UK: "MTM HONG KONG" – New Ruling On The Calculation Of Damages Following The Repudiation Of A Charterparty

Last Updated: 30 November 2015
Article by Marcia Perucca

In the "MTM HONG KONG", the Commercial Court upheld an award of damages to a shipowner that included losses arising from the loss of the benefit of two voyages that the ship would have undertaken but for the charterer's repudiation.

Charterers Louis Dreyfus Commodities Suisse SA had chartered the MTM HONG KONG from MT Maritime Management BV to carry a cargo from South America to the Gibraltar-Rotterdam area. The vessel's previous employment had taken her to Boma, in the Democratic Republic of Congo, where she had grounded. This led to delay and exchanges between the parties, with owners accepting the charterers' latest message as a repudiation, bringing the charter to an end.

After discharging at Boma, the vessel proceeded to South America on 19 January 2011. The charter came to an end on 21 January 2011. The vessel continued to South America, where owners believed they would find substitute business, and arrived in Uruguay on 2 February 2011. However, the vessel was only fixed on 24 February 2011 for a voyage from Argentina to Rotterdam ("the substitute fixture"), where it completed discharge on 12 April 2011. If the original charter had been performed, the voyage would have completed on 17 March. The vessel would then have carried a cargo from the Baltic to the United States, followed by a cargo from the United States to Europe.

The arbitrators held that the charterers had repudiated the charter and that the owners' decision to direct the vessel to South America and to wait there until the substitute fixture could be performed was reasonable. They awarded damages consisting of the difference between (a) the profit which the vessel would have earned if not only the contract voyage but also the next two voyages had been performed and (b) the substitute fixture. Charterers appealed on quantum under section 69 of the Arbitration Act 1996.

The Commercial Court decision

The question of law before the Commercial Court was:

"If a voyage charter is repudiated by charterers in circumstances where the substitute employment begins after the contract voyage would have begun, and ends after the contract voyage would have ended, should damages be assessed by reference to the vessel's (actual or hypothetical) earnings up to the end of the contract voyage, or such earnings up to the end of the substitute employment?"

Males J reviewed the authorities on damages for repudiation of a voyage charter (Smith v M'Guire, The Concordia, The Noel Bay, The Elbrus, as well as textbooks Scrutton on Charterparties and Cooke on Voyage Charters) and on remoteness and assumption of responsibility (Hadley v Baxendale, Siemens Building Technologies Ltd v Supershield Ltd, The Achilleas, John Grimes Partinership Ltd v Gubbins and The Sylvia) and said that he did not think it was possible to give an answer to the above question which would hold good in all circumstances. Rather, the question must be answered in accordance with the following principles applicable in the present case:

  • The fundamental principle is the compensatory principle - the innocent party is so far as possible to be placed in the same financial position as if the contract had been performed
  • Smith v M'Guire provided the prima facie measure of damages – the starting point was the amount of freight which the ship would have earned if the charter had been performed, and from this amount there should be deducted the expenses which would have been incurred in earning it together with what the ship earned (if anything) during the period which would have been occupied in performing the voyage
  • On appropriate facts, it may be necessary to depart from the above measure to give full effect to the compensatory principle
  • The net freight and demurrage represent a cap on the owners' damages for loss of the profit which would have been obtained from performance of the repudiated charter
  • The position is different if the owner suffers a different kind of loss, that is to say something different from the loss of the profit described above. In such a case, there is in general no reason why such loss should not be recoverable subject to the principles of causation, mitigation and remoteness. On the contrary, failure to award such damages would be contrary to the compensatory principle
  • Such losses must be sufficiently proved. If this required complex hypothetical calculations about the future employment of a vessel, the likely conclusion will be that such losses are too speculative to be recovered
  • An example of such a different kind of loss arises when a vessel is redelivered to an owner in the wrong location or when a substitute fixture is completed at a different discharge port. The ability of a vessel to earn freight will depend to a large extent on the vessel being in a place where appropriate cargoes may be had. The package of rights for which an owner contracts when concluding a charter includes not only the freight but also the right to have the vessel back again and ready for her next employment. The Smith v M'Guire measure of damages does not address the latter

Applying the above principles to the present case, Males J said that the consequence of the charterers' repudiation was twofold: they had to make do with the lesser freight earned under the substitute fixture, but they also suffered a delay in repositioning the vessel in Europe and thereby lost the benefit of the two transatlantic voyages which the vessel would have been able to perform. There was no reason in law why damages for the consequence of the vessel's delay in returning to the North Atlantic market should not be awarded, since the arbitrators had found that the loss was suffered by owners, that it was caused by the charterers' repudiation, and that there was no failure to mitigate. There was no error of law in the arbitrators' reasoning.

Comment

Males J's decision provides an in-depth review of the authorities and also an interesting reasoning. When addressing the last principle set out above, Males J said that these were "important commercial considerations which the law of damages needs to recognise". This appears to have been the basis for his conclusion. In a postscript, he emphasised that he should not be taken as deciding that on similar facts an owner's claim for loss of future employment would always succeed. He said three factors had been important for owners to succeed in this case: 1) the finding that owners acted reasonably in sending the vessel to South America, because the lack of immediate employment was unexpected; 2) there was no suggestion in the arbitration that the losses were too remote; and 3) it was possible to predict the vessel's immediate future employment if the contract had been performed.

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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