UK: War Reduced Damages For Wrongful Early Redelivery

Last Updated: 14 August 2008
Article by Richard Mabane

Fairness at the expense of certainty? Richard Mabane discusses the House of Lords' decision in the Golden Victory

Damages due from charterers for wrongful early redelivery were payable only up to the point where, after the outbreak of the Gulf War in March 2003, the charter would have been cancelled pursuant to an express War Clause, according to the finding of the House of Lords in a judgment of March 28.

On December 14, 2001, the 300,000 dwt crude oil tanker Golden Victory was redelivered three years into a seven-year charter on the Shelltime 4 form.

In London arbitration, the arbitrator found that damages were payable for wrongful redelivery, but only up to the outbreak of the Gulf War, when (he found) the charterers would have cancelled.

After unsuccessful appeals by the owners at first instance and in the Court of Appeal, the matter came before the House of Lords in January 2007.

The owners argued for strict application of what has been called the "breach date" or "available market" rule (The Elena d'Amico [1980] 1 Lloyd's Rep. 75; the Wave [1981] 1 Lloyd's Rep. 521).

That approach requires that, provided there was — at, or shortly after, termination — an "available market" for what has been lost as a result of the breach, the resulting claim is calculated by reference to the price which can be obtained for it in that market at that time. This reflects the expectation that the innocent party, acting reasonably, will promptly go out into the market to mitigate its loss, in the case of early re-delivery by obtaining a substitute fixture on substantially the same terms as that which has been lost.

On this basis, the owners argued, no attention should be paid to later events unless inevitable or "pre-destined" at the time of termination.

This approach, they said, had the advantages of certainty and predictability — qualities long prized in English law — and also finality, in as much as the parties could ascertain the amount of the claim at an early stage, which, in turn, could only promote an early settlement.

The charterers, whilst accepting that the measure of loss (here, the applicable substitute hire rate) crystallised around the time of termination, argued that the position was not, at that stage, final as to the period for which damages could be claimed. The court, they said, could in respect of that issue have regard to subsequent events occurring between termination and the assessment of damages. This, they asserted, was in keeping with the "compensatory principle", whereby damages are aimed (insofar as possible by monetary payment) at putting the innocent party in the position it would have been in had the contract been performed.

The majority (Lords Carswell, Scott and Brown) favoured the charterers' approach as giving full effect to the compensatory principle which, they held, should in these circumstances prevail over any competing criteria of certainty, predictability and finality.

Whilst recognising that the final assessment could be deliberately delayed in some cases, they pointed to the existence of means to prevent this.

In a strong dissenting judgment, Lord Bingham (Lord Walker also dissenting) referred to the fact that contracts were made to be performed and that, if the charterers had promptly honoured their secondary obligation to pay damages, they would have done so without any reduction based on the later Gulf War.

The owners, he said, were entitled to be compensated for the value of what they had lost at the time it had been lost, and there was no clear authority for the charterers' approach in the context of commercial contracts such as charterparties (as opposed to other areas of law, such as claims in tort for personal injury).

On one view, the value of the contractual rights lost by the owners can be seen as properly valued at the time of termination and entirely unaffected by the War Clause. Had the vessel been sold with the charter attached to it shortly before termination, the commercial value of the charter would most likely have been calculated on the basis of it being performed in full — reflecting the fact that war between either the UK or the US and Iraq was by no means considered likely.

There is also a strong undercurrent in English law which (for good commercial reasons) encourages certainty, predictability and finality, and being able promptly to calculate the amount of the claim can only facilitate early settlement.

However, as Lord Mance had stated in the Court of Appeal, the charter always had inherent in it the uncertainty involved in the War Clause, and that was part of the package of contractual rights which the owners had lost.

The uncertainty of future events is also well established in English law as a means of reducing damages for the future, for example where damages assessed by way of a percentage for "loss of chance". On that basis, even the breach date approach need not ignore the effect of future events on the value of the contract.

Nor are damages necessarily always based on the position at, or very shortly after, termination: indeed, the owners here had argued (despite asserting an "available market") for a market rate calculated at a date several months after termination, claiming for the intervening period damages based on spot market rates.

It is also not unusual for the quantification of damages to be deferred, where appropriate, to achieve an accurate and fair result, as indeed happened here for an additional claim by the owners for loss of a share of profits, which the charter provided would be payable where the market rate for the vessel went above a certain base figure.

Nor does the approach adopted by the majority necessarily favour the party in breach, and the "breach date" rule can itself be harsh in its results. In this case, for example, had war seemed probable at the time of termination, damages assessed on that basis at that time might have been reduced to reflect the risk, only for war to have been averted at the last moment. Would that still have been the right approach if damages had been assessed after the threat of war had abated?

It is also (rightly or wrongly) the approach of the English courts to favour the defendant in certain related circumstances, as for example in assuming, where there would have been optional modes of post-termination performance, that the method most favourable to the defendant would have been adopted (however unlikely), reducing the resultant claim accordingly (The World Navigator [1991] 2 Lloyd's Rep. 23 (C.A.)).

While achieving certainty, that is a controversial area of English law, and in this scenario, provided the necessary event has occurred by the time damages are assessed, exercise of the option to cancel might well be presumed in favour of the defendant.

Many will consider that an unfair result, but even proof on a "balance of probabilities" (which it appears may have been the approach of the arbitrator here) could be harsh in its results. For example, an innocent claimant might be deprived of further damages simply because the party in breach had demonstrated a 51% chance that it would have cancelled.

On the other hand, the comments of the majority (in particular, Lord Brown) in respect of possible events after the assessment of damages point towards a "loss of chance" approach permitting a percentage reduction to reflect any more than speculative chance of a future event happening.

Some may see this as creating a field day for defendants, since there may be many future events with a real chance of occurring over the course of a long-term contract.

Indeed, the difficulties at the heart of the case are likely to be most acute in relation to long-term contracts terminated at an early stage. In particular, the temptation to delay the assessment of damages is likely to be greater; and, whilst the majority specifically approved the "date of breach" rule as a means of ascertaining the market rate to apply in calculating damages, it would be a natural extension of their approach to take account of market movements since termination, for example in so far as these have benefited the innocent party because it did not mitigate by seeking a substitute contract on similar terms, such as where an owner has chartered out on a (rising) spot market rather than concluding another long-term charter before the market rose.

There may also be issues as to whether an "available market" exists for long-term contracts. Some commentators, indeed, may not recognise the existence of such a market for seven-year charters, often negotiated months in advance and linked to the owners' financing arrangements.

Whatever the position may be, this latest judgment still leaves much uncertainty in an important area of the law, and doubtless there will be strong views in the shipping industry as to whether the majority of the Law Lords got it right.

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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