Omak Maritime Ltd v Mamola Challenger Shipping Co & Ors [2010] EWHC 2026 (Comm) (04 August 2010)

Shipowners claimed wasted expenditure following charterers' repudiation of a five-year charterparty, despite earning more at higher market rates afterwards. The Commercial Court held reliance damages are governed by Robinson v Harman, so benefits from mitigation must be set off, leaving no recoverable loss.

Facts

The Charterers agreed to charter the vessel MAMOLA CHALLENGER from the Owners for five years at a hire rate of US$13,700 per day. The Owners were required to carry out modifications to the vessel, including installing a new crane, and incurred various preparatory expenses (including removing a crane from another vessel at Port Gentil and holding the vessel at Cape Town pending clarification of the Charterers’ position).

The intended sub-charter to Snepco could not proceed because Napims approval was not forthcoming. The Charterers repudiated the charterparty, and the Owners accepted that repudiation on 29 January 2007. By that time, the market rate of hire had risen to US$21,347 per day, significantly above the contract rate. The Owners subsequently fixed the vessel on short-term fixtures and, over the five-year period, earned (or would earn) more than they would have under the charterparty, an excess greater than the wasted expenditure claimed.

The LMAA tribunal awarded the Owners US$86,534 in wasted expenditure damages, despite finding as fact that the Owners had “more than recuperated the losses they claim in this arbitration” and “did not… suffer any net loss in this case”. The Charterers appealed.

Issues

The central legal issue was whether a contracting party can recover wasted expenditure as damages for breach of contract where, as a result of mitigation following the breach, the innocent party has suffered no net loss overall. More specifically, the court had to determine whether reliance (wasted expenditure) damages are governed by the principle in Robinson v Harman (1848) 1 Exch 850, or whether they constitute an independent species of loss based on a different juridical foundation (placing the claimant in the position as if the contract had never been made).

Arguments

The Charterers (Appellants)

Mr Young QC argued that the tribunal erred in law. Damages for breach of contract are compensatory and designed to put the innocent party in the position they would have occupied had the contract been performed (Robinson v Harman; The Golden Victory). Where the innocent party receives a benefit flowing directly from the breach, that benefit must be brought into account (British Westinghouse v Underground Electric Railways). The Owners had suffered no net loss and were therefore entitled only to nominal damages.

The Owners (Respondents)

Mr Brenton QC argued that reliance losses protect a claimant’s “negative” interest and are awarded on a juridically distinct basis from expectation losses, namely to place the claimant in the position they would have been in had the contract never been made. On that basis, the benefit of higher market earnings from substitute employment could not be used to extinguish a claim for wasted expenditure incurred before the substitute fixture commenced. The expectation loss principle, he submitted, did not provide a rational explanation for the award of reliance damages.

Judgment

Teare J allowed the Charterers’ appeal and set aside the award.

Robinson v Harman as the governing principle

The court reaffirmed that the fundamental principle in Robinson v Harman governs all damages for breach of contract:

The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

A corollary is that damages must not place the claimant in a better position than performance would have done.

Reliance damages as a species of expectation loss

Teare J undertook an extensive review of authority across common law jurisdictions, including L. Albert & Son v Armstrong Rubber Co (Chief Judge Learned Hand), Bowlay Logging v Domtar, C&P Haulage v Middleton, CCC Films v Impact Quadrant Films, and Commonwealth of Australia v Amann Aviation. He concluded that the weight of authority firmly supports the view that reliance damages are a species of, and governed by, the expectation principle in Robinson v Harman, rather than an independent juridical basis.

The court rejected the criticisms advanced by Mr Brenton (supported by Professor Treitel’s commentary). The right of a claimant to “elect” between expectation and reliance measures is not an election between inconsistent remedies but merely a choice as to how to frame the claim, with the defendant retaining the opportunity to prove that the expenditure would not have been recouped on full performance. Cases involving non-profit-making contracts (e.g. purchases for pleasure or charity) are accommodated because the defendant will usually be unable to demonstrate that expenses exceeded the value the claimant sought.

Application of British Westinghouse mitigation principles

Where the claimant takes mitigating steps following breach, the benefits obtained must be set against the loss otherwise sustained. To ignore such benefits would breach the principle in British Westinghouse and place the claimant in a better position than performance. Here, the Owners’ higher earnings from substitute fixtures expunged not only the lost contract earnings but also the wasted preparatory expenditure.

Tribunal’s error

The tribunal had wrongly treated wasted expenditure and loss of profits as two separate and independent claims that could not be “mixed”. Both are manifestations of the single principle in Robinson v Harman, which requires the comparison between the claimant’s actual position and the position had the contract been performed, with mitigation benefits brought into account.

Cross-appeal

The Owners’ cross-appeal (regarding lost hire between 15 January and 5 February 2007) necessarily failed in light of the appeal being allowed. Teare J nevertheless indicated, obiter, that had the Charterers’ appeal been dismissed, he would have held the tribunal’s reasons for refusing this element wrong in law and would have remitted the matter for findings on whether the vessel would in fact have been employed from 15 January.

Implications

The decision provides important clarification of the juridical basis of reliance damages in English contract law. It confirms that wasted expenditure claims are not founded on a distinct principle of restoring the claimant to the pre-contractual position but are simply an alternative manner of calculating damages within the unitary Robinson v Harman framework.

The practical consequences are significant. First, where a defendant can prove the contract would have been loss-making (a “bad bargain” case), recovery of wasted expenditure is limited accordingly, consistent with C&P Haulage v Middleton. Second, and more novel on these facts, where mitigation following breach yields benefits that exceed the wasted expenditure, the claimant has suffered no net loss and is entitled only to nominal damages. The benefits of mitigation cannot be ring-fenced from a reliance claim.

The evidential burden of proving that the contract would not have allowed recoupment of expenditure rests on the defendant, in accordance with L. Albert & Son v Armstrong Rubber and CCC Films v Impact Quadrant Films. This protects claimants who genuinely cannot demonstrate expected profits.

The case is particularly significant for shipowners, charterers and other commercial parties in long-term contracts. It demonstrates that an innocent party cannot recover preparatory expenditure where the breach has, on the overall accounting, left them better off due to favourable market movements. It reinforces the strictly compensatory nature of contract damages and the integration of the mitigation principle in British Westinghouse with reliance-based claims.

The decision leaves open certain factual and procedural questions (such as the precise treatment of forgone alternative earnings as part of negative-interest claims, addressed only obiter in relation to the cross-appeal), but firmly resolves the principal question that there are not two competing principles governing damages but one.

Verdict: The Charterers’ appeal was allowed and the arbitral award set aside. The Owners’ cross-appeal was dismissed. The court held that reliance damages for wasted expenditure are governed by the principle in Robinson v Harman, requiring mitigation benefits to be brought into account; as the Owners had more than recouped their losses through higher market-rate substitute employment, they had suffered no recoverable loss.

Source: Omak Maritime Ltd v Mamola Challenger Shipping Co & Ors [2010] EWHC 2026 (Comm) (04 August 2010)