House of Lords
Published July 10, 2008
Transfield Shipping Inc v Mercator Shipping Inc
Before Lord Hoffmann, Lord Hope of Craighead, Lord Rodger of Earlsferry, Lord Walker of Gestingthorpe and Baroness Hale of Richmond
Speeches July 9, 2008

Charterers were not liable for a shipowner’s loss of profits on a subsequent fixture resulting from the late redelivery of the vessel.

The House of Lords so held by in allowing an appeal by charterers, Transfield Shipping Inc, from the order of the Court of Appeal (Lord Justice Ward, Lord Justice Tuckey and Lord Justice Rix) ([2007] 2 Lloyd’s Rep 555) affirming the decision of Mr Justice Christopher Clarke to uphold an arbitrators’ award (Mr David Farrington and Mr Bruce Buchan; Mr Christopher Moss dissenting) that the owners, Mercator Shipping Inc, had been entitled to recover from their loss of profit on a follow-on fixture.

The charterers had chartered the Achilleas. Prior to the redelivery date, the owners had arranged a follow-on charter at $39,500 a day. Market hire rates then fell sharply and as the vessel was redelivered nine days’ late, the owners had been forced to renegotiate the follow-on charter at the lower rate of $31,500 a day.

The owners claimed US$1.3 damages for the $8,000 a day loss of profit they had suffered over the duration of the follow-on charter. The charterers claimed that they were only entitled to $158,301, being the difference between the market and charter rates of hire for the overrun period.

Mr Dominic Kendrick, QC and Mr Benjamin Parker for Transfield; Mr Simon Croall, QC and Miss Ruth Hosking for Mercator.

LORD HOFFMANN said that the majority arbitrators had said that the loss on the new fixture was damage of a kind which the charterers ought to have realised was not unlikely to result from a breach of contract so as to fall within Hadley v Baxendale ((1854) 9 Exch 341, 354) and The Heron II ([1969] 1 AC 350, 382-383).

However, liability for damages in contract had to be founded on the intention of the parties, objectively ascertained, because all con-tractual liability was voluntarily undertaken. It would be in principle wrong to hold someone liable for risks for which people entering into such a contract in their particular market would not reasonably be considered to have undertaken. The general understanding in the shipping industry was that damages were not recoverable for loss of a profitable following fixture.

The owners had said that the starting point was that damages were designed to put the innocent party, so far as it was possible, in the position as if the contract had been performed.

But in South Australia Asset Management Corp v York Montague Ltd (The Times June 24, 1996; [1997] AC 191), the House had said that that was the wrong place to begin. One had first to decide whether the loss for which the compensation was sought was of a kind or type for which the contract-breaker ought fairly to be taken to have accepted responsibility.

If one considered what these parties, contracting against the background of shipping market expectations, would reasonably have considered the extent of the liability they were undertaking, it was clear that they would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility.

Lord Hope delivered a speech concurring with Lord Hoffmann.

LORD RODGER said that, in the absence of special knowledge, a party entering into a contract could only be supposed to have contemplated losses which were likely to result from the breach in question; in other words, those losses which would generally happen in the ordinary course of things if the breach occurred. The rationale was that other losses not having been in contemplation, the parties had had no opportunity to provide for them.

In the present case, although market rates for tonnage went up and down, the extent of the relevant rise and fall in the market within a short time had been unusual. The owners’ loss stemmed from that unusual occurrence.

Neither party would reasonably have contemplated that an overrun of nine days would in the ordinary course of things cause the owners the kind of loss for which they had claimed damages. It was too remote to give rise to a claim for damages for breach of contract.

His Lordship had not found it necessary to explore the issues concerning South Australia and assumption of responsibility but was otherwise in substantial agreement with Lord Hoffmann.

Lord Walker delivered a speech concurring with Lord Hoffmann, Lord Hope and Lord Rodger. Lady Hale delivered a speech concurring with Lord Rodger.

Solicitors: Swinnerton Moore LLP; Bentley Stokes & Lowless, Aldgate.

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