Voyage charters – an update on the assessment of damages following repudiatory breach by charterers

Publication March 2016

Much has been written in recent years concerning the quantification of damages for breach of a time charter. Little has, by comparison, been written concerning the equally important quantification of damages for breach of voyage charters. The recent decision of Louis Dreyfus Commodities Suisse SA v MT Maritime Management BV, “MTM Hong Kong” [2015] EWHC 2505 (Comm) provides both a welcome addition to the body of law addressing this important point and much needed clarification of the damages available to an owner of a ship on voyage charter, following breach by a charterer.

The facts

The ship MTM Hong Kong was chartered on an amended Vegoil form for the carriage of crude/refined vegoil from one or more safe ports South America to one or more safe ports Gibraltar-Rotterdam. Prior to this charter being performed, the ship suffered a grounding in the River Congo which caused delay, the consequences of which led to the owners accepting the charterers’ repudiatory breach which brought the charter to an end.

The owners continued to direct the ship to South America in aid of a substitute charter. After a lengthy delay, a substitute charter was concluded from Argentina to Rotterdam. The substitute charter was performed and the ship completed discharge on 12 April 2011 in Rotterdam.

If the original voyage charter had been performed, the voyage would have taken 43.6 days, completing on 17 March 2011. The ship would then have carried a cargo of urea ammonium nitrate (UAN) from the Baltic to the United States, followed by a chemical cargo from the United States to Europe.

Owners’ claim

The owners claimed damages consisting of the difference between:

  1. the profit which the ship would have earned if not only the contract voyage but also the next two voyages (UAN to the United States and a chemical cargo back to Europe) had been performed; and
  2. the profit actually earned on the substitute charter to Europe.

The charterers disputed this method of calculating the owners' damages, contending that it was wrong (as a matter of law) to take into account the position up to the end of the substitute fixture which had terminated long after the charter voyage itself would have terminated. The charterers submitted that the correct approach was to apportion the earnings under the substitute charter, so as to reflect the amount earned up to the date on which performance of the voyage charter between the parties would have been completed.

Arbitration award

The arbitrators agreed with the owners. In doing so, they determined that the loss claimed had actually been suffered by the owners, that damages were to be awarded to compensate the owners and that there was no rule of law which prevented the full application of the compensatory principle by limiting damages by reference to the period when the contract voyage would have come to an end. The charterers appealed, contending that the arbitrators, in failing to award damages in accordance with the compensatory principle set out in Smith v M'Guire (1858) 3 H & N 554, made an error of law. They appealed pursuant to section 69 of the Arbitration Act 1996.

The authorities on damages for repudiation of a voyage charter

In Smith v M'Guire, the court directed the measure of damages in the following terms:

… the 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.1

The Court in MTM Hong Kong stated that the Smith v M'Guire measure represents the prima facie measure of damages for loss of the profit which would have been obtained by a shipowner from performance of the repudiated charter. It reflects the compensatory principle and the related principles of causation and mitigation. In most cases it would not be necessary (and wrong) to look beyond the damages resulting from the application of the prima facie measure. The Court, however, reasoned that the Smith v M'Guire measure is only the prima facie measure and, under appropriate facts, it may be necessary to depart from it in order to give full effect to the compensatory principle (see The Elbrus [2010] 2 Lloyd's Rep 315). The Court went on, however, to note that:

It is hard to imagine circumstances where the owners’ 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.2

The position is different if the owner suffers a different kind of loss or, in other words, a loss which is something different from loss of the profit which would have been obtained from performance of the repudiated charter. In such a case there is no general reason why such a different loss should not be recoverable in damages in addition to damages for loss of the profit from performing the charter subject to the principles of causation, mitigation and remoteness. Failure to consider such a loss would, the Court reasoned, be contradictory to the compensatory principle.

In applying the principles to the facts the Court found:

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. The consequence of the charterers' repudiation was therefore twofold. The owners lost the charter freight and had to make do with the lesser freight earned under the Glencore charter. But they also suffered a delay in repositioning the vessel in Europe and thereby lost the benefit of the two transatlantic voyages which, on the arbitrators' findings, the vessel would have been able to perform in about the same time as was taken up by actual performance of the Glencore fixture. These were two distinct heads of loss, both of which were caused by the charterers' breach.3

On this basis, the Court found that there was no reason why damages for the consequence of the ship’s delay in returning to the North Atlantic market should not be awarded in addition to the loss of the profit which would have been earned from performing the contract voyage.

Specific criticisms by charterers

The following four specific criticisms were made by the charterers and responded to by the Court:

  1. The arbitrators misapplied the compensatory principle. To this the Court responded:

    … the Smith v M'Guire measure does not represent compensation for losses other than loss of the profit which would have been earned from performing the contract voyage. It does not represent compensation for losses such as those which the owners sustained here.4

  2. The arbitrators’ reasoning failed to keep distinct the loss which the owners had suffered and the steps taken by them in mitigation. To this the Court responded:

    Once the two kinds of loss for which the arbitrators were awarding compensation are recognised, it is apparent that (broadly speaking) the losses suffered consist of the net freight which would have been earned under both the contract voyage and the two follow-on transatlantic voyages, against which credit needs to be given for the net freight earned in mitigation under the Glencore charter.5

  3. In extending the calculation of loss beyond the date when the contract voyage would have terminated, the arbitrators became involved in a comparison of what the ship actually did and what she would have done if the contract had been performed which was too speculative to provide a secure foundation for the award of damages. To this the Court responded:

    In some cases this would probably be a valid criticism … The arbitrators found that it was possible to make firm findings 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 the actual and notional performance converged. Thus, after performing the UAN and chemical cargo voyages, the vessel would have been back in Europe at about the same time as she did in fact complete discharge under the Glencore fixture. There was, therefore, no need for calculations extending into the distant future, let alone to the end of the vessel's working life.6

  4. The award was contrary to the allocation of responsibility under a voyage charter where charterers did not accept responsibility for losses after the period when the contract voyage would have been completed. To this the Court responded:

    In principle, loss which is caused by the breach and which is not too remote, i.e. which is within the reasonable contemplation of the parties, should normally be recoverable. There is nothing in the award to suggest that this normal position should not apply here.7

    Similarly, if the argument is put in terms of remoteness, there are no findings to suggest that the loss suffered was beyond the reasonable contemplation of the parties. This is not surprising as there was no issue of remoteness in the arbitration, but the onus was on the charterers at least to raise the issue.8

Conclusion

The decision in MTM Hong Kong has reinforced the principle set out in Smith v M'Guire, while acknowledging the deficiency in that it limits the assessment of damages when the compensation principle can be expected to extend further. In this, the Court has helpfully split damages between the two heads of loss which an owner can (potentially) recover, being (i) those recoverable under Smith v M'Guire, and (ii) those recoverable as consequential losses and which extend beyond the end of the charter period.

While the decision is a helpful clarification on the jurisprudence governing recovery of damages for termination of voyage charterers, it is nonetheless very fact dependent and consequently will continue to cloud certainty governing the assessment of damages for breach. The decision does not, however, disturb the approach the English courts will take when applying the compensatory principle, as the leading case in this area remains the Golden Victory [2007] UKHL 12.


Footnotes

1

"MTM Hong Kong” [2015] EWHC 2505 (Comm), para. 24.  

2

"MTM Hong Kong” [2015] EWHC 2505 (Comm), para. 60.

3

"MTM Hong Kong” [2015] EWHC 2505 (Comm), para. 65.

4

"MTM Hong Kong” [2015] EWHC 2505 (Comm), para. 69.

5

"MTM Hong Kong” [2015] EWHC 2505 (Comm), para. 70.

6

"MTM Hong Kong” [2015] EWHC 2505 (Comm), para. 71.

7

"MTM Hong Kong” [2015] EWHC 2505 (Comm), para. 74.

8

"MTM Hong Kong” [2015] EWHC 2505 (Comm), para. 75.


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