In what could prove to be a highly controversial decision, the Commercial Court in London appears to have extended, or arguably overstretched, the logic that underlined the House of Lords majority decision in the “Golden Victory” to the issues of mitigation and the calculation of damages in the absence of an available market.
The Commercial Court, hearing an appeal from a LMAA arbitration award, was faced with the question of whether, following the wrongful early redelivery of the “Elbrus”, all the profit earned under a substitute fixture which overran the original charter period should be used in calculating the damages due to the owners, or whether only the profit earned under the substitute fixture up to the point when the original fixture would have ended should be considered.
In a judgment which is difficult to reconcile with a number of key decisions on damages, including the “Elena D’Amico”, the “Achilleas” and indeed the “Golden Victory”, Mr. Justice Teare affirmed the arbitration tribunal’s finding that all the profits under the substitute fixture, even those arising after the vessel should have been redelivered under the original fixture, should count. The net effect was that the owners were held to have suffered no loss, even though it was unclear to what extent the owners had benefited from entering the substitute fixture at an earlier point in time.
Whilst the “Elbrus” is an unusual case with a distinct set of facts and arbitral findings, Teare J’s obiter comments on damages and on the approach arbitrators are entitled to take in assessing same could have far-reaching implications.
The Facts
The owners chartered their vessel, the “Elbrus", to charterers for a period of 5-7 months on an amended NYPE 1993 form charterparty. Contractual redelivery would have been at Houston on 13 May 2005, but the charterers wrongfully terminated the fixture on 4 April – 39 days early. The vessel was in Angola at the time.
For that 39 day period, the vessel only earned hire for 7 days, from 6 to 13 May. That hire was under a new charter with a company called Navimed. The Navimed fixture was more lucrative than the wrongfully terminated fixture, with the vessel earning over US$ 7000 a day more. That fixture ran from 6 May to 13 June and had been fixed with a 20 May cancelling date, on terms that required the vessel to be “freshly drydocked”.
Had the first charterparty not been terminated it appears the vessel would have missed the laycan under the Navimed fixture as there would have been insufficient time to drydock the vessel after redelivery. After the vessel was redelivered off Angola, the owners sailed the vessel to Portugal for drydocking.
The owners claimed the lost earnings under the terminated fixture, less their earnings under the Navimed fixture up to 13 May – the date when the first fixture should have come to an end.
The Tribunal’s Findings
It was held in the arbitration that there was no available market for the vessel at the time of her redelivery in Angola. If there had been an available market then the usual “market rule” would have applied to the assessment of damages and the measure of damages would have been the difference between the market rate and the charterparty rate for the remaining period of terminated fixture. In the absence of the available market, the tribunal had to look at what the owners actually did by way of substitute employment, or otherwise, during that period.
The tribunal held that the owners had suffered no loss. It held that, absent the wrongful early termination, the owners would not have been able to drydock in time to make the cancelling date under the Navimed fixture: owners “did not lose as a result of the cancellation of the charterparty, but made a gain to a greater or lesser extent”.
Teare J acknowledged that in order to reach this conclusion the tribunal looked not at the notional and actual earnings of the vessel from 4 April (the date of the wrongful termination) to 13 May (the contractual termination date under the terminated fixture) but instead compared notional and actual earnings from 4 April until 13 June (the end date of the Navimed fixture).
The owners appealed, contending that the tribunal had erred in law by looking at earnings beyond the 39 days left to run in the original fixture. The charterers countered that where there is no available market for a vessel redelivered early, the assessment of loss should involve comparing the financial position if the charter had been performed with the actual position resulting from the breach, with proper credit for the benefit conferred upon the owners as a result of the vessel being at their disposal much earlier than would have been the case under the charter.
The charterers cited the “Golden Victory” in support of their submission that “the whole picture must be examined in order to assess the actual loss suffered”.
Teare J described the steps in the tribunal’s reasoning as follows:
i) The normal measure of damages for early redelivery is the difference between the contract rate and the market rate as at the date of breach.
ii) There was no available market.
iii) In those circumstances the measure of damage is the sum that would put the owners in the same financial position as if the charter had been performed.
iv) The owners acted reasonably in sailing the vessel to dry dock and delivering her to Navimed, thereby ensuring that that fixture was not lost and that they would be earning the higher rate under that fixture at an earlier point.
v) “The various permutations and schedules provided by the charterers showed that owners did not lose as a result of the cancellation of the charterparty but made a gain to a greater or lesser extent.”
Teare J was comfortable that steps i) - iv) were correct in law but recognised that step v) was where the difficulty lay.
Teare J eventually found for the charterers, thus following the approach taken by the tribunal. His decision appears to have been constrained by the manner in which the award was drafted. Teare J saw what he recognised to be a rather unspecific benefit determined by the tribunal as accruing to the owner following early termination, as a finding of fact – something that was not open for him to reassess on appeal. It is disappointing that Teare J reached this conclusion, not least because in reaching his decision, he expressly recognised all of the problems that would stem from such a result.
In paragraph 42 of his judgment Teare J made the following observation:
“…In the present case it could be said… that assessing the financial benefit of the Navimed charter up until the date when the vessel would have been delivered to Navimed, assuming no repudiation of the original charter, is an incomplete, and therefore arbitrary, exercise because it takes no account of the notional earnings of the vessel after that date. Those earnings may have been greater than those in fact earned by the vessel after performing the Navimed fixture. But a complete assessment would involve calculations to the end of the vessel’s working life which is impractical and therefore one should apply the prima facie measure of damages.”
He then went on to say, at paragraph 45:
“Whilst other tribunals of fact might not have been persuaded that being able to earn the high rate on the Navimed fixture earlier than would otherwise have been the case was ultimately more beneficial to Owners (because a calculation to the end of the vessel’s working life would be required which would be impractical), I do not consider that the tribunal’s decision in this case demonstrates an error of law. The law, in particular the the principles relating to the mitigation of loss, permits the tribunal to take account of the benefits obtained by the Owners as a result of action taken to mitigate their loss. Whether a particular benefit has been established on the evidence is a matter for the tribunal to determine as a fact.”
Whilst the last sentence of the above extract is of course correct, the result of Teare J’s decision not to question whether the tribunal went beyond the legal constraints placed on its ability to make findings of fact could cause some difficulty. The tribunal’s finding, if followed in future cases, could make the assessment of damages – in particular the assessment of steps taken by a mitigating party – both uncertain and expensive.
A case both the tribunal and Teare J relied on as supporting the position that damages calculations should factor benefits accruing beyond the terminated contract period was the “Noel Bay”[1].
The “Noel Bay” was a complex decision which was factually very specific. It involved the wrongful cancellation of a voyage charter and the question of the impact the terms of the replacement (mitigation) fixture should have on the assessment of damages. The main area of dispute was what equivalent daily rate should be applied to the replacement voyage – essentially whether the ballast voyage to the new load port should be factored. Treating the ballast voyage as part of the replacement fixture would have resulted in a greater period of overlap between the cancelled voyage and the replacement voyage, thus entitling the charterers to greater credit to offset against the owners’ losses. Obviously underlying the reasoning of both sides in the “Noel Bay” was an understanding that only losses and profits during the deemed remaining period of the lost fixture would count in the assessment of damages. The Court of Appeal, with Staughton LJ giving the lead judgment, sided with the charterers on this issue.
Teare J accepted the charterers’ argument in the “Elbrus” that the “Noel Bay” “recognise[d] that where the substitute voyage confers a benefit upon the owner which he would not have had but for the repudiation of the charterparty, account may be taken of that benefit when assessing damages”. Such a conclusion can only be reached by ignoring what actually happened in the “Noel Bay” and focusing instead on the passing comment made by Staughton LJ that “another problem is that the vessel may have been better - or worse – placed for future employment at the end of one voyage than at that the end of the other. That is commonly a factor which is said to be relevant”[2].
There is a considerable risk that Teare J’s judgment will be taken to cast the “Noel Bay” in a new light – as an authority that supports the right of a party in breach to look beyond the period of a wrongly terminated fixture. It is difficult to reconcile such an approach with the logic behind the House of Lords recent decision in the “Achilleas” , a decision that shifted emphasis to the importance of certainty from the “fair compensation” approach espoused by a different House of Lords in “Golden Victory”.
The main lesson to be learned from the “Elbrus”, is that an owner in a similar situation should carefully consider arguing the existence of an available market, as the “market rule”, referred to above, may enable the protection of “bumper” profits. It was because the “market rule” applied that no questions were raised in the “Golden Victory” about the profits made by the owner, who got his tanker back following early termination of a long term charter just in time to catch the greatest tanker market spike in history. That owner was still able to claim back the difference between the market rate and the contract rate, assessed at the moment of breach (pre-spike!), for the remaining period for which the terminated charterparty would have run.
[1] [1989] 1 Lloyd’s Rep. 361
[2] Ibid at p.363.
