The MTM HONG KONG case says not only loss of freight, though whether anything more can be claimed is fact-sensitive.

Introduction
When a party has acted in breach of contract, the innocent party is entitled to recover the “expectation loss” or “loss of bargain” from the defaulting party i.e. what the innocent party would have otherwise earned had the defaulting party not breached the contract.   This is probably a well-known legal principle.   In the context of the repudiation of a voyage charter by the charterer, it was held in Smith v M’Guire (1858) 3 H&N 554 that the owners were entitled to recover “the amount of freight which the ship would have earned if the charter-party had been performed” after deducting (i) the expenses which would have been incurred in earning that freight and (ii) “what the ship earned (if anything) during the period which would have been occupied in performing the voyage”, which has been accepted as a standard measurement.   However, a recent English case Louis Dreyfus Commodities Suisse SA v MT Maritime Management BV, “The MTM HONG KONG” [2015] EWHC 2505 (Comm) reflects that in certain circumstances this application may not be followed.

Background and Facts

Repudiation and substitution voyage
The fact of the case is quite simple. Louis Dreyfus Commodities Suisse SA (the “Charterer”) repudiated a voyage charter for carriage of a cargo from South America to Europe. Because of the repudiation, the ship owner – MT Maritime Management BV (the “Ship Owner”) – decided to find substitute voyage to Europe. It took some time for the Ship Owner to find one, which ended much later than the repudiated charter if performed. As a result, the ship reached Europe, where freight rates were higher, at a much later time, and was not able to perform the next two North Atlantic voyages originally scheduled.

To recover the loss, the Ship Owner claimed against the Charterer damages being the difference between (a) the profit which the ship would have earned if BOTH the repudiated voyage and the next two North Atlantic voyages had been performed and (b) the profit actually earned on the substitute voyage to Europe (which ended much later than the repudiated charter if performed). The damages claimed by the Ship Owner were almost three times as much as the amount calculated according to the Smith v M’Guire formula.

The arbitral tribunal ruled in favour of the Ship Owner and awarded the damages claimed. The Charterer then appealed to the English High Court, arguing that the arbitral award was wrong in law.

Reference time period disputed
The Charterer’s argument, in essence, was that the loss of bargain suffered by the Ship Owner should only be the loss of profit (i.e. freight) which would otherwise have been earned under the repudiated voyage had it been performed, and hence any alleged loss happened after the day the repudiated voyage would have ended should be disregarded. The arbitral award was wrong in law by taking such loss into account.

In contrast, the Ship Owner put the view that in measuring damages for repudiation of voyage it is permissible to look beyond the day the repudiated voyage would have ended. This view was accepted by the arbitrators in allowing the damages claimed.

Application of the compensatory principle
It was not disputed that the nature of contractual damages is compensatory. The major dispute before the judge was how this fundamental compensatory principle should be applied – how the loss to be compensated should be defined and measured.

After reviewing a number of cases and commentaries, the judge formed the view that in some circumstances, loss of profit is not the only kind of loss a party to a voyage charter may suffer.   He gave the example of discharging at a different or wrong location, and held the view that the Smith v M’Guire formula “does not address any loss which may be suffered if the vessel is less advantageously positioned as a result of the charterer’s repudiation”.

The judge found the present case an example of this situation, and therefore the measurement of damages can look beyond the day the repudiated voyage would have ended.   He recognised that after the Charterer repudiated the voyage charter when the ship was still in South America, the Ship Owner had two choices: (a) cause the ship to sail to Europe directly under ballast voyage and (b) find a substitution voyage notwithstanding a potential delay in arriving Europe. The Ship Owner took option (b), which caused a delay in arriving Europe and thus losing two North Atlantic voyages.  The judge found that the Ship Owner’s choice was reasonable.

Upon this basis the judge found that the loss suffered by the Ship Owner as a result of the repudiation by the Charterer was twofold:

1.         the loss of charter freight (after deducting the freight earned under the substitution voyage), and

2.         a delay in repositioning the ship to Europe.

Since the delay was caused by the Charterer’s repudiation and was reflected by the loss of the benefit of two North Atlantic voyages, the judge held that such loss of benefit could be calculated as part of the damages. Therefore, the arbitral award was upheld and the Charterer’s appeal was dismissed.

Uncertainties reflected
The ruling in The MTM HONG KONG again appears to be contradictory to the “assumption of responsibility” principle (i.e. whether the loss is the “kind” or “type” for which the contract-breaker ought fairly to be taken to have accepted responsibility) laid down by Lord Hoffman in the House of Lords case The Achilleas [2008] 2 Lloyd’s Rep. 275. In fact, the ruling of this case is more in line with the overriding compensatory principle laid down in the famous House of Lords decision The Golden Victory [2007] 2 AC 353 that damages awarded should represent no more than the value of the contractual benefits of which the innocent party had been deprived.   

Although the ruling in The MTM HONG KONG confirms a more flexible approach in measurement of damages by recognising different kinds of loss which may be suffered by a vessel owner under a repudiated voyage charter, it also reveals uncertainties in the measurement of loss and damages. The application of the compensatory principle to those kinds of loss other than loss of freight profit is fact-sensitive. As the judge had reminded in his judgment, his ruling in favour of the Ship Owner was based on three important pieces of fact:

1.         the Ship Owner acted reasonably in finding substitution voyage;

2.         the Charterer did not suggest any loss claimed to be too remote; and

3.         the two North Atlantic voyages of which benefit was lost as a result of the delay were certain and immediate future employment.

Therefore, this case should not be taken as meaning that a vessel owner can always or often claim more than the amount of the lost freight. There is such a possibility in principle, but possibility together with fact-sensitivity means uncertainties.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.