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The English Commercial Court gave an instructive judgment on the assessment of damages in Hapag Lloyd AG v Skyros Maritime Corporation and Hapag Lloyd AG v Agios Minas Shipping Company; an appeal brought under section 69 of the Arbitration Act 1996 concerning the late redelivery of two container ships under time charter.
While the decision is novel, being the first to deal with circumstances of this sort, the outcome is nothing more than an application of the fundamentals underpinning the assessment of damages, namely, that the innocent party be put back into the position it would have been in had the breach not occurred. The judgment is of interest to shipping and commodity markets alike, giving guidance on redelivery under a time charter as well as to sale of goods contracts where the goods have been on-sold.
Background
Hapag Lloyd time chartered the MV Skyros and the MV Agios Minas from Skyros Maritime Corporation and Agios Minas Shipping Company (Owners) on materially identical terms. During the term of the charter, the Owners entered Memorandums of Agreement (MOAs) for the sale of the vessels to third parties. The MOAs prohibited entering further fixtures once the charterparties had expired.
The vessels were redelivered two and seven days late respectively. Hapag Lloyd paid the charterparty hire rates for the additional period. However, at the time of redelivery the market rates were significantly higher than the hire rates.
The Owners successfully argued before the arbitral Tribunal that they were entitled to claim damages for the difference between the hire and market rate.
The Charterers appealed to the English Commercial Court. The question to be tried was framed as follows:
“Whether substantial damages are recoverable for late delivery of a ship under a time charterparty where there is evidence that after a timely redelivery, the owner could not or would not have chartered it out.”
Parties’ Positions
Hapag Lloyd contended the Owners were not entitled to substantial damages. It relied on the long-standing principle that the object of contractual damages is to put the innocent party in the same position as if the contract had been performed. As such, even if the vessels had been redelivered on time, the Owners could not have taken advantage of the higher market rates on account of the MOAs. Its losses are therefore nil.
The Owners argued that as a matter of principle, it is entitled to claim the difference between the hire and market rate. It contended the MOAs and any effect they may have had was res inter alios acta (a thing done between others) and ought to be disregarded.
It relied on The Achilleas, a case where late redelivery resulted in a renegotiation of the subsequent fixture at much lower market rates. The shipowner was not entitled to the profit lost over the entire subsequent fixture, but was entitled to claim the difference between the hire and market rate for the overrun period.
The Owners also claimed:
- Quantum meruit – the principle of unjust enrichment which applies where services are rendered without agreement;
- User damages – the principle that a person who has wrongfully used another’s property without causing any pecuniary loss may still be liable for more than nominal damages; and
- Negotiating damages – damages assessed by reference to the sum that the claimant should hypothetically have negotiated from the defendant in return for releasing it from the obligation it failed to perform. The rationale being that the claimant has been deprived of a valuable asset, and the loss can be measured by determining the economic value of the asset.
Decision
The Court held in favour of Hapag Lloyd, confirming that the Owners were entitled to nominal damages only. Its reasoning was as follows:
- While the usual approach for late redelivery is to award the difference between the hire and market rate, each case will turn on the facts and terms of the charter.
- The Achilleas was concerned with whether the recovery of sums actually lost can be restrained by one principle (remoteness), or whether it can be restrained by a further principle (assumption of responsibility). It did not consider whether there can be recovery of sums that have not been lost at all. The compensatory principle is still the object of the analysis and in this case the Owners had suffered no loss.
- The Owners’ contention that the MOAs were res inter alios acta and should be disregarded was “unrealistic”. They relied on an artificial construction of Lord Hoffman’s remarks in The Achilleas which were rejected.
- The Owners’ other arguments were dismissed as “makeweights”:
- Quantum meruit did not apply as the service was performed within the context of an agreement; the hire was earned and paid at the charterparty rate.
- Similarly, the vessel was not “wrongfully used” in the way contemplated by user damages. The Owners were never deprived of possession of the vessels. While Hapag Lloyd had use of the vessels in the sense that it could give orders, this was not wrongful; the Owners accepted the illegitimate last voyage order which was held to be the direct cause of its loss.
- As for negotiating damages, the obligation to make timely redelivery did not create a “valuable asset”, as timely redelivery was not of any economic value to the Owners.
Our Comment
The decision endorses the well understood principle that the starting point for the assessment of damages for late redelivery is the difference between the hire and market rate. However, this is not a rule applied without deviation. The Court will consider the surrounding circumstances and the specific terms that apply, always returning to first principles; damages are intended to compensate the innocent party for losses resulting from a breach of contract.
If you have any questions about the assessment of damages or particular charterparty terms, please get in touch with our Trade & Transport Team or your usual contact at Hesketh Henry.
Chante Fourie (Associate) co-authored this article.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
