts of any given case. This is hardly surprising. To give effect to the compensatory principle necessarily requires an appraisal of the nature and extent of the contractual bargain lost by the innocent party and an evaluation of how best to reflect that loss in monetary terms. That appraisal demands a detailed factual inquiry and a comparison between, on the one hand, the actual position the innocent party was placed in as a consequence of the repudiation (along with the steps taken to reasonably mitigate the loss) and, on the other, the more hypothetical proposition of the position the innocent party would have been in had the contract been performed as planned. This type of inquiry is never necessarily straightforward and will very rarely result in identical factual scenarios to which past precedent will neatly apply. Indeed Males J acknowledged as much in his judgment, noting that application of the compensatory principle ‘may prove complicated’16 and quoting Bingham J’s comments in a case decided over 30 years ago to like effect.17

To prove the point, Males J compared how an issue that arose in both The Concordia C18 and ‘The Noel Bay19 was answered differently despite the courts in each case purporting to give effect to the same compensatory principle.20 In The Concordia C, Owners accepted the Charterers’ repudiatory breach of contract on 2 February 1982 and fixed a substitute charter the same day. The vessel then performed a ballast voyage towards the designated loadport under the substitute fixture, and that charter subsequently commenced on 13 February 1982. The repudiated charter would have come to an end on 16 February 1982 if it had been performed, so there was a notional overlap between the repudiated charterparty and the substitute fixture of three days (13–16 February 1982). On the facts of that case, which unlike The MTM Hong Kong did not involve a claim for loss extending beyond the date on which the repudiated charter ended, the Owners were entitled to recover the difference between the profit they would have earned under the repudiated charter, less the pro rata profit earned under the substitute charter up to 16 February.21 One of the other issues that arose was whether the Owners were also entitled to recover their costs of the ballast voyage towards the load port stipulated under the substitute fixture. Bingham J held they were and awarded an additional lump sum in damages for ‘deviation expenses’.

The same issue arose in The Noel Bay; but there the Court of Appeal declined to make the same finding. In that case, the cost of ballasting from Augusta in Italy to Tuapse in Russia in order to perform the substitute fixture was deemed to form part and parcel of the process of earning freight under that fixture.

There is no doubt that both Bingham J in The Concordia C and the Court of Appeal in The Noel Bay were seeking to give effect to the same compensatory principle when determining that issue.22 Nonetheless, due to the inherent difficulties in applying that principle to any given set of facts, it is entirely conceivable that different courts or tribunals can reach different results on exactly the same issue. The Smith v M’Guire measure

In the context of awarding shipowners damages for repudiation of a voyage charterparty, or a time-trip charter, it has long been established that the prima facie measure is that described in Smith v M’Guire:23 freight that would have been earned under the repudiated charterparty (less the expenses of earning it) minus any net profit earned by the vessel under a substitute charter fixed in mitigation of loss. Successive editions of the leading textbooks on the subject have accepted this approach24 and, after a review of the relevant authorities, Males J recognised that this measure was undoubtedly the starting point in calculating damages in a case such as the one before him.25 The Charterers’ argument

The Charterers’ argument before Males J was that the Smith v M’Guire measure already gave effect to the compensatory principle and that there was no good reason to depart from it on the facts of The MTM Hong Kong. The fact the Substitute Charter had extended beyond the anticipated end of the Contract Charter was not atypical and did not constitute grounds on which to depart from the ordinary measure in Smith v M’Guire.

Males J accepted that, in cases where Owners were forced to find substitute employment for a vessel following repudiation of a charter, the substitute fixture typically extends beyond the date on which the repudiated charter would have ended.26 He also accepted that the Smith v M’Guire measure does generally reflect, and give effect to, the compensatory principle.27 However, the relevant point was that the Smith v M’Guire measure only compensated shipowners for the profit lost from being unable to complete the Contract Charter. It did not compensate shipowners for any other loss that might be suffered as a consequence of Charterers’ repudiation of the charterparty; and it would not compensate the Owners in The MTM Hong Kong for their loss of the opportunity to perform the highly profitable follow-on fixtures after the Contract Charter came to an end.28 As such, Males J noted that in order to give full effect to the compensatory principle it might sometimes be necessary to depart from the Smith v M’Guire measure in order to properly put the innocent party in the position they would have been in but for the Charterers’ repudiation.29 Is the Smith v M’Guire measure now irrelevant?

One might come to the view that the Smith v M’Guire measure is irrelevant after The MTM Hong Kong, or that the approach to calculating damages for repudiation of voyage charters has fundamentally changed as a consequence of Males J’s judgment. It would be wrong to do so for at least two reasons.

First, it is important to recognise that Smith v M’Guire was never an invariable rule. Counsel for the Charterers indeed conceded as much during the course of oral submissions before Males J.30 The measure did not, and had never purported to, supplant the ordinary law of damages in English law in cases concerning repudiation of voyage charterparties. It was merely a convenient starting point in assessing how best to compensate the innocent party. Courts and tribunals had thus always been fundamentally concerned with giving effect to the compensatory principle, irrespective of the nature of the contract that had been repudiated. In certain cases that principle would be satisfied by the Smith v M’Guire measure alone.31 In others cases, however, the Smith v M’Guire measure simply could not take account of the full tapestry of loss suffered, or relative benefits obtained, by the shipowner as a consequence of the Charterers’ repudiatory breach of contract. The measure might then be incapable of adequately giving effect to the compensatory principle.

One such case, considered by Males J in his judgment, is The Elbrus.32 That concerned a time-trip charterparty that would ordinarily have ended on 13 May 2005 but for the Charterers’ wrongful termination on 4 April 2005. At the time of that wrongful termination, the vessel was scheduled to complete the charterparty on 13 May 2005, sail to Setúbal in Portugal to drydock and then perform a lucrative fixture with Navimed (‘the Navimed Fixture’).33 The laycan for the Navimed Fixture was 1–20 May 2005. It was accepted at trial that if the original charterparty had been performed as scheduled the vessel would not have drydocked in time and would have missed the laycan under the Navimed Fixture. However, because the original charterparty had come to an end sooner than expected on 4 April 2005, and there was no available market for the vessel off the west coast of Africa at the time of termination, shipowners reasonably decided to sail to Setúbal, drydock and make the laycan for the Navimed Fixture, which they duly did.

Figure 11.2

Figure 11.234

The Charterers brought arbitral proceedings against the shipowners for recovery of sums due on a final balance of account. The shipowners counterclaimed for damages consequent upon Charterers’ repudiation of charterparty and sought to set off these damages against the claim. At the arbitration, shipowners argued that their loss under the repudiated charter had to be assessed, as a matter of law, up to the date when the Elbrus would have been redelivered under that charter, i.e. up to and not later than 13 May 2005. Since the vessel began the Navimed Fixture on 6 May 2005, this meant shipowners would only have to give credit for the seven days overlap during which they earned hire under that substitute charter. This was obviously more favourable to shipowners than having to give credit beyond 13 May 2005, not least because the vessel earned hire under the repudiated charter at a rate of only US$10,800 a day as compared with US$18,100 a day under the Navimed Fixture.

Whilst the tribunal found that shipowners had acted reasonably in mitigation of their loss by deciding to drydock and perform the Navimed fixture, they decided that the Charterers’ repudiation had actually benefited the shipowners because they were able to meet the Navimed fixture and earn a high rate of hire at a time when market rates were softening and in circumstances where they would otherwise have missed it.35 As such, the shipowners had failed to prove that they had suffered any loss and their counterclaim was rejected. On appeal to the High Court, the shipowners maintained that the arbitral tribunal had made an error of law in looking beyond the notional end of the repudiated charterparty. Teare J disagreed and dismissed the appeal. In his view, the shipowners had secured a benefit by the reasonable steps they took to mitigate their loss. That benefit was additional to earning hire between 6 May and 13 May, and was characterised by Teare J as follows:

What was that benefit? … being able to earn under the Navimed fixture earlier than would have been the case. … the benefit was being able to ensure that the Navimed fixture was not lost (there having been a possibility that Navimed would have cancelled …). The tribunal considered that these were alternative ways of expressing the same benefit, though I am not sure that they are.36

According to Teare J, who had regard to both The Concordia C and The Noel Bay by analogy, the tribunal had been perfectly entitled to have regard to matters that took place after the date on which the repudiated charter would have come to an end in order to give effect to the compensatory principle:

Mr Baker submitted that it was wrong in law to take into account the earnings of the vessel after the date on which the vessel would have been notionally redelivered under the original charterparty. As I have already observed the Owners are to be compensated for the contractual right they have lost and therefore what has to be valued is the value in monetary terms of the right to earn hire up to and not beyond the notional date of redelivery, less such benefits as have been obtained by action taken to mitigate that loss. There is no reason in principle to limit the type of benefit which may be taken into account. The approach of Bingham J in The Concordia C shows that when assessing the monetary value of the benefits obtained as a result of action taken to mitigate the Owners’ loss it may be appropriate to reduce the recoverable damages by benefits other than the hire earned on a substitute voyage during the period ending with the notional date of redelivery. That is also shown by the statement of principles by Staughton LJ in The Noel Bay. Where such other benefits have been obtained (eg where the vessel is redelivered after the substitute voyage in a location where she is better placed for future employment) it will be a matter for the fact-finding tribunal to assess the monetary value of such benefits. Depending on the nature of the benefit and the approach taken to valuation it may be necessary to take into account earnings after the notional date of redelivery. Thus the mere fact that such earnings have been taken into account does not necessarily mean that the tribunal has erred in law.37

Teare J then proceeded to mirror comments made by Bingham J in The Concordia C about the complexity that can be involved in accurately giving effect to the compensatory principle. He also reiterated the point that the Smith v M’Guire rule was only a prima facie measure of damages in cases concerned with the repudiation of voyage charters.38 It follows that The Elbrus is therefore a case decided well before The MTM Hong Kong which provides further support for the proposition that courts and tribunals are entitled (a) to depart from the Smith v M’Guire measure of damages in order to properly give effect to the compensatory principle, and (b) to look beyond the notional end of the repudiated charterparty in order to accurately assess a shipowner’s loss.39

The second point is that it is important to appreciate that The MTM Hong Kong was in many respects an unusual case. If the facts had been only slightly different, the Smith v M’Guire measure would, it is suggested, have done justice to the compensatory principle without more.

One of the unusual features of the case was that it took a great deal of time between 2 February and 24 February to find alternative employment in South America. If the Owners had not suffered that misfortune, and a substitute fixture had been found promptly after the Contract Charter was repudiated, Owners may well have been able to perform the intended follow-on fixtures, or equally profitable fixtures from and to the EU/Baltic area.

Figure 11.3

Figure 11.340

In that hypothetical scenario, the shipowner suffers no difference in earnings after the notional end of the Contract Charter since equally profitable Europe/Baltic to US and US to Europe range fixtures could have been obtained within the same period. There would therefore have been no need to look beyond 17 March to adequately compensate the innocent party.

Another unusual feature of The MTM Hong Kong was that it was possible to predict, with a measure of certainty, the vessel’s immediate future employment if the Contract Charter had been performed. The follow-on fixtures that were due to be performed after the Contract Charter were not merely hypothetical voyages that could have been performed if the vessel so happened to find itself in that particular part of the world. They were already planned and, ceteris paribus, due to be performed. The shipowners were not, for example, relying merely on published index rates in Europe or the Baltic on around 17 March 2011 in an attempt to evidence the earnings that might have been achievable after the Contract Charter came to an end by reason of being positioned in Europe. Nor did shipowners need to refer the tribunal to fixtures that had in fact been made on the market around 17 March 2011 with vessels of equivalent tonnage (etc.) for voyages from Europe to the United States (or elsewhere) in an attempt to argue that The MTM Hong Kong could have been fixed for such voyages.41 As Males J recognised, it will not always be the case that a vessel’s immediate future employment can be predicted with such a degree of certainty.42 In cases such as those, the tribunal or court at first instance must be bound to conclude that the claim to recover lost profit from potential follow-on fixtures is, on the balance of probabilities, too speculative to succeed. If the shipowner fails to come to proof in that sense, the Smith v M’Guire measure will then be perfectly adequate to properly compensate him.

As Males J put it:

caution will be necessary in considering such claims, bearing in mind that such losses must be sufficiently proved. If proof of such losses requires complex hypothetical calculations about the future employment of a vessel, the tribunal of fact is likely to conclude that they are too speculative to be recovered. The more complex the calculation, the less likely the claim is to succeed.43

Allied to this unusual feature was another: the Substitute Charter to Rotterdam actually performed and the second of the two follow-on fixtures (from the US to Europe) that would have been performed but for the repudiation both came to an end at roughly the same time.44 In short, the vessel came free in roughly the same geographical location (Europe) at around the same point in time (12 April 2011), both as a matter of fact (i.e. after the Substitute Charter) and in the intended scenario (i.e. if the Contract Charter and follow-on fixtures had been performed). This provided a convenient and easily identifiable cut-off point at which the tribunal could quantify and meaningfully compare the shipowner’s net earnings under the intended follow-on fixtures and under the Substitute Charter. In other words, the tribunal could – insofar as is possible to do – compare like-for-like. The coalescence of that factor with the degree of certainty about the vessel’s follow-on fixtures meant that the tribunal could safely look beyond the notional end of the Contract Charter to determine the shipowner’s actual losses without being accused of engaging in an entirely speculative or hypothetical exercise without a meaningful temporal limit.45 One imagines this is quite an unlikely state of affairs.

The point that arises from the foregoing is that Smith v M’Guire is no less relevant after The MTM Hong Kong than it was before. The Smith v M’Guire measure was never an invariable rule but merely a convenient starting point for determining the damage caused to an innocent party by a repudiatory breach of a voyage charterparty. Once that point of principle is appreciated, it becomes clear that a tribunal will rarely commit an error of law per se in having regard to matters that take place after the end of the repudiated voyage charterparty. The argument from loss and mitigation

The second argument made by the Charterers before Males J was that the arbitral tribunal had failed in its award to keep two matters distinct: (a) the loss the Owners had suffered, and (b) the steps taken by the Owners to mitigate that loss. The reasoning was as follows. The loss suffered by the Owners as a consequence of the Charterers’ repudiation could not be greater than the profit the Owners would have earned from performance of the Contract Charter. In other words, the maximum recoverable damages was the profit that would have been earned if the contract had been performed.46 The calculation of that profit only required one to look at the period during which the Contract Charter would have been performed. In The MTM Hong Kong, there was therefore no reason to look beyond 17 March to calculate the Owners’ maximum recoverable damages. Whilst it might be necessary to look beyond that date to determine the credit that Owners needed to give for earnings made pursuant to a Substitute Charter performed in mitigation of their loss, that was no justification for looking beyond 17 March to calculate the Owners’ maximum recoverable damages. Since ‘loss’ and ‘mitigation’ needed to be kept distinct, the correct approach was to determine the Owners’ profit under the Contract Charter up to 17 March and only look beyond that date to discover what earnings were made by the Owners under the Substitute Charter. Once those two matters were determined, the profit under the Substitute Charter could be apportioned up to the notional end of the Contract Charter (17 March) and deducted from profit earned under the Contract Charter to arrive at a fair measure of compensation.

Part of the thinking behind this argument is that, if the Owners had failed to mitigate their loss entirely and did not enter into the Substitute Charter in South America, but instead sailed directly to the stipulated discharge port under the Contract Charter (Gibraltar/Rotterdam) with a view to performing the two follow-on fixtures, the Owners’ loss would have been calculated by reference to nothing more than the profit earnable under the Contract Charter.

Figure 11.5

Figure 11.5

Another aspect of the Charterers’ thinking was that steps taken in mitigation of loss could not increase one’s loss because the concepts must be kept distinct. As such, even if the substitute fixture entered into in mitigation extended beyond the end of the Contract Charter, that did not justify looking beyond the notional end of the Contract Charter to calculate the loss caused by Charterers’ repudiation.

This argument received short shrift from Males J, who took the view that once the arbitrators recognised that the Owners had suffered two kinds of loss (loss of profit from the Contract Charter and loss of the chance to earn profit under the two follow-on charters), the criticism that the tribunal had failed to keep loss and mitigation distinct was not apposite.47 The tribunal was not confusing mitigation with loss when taking into account events that would have happened after the end of the Contract Charter but for the Charterers’ repudiation. The two follow-on fixtures that would have been performed were a part and parcel of the Owners’ losses, since the Charterers’ repudiation had meant the vessel was not located in Europe at a particular point in time so as to allow her to perform those charters. Having a vessel positioned in a particular geographical location in the world at the point of redelivery is part of the bundle of rights contracted for by shipowners when entering into charterparties.48 There was therefore no good reason, as a matter of principle, to ignore the loss which the Owners had suffered by reason of The MTM Hong Kong being positioned in South America, and not Europe, at the time the Contract Charter came to an end.

For this reason, Males J was right to dismiss the Charterers’ second argument. On a related matter, one notes that the essence of the Charterers’ argument effectively amounted to this: mitigation of loss should not have the effect of increasing loss and the Charterers should not be penalised by way of an increased award for damages because the Owners made the decision to perform a substitute charter when they could equally have sailed to Rotterdam to perform the two follow-on fixtures. Had the argument been framed in those terms expressly, one suspects it would have been dismissed out of hand. Steps taken in mitigation can have the effect of increasing the innocent party’s loss and increasing the sum for which the wrongdoer is liable to pay, provided the steps taken in mitigation were reasonable (which is never a particularly high hurdle for the innocent party, not least since the burden is on the wrongdoer to prove unreasonableness)49 and there is a sufficient causal link between the wrongdoer’s breach of contract and the increased loss.50 The argument of ‘speculative losses’

The third argument made by the Charterers was that, if the Owners were allowed to claim damages for the period after the end of the Contract Charter, the court would be opening the door to claims for speculative losses. The point being made was that, since there was necessarily a hypothetical element involved in taking into account events that could have happened after the notional end of the repudiated charter, and a substitute charter would not necessarily end at the same time or in the same place as the repudiated charter, there was no logical cut-off point for the assessment of the Owners’ loss. The Charterers relied in this connection on Staughton LJ’s comments in The Noel Bay to the effect that there was a danger that, in such a case, ‘one would be involved in calculations to the end of the ship’s working life’.51 It was argued that this was too speculative an exercise to provide a secure foundation for awarding damages.52 The better course was to use the convenient cut-off point for assessing loss provided by the Smith v M’Guire measure, i.e. the notional end of the Contract Charter.

It will be clear from the foregoing that this argument was bound to fail. The tribunal had made clear that this was an unusual case where it could predict with a considerable measure of certainty what the vessel would have done but for the Charterers’ repudiation. Males J evaluated the Charterers’ argument in the following terms:

In some cases this would probably be a valid criticism, not least if the vessel’s notional future employment if the contract had been performed was very different from what actually happened to her or was too uncertain to enable findings to be made. The uncertainty and unpredictability of maritime trade would make a valid comparison difficult. In the present case, however, that problem does not arise. The arbitrators found that it was possible to make firm findings as to what this particular 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 the actual and notional performance converged. Thus, after performing the [follow-on fixtures], the vessel would have been back in Europe at about the same time as she did in fact complete discharge under the [Substitute Charter]. There was, therefore, no need for calculations extending into the distant future, let alone to the end of the vessel’s working life. The only calculations necessary concerned events about which the arbitrators were able to make findings with (in their words) ‘some degree of certainty’.53

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