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"Owners argued that the Charterer was in breach of its obligation to redeliver the Vessels on time and was subsequently liable for 'substantial damages'."
Background
Hapag-Lloyd AG (the “Charterer”) chartered two ships, the M/V “SKYROS” and M/V “AGIOS MINAS” (together, the “Vessels”), from Skyros Maritime Corporation and Agios Minas Shipping Company (the “Owners”), respectively.
Prior to the redelivery dates, the Owners entered into two MOAs for the sale of the Vessels. Under the terms of the MOAs, the Owners were expressly prohibited from entering into further fixtures before delivering the Vessels to the buyers.
Subsequently, the Charterer redelivered the M/V “SKYROS” approximately two days late, and M/V “AGIOS MINAS” approximately seven days late. Although the Charterer continued to pay hire at the contractually agreed rate, the Owners argued that the Charterer was in breach of its obligation to redeliver the Vessels on time and was subsequently liable for “substantial damages” for the late redelivery period. Those damages would be assessed as the “normal measure” of damages, being the difference between the agreed contract rate and the (significantly higher) market rate. However, the Charterer argued that, as the MOAs prevented the Owners from entering into further fixtures, they lost their right to user damages (i.e. damages for loss of use of the Vessels) and should instead receive only nominal damages.
The matter was originally decided as a preliminary issue in an arbitration conducted under the LMAA Rules, where the Tribunal found in favour of the Owners. This award was subsequently appealed under Section 69 of the Arbitration Act 1996 and the arbitral decision was overturned by the Commercial Court. With the permission of the judge below, the Commercial Court decision was then appealed to the Court of Appeal where the award of the arbitrators was restored.
Arbitrators’ award
The Charterer put to the arbitrators that an award for substantial damages would be contrary to the fundamental compensatory principle established in Robinson v Harman (1848) 1 Exch 850, 855, that if a party suffers loss for breach of contract, so far as money can do so, the party is to be placed in the same situation as if the contract had been performed. Had the Vessels been redelivered on time, the Owners would not have been able to charter them out due to the restrictions in the MOAs and therefore would not have been able to enjoy hire at the higher rate. They should be awarded nominal damages only.
"The party is to be placed in the same situation as if the contract had been performed."
However, the Tribunal held that the Owners were entitled to substantial damages for the following reasons:
- the Owners were entitled to damages on a quantum meruit basis – where one party has conferred a benefit on another party, they are entitled to claim reasonable compensation for that benefit. There was an implied request by the Charterer for services outside the scope of the charterparty, namely the use of the Vessels during the overrun period, which was coupled with an implied agreement to pay for those services at the current market rate. Owners should be compensated for providing a service outside of the scope of the charterparty;
- if the above was found to be wrong, in the alternative, the Owners would be entitled to recover user damages, consisting of the difference between the contract rate and the market rate during the overrun period. This was on the basis that damages would compensate the Owners for the loss of their right to use the Vessels, regardless of their plans for the Vessels following this fixture. Additionally, the MOAs were disregarded as being too remote or res inter alios acta (literal translation being ‘a thing done between others’) – “a collateral matter disregarded by the law for the purpose of assessing damages” (Males LJ); and
- if the Tribunal was wrong about quantum meruit and user damages, they considered that the Owners were entitled in principle to recover “negotiating damages” – this represents what the parties would have agreed in a hypothetical negotiation (although this would not have necessarily mirrored the prevailing market rate).
"'A collateral matter disregarded by the law for the purpose of assessing damages'."
The Commercial Court
The Charterer appealed the decision of the Tribunal to the Commercial Court. Mr Justice Bright overturned the arbitration award and found that the Owners were not entitled to recovery of substantial damages. Bright J held that:
- the quantum meruit principle could not apply as the services rendered and hire paid had been provided pursuant to the charterparties. There was therefore no basis for implying a request by the Charterer to perform the voyage outside of the charterparty as contended by the Owners (regardless of whether the last voyage was legitimate/illegitimate);
- Bright J also rejected the Owners’ claim for user damages as the Owners had remained in possession of the Vessels at all times. Although the Charterer had use of the Vessels, this was in accordance with the charterparties and the subsequent late redelivery was not an invasion of the Owners’ property rights; and
- the claim for negotiating damages also failed because redelivery on time would not have provided any economic value to the Owners.
Bright J stated that the normal measure of damages for late redelivery is the difference between the market rate and the contract rate for the late period. However, there was no scope for the recovery of such damages as the Owners had lost the opportunity to take advantage of the market rate during the overrun period because the terms of the MOAs prevented them from rechartering the Vessels.
The Owners were granted the right to appeal on two specific issues only: whether (1) the MOAs must be disregarded as res inter alios acta; and (2) the Owners could recover user damages for late redelivery.
Submissions on appeal to the Court of Appeal
The Owners argued they were entitled to recover damages during the overrun period in accordance with the normal measure regardless of whether the Owners could or would have chartered out the Vessels if they had been redelivered on time. In addition, the MOAs were too remote or should be disregarded as res inter alios acta.
The Charterer argued that damages for late redelivery under a charterparty compensate an owner for the lost opportunity to fix the vessel in the market which, in this case, the Owners did not have because, under the terms under the MOAs, the Owners were not permitted to fix the Vessels in the market.
Court of Appeal Judgment
The Court of Appeal decided in the Owners’ favour, reversing the decision of the Commercial Court and reinstating Owners’ right to recover the normal measure of damages. In Lord Justice Males’ lead judgment, the court recognised that applying the normal measure of damages may under- or over-compensate the Owners, but that allowed for commercial certainty with respect to the award of damages.
The Court of Appeal cited a significant line of authority which established that damages for late redelivery should consist of the difference between the charter rate and the market rate, for the overrun period. In doing so, Males LJ cited Lord Hoffman in The Achilleas – “a uniform series of dicta over many years in which judges have said or assumed that the damages for late [re]delivery are the difference between the charter rate and the market rate” and confirmed that none of the authorities argued that an owner must prove that their vessel was to be re-chartered instantly after the conclusion of the charter.
The argument that the Owners had lost their ability to charter the Vessels out, by virtue of the MOA terms, was disregarded as being a collateral matter that the law does not take into account. Although it is often inconvenient for owners to immediately enter into a new fixture owing to possible repairs to the vessel or by carrying out a position voyage, the principle would still apply i.e. it has not been suggested that such possibilities should affect the Owners’ rights to recover the normal measure of damages.
"None of the authorities argued that an owner must prove that their vessel was to be re-chartered instantly after the conclusion of the charter."
Males LJ did not go into significant depth on whether user damages should be awarded, owing to the appeal being permitted under the res inter alios acta principle. He did state that although late redelivery can, to some extent, be considered a wrongful use of property, it is not comparable with an invasion of property rights – “Either the last voyage was legitimate, in which case the charterer was entitled to require it to be performed, albeit liable in damages in the event of an overrun; or it was illegitimate, in which case the owner need not have accepted the order…“. The court therefore rejected the argument that user damages should be awarded.
Concluding Thoughts
The Court of Appeal’s judgment has prompted significant debate regarding the proper measure of damages for late redelivery under a time charter. However, it will not be the last word on this matter, as the Supreme Court has granted the Charterer permission to appeal.
The traditional approach to damages for breach of contract is the compensatory principle: damages are intended to place the innocent party, so far as money can achieve it, in the position they would have been in had the contract been performed. In this case, the Court of Appeal’s decision departs from this traditional approach and results in the Owners being placed in a more favourable financial position than if the charterparties had been performed strictly according to their terms, because under the MOAs the Owners would not have been in a position to enter into further fixtures for the vessels. One view is that the proposition that no compensation is payable in the absence of loss is overly simplistic, as it does not take into account the contractual allocation of risk and the rights the parties agreed upon.
Although the Court of Appeal’s judgment does not necessarily establish that the “normal measure” of damages will apply in every late redelivery case (each case will turn on the specific facts and the contractual terms), it reinforces the default position that market rate damages should generally apply. The court recognised that the normal measure may over‑ or under‑compensate owners in particular cases but considered that adopting this standard promotes commercial certainty and predictability in assessing damages. This approach reduces the scope for disputes over the Owners’ subsequent commercial arrangements or intended plans for the vessel. Questions such as whether the owners would or could have concluded a further fixture are treated as res inter alios acta—a collateral matter that the law disregards when assessing damages. The decision therefore strengthens owners’ position in charterparty disputes by preventing charterers from relying on owners’ other contractual commitments to limit their liability.
For charterers, care must be taken when giving orders for final voyages, particularly when the market is volatile. Although a charterer can continue paying the charterparty rate for the late redelivery period, this will not offer protection from a claim arising for damages at the market rate. This means that charterers will have to carefully consider their exposure to the risk that their final voyage overruns the charter period, leading to a claim for substantial damages, especially in rising markets.
The Skyros case is scheduled to be heard by the Supreme Court and we are closely monitoring developments to keep clients informed of the implications arising from the judgment.
London Trainee Chris Heron also contributed to this article.
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