Recent Shipping Cases and the Law of Contract
Jeffrey Gruder QC Essex Court Chambers
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In past shipping cases cornerstone of the development of the law of contract.
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A few examples:
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Hong Kong Fir [1962] 2 QB 26 on conditions, warranties and innominate
terms, Suisse Atlantique [1967] 1 AC 371 on fundamental breach, World War
I and Suez Canal closure cases on frustration of contracts, British and
Beningtons v North West Cachar Tea [1923] AC 48 on effect of repudiation
of the contract, Scrutton v Midland Silicones [1962] AC 44 on privity.
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In recent years very few shipping cases have reached the Supreme Court since
first judgments given in December 2009.
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The shipping cases to reach Supreme Court which deal with matters of
contract include (1) Bunge v Nidera [2015] UKSC 43 (actually international
sale of goods) on default clause in GAFTA 49 and the effect of subsequent
events on claim for damages (see The Golden Victory [2007] 2 AC 353
discussed below); (2) Rainy Sky v Kookmin Bank [2011] UKSC 50 on the
modern principles of construction of contracts; (3) Petroleo Brasiliero SA v
ENE Kos 1 [2012] UKSC 17 which although it deals with employment and
indemnity clause in C/P also has discussion of an issue of more general
interest relating to bailment and restitution.
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Ocean Victory [2015] 1 Lloyd's Rep. 381is going to Supreme Court later this
year. First part of the case which relates to abnormal occurrences and safe
ports is of interest only to shipping lawyers but there is a second issue of
general importance which relates to the effect of joint insurance or the
payment of insurance premium by one party on the liability of the co-assureds
for a breach of the express provision in the underlying contract and the right of
the insurer to be subrogated to one assured’s claim for damages against the
other.
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Since many, if not most shipping cases go to arbitration, the restriction of
appeals first by the Nema guidelines under the 1979 Arbitration Act, and the
by s.69 of the Arbitration Act, has reduced the flow of shipping cases to the
highest courts.
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But that having been said, there have been important cases of general interest
in recent years, primarily in the areas of assessment of damages for breach of
contract.
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The Achilleas [2009] 1 AC 61 (HL) deals with the extent to which knowledge
of the likelihood of loss in the event of breach of contract under the rule in
Hadley v Baxendale is sufficient to fix the contract breaker with liability to
compensate the victim for an unusual loss. Some of the judgments, notably
Lord Hoffman, appear to add an additional requirement of assumption of
responsibility on the part of the contract breaker for the type of loss claimed.
In that case, it was the cancellation of a profitable follow on charterer due to
late delivery and the renegotiation at a less favourable rate. Subsequent cases
have restricted The Achilleas to its particular facts. For example, as Sir David
Keene said in CA in John Grimes Partnership Limited v Gubbins [2013]
EWCA Civ 37
“…It seems to me to be right to bear in mind, as Lord Hoffmann emphasised
in The Achilleas , that one is dealing with the law of contract, where the
situation is governed by what has been agreed between the parties. If there is
no express term dealing with what types of losses a party is accepting
potential liability for if he breaks the contract, then the law in effect implies a
term to determine the answer. Normally, there is an implied term accepting
responsibility for the types of losses which can reasonably be foreseen at the
time of contract to be not unlikely to result if the contract is broken. But if
there is evidence in a particular case that the nature of the contract and the
commercial background, or indeed other relevant special circumstances,
render that implied assumption of responsibility inappropriate for a type of
loss, then the contract-breaker escapes liability. Such was the case in The
Achilleas ….”
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The Golden Victory [2007] 2 AC 353 considers the extent to which future
contingencies should be taken account by the court in assessing damages
where a contract is terminated for an accepted repudiatory breach. By the time
damages came to be assessed by an arbitrator for charterer’s repudiatory
breach, the Gulf War had broken out, which event would have entitled the
charterers to cancel. Could this contingency be taken into account in order to
reduce the damages otherwise payable? By a majority of 3-2, the HL said that
such a contingency could and should be taken into account even though it
came into existence after the date the repudiation was accepted. The Court
should not ignore facts that were available and should achieve fair but not
excessive compensation for Claimant and put him in no better position than if
contract had been performed.
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The Golden Victory was explained by Lord Sumption in this way by the
Supreme Court in Bunge v Nidera:
The real difference between the majority and the minority turned on the
question what was being valued for the purpose assessing damages. The
majority were valuing the chartered service that would actually have been
performed if the charterparty had not been wrongfully brought to a premature
end. On that footing, the notional substitute contract, whenever it was made
and at whatever market rate, would have made no difference because it would
have been subject to the same war clause as the original contract… The
minority on the other hand considered that one should value not the chartered
service which would actually have been performed, but the charterparty itself,
assessed at the time that it was terminated, by reference to the terms of a
notional substitute concluded as soon as possible after the termination of the
original. That would vary, not according to the actual outcome, but according
to the outcomes, which were perceived as possible or probable at the time that
the notional substitute contract was made. The possibility or probability of
war would then be factored into the price agreed in the substitute contract…
… There is no principled reason why, in order to determine the value of the
contractual performance which has been lost by the repudiation, one should
not consider what would have happened if the repudiation had not occurred.
On the contrary, this seems to be fundamental to any assessment of damages
designed to compensate the injured party for the consequences of the breach.
If the contract had not been repudiated, it would have been lawfully
cancellable. If it was lawfully cancellable, the charterer would have been
entitled to avail himself of that right regardless of his motive. The only
question is whether he would in fact have done so, a question which in
practice would probably have been determined by his financial interest.
Commercial certainty is undoubtedly important, although its significance will
inevitably vary from one contract to another. But it can rarely be thought to
justify an award of substantial damages to someone who has not suffered
any…”
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In Fulton Shipping Inc. of Panama v Globalia Business Travel (“New
Flamenco”) [2015] EWCA Civ 1299;Charterer redelivered early in breach of
contract. The owner sold the vessel, as he could not relet it. The price obtained
was higher than the price which might have been obtained had the C/P ran its
agreed length. Was the increased sale proceeds to brought into the equation as
a credit in the claim for damages for loss of hire? Popplewell J said “No” but
the CA disagreed. They held that when assessing a shipowner's damages for
loss of profits under a time charterparty following the charterer's early
redelivery of the vessel, the benefit obtained by the shipowner by the
difference in the value of the vessel when sold on early redelivery and its
value at the end of the charterparty could be brought into account to diminish
its loss, provided that the acquisition of the benefit arose out of the
consequences of the breach in the ordinary course of business and by way of
mitigation of the shipowner's loss. The doctrine of mitigation might
sometimes require an owner to sell the vessel if it was returned early; if that
was the position, the owner would only recover the amount of hire after it had
given credit for the sale price it could have obtained if it had sought to sell
after the breach. This was an application of the British Westinghouse principle
to the particular facts of the case.
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The Glory Wealth [2014] QB 1080 (Teare J) is an important first instance
decision. Again it deals with an accepted repudiatory breach (of a COA).
Although following earlier cases such as British and Beningtons v North West
Cachar Tea [1923] AC 48, it is not necessary for the Claimant in establishing
liability to prove that he was ready willing and able to perform his obligations,
he will not be able to obtain substantial damages unless he can. Again, as in
The Golden Victory, the compensatory principle is paramount. The Claimant
cannot be put in a better position than it would have been in than if the
contract had been performed. If the Claimant could not have performed, it
cannot obtain damages on a fictional basis. As Teare J said:
“….The assessment of loss necessarily requires a hypothetical exercise to be
undertaken, namely, an assessment of what would have happened had there
been no repudiation. That enables the true value of the rights, which have
been lost to be assessed. The innocent party is claiming damages and
therefore the burden lies on that party to prove its loss. That requires it to
show that, had there been no repudiation, the innocent party would have been
able to perform his obligations under the contract. If the court were to assume
that the innocent party would have been able to perform, rather than to
consider what was likely to have happened in the event that there had been no
repudiation, the court might well put the innocent party in a better position
than he would have been in had the contract been performed. The assessment
of damages does require an assumption to be made, but it is not the
assumption suggested by Mr. Akka. When assessing what the innocent party
would have earned had the contract been performed the court must assume
that the party in breach has performed his obligations…”
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One of the hottest recent differences between first instance judges is whether
the obligation to pay hire punctually under the NYPE time C/P is a condition
of the contract or merely granted the owner an option to cancel. The difference
is that if the failure to pay punctually is a breach of condition or repudiatory
breach then the owner cannot only terminate the contract but also claim
damages for breach of bargain.
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Flaux J in Kuwait Rocks Co v AMN Bulkcarriers Inc [2013] EWHC 865 said
that the obligation to make punctual payment was a condition. Popplewell J in
Spar Shipping AS v Grand China Logistics Holding (Group) Co Ltd [2015]
EWHC 718 (Comm) disagreed in a very detailed judgment which considers all
the authorities. The matter remains to be settled by the CA.