August, 2011


Introduction


When calculating damages for breach of contract, the Court ordinarily takes the monetary value of the contractual rights lost, and then deducts any amount earned in mitigation by the victim of the breach. InDalwood Marine Co v Nordana Line A/S (the “Elburus”) [2009] EWHC 3394 (Comm), the English High Court established that amounts earned in mitigation after the intended period of performance of the original contract could also be taken into account.


Here, the charterers of a vessel had wrongfully terminated a charterparty with the owners. Because of the early termination, the vessel was able to meet her laycan and earn a high rate of hire under an alternative fixture. An arbitral tribunal, when calculating the amount to be deducted due to mitigation from the sum of damages, took into account earning from the alternative fixture even after the period of the original charter.


The Court held that the arbitral tribunal had not erred in law in its calculation of damages. While the prima facie assessment of mitigation would ordinarily span only the period of performance of the breached contract, the Court is entitled to take into account all benefits obtained due to the contract’s cancellation, and the assessment of the monetary value of such benefits may require looking beyond this period of performance.

On one hand, this approach is realistic as it recognises that the benefits obtained due to the termination of a contract do not conveniently end at the conclusion of the original performance period. One the other hand, it raises a specter of uncertainty as it invites the Court to consider the fruits of mitigation over an indefinite period, without any clear guidelines in place.


Brief Facts


(1)     The Charterers and Owners entered into a charterparty (“the Charterparty”), in which the Vessel was to be employed for 39 days until redelivery on 13 May 2005 (“the Performance Period”). However, the Charterers wrongfully terminated the Charterparty on 4 April.


(2)     To mitigate their losses, the Owners entered into a charterparty with Navimed from 6 May 2005.


a.        This fixture had been fixed for a “good hire rate” with a laycan for 1-20 May 2005, and the vessel was only able to meet the laycan due to the early cancellation of the Charterparty. There was a possibility that Navimed would not have agreed to an extension because market rates had softened.


b.       The Navimed fixture only overlapped with the Performance Period for 6 days (i.e. 6 – 13 May 2005), and continued beyond 13 May.


(3)     The dispute was submitted to arbitration, where the tribunal found that the Owners did not make any loss as a result of the cancellation, but instead made a gain. The Tribunal reached this conclusion by comparing the notional and actual earnings of the vessel, not from the date of cancellation to the end of the Performance Period, but from the date of cancellation to the date the vessel would have been delivered to Navimed (either 13 June or 10 July).


(4)     The Owners submitted before the Court that the arbitral tribunal had erred in law by taking into account what the Owners in fact earned through their substitute charterparty even beyond the Performance Period.


Issue


Had the Charterparty not been terminated, the Owners would have earned US$421,200 from 4 April to 13 May. However, since the termination resulted in the Owners being able to earn the higher rate under the Navimed charter, they ended up earning US$226,000 more between 4 April and 13 June (even taking into account the period between 4 April and 6 May 2005, during which the vessel did not earn any hire owing to the termination). This was the basis of the tribunal’s finding.


The Court thus had to determine whether the tribunal was wrong in law in taking into account the vessel’s actual earnings for a period which extended to a date long after the Performance Period end date of 13 May.


Holding Of The High Court


It was held that the tribunal had not committed any error of law, and that its assessment of the quantum of damages and mitigation was sound.


General Law


The purpose of damages for breach of contract is to compensate the victim, in monetary terms, for the contractual rights he has lost. Therefore, the prima facie measure of damages for the breach of a charterparty is the hire which would have been earned during the performance period, minus the hire which was actually earned during that period from alternative employment secured.


However, authorities show that the Court may depart from this prima facie measure of damages.


(i)      Where the substitute voyage confers a benefit which would not have occurred but for the repudiation, account may be taken of that benefit when assessing damages.


(ii)    There is no reason in principle to limit the type of benefit that may be taken into account. Such benefits may include the vessel being redelivered after the substitute voyage to a better location for future employment.


(iii)  Depending upon the nature of such benefits, it may be necessary to calculate their financial value by reference to earnings after the notional date of redelivery under the original charterparty.


(iv)   Whether a particular benefit has been established on evidence and the assessment of the monetary value of that benefit are matters of fact to be assessed by the tribunal or Court hearing the dispute.


Application


In order to justify its departure from the prima facie measure of damages, the tribunal had to have considered that there was a benefit received by the Owners in addition to the hire from the Navimed charter between 6 and 13 May. The Court found that the benefit the tribunal had in mind was that of being able to earn the high rate under the Navimed fixture earlier than would have been the case.


The Court found that in assessing the value to be attached to this benefit, the tribunal was entitled to look beyond the end of the Performance Period, and consider the earnings from the Navimed charter even after 13 May.


(i)      The Court acknowledged other tribunals might not have concluded that this ‘benefit’ was ultimately to the Owners’ advantage. However, this was a finding of fact, and could not be said to be an error of law.


(ii)    Similarly, although other tribunals may not have been willing to find that having the use of money earlier than would otherwise have been the case was as substantial as this tribunal did, the Court would not substitute findings of fact.


Therefore, the tribunal had not erred in law in its assessment of the damages and mitigation.


Concluding Words


The Court recognised that the assessment of damages in this context can be difficult, and indeed, the decision to accept the consideration of earnings beyond the original Performance Period stands in the face of conflicting principles.


(i)      On one hand, assessing the benefits of substitute employment only until the point at which the original contract’s performance was to end would be an incomplete and arbitrary exercise. It would fully discount the notional earnings after that date.


(ii)    On the other hand, looking beyond the performance date would involve hypothetical calculations far into the future, which would be impractical and could amount to mere speculation.


It is not easy to strike a balance between these two extremes, which is why the ordinary stance is still to consider only the original Performance Period. However, where there is clear evidence that an additional benefit has been obtained, and that the value of this benefit must be considered beyond the Performance Period, then a departure from the ordinary stance is necessary in the interests of fairness, and to ensure that the claiming party does not obtain damages disproportionate to the compensatory principle. 

 


By Danny Ong and Harish Kumar

 

 

 

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