Case gives clarity on the incorporation of standard terms. Credit: 3D Animation Production Company, Pixabay

Judgment gives clarity on damages for late redelivery of vessels under a time charter  

 

By Anna Fomina and Alex Andreou, HFW 

 

In Hapag-Lloyd AG v Skyros Maritime Corporation and Agios Minas Shipping Company, the Court of Appeal has clarified the law on damages in relation to a claimant’s ability to recover market loss in circumstances where the claimant’s contractual arrangements with third parties mean that it would not have been able to take advantage of the market. The judgment deals with damages for late redelivery of vessels under a time charter but will be relevant to other claims for market loss, for example for early redelivery and in carriage of goods and sale of goods disputes. 

The dispute arose from two materially identical time charterparties for the vessels Skyros and Agios Minas, both owned by the Defendants (the owner) and chartered to Hapag-Lloyd AG (the charterer). Under the charterparties, the vessels were to be redelivered at the end of May 2021. 

Before redelivery, the owner had entered into memoranda of agreement (MOAs) to sell both vessels to third-party buyers. The MOAs expressly prohibited the owner from entering into any further charter fixtures after the expiry of the existing charters. As a result, even if the vessels had been redelivered on time, the owner would not have been able to recharter them or earn further hire. 

Both vessels were returned late and the charterer paid hire at the charterparty rates for the overrun period (of two and seven days respectively). However, at the time of late redelivery, the market rate for chartering similar vessels had risen substantially. 

It was common ground between the parties both that the charterer was in breach and that, even if redelivered on time, the owner would not have rechartered the vessels but would have delivered them to the buyer under the MOAs.

Arbitration and preliminary issue

The owner commenced arbitration, seeking damages for late redelivery calculated as the difference between the charter rate and the higher market rate for the period of the overrun—a measure long considered orthodox. The arbitral tribunal was asked to determine a preliminary issue as to whether owner was in principle entitled to recover these substantial damages. The charterer argued that owner could only recover nominal damages, according to the compensatory principle that they should be put in the same position as if the contract had been performed.

The owner argued that the MOAs should be disregarded and the normal measure of damages should be applied, even though they would not have rechartered the vessels. The tribunal agreed. Their primary reasoning was that there was an implied request by the charterer for services outside the scope of the charterparty (namely, use of the vessel during the overrun), with an implied agreement to pay for this at the market rate (“quantum meruit“). Alternatively, they held that the owner was entitled to “user damages” (compensation for loss of the right to use the vessels, regardless of whether they would have used them). As a fallback, they considered the owner might be entitled to “negotiating damages” (what would have been agreed in a hypothetical negotiation for the overrun period). The charterer appealed.

 

Commercial Court judgment

The Commercial Court overturned the tribunal’s award, holding that the owner was entitled only to nominal damages. It held that the quantum meruit principle did not apply as the vessel’s services were provided under the charterparties and hire was paid at the contract rate. It also rejected the owner’s claims for user damages or negotiating damages. The focus of the Commercial Court decision was on the compensatory principle in damages, including the principles of remoteness and collateral matters (“res inter alios acta”).

The Court held that since the owner had lost the opportunity to benefit from higher market rates due to their sale commitments, only nominal damages were recoverable.

It carried out a detailed analysis of the judgments given in The Achilleas and in disputes arising from contracts for the sale and purchase of goods. The Court concluded that a claimant’s arrangements with third parties cannot be taken into account to allow it to recover more than the market loss (unless those arrangements were in contemplation of the parties at the time when the contract was concluded). However, where the reverse position was true, then such arrangements must be taken into account to reduce the claim below the market rate even if they were not in contemplation of the parties at the time of the main contract, as long as they relate to the same specific goods. In this case, the MOAs were concluded in relation to the same vessels as those chartered by the charterer. The MOAs prevented the owner from entering the market and earning hire at the market rate. Consequently, the owner could not recover the normal measure of damages from the charterer. 

The owner was granted leave to appeal, on whether the MOAs must be disregarded when assessing damages and on the principle of user damages.

 

Court of Appeal judgment

The Court of Appeal reversed the Commercial Court’s decision on whether the MOAs should be taken into account when assessing damages.

The Court of Appeal identified two questions among many to answer when assessing damages: (a) how much an innocent party has lost due to a breach and (b) how much of their loss is recoverable. The first question requires an assessment of the position the innocent party would be in but for the breach and English law permits the innocent party to disregard some factual matters from its assessment, on the basis that they are collateral and arise independently of the breach of contract. The second question requires an assessment of whether the loss was in reasonable contemplation of the parties, remoteness of loss. The Court of Appeal held that the actual steps taken by a shipowner after redelivery of a vessel were collateral issues which therefore do not have to be taken into account when assessing loss under the first question.

In reaching this conclusion, the Court of Appeal considered the practitioner’s textbooks on damages for late redelivery as well as the House of Lords decision in The Achilleas.  

The practitioner’s textbooks give no indication that damages should be recovered based on whether the shipowner should have reasonably re-entered the market after redelivery. The Court of Appeal agreed with this approach because although it is common for a shipowner to do so, it is not always the case. A shipowner may dry dock or re-position their vessel, for example. These are foreseeable operational or commercial options but it has never been suggested they should be taken into account when assessing damages.

In The Achilleas, the key issue following late redelivery was whether the shipowner should be awarded actual damages (for a cancelled follow-on fixture) or the ordinary measure of damages (market vs contract rate for the overrun period). The House of Lords held that the shipowner was only entitled to recover the ordinary measure of damages. This did not require knowledge of the shipowner’s arrangements for the next charter, which was regarded by the market as a collateral arrangement.

The Court of Appeal therefore concluded that in this case, the existence of the MOAs and the fact that the owner could not go into the market was a collateral matter, to be disregarded for the purpose of assessing damages.

The normal measure of damages for late redelivery applied, regardless of whether the owner would or could have rechartered the vessels.

The Court of Appeal noted: “The normal measure may either over- or under-compensate the Owners in some cases.” Nevertheless, the Court of Appeal strongly preferred this approach to promote certainty and avoid the need for intrusive inquiries into the owner’s future plans.

The Court of Appeal also noted that their approach was consistent with the decision in The Doric Valour, where substantial damages at the market rate were awarded to a bill of lading holder for delivery of damaged goods, even though the bill of lading holder had been paid the full price under their sale contract, since payment under the sale contract was a collateral matter.

Despite having heard submissions on sale of goods and carriage of goods cases as to when a claimant’s sub-contracts should be taken into account for the purposes of assessing damages for non-delivery, late delivery and delivery of damaged goods, the Court of Appeal did not discuss these, declaring them “potentially deep waters which it is unnecessary to explore in this appeal.” 

Lastly, although the owner’s claim had succeeded on the grounds of assessment of damages, the Court of Appeal nevertheless considered the owner’s claim on user damages. It held that this would have been rejected, because late redelivery under a time charter was not comparable to the invasion of property rights on which the principle is founded. 

 

Our comments

This is a significant decision and provides market clarity on assessment of damages in charterparty claims for both early and late redelivery. As the Court of Appeal itself has indicated, it is a decision which should stop unnecessary arbitration. It makes clear that charterers cannot look behind contractual arrangements and enquire what the shipowner actually did. Instead, a mechanical assessment should be made based on the prevailing market rate, even though this may appear to some to be a departure from the compensatory principle.

For charterers, care should be taken both when giving redelivery notices and when giving orders for final voyages, particularly in rising or volatile markets.

This judgment is a reminder that paying the charterparty rate for early or late redelivery periods will not offer protection from a claim for damages at market rate.

More broadly, the judicial approach to assessing loss using the prevailing market rate as the ordinary measure of loss is similar in charterparty, carriage of goods and sale of goods disputes. Whilst the Court of Appeal declined to enter the debate about the assessment of loss in sale of goods contracts where there are sub-contracts in place, this judgment gives an insight into its mindset, which was to emphasise that certainty and consistency in commercial dealings remain cornerstones of English law and are to be prioritised, even where on occasion, this leads to higher or lower levels of compensation.

Anna Fomina is a partner, and Alex Andreou is a senior associate at HFW. Research for this article was conducted by trainee solicitor Anson Cheung.