UK: The Relevance Of A Revival Of The Market To The Assessment Of Damages

Last Updated: 6 October 2011
Article by Kevin Cooper and Victoria Waite

Glory Wealth Shipping Pte Limited v. Korea Line Corporation (M/V Wren) [2011] EWHC 1819 (Comm)

Following the collapse of the shipping market in 2008, there were many instances of vessels under time charter being redelivered early by charterers who found themselves tied in to a financially unprofitable long-term charter. In those cases, there was often no serious issue that the charterers were liable for repudiatory breach of charter. The more contentious issue was usually the measure of damages recoverable by the owners for the charterers' breach.

The basic principle for assessing contractual damages in English law is that the innocent party should be put in the same financial position as it would have been in if the contract had been performed. The innocent party is however expected to minimise its losses so far as reasonably possible. So where a charterer repudiates a charterparty by redelivering early, the owner is expected to mitigate his damages by going into the market, where there is an available market, and fixing a time charter for a period equivalent to the balance period of the repudiated charter. The owner is then, in principle, entitled to recover the difference between the charter and market rates. See, for example, the Elena d'Amico [1980] 1 LLR 75, where the court also held that if the innocent party decided not to enter into a comparable replacement charter but preferred instead to take its chances on the spot market, then its resulting gains or losses need not be taken into account when damages were being calculated because they were not deemed to be a direct result of the breach. The advantage of this market-based approach is that it allows damages to be quantified relatively quickly after a repudiatory breach so that the dispute can be resolved within a reasonable time.

Where there is no available market rate, as was the case when the market collapsed in 2008, then damages will be assessed on the basis of the owners' actual losses because there is no "like-for-like" basis for calculating the losses. What happens if there is no available market at the time of the termination of the charter but the market subsequently revives at a later stage when there is still a considerable period of unexpired time under the original charter? That was the primary issue in the M/V Wren. In that case, the court held that the owners' damages should nonetheless be calculated on the basis of their actual losses for the whole of the balance charter period, even if a similar replacement charter became available some months after the termination.

The background facts

In the M/V Wren, the charter period was 36 – 38 months and the daily charter rate was US$39,800. The charterers redelivered the vessel only five months into the charter. It was common ground that there was no available market for a similar charter at the time of termination in November 2008. Instead, the owners entered into a voyage charter on the spot market and suffered considerable losses as a result of the significant fall in the market. The market revived somewhat around eight months later, when there were still around two years left unexpired under the original charter. The owners did not take this opportunity to fix a "like-for-like" charter when the market revived but continued to trade on the spot market, which was picking up at that stage and was therefore going to be more profitable for them. They nonetheless sought to claim their losses from the charterers on the basis of the losses they had made on the spot market before the market revived and thereafter the market rate for a "like-for-like" charter. The owners' reasoning was in essence that, once the market revived, actual losses were to be put to one side and damages were to be measured by reference to market rates for a comparable replacement two-year time charter.

The arbitrators agreed that the owners could claim damages on this basis. The charterers appealed to the court on the ground that the available market measure could only be taken into account when assessing damages where there was an available market at the time of termination. Otherwise, they argued, the owners would make a windfall profit on a rising market rather than be compensated for their losses, which was not what was intended by an award of damages.

The Commercial Court decision

Mr Justice Blair reviewed the relevant case-law but referred in particular to the judgment in M/V Kildare [2010] EWHC 903 (Comm), which had come too late to be cited to the arbitrators in this case. The litigation in the M/V Kildare also arose out of the market collapse in 2008 and related to the repudiatory breach of a consecutive voyage charterparty ("CVC") by the charterers with almost four and a half years left to run. In that case, Mr Justice Steel found that there was no available market on which the vessel could have been fixed for a similar period and on equivalent terms. It was common ground, however, that an available market emerged subsequently, when there were still three and a half years unexpired under the original CVC. Mr Justice Steel distinguished the Elena d'Amico which, he said, was premised on the existence of an available market at the time of breach / termination. Where there was no available market at that time, however, the judge said that there was no basis for requiring the owners to go back to the term market at the end of every spot voyage, or to disregard short time charters in case the market for longer charters emerges in the meantime. Mr Justice Steel added that where a term market emerges later on for the outstanding period of the charter, it did not follow that a decision not to take advantage of that emerging market was a business decision independent of the charterers' wrongful termination.

Mr Justice Blair agreed with this approach and allowed the charterers' appeal. He then remitted the matter back to the arbitrators so they could assess the actual losses sustained by the owners.

Comment

The advantage of having a cut-off period for assessing an innocent party's damages by reference to the time of breach / termination is that quantum can be established early on. This does not mean that a subsequent revival of the market becomes irrelevant, however, because it may still be a factor to take into account in deciding whether the owners have reasonably mitigated their losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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