MTM HONG KONG

Louis Dreyfus Commodities Suisse SA v MT Maritime Management BV [2015] EWHC 2505 (Comm)

A new way of looking at damages for repudiation of a voyage charter.

The recent judgment by the Commercial Court in London in MTM HONG KONG [2015] EWHC 2505 (Comm) is the first reported decision where the detriment suffered by an owner after an unperformed repudiated charter would have come to an end has been taken into account in order to increase the amount of damages awarded.

The Facts

Louis Dreyfus Commodities Suisse SA (Charterers) had chartered the “MTM Hong Kong” from the owner, MT Maritime Management BV, by a voyage charter dated 6 January 2011.

The Charter contained the following clause:

"If it becomes obvious that the Vessel will miss her cancelling then owners to nominate a new 3 day spread laycan, after which Chrts have 1 working day to declare if they wish to cancel the c/p, o/w c/p to be maintained with new laycan as proposed."

On 17 January 2011, Owners sent Charterers the following message:

"Pls note ETA Paranagua 2-3th [sic] February 2011 due to heavy berthing delays at last discharge port Boma. It has become obvious that the vessel will miss original agreed cancelling and Owners hereby nominate a new 3 day spread laycan of 4-6 Feb 2011.

Charterers did not declare within 1 working day that they wished to cancel the charter. It was only 3 days later, on 20 January 2011, that they made it clear that they would not be performing the Charter after all. That was a repudiatory breach which was accepted by the Owners as bringing the Charter to an end.

The vessel had already set sail towards South America from West Africa on 19 January 2011 in anticipation of performing the Dreyfus charter, but when Charterers repudiated, Owners took the decision to continue to South America in the hope of picking up a substitute cargo there.

But for some time no business materialised. The vessel had to wait in South America from 2 February 2011 until 24 February 2011 before it was eventually fixed to Glencore for a voyage from San Lorenzo in Argentina to Rotterdam with a cargo of sunflower oil and soya methyl ester.

The substitute fixture with Glencore terminated on 12 April 2011 when the vessel completed discharge at Rotterdam.

Owners' Claim

Owners claimed as damages the difference between:

  1. what the vessel actually earned between the date of repudiation (20 January 2011) and the date when the substitute Glencore fixture came to an end (12 April 2011); and
  2. what the vessel would have earned if the original Dreyfus fixture had been performed.

The problem was that the Dreyfus fixture would have come to an end some time before 12 April 2011, when the substitute Glencore fixture came to an end. The Dreyfus fixture would have been completed by 17 March 2011. So in order to calculate what the vessel would have earned after 17 March 2011, it was necessary to embark on a degree of speculation as to the voyage(s) that would have been undertaken after the Dreyfus fixture and the vessel's likely earnings for that extra period of time.

Charterers contended that this was contrary to precedent. In all of the reported cases, they contended that damages were calculated by reference to the difference between:

  1. what the vessel actually earned between the date of repudiation up to the time when the repudiated fixture would have terminated (in the present case, 17 March 2011); and
  2. what the vessel would have earned if the original Dreyfus fixture had been performed over the same period. (i.e. up to 17 March 2011).

The difference between the rival calculations amounted to several hundred thousand dollars.

The Law

The general and long established rule when assessing damages for breach of contract is to put the innocent party in the same position as he would have been if the contract had been performed. The proposition is obvious, sensible and fair – yet not always easy to apply.

In the case of a repudiatory breach of a voyage charter, the English High court applied this principle in 1989 as follows:

"The owners are entitled to be placed in the same position, financially, as they would have enjoyed if the contract had not been broken. That involves a comparison of the money they would have earned, less expenses, on the contract voyage with the money they in fact earned, less expenses, on the substitute voyage…".

See: The Noel Bay [1989] 1 Lloyd's Rep 361. Per Staughton LJ.

This approach can be traced back to 1858 and the decision of Smith v M'Guire (1858) 3 H & N 554.

"the legal damage was the loss which had arisen from the breach of the contract; that from the amount of the freight which the ship would have earned if the charter-party had been performed, there ought to be deducted the expenses which would have been incurred in earning it, and also any profit which the ship earned between the expiration of the lay days and the time when the employment of the ship under the charter-party would have ended."

This principle was endorsed in the leading text book on Charterparties (Scrutton), in the 1984 edition, as follows:

"In an action against a charterer for not loading a cargo, the measure of damage under the older authorities is the amount of freight which would have been earned under the charter after deducting the expenses of earning it, and also any net profit the ship may, or might have earned during the period of the charter on a substitute voyage. If the expense of earning freight on a substituted voyage of the same duration be the same as on the chartered voyage, the same result is arrived at by taking the difference between the charterparty rate of freight and the market rate of freight. And in modern times this would probably be laid down as the primary measure of damage."

These statements of principle gave rise to a generally held view amongst those involved in shipping that the way to calculate damages in the case of a repudiation of a voyage charter was to compare what the vessel would have earned over the period of time that would have been taken in the performance of the repudiated charter with what she actually earned over the same period, rather than the period of time until completion of the substitute voyage.

If the substitute charter(s) lasted longer than the repudiated charter would have done, the solution was to pro-rate the earnings of the substitute charter(s) by converting the returns of a voyage charter to a time charter equivalent, or TCE, over the period that the repudiated charter would have taken. See The Noel Bay [1989] 1 Lloyd's Rep 361.

The relevance of the period after the original (repudiated) charter would have ended

Although the reported decisions of repudiation of a voyage charter decided by the Court up to and including the NOEL BAY involved the calculation of damages up to the time that the original charter would have come to an end, Staughton J did recognise in the NOEL BAY that the period following the time when the repudiated charter would have come to an end might be relevant.

For example, the substitute charter might leave the vessel in a worse position in terms of picking up her next cargo than she would have been if the original charter had been performed. Should the Owners be compensated for that too?

Staughton J commented as follows, without actually answering the question:

"Another problem is that the vessel may have been better - or worse - placed for future employment at the end of one voyage than at the end of the other. That is commonly a factor which is said to be relevant. But there is nothing to suggest that it has any importance in this case."

In The Elbrus [2009] EWHC 3394 (Comm), [2010] 2 Lloyd's Rep 315, the Court held that a benefit that the Owner received as a result of the substitute fixture which was entered into by the Owner after the charterers' repudiation had to be taken into account in reducing the damages that would otherwise have been awarded to him.

In that case, if the original contract had been performed, the vessel would have been redelivered on 13 May 2005 and would have missed the laycan on her next employment, a fixture with Navimed at a high rate. The Court held that that benefit could be taken into account and would reduce the damages awarded, because in this respect, the Owners were better off than they would have been if the original charter had been performed.

But, prior to the decision in the MTM Hong Kong, there was no reported case where the detriment suffered by Owner after the original (repudiated) charter would have come to an end, had been taken into account in order to increase the damages to be awarded to the Owner.

The absence of such a decision led to a general belief that it would be wrong in principle to calculate damages beyond the period the original (repudiated) charter would have come to an end.

The concern was this: If that period were to be taken into account, where would you stop? Suppose, for example, that the substitute charter continues for a period shortly after the time of the original charter, but at the end of the substitute charter the ship ends up in another area where, again, she finds it more difficult find a profitable cargo than the area she would have ended up if the original charter had been performed. Should the poor returns on that next voyage also be taken into account? But what if the voyage after that i.e. the third voyage following the repudiation is a highly profitable one, albeit some months after the original repudiated charter would have come to an end, and is a fixture that arguably would not have been available to the Owner had the original fixture been performed some months earlier? Should that voyage then also be taken into account in order to reduce the damages payable?

In short, for how long is it necessary to compare a series of actual voyages performed following the repudiation with a series of hypothetical voyages in order to balance justice with the increasing amount of speculation that the hypothetical voyages would involve?

There is no clear answer to that question and the theoretical difficulties of the type described above led to a general belief that the correct approach was to stop at the end of the hypothetical period of the repudiated voyage – unless, as in the case of the Elbrus, there was a clear case of benefit to the Owner.

Looking back, the idea that a clear case of benefit going beyond the period of the repudiated voyage could be taken into account in order to reduce the losses/damages, but that a clear case of detriment could not, is neither fair nor logical. The issue, then, is not one of principle but one of evidence: In order to avoid the theoretical difficulties outlined above, one should not take into account the period beyond the hypothetical period of the repudiated voyage unless the evidence is clear.

The Result

But in the case of the MTM Hong Kong, the evidence was clear. The vessel waited for a long time in South America before she could find a fixture, and during that time, the vessel earned nothing.

Then, when a fixture (the Glencore charter) finally materialised, the vessel was locked into a low earning fixture out of South America, keeping the earnings of the vessel depressed for a period of time which long exceeded the time when the repudiated Dreyfus charter would have come to an end.

The Owners presented a claim for damages which took as the relevant period, the time from repudiation up to the time when the substitute (actual) fixture came to an end rather than the time that the repudiated Dreyfus fixture would have ended.

In order to make good that claim, they had to produce convincing evidence of the further hypothetical voyages that would have been performed if the original Dreyfus fixture had been performed, right up to and including the period when the Glencore fixture came to an end.

It just so happened that the Owners' trading pattern for their fleet was such that they were able to provide that evidence and no expert evidence was adduced by Charterers to challenge it.

The Owners were awarded the sum of approximately $1.2m in damages, plus interest and costs. Dreyfus's attempt to appeal the tribunal's award in favour of Owners failed, the court ruling that:

There is therefore 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 in addition to the loss of the profit which would have been earned from performing the contract voyage. In the absence of any such reason, the compensatory principle requires that such damages should be awarded. (Judgment. Para 67).

Conclusion

In the case of the MTM Hong Kong, calculating the claim up to the termination of the substitute voyage made a big difference to the size of the claimed damages, because of the long waiting time before a substitute fixture could be found, coupled with the poor returns from the substitute fixture.

After that, it was just a question of evidence.

In many cases, it would be difficult for an Owner to prove how the vessel would have traded after the repudiated charter would have come to an end if it had been performed.

The crucial thing for owners in this case was that they were able to provide such evidence and charterers failed to undermine that evidence, for example by producing expert evidence to challenge Owners' evidence as to how the vessel would have traded after the time when the repudiated charter would have come to an end.

The case was, therefore, decided more as a question of fact than law, as indeed is the case with many disputes concerning the quantification of damages. But the case did succeed in refuting the generally held belief that any losses suffered by Owners after the time when the repudiated charter would have come to an end, are irrelevant.

Issued by

Mike Lax
Partner
Lax & Co LLP
Dir: +44 (0) 20 7623 9434
mike.lax@laxlaw.co.uk

This article has been featured Lloyd's List on 11 January 2016:

http://www.lloydslist.com/ll/sector/tankers/article477207.ece

December 21st, 2015

Copyright Lax & Co. LLP 2015