158. Transfield Shipping Inc v Mercator Shipping Inc (The “Achilleas”) [2007] 1 Lloyd’s Rep 19; [2008] 3 WLR 345; [2009] 1 AC 61

Redelivery – owners not entitled to recover loss of profits for late redelivery.

The facts

The vessel was let on an amended NYPE form for an extended period.

At about the time when notices of redelivery were given by the charterers, the owners entered into a subsequent fixture with a third party at a rate substantially higher than the rate specified in the charter.

Due to the late redelivery, the owners were compelled to agree upon a revised laycan date with the third party at a reduced rate of hire.

The owners accordingly suffered a loss of profits on the subsequent fixture which they sought to recover from the charterers.

The charterers argued that the usual measure of damages for late delivery was the difference between the charter rate and the market rate calculated over the period of delay. Where the market rate was not above the charter rate, the measure of damages was simply the charter rate calculated over the period of delay.

Findings

Arbitrators awarded loss of profits. The Commercial Court, Christopher Clarke J, confirmed the arbitrators’ award. He reasoned that upon a modern approach to the measure of damages as set out in Hadley v Baxendale (with the gloss in The Heron II) damages were recoverable if they were foreseen as a reasonable possibility.

In the Court of Appeal (Rix LJ) the judgment in the Commercial Court was confirmed.

In the House of Lords (speeches by Lords Hoffmann, Rodger, Walker, Hope and Baroness Hale) the owners suffered a reverse with all five Lords finding in favour of the charterers. Lord Hoffmann’s reason was that the parties must have been taken to have contracted on the basis of the traditional measure of damages. The other Lords found on a narrower basis that damage suffered was not reasonably foreseeable.

Commentary

Criticism of the House of Lords’ decision is as follows:

1. The issue of special damages in redelivery cases had never been squarely up for decision and was therefore open to be decided on principle as opposed to precedent.

2. There was no evidence of the market expectations of the parties and therefore no factual basis for the Lord Hoffmann’s reasoning.

3. The arbitrators’ decision on the factual issue of foreseeability should not have been disturbed.

Lord Hoffmann’s emphasis on the expectations of the parties to a contract in the event of breach subverts the principle of pacta sunt servanda. Contracts are entered with expectations of fulfilment, not breach.

“If thought corrupts language, language also corrupts thought” – George Orwell.

Lord Hoffmann, without almost any reflection, sweeps away over 150 years of jurisprudence.

Restitutio in integrum,  as the foremost remedy for breach was laid down by Baron Parke (Lord Wensleydale)  in Robinson v Harman.

A study of Robinson and Hadley v Baxendale shows that this remedy derives from the civil law.

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