England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE LANGLEY

		Royal Courts of Justice Strand, London, WC2A 2LL
		18/10/2005

Lord Justice Mance:

1. This appeal raises a short point of some novelty and difficulty relating to the measurement of damages for repudiatory breach, here by charterers, of a long term time charter. If after an accepted repudiation, an unexpected event occurs which means that the original charter would not have run its full term, are damages still measured by reference to that full term, or by taking into account that the owners would in fact only have had the benefit of the charter for a shorter term?
2. The arbitrator, Mr Robert Gaisford, would have measured them by reference to the full term in his award dated 27^th October 2004, had he not felt constrained to take the shorter term by first instance authority (B. S. & N. Ltd. v. Micado Shipping Ltd. (Malta) ("The Seaflower") [2000] 2 Ll.R. 37 (Timothy Walker J). However, on appeal to the Commercial Court, Langley J by judgment and order dated 15^th February 2005 concluded that it was right to take the shorter term as a matter of principle. But he gave permission to appeal to this Court, on the basis that the point is of some general significance.
3. The factual background can be shortly summarised. The charterparty was dated 10^th July 1998 and was subject to two memoranda, Nos. 1 and 2, both dated 17^th July 1998. It was made between Golden Strait Corporation as owners of the tanker "Golden Victory" and NipponYusen Kubishika Kaisha as charterers for a period of 7 years (one month more or less in charterers' option) – a perhaps unusually long period in modern times, at least for a charter for trading rather than financing purposes. Another feature of the charter, probably associated with its length, was that the rate of hire, stated in the charter itself to be "as agreed", was recorded in addendum No. 1 as consisting of (a) a minimum guaranteed base charter hire rate, starting at $31,500 per day and increasing from year to year, plus (b) a share in any operating profit over and above such base charter rate

"for each two … voyages by additional charter hire in an amount (the "Shared Profit") equal to fifty percent …. of the excess (the "Profit") of actual nett daily time charter returns by the Charterers for such two …. voyages as determined according to this Clause over the Base Charter Hire for such two …. voyages ….., i.e: (Minimum Guaranteed Base Charter Hire Rate) x (Days of actual On-Hire during such quarter)."

4. The charter further provided:

"Outbreak of War ["the War Clause"]

33. If war or hostilities break out between any two or more of the following countries: U.S.A., former U.S.S.R., P.R.C., U.K., Netherlands, Liberia, Japan, Iran, Kuwait, Saudi Arabia, Qatar, Iraq, both Owners and Charterers have the right to cancel this charter.

69. CANCELLING OPTION IN CASE OF LONG OFF-HIRE

If for any reason whatsoever the Vessel will be off-hire or is reasonably estimated to be off-hire for 30 days, Charterers have the option to cancel the balance of this Charter Party."

5. Having regard to the vessel's delivery date under the charter, the earliest contractual date for redelivery of the vessel under the charter was, the arbitrator found, 6^th December 2005. The charterers repudiated the charter by purporting on 14^th December 2001 to redeliver the vessel to the owners, who accepted the repudiation as bringing to an end performance of all primary obligations under the charter on 17^th December 2001. On the basis of the evidence before him, the arbitrator concluded that:

"…. at 17 December 2001, a reasonably well-informed person would have considered war or large-scale hostilities) between the United States/United Kingdom and Iraq merely a possibility. I do not consider that such a person would have considered it inevitable or even probable but merely a possibility, although I do accept that the degree of probability would have been higher had that person known as much about the prevailing circumstances then as we do today."

6. In fact, on 20^th March 2003 there occurred what the arbitrator described as the Second Gulf War involving hostilities between both the United States and the United Kingdom and Iraq. The arbitrator considered that the charterers were not only entitled to the benefit of a presumption that they would in that event have cancelled the charter under clause 33 had it not already been terminated on account of their repudiation, but that they would on the evidence in fact have cancelled it under clause 33 (despite an immediate increase in rates brought about by the war) because they were fundamentally disenchanted with the charter.
7. In claiming damages for the charterers' repudiation of the charter, by Particulars of Damage in the arbitration dated 25^ththtjtht September 2003, the owners calculated (a) the basic hire that they would have received under and in accordance with the charter, but for its breach, in the period from 17^th December 2001 to 6^th December 2005 and (b) the profit shares that they would have made on projected voyages on an assumption that actual market rates during that period "were a repeat of those achieved in the 3 year cycle from January 1999 to December 2001". They then compared the total of these two figures with earnings calculated on the basis that there was a market on which a substitute long term charter could have been fixed for the period from 1^st April 2002 until 6^th December 2005, with the vessel trading spot between 17^th December 2001 and 1^st April 2002. The comparison gave a claim of nearly US$22.4 million.
8. At the heart of the appellant owners' case is the proposition that damages fall to be measured as at or very shortly after the date of breach, and that subsequent events are irrelevant, at least unless they can be said to have been inevitable, or perhaps probable, at the date of breach. Owners accept that, where a charter contains a simple option in charterers' favour, damages are to be measured on the basis of an assumption or presumption that the charterers would, but for their breach, have exercised that option in their favour. But, where a charter contains an option which may or may not arise, according to subsequent developments not inevitable or at least probable at the time of breach, owners submit that it would be inconsistent with principle and with the requirements of business certainty, if the measure of damages could be affected from time to time by such developments.
9. Mr Nicholas Hamblen QC for the appellant owners starts with the proposition that damages should be measured as at the date of breach. But the House of Lords authority to which he refers on this point, Johnson v. Agnew [1980] AC 367, shows that this is neither the most basic nor an invariable principle. Lord Wilberforce, with whose speech all other members of the House concurred, said at p.400H-401A:

"The general principle for the assessment of damages is compensatory, i.e. that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed. Where the contract is one of sale, this principle normally leads to assessment of damages as at the date of the breach – a principle recognised and embodied in section 51 of the Sale of Goods Act 1893. But this is not an absolute rule: if to follow it would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances."

10. S.51(1) of the 1893 Act also contained a basic principle, viz that

"The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller's breach of contract."

The normal rule was then stated in s.51 (3):

"Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered, or, if no time was fixed, then at the time of refusal to deliver."

11. In Koch Marine Inc. v. D'Amica Societa de Navigazione A.R.L. ("The Elena d'Amico") [1980] 1 Ll.R. 75, Robert Goff J, as he was, drew on the sale of goods analogy in holding that, in the event of an accepted repudiation of a long-term time charter (in that case a repudiation by the owners after 14 months of a 3 year charter), then:

"If, at the date of the breach, there is an available market, the normal measure of damages will be the difference between the contract rate and the market rate for chartering in a substitute ship for the balance of the charter period. If however the time charterer decides not to take advantage of that market, then, generally speaking, that will be his own business decision independent of the wrong; and the consequences of that decision are his. If he judges the market correctly, he reaps the benefit; if he judges it incorrectly, then the extra cost falls on him.

It does not matter ….. that his decision was a reasonable one, or was a sensible business decision, taken with a view of [sic] reducing the impact upon him of the legal wrong committed by the shipowners. The point is that his decision so to act is independent of the wrong. He could have done it anyway. He could have decided, for example, to have assigned away his existing charter-party at that time, and not to charter in a substitute vessel at all or alternatively to have chartered in a substitute vessel at a later date, depending on his judgment of the market."

12. So, in the present case, Mr Hamblen submits that, if, as we are for present purposes to assume, the owners could, at least within a relatively short time, have arranged a substitute charter for the balance of the charter period, that represents the normal measure of their loss, and there is, he further submits, nothing to displace that normal measure. On the contrary, there are, he submits, powerful considerations of commercial certainty militating in favour of adhering to it. Damages will be ascertainable at a fixed date. The innocent party will know what it will receive and the guilty what it has to pay. The amount will not be subject to fluctuation and maybe radical change over time, as events develop. The guilty party will not be able to delay in the hope of some event reducing its liability. Settlement will be easier and will be encouraged. There will be no question of applications to set aside judgments assessing damages based on the occurrence subsequent to judgment of some event which would, if known at the time of judgment, have affected the court's assessment of the damages. In support of these submissions, Mr Hamblen observes that Toulson J in Dampskibsselskabet "Norden" A/S v. Andre & Cie S.A. [2003] EWHC 84 (Comm); 1 Ll.R. 287, 292 expressly interpreted the rationale of Robert Goff J's decision in the Elena d'Amico as being that:

"it is fair and reasonable because it reflects the wrong for which the guilty party has been responsible and the resulting financial disadvantage to the innocent party at the time of the breach. ….. The availability of a substitute market enables a market valuation to be made of what the innocent party has lost, and a line thereby to be drawn under the transaction."

13. Mr Timothy Young QC for the charterers submits, on the other hand, that the normal measure fixes no more than the basic comparison to be made between rates over the balance of the charter period. If, in the event, it becomes clear that the original charter would not have run the balance of its period, then account should be taken of that fact, once it is established. Certainty and finality should not be carried to the point where injustice is involved because damages are being paid in respect of a loss which, it has now become obvious, has not been suffered. The present charter is, he suggests, uncommon in its length, and arbitrators and courts, and indeed parties, have commonly to assess damages after the expiry of the time for performance of the contract and do so taking account of developments in the meanwhile. The assessment of damages is, for example, commonly undertaken by taking account of subsequent events. Mr Young takes as an example the situation where there was no market for a substitute at or around the time of breach or the situation with regard to the loss of the profit share in the present case. He points out that, even the market substitute rule is not rigidly tied to the date of breach. Mustill J spoke in Woodstock Shipping Co. v. Kyma Co. Nav. S.A. ("The Wave") [1981] 1 Ll.R. 521, 532 of entering into "a kindred fixture on or shortly after the date when the contract was repudiated"; and that qualification is fully invoked in the present owners' claim which asserts that the (hypothetical) market substitute on which they rely could and would only have been achieved with effect from 1^st April 2002 – some 3½ months after their acceptance of the charterers' repudiation (and a date by when we are told the market was still lower than it had been in December 2001). Mr Young also makes the point, validly in my view, that the owners' method of calculating their loss in respect of the profit share (on an assumption that actual market rates during that period "were a repeat of those achieved in the 3 year cycle from January 1999 to December 2001") is artificial and unrealistic. Any court or arbitrator would expect to look at and take account of actual market rates during the period December 2001 to December 2005, in so far as those lay in the past by the time of the arbitration, or to predict future rates in so far as they did not. As to the suggestion that guilty parties might be encouraged to delay in the hope of some event occurring to reducing their liability, guilty parties may seek to delay for many reasons, but, unless an event was already probable, they would, if they delayed on its account, be just as, if not more, vulnerable to its not materialising as they would be likely to benefit by its occurring.
14. Mr Young also relied strongly on The Bwllfa and Merthyr Dare Steam Collieries (1891), Limited v. The Pontypridd Waterworks Company [1903] AC 426. That was a case where, following a ban on further exploitation of a profitable seam over a period of years, statutory compensation was due and was held to be calculable by reference to actual market values which had, by the time of the arbitrator's assessment, become known. Lord Macnaghten asked at p.431: "Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?" That case appears to me to support the obvious proposition that, in the present case, any assessment of loss of profit share would be expected to take into account actual market rates during the balance of the original charter. But I do not regard it as directly assisting (or harming) Mr Young on the main issue whether account should be taken of the fact that it is now known that charterers would have had the right to cancel under the War Clause before the original charter otherwise expired.
15. Before the arbitrator and also the judge, though to a lesser extent before us, considerable reliance was on the owners' side placed on this Court's decision in Maredelanto Co. Nav. S.A. v. Bergbau-Handel G.m.b.H. ("The Mihalis Angelos") [1971] 1 QB 164. But the issue in that case was whether, in the event of an accepted anticipatory repudiation of a charterparty before the vessel tendered for loading at Haiphong, it was open to charterers to show that the vessel would not in fact have been ready for loading before the date after which the charterers would have had a contractual right of cancellation, which they would have exercised. The argument for owners, presented by Mr Robert Goff QC and Mr Brian Davenport, was that an accepted anticipatory repudiation merely anticipated and led to the deemed occurrence of an actual breach, consisting in a failure to load at Haiphong, which was inconsistent with and excluded any measure of damages based on an assumption that the charterers could and would have cancelled and so not been in breach by failing to load. This argument failed, because the Court of Appeal held that an accepted anticipatory repudiation is itself a breach, on the basis of which damages have to be assessed, and that, in the circumstances, no loss had been suffered. Lord Denning said at p.196G-H:

"Seeing that the renunciation is itself the breach, the damages must be measured by compensating the injured party for the loss he has suffered by reason of the renunciation. You must take into account all contingencies which might have reduced or extinguished the loss. …. It follows that if the defendant has under the contract an option which would reduce or extinguish the loss, it will be assumed that he would exercise it. ….. In short, the plaintiff must be compensated for such loss as he would have suffered if there had been no renunciation: but not if he would have lost nothing."

16. Edmund Davies LJ also considered at pp.202H-203C that:

"One must look at the contract as a whole, and if it is clear that the innocent party has lost nothing, he should recover no more than nominal damages for the loss of his right to have the whole contract completed. ….. In the light of the arbitrators' findings, it is beyond doubt that, on the belated arrival of the Mihalis Angelos at Haiphong, the charterers not only could have elected to cancel the charterparty, but would actually have done so. The rights thus lost to the owners by reason of the assumed anticipatory breach were thus certain to be rendered valueless. It follows ….. that the arbitrators were right in holding that, in the circumstances, the owners' claim for damages should be dismissed."

17. However, it is on Megaw LJ's reasoning at pp.209H-210B that the owners have placed the most emphasis:

"In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has lost, subject to his duty to mitigate. If the contractual rights that he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those events."

18. The use of the words "beyond doubt" and "predestined" in these passages must be read with the Court's conclusion that nothing whatever of any value had been lost. But Megaw LJ's judgment also introduces as a relevant consideration the position as it appeared "at the date of acceptance of the repudiation". In Mr Hamblen's submission this correctly reflects the need to measure damages at the date of breach. But the other two judgments do not make any such point, and it is clear that the point was not in issue or argued before the Court. Mr Robert Goff's argument, as reported, was in fact to contrary effect. He said (cf p.190H-191C):

"It follows that the present case must be decided on the basis that the vessel would have proceeded to Haiphong and the charterers would then, in actual breach of contract, have failed to do what they then had to do. All matters relevant to the assessment of damages on this basis are relevant, but no other matters. Thus if, for example, the charterparty gave the charterers an option as to the amount of cargo to be shipped, such an option would have to be taken into account by the court in assessing damages for the actual breach and must likewise be taken into account when assessing damages where that breach has been anticipated. Again, any relevant event subsequent to the time of the actual breach which would have had the effect of reducing the damages which would otherwise have flowed from the actual breach (even an event which would thereafter have frustrated the adventure) must be taken into account in assessing damages where the breach has been anticipated: In re Thornett & Fehr & Yuills Ltd. [1921] 1 KB 219; Kaye Steam Navigation Co. Ltd. v. Barnett Ltd. (1931) 41 Ll.L.Rep. 231; Withers v. General Theatre Corporation [1933] 2 KB 536; Watts, Watts & Co. v. Mitsui & Co. Ltd. [1917] AC 227."

19. Thus Mr Goff, in his reference to the significance of "any relevant event subsequent to the time of the actual breach", even a frustrating event, assumed an answer to the problem before us opposite to that which Megaw LJ appears to have assumed in the single phrase which I have identified. The authorities cited in Mr Goff's argument do not carry the present point much further, although Romer LJ in Withers, where the defendants had repudiated the plaintiff actor's engagement, referred to a clause giving the defendants a right to direct the plaintiff to appear at theatres other than the Palladium, and said that "the jury ought to have taken into consideration the possibility, and I think the probability, that if the defendants instead of repudiating the contract on 2 July had elected to go on with the performance they would have sent the plaintiff to perform somewhere else than at the Palladium". That was, of course, a case of an existing option, already exercisable without more by the defendants at the time they repudiated. But it is clear that Mr Robert Goff did not see that as a fundamental distinction, and Mr Hamblen's submissions raise the question why it should be so significant.
20. In North Sea Energy Holdings N.V. v. Petroleum Authority of Thailand [1999] 1 Ll.R. 463, the Court of Appeal considered the damages recoverable on the basis that there was a repudiation by the buyers of a contract for the supply by the sellers of oil, which oil the sellers could only have procured from third parties. Waller LJ, giving the judgment, said at p.495:

"[The plaintiffs] are claiming loss of profits on the basis that if the repudiation had not occurred the contract with PTT [the buyers] would have continued and profits would have been earned by virtue of MSH [the sellers] being able to deliver oil under it. That was dependent on the actions of third parties, actions of MSH and actions of PTT. It is a situation in which I can accept that the assessment of damages might be approached on the basis of a chance rather than putting on the plaintiffs the onus of establishing on the balance of probabilities every element including that the third parties would have acted as MSH were asserting. However, in a loss of a chance case it is for the plaintiffs MSH to prove on the balance of probabilities that they would have taken the action required by them to produce the deliveries of oil, and that in so far as the production of oil was dependent on the actions of third parties that there was a real or substantial chance that the oil would be produced."

Waller LJ's analysis reflects the decision in this Court in Allied Maples Group Ltd. v. Simmons & Simmons [1995] 1 WLR 1602. Waller LJ went on at p.496 to refer to The Mihalis Angelos and to conclude on the facts that "At the time of the repudiation ….. it was predestined" that no oil could be delivered by the sellers without certain information which it was also predestined would not have been supplied (voluntarily, since there was no obligation to supply it) by the buyers. Any damages could thus only be nominal. The decision does not suggest that "predestination" at the time of the repudiation was a minimum pre-requisite. It simply represented the factual position, and therefore obviated any further argument. The earlier passage which I have quoted from p.495 tends on the contrary to suggest a conventional approach involving an assessment of the probabilities on the evidence at trial.

21. In The Seaflower the charterers who had repudiated an 11 month charter after some 2 months claimed that the charter would anyway have come to an end after 4 months, because the vessel would by then have lost and not regained a Mobil approval, without which charterers were entitled to cancel under an express charter clause. Timothy Walker J refused to treat Megaw LJ's words in The Mihalis Angelos as introducing a minimum test of predestination, preferring Lord Denning's formulation that the court "must take into account all contingencies which might have reduced …. the loss". He held on the facts that the approval would inevitably have been lost and not regained and that it went without saying that charterers would then have cancelled. Any damages were limited accordingly to the balance of the first four months of the charter.
22. In the present case Langley J agreed with Timothy Walker J and his analysis of The Mihalis Angelos, save to say that, if Timothy Walker J intended "inevitability" rather than probability to be the test, he (Langley J) would differ. Langley J thus considered that the arbitrator was right in his conclusion despite his reluctance to reach it. It was consistent with the basic compensatory rule for the assessment of damages. He saw no reason why the normal approach to mitigation (i.e. taking the cost of any substitute available on the market) should dictate another result. Accepting the desirability of certainty and crystallisation, he did not consider that they were more obviously achievable on Mr Hamblen's approach. He pointed out that the charter itself contained the uncertainty of the War Clause and that Mr Hamblen's approach would lead to the owners recovering more than they had lost.
23. Mr Hamblen's submissions were, as always, presented with clarity and force, but I too have come to the conclusion that they must be rejected. As the judge observed, this charter always had inherent in it the uncertainty involved in the War Clause. In many circumstances, this uncertainty could be disregarded – e.g. if damages were being assessed after the end of the original charter period and no relevant war had occurred, or if damages were being assessed during the original charter period on the basis that there was no significant prospect of any such war. In other circumstances, if damages were being assessed during the original charter period, account might have to be taken of the contingency (to use Lord Denning's word) or chance (to use Waller LJ's) that a war might occur, and consideration would then also have to be given to whether or not charterers would in that event probably cancel.
24. Certainty, finality and ease of settlement are all of course important general considerations. But the element of uncertainty, resulting from the War Clause, meant that the owners were never entitled to absolute confidence that the charter would run for its full 7 year period. They never had an asset which they could bank or sell on that basis. There is no reason why the transmutation of their claims to performance of the charter into claims for damages for non-performance of the charter should improve their position in this respect.
25. Further, as Mr Young submitted, the assessment of damages often depends on, or is informed by, subsequent events, and the claim for loss on the spot market from 17^th December 2001 until 1^st April 2002, the claim based on a substitute rate as from 1^st April 2002 and the claim for loss of a profit share - which as I have said would surely depend on looking at actual market rates over the balance of the original charter - are all instances applicable in this case. The additional need to take into account the now known fact of the Second Gulf War is simply another instance.
26. In any event, I consider that this is a situation where any considerations of the type mentioned in the first sentence of paragraph 24 above would have, so far as necessary, to yield to the greater importance of achieving an assessment of damages and compensation which more accurately reflects the actual loss which the owners can, at whatever is the date of assessment, now be seen to have suffered as a result of the charterers' repudiation.
27. Mr Hamblen's emphasis on the available market rule appears to me carry the scope of that rule beyond its proper function. The purpose of that rule is to fix a rate which then falls to be compared with the original charter rate. In this way, the owners are put back notionally in the same position as they would have been under the original charter. Assuming that the owners grant a substitute charter, they can operate the vessel subject to that charter or dispose of her with it, as they like. But the aim in assessing damages on such an assumption is not to eliminate from consideration any of the original charter terms, or any effect which they might have. Indeed, the market rate for a substitute charter "must be ascertained by postulating a charter-party which corresponds as closely as possible with the actual charter-party": cf Arta Shipping Co. Ltd. v. Thai Europe Tapioca Service Ltd. ("The Johnny") [1977] 2 Ll.R. 1, 4 per Sir David Cairns. On this basis, it would, under the notional substitute charter in the present case, have been possible for either the owners or the charterers to cancel the substitute charter on the actual outbreak of war. If the substitute charterers would not have done this (e.g. because the substitute charter rate was low enough to make it attractive for them to continue) the owners could do so, and thereby put themselves in the same position as they would have been after the assumed cancellation by the original charterers. We were told that bilateral War Clauses are invariable in time charters for tankers which are likely to visit the Gulf. But, if it is possible to assume a reasonable substitute charter with no War Clause or under which only unilateral cancellation by the charterers was possible, then it would seem to me that, in that event (as Langley J also suggested - paragraph 25), the owners could potentially claim (a) the difference between the original charter rate and the substitute charter rate for the period until there would have been cancellation under the War Clause in the original charter, plus, in respect of the balance of the original charter period, (b) the difference between on the one hand the prevailing market rates which they would have earned following cancellation under the original charter and on the other hand the substitute charter rate to which owners had in fact arranged on the market in reasonable mitigation of the breach of the original charter and to which they would on the hypothesis under discussion be limited during the balance of the original charter period. In the present case, that problem does not arise, because the owners do not suggest that they have in fact granted any substitute long-term time charter at all.
28. For all these reasons, I consider that the judge came to the correct conclusion, and I would dismiss this appeal.

Lord Justice Tuckey: I agree

Lord Justice Auld: I also agree that the appeal should be dismissed.