CONTENTS
Since our article in the February Medlemsblad about the assessment of damages when a time charterer repudiates, two further cases have been decided by the High Court in London. Both cases arose out of the collapse of the shipping market in the wake of the financial crisis. This article will focus on the most recent case, Glory Wealth Shipping Pte Limited v Korea Line Corporation (The MV Wren) (2011) EWHC 1819 (Comm.), but in light of the fact that the court referred to and relied upon the findings in the earlier case, Zodiac Maritime Agencies v Fortescue Metals Group Limited [2010] (“Zodiac v Fortescue”), this latter case will be touched upon as well.
The MV Wren
The issue before the court was one of appeal on a point of law from an arbitration award, namely, what is the correct measure of damages for a charterer’s repudiation of a time charter where there is, at the date of the repudiation, no available market for the unexpired period, but the market revives at a much later date? In other words, is there a rule or principle of law preventing a court or tribunal from assessing damages on the basis of combined actual and market-based losses?
The charterers redelivered the vessel to the owners two years before the expiry of the charterparty in repudiatory breach, which owners accepted. At the time of the termination, in November 2008, there was no available market for the vessel for the unexpired period, such that the owners had to trade her on the spot market. However, by June/July 2009, the market had begun to revive. The owners therefore claimed damages on a “hybrid” basis, originally by reference to losses on substitute fixtures on the spot market up to July 2009, and thereafter by reference to market rates for the balance of the charter period from July 2009. It was not in dispute that the owners had not actually fixed the vessel on a long-term charter in July 2009, but had continued to trade her on the spot market.
The owners’ position was that there was no reason in principle why the hybrid claim could not best fulfil the object of an award of damages. They submitted that once the market had revived, their actual losses were to be put to one side and the market rate used intead. Furthermore, relying on the principle laid down in The Elena D’Amico (see February Medlemsblad pages 6234 – 6235), they argued that their decision not to fix her a for a long-term charter in July 2009 was an business decision independent of the termination, so that it did not follow that they could not recover market-based damages from that time. The charterers argued that it was wrong in law to bring a hybrid claim. They submitted that the only relevant date for market-based losses is the date of termination because this is the moment at which the aggrieved party can go into the market and mitigate its losses. Where there is no available market at that time, then the aggrieved party should be placed in the same financial position as if the contract had been performed by deducting what the vessel actually earned during the unexpired period from what she would have earned under the repudiated charterparty (see The Elbrus, page 6239 of the February Medlemsblad). Since the owners did not enter into a long-term charter in July 2009, their actual trading thereafter should be the only basis of the damages claim.
The tribunal found in favour of the owners on the basis that it thought the owners were in a position to put forward a hybrid claim. Given the law’s preference for market-based claims, the tribunal also found that, once a viable market could be identified following the revival of the market, it was logical that this should become the relevant marker for determining the loss. The charterers appealed. Before the court the parties’ arguments were substantially the same as before the tribunal. The judgment from Mr Justice Blair contains a discussion of the principles from The Elena D’Amico and The Golden Victory and the reasoning underlying these principles (both of which are considered in the February Medlemsblad). However, the judge went on to find that as these were cases where there was an available market at the date of termination, and as The Elbrus was a case where the market never revived, these were not determinative of the issues currently before him.
The court found, however, that the question had been addressed in Zodiac v Fortescue and, having considered the Mr Justice Steel’s findings in that case, found that the principles laid down should also apply to The MV Wren. Mr Justice Blair noted that as at the time the tribunal was having to decide The MV Wren, the court’s decision in Zodiac v Fortescue had not yet been handed down, it was unsurprising that the tribunal had reached the conclusions they had seeking to find a practical solution to the issue.
In Zodiac v Fortescue, the charterers were in repudiatory breach by terminating a consecutive voyage charterparty (CVC) in January 2009 when it still had almost four-and-a-half years to run. At the time, the court found there was no available market where the vessel could have been fixed for a four-and-a-half-year CVC/time charter on equivalent terms. The court considered the significance or otherwise of a later emerging period-charter market: it was common ground that in January 2010 there was an available market for a three-and-a-half-year charter. The owners’ case was, as in The MV Wren, that their losses should be assessed from this date by reference to that available market. The charterers, however, argued that the newly emerged available market would only be relevant if the owners had been bound, by reason of mitigation, to fix on that market (i.e., in line with the principle that if the owners had unreasonably failed to fix on that market, then they could not have claimed extra losses due to this failure). The key issue was essentially whether the fact that an available market later emerges imports with it the proposition that a decision not to take advantage of it forms an independent business decision not linked to the wrongful termination. The court held it did not because this would require an owner to look at the term market at the end of every spot charter or could even mean that an owner would have to turn down a shorter term in case a longer term emerged later. The court could see no basis for this being the correct approach. Mr Justice Steel also held that, on the facts, the owners’ decision to employ the vessel on an alternative charter was not an independent business decision, but was still part of the owners’ continuous dealing with the situation in which they found themselves.
The owners in The MV Wren tried to distinguish the above case on the basis of the facts being different, namely that in the latter case, the vessel was fixed on two spot charters and then an earlier term charter, which had longer to run than the original CVC. In other words, at no time did the owners have a free choice whether to employ the vessel on the available market or not. The owners submitted that while the court had decided that the subsequent emergence of an available market did not always bring with it a proposition that the aggrieved party’s actual position should be ignored, it had not decided whether the available market should always be ignored. The charterers argued that the court had approached the issue as a matter of principle and the same should be applied here.
Mr Justice Blair agreed with the charterers and held that the court’s reasoning in Zodiac v Fortescue was that an owner’s decision not to take advantage of a later emerging market was not a business decision independent of the termination (which was the analysis which underlay the decision in The Elena D’Amico). Furthermore, the decision in The Elena D’Amico was clearly premised on the fact that an available market existed at the time of the termination, which was not the case here. Mr Justice Blair also agreed with Mr Justice Steel’s reasoning underlying his findings that a newly emerging market does not import with it the proposition that a decision not to take advantage of it forms an independent business decision not linked to the wrongful termination. He also concluded that, whilst an emerging available market might give rise to mitigation issues, it did not do so on the basis of the current set of facts. As such, the court followed the principles laid down in Zodiac v Fortescue and held that the owners were not entitled to bring a claim on a hybrid basis and that, where issues of mitigation did not arise, a subsequently emerging available market was to be ignored.
One further point considered by the court, and perhaps of practical interest, was how the owners’ actual losses were to be calculated where, as was the present situation, the term of the repudiated charterparty had not expired. The charterers offered two options: (1) looking at the owners’ position over time, awarding damages as and when loss crystallised on a voyage, or (2) assessing actual losses to the date of the decision and future loss by projecting forward a forecast of actual trading results. The court commented that option (1) had been mentioned with disapproval in The Golden Victory and that the owners had not currently pleaded option (2) as an alternative, but had reserved their rights to amend their pleadings if necessary. The court stated that this was a point to be decided by the tribunal, but it would appear that option (2) is likely to be considered the most appropriate option in such cases.
In summary, it therefore seems that in cases where there is no available market at the time of the termination, the subsequent revival of an available market is always to be ignored unless issues of mitigation arise. In other words, in such situations and subject to mitigation principles, the innocent party’s losses will always be calculated by reference to that party’s actual losses and the court or tribunal is precluded from assessing damages on a hybrid basis.
