C Czarnikow Ltd v Koufos (The Heron II) [1967] UKHL 4 (17 October 1967)

A shipowner breached a charter party by deviating, causing nine days' delay in delivering sugar to Basrah. The sugar market price fell during the delay. The House of Lords held the charterers could recover damages for loss of market as such loss was not unlikely to result from the breach and was within the parties' contemplation.

Facts

The Respondents (charterers) chartered the Appellant’s vessel, Heron II, to carry 3,000 tons of sugar from Constanza to Basrah. The charter party was dated 15th October 1960. A reasonably accurate prediction of the voyage duration was twenty days. However, due to deviations by the shipowner in breach of contract, the vessel arrived nine days late on 2nd December 1960. The Respondents intended to sell the sugar promptly after arrival at Basrah, where there was an established sugar market. The Appellant knew of the existence of this market but did not know the Respondents’ specific intention to sell immediately upon arrival. During the nine-day delay, the market price of sugar fell partly due to the arrival of another cargo of sugar. The sugar realised £31 2s. 9d. per ton instead of the £32 10s. 0d. per ton it would have fetched had the vessel arrived on time.

Issues

The central issue was whether the charterers could recover damages for loss of market resulting from the delay, or whether damages should be limited to interest on the value of the goods during the period of delay. This required consideration of the correct application of the rule in Hadley v Baxendale (1854) to contracts for carriage of goods by sea, and whether The Parana (1877) established any special rule limiting such damages.

Judgment

The House of Lords unanimously dismissed the appeal, holding that the charterers were entitled to recover damages for the loss of market.

Lord Reid

Lord Reid analysed the rule in Hadley v Baxendale and concluded that damages are recoverable where the defendant ought to have realised the loss was ‘not unlikely’ to result from the breach. He distinguished the test in contract from the wider test of reasonable foreseeability in tort. He held that on the facts, a reasonable shipowner would have contemplated that delay might cause loss due to market fluctuations. He stated that The Parana could not be relied upon as establishing a rule requiring a different decision.

Lord Morris of Borth-y-Gest

Lord Morris emphasised that the rule in Hadley v Baxendale remained the governing principle. He considered that a shipowner contracting to carry sugar to a port with a sugar market must have contemplated that delay was likely or liable to result in financial loss referable to market price fluctuations. He held there was no special rule for carriage by sea diverging from general principles.

Lord Hodson

Lord Hodson agreed that the word ‘probable’ in Hadley v Baxendale should not be interpreted narrowly. He adopted the phrase ‘liable to result’ as appropriate. He rejected the suggestion that The Parana established a rule of law limiting damages in sea carriage cases, holding it was at most an inference of fact from the particular circumstances.

Lord Pearce

Lord Pearce endorsed the approach taken in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, accepting ‘serious possibility’ or ‘real danger’ as the appropriate test, though deprecating the colloquialism ‘on the cards’. He held that on the facts, loss of market arose naturally from the shipowner’s deviation and that The Parana, if it purported to lay down any general proposition, was wrongly decided.

Lord Upjohn

Lord Upjohn confirmed the distinction between the test for damages in contract (contemplation of the parties) and tort (foreseeability). He adopted ‘real danger’ or ‘serious possibility’ as the practical test. He held that the parties must be assumed to have contemplated punctual delivery to a port with a sugar market and that there was a real danger that delay would cause the charterer to miss the market and suffer loss accordingly. He stated that The Parana must be regarded as obsolete or overruled.

Implications

This case is a leading authority on remoteness of damage in contract law. It clarified that the test for recoverable damages in contract requires that the type of loss be within the reasonable contemplation of the parties as a not unlikely consequence of breach, rather than merely foreseeable as in tort. The decision confirmed that there is no special rule limiting damages for delay in carriage of goods by sea to interest on the value of goods. The case effectively disapproved The Parana and aligned the principles governing sea carriage with those for land carriage. It remains essential reading for understanding the boundaries of contractual liability for consequential losses.

Verdict: Appeal dismissed. The charterers were entitled to recover damages for loss of market in addition to the admitted sum for interest and expenses.

Source: C Czarnikow Ltd v Koufos (The Heron II) [1967] UKHL 4 (17 October 1967)