Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48

This landmark House of Lords decision concerned the recoverability of damages for loss of profit on a follow-on charter fixture caused by late redelivery of a vessel under a time charterparty. The House of Lords unanimously allowed the appeal, holding that the charterers were liable only for the difference between the market rate and the charter rate for the period of overrun, rather than the owners claimed loss of profit on a subsequent fixture.

Facts

The Achilleas was a bulk carrier chartered by Transfield Shipping Inc (the charterers) from Mercator Shipping Inc (the owners). The original time charter was dated 22 January 2003, and an addendum dated 12 September 2003 extended the charter for a further five to seven months at a daily hire rate of US$16,750. The latest contractual date for redelivery of the vessel was midnight on 2 May 2004.

By April 2004, market rates had more than doubled compared with September 2003. On 20 April 2004, the charterers gave notice of redelivery between 30 April and 2 May 2004. Relying on this, the owners on approximately 21 April fixed the vessel for a new four-to-six-month charter with Cargill International SA at a daily hire rate of US$39,500, with a cancellation date of 8 May 2004.

With less than a fortnight remaining on the charter, the charterers sub-chartered the vessel for a final voyage carrying coal from Quingdao in China to Tobata and Oita in Japan. The owners raised no objection to this voyage, which, if all had gone to plan, would have permitted redelivery by 2 May. However, the vessel experienced delays at Oita and was not redelivered until 11 May 2004.

By 5 May, it became clear the vessel would not be available to Cargill before the cancellation date of 8 May. Between the fixing of the Cargill charter and this date, market rates had fallen sharply. In return for extending the cancellation date to 11 May, Cargill insisted on a reduction of the hire rate from US39,500toUS31,500 per day. The owners agreed.

The owners claimed damages for the lost difference of US8,000 per day over the full duration of the Cargill fixture, totallingUS1,364,584.37. The charterers contended liability was limited to the difference between the market rate and the charter rate for the nine days of overrun – US$158,301.17.

Issues

The case raised a fundamental question of principle in the law of contractual damages:

1. Remoteness of damage: Was the owners’ loss of profit on the Cargill fixture recoverable as damages flowing from the charterers’ breach, or was it too remote?
2. The nature of the foreseeability test: Is the rule that a party may recover losses which were foreseeable (“not unlikely”) an external, inflexible rule of law imposed upon every contract in default of express provision, or is it a prima facie assumption about what the parties may be taken to have intended – applicable in the great majority of cases but capable of rebuttal where the context, surrounding circumstances, or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses?
3. Type of loss: Was the loss of profit on the follow-on fixture the same “type” or “kind” of loss as the ordinary consequences of late redelivery, or was it a different and more remote category of loss?
4. Industry understanding and assumption of responsibility: What weight should be given to the longstanding understanding in the shipping market that damages for late redelivery are limited to the difference between the market rate and the charter rate for the overrun period?

Judgment

The House of Lords unanimously allowed the appeal, though the Law Lords offered differing (though overlapping) reasoning.

Lord Hoffmann

Lord Hoffmann delivered the lead opinion, grounding his analysis in the concept of assumption of responsibility. He held that the rules in Hadley v Baxendale (1854) 9 Exch 341 are not inflexible external rules of law but rather give effect to the presumed intentions of the parties, objectively ascertained. The key question is not simply whether a loss was foreseeable, but whether the type of loss is one for which the contract-breaker ought fairly to be taken to have accepted responsibility.

Lord Hoffmann drew an analogy with South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 (the SAAMCO principle), where the House had held that a negligent valuer was not liable for losses attributable to a fall in the property market even though such losses were foreseeable and caused by the breach. The scope of the valuer’s duty did not extend to protecting against that kind of risk. Lord Hoffmann held that the same principle applies to express contractual duties: the consequences for which a contracting party will be liable are those which the law regards as best giving effect to the obligations assumed, without extending them to impose a liability greater than the party could reasonably have thought it was undertaking.

He noted the uniform series of dicta and textbook authorities over many years assuming that damages for late redelivery are the difference between the charter rate and the market rate. He also relied on the findings of the arbitrators themselves, including the majority’s acknowledgment that shipping lawyers would have advised that liability was so limited. The risk of loss of a follow-on fixture was “completely unquantifiable” at the time of contracting — the parties would have no idea when a forward fixture would be made, its length, or its terms. A party cannot reasonably be regarded as having assumed responsibility for a risk of this nature without specific provision.

Lord Hoffmann emphasised the commercial logic: anyone asked to assume a large and unpredictable risk would require a premium in exchange. Imposing liability for a risk that a party reasonably thought was excluded gives the other party “something for nothing.” He cited Willes J in British Columbia Saw Mill Co Ltd v Nettleship (1868): “one of two contracting parties ought not to be allowed to obtain an advantage which he has not paid for.”

Lord Hope of Craighead

Lord Hope concurred but approached the matter through a more orthodox application of the remoteness principles. He emphasised that assumption of responsibility is determined by more than mere foreseeability, drawing on Lord Reid’s distinction in The Heron II [1969] 1 AC 350 between the remoteness tests in tort and contract. In contract, the test is narrower: the question is whether the loss was of a type for which the party can reasonably be assumed to have accepted responsibility.

Lord Hope stressed that while loss of use at the market rate during the overrun was within the parties’ contemplation, the charterers could not be expected to know how the owners would deal with new charterers. The terms of any subsequent fixture — its duration, terms, and what would happen if the previous charter overran — were completely unpredictable and outside the charterers’ control. A party cannot be expected to assume responsibility for something it cannot control and cannot quantify.

He endorsed the minority arbitrator’s reasoning that imposing liability for a “completely unquantifiable risk” in the relatively common situation of late delivery under a time charter would create serious commercial uncertainty.

Lord Rodger of Earlsferry

Lord Rodger reached the same conclusion but on what Baroness Hale described as a narrower ground. He applied the traditional Hadley v Baxendale principles more directly, holding that the owners’ loss was not the “ordinary consequence” of a breach of this kind. The loss occurred only because of “extremely volatile market conditions” — the sharp rise and subsequent fall in rates within a very short period — which produced both the owners’ initially lucrative Cargill fixture and the subsequent pressure to accept a lower rate. Back in September 2003, this type of loss could not have been reasonably foreseen as likely to arise out of a relatively short delay.

Lord Rodger drew on the Victoria Laundry distinction between ordinary loss of profits (recoverable) and loss of “particularly lucrative” contracts unknown to the defendant (not recoverable). He also relied on Lord Mustill’s observations in The Gregos [1995] 1 Lloyd’s Rep 1, which endorsed the market rate measure as the ordinary approach to damages for late redelivery.

Lord Walker of Gestingthorpe

Lord Walker agreed with the other Lords and emphasised that the majority arbitrators had applied too crude a test — simply asking whether the type of loss was “foreseeable.” The correct question, informed by Lord Reid’s speech in The Heron II, was whether the loss was “sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach.” He also drew on the Victoria Laundry distinction, noting that the majority arbitrators had failed to consider whether the owners’ extraordinary loss — measured over the entire term of the renewed fixture — was truly within the common intention of reasonable contracting parties.

Baroness Hale of Richmond

Baroness Hale expressed some reservations about the broader “assumption of responsibility” reasoning advanced by Lord Hoffmann, describing it as introducing “an interesting but novel dimension” to remoteness of damage in contract. She was not immediately attracted to importing the SAAMCO “scope of duty” concept from negligence into the general law of contract, warning that while it might bring certainty in this particular market, it could come “at the expense of justice in some future case” and “introduce much room for argument in other contractual contexts.” She preferred the narrower ground identified by Lord Rodger — that the particular loss was simply not within the parties’ reasonable contemplation given the extraordinary market volatility — leaving the wider ground to be explored in a future case.

Implications

1. Refinement of the remoteness test: The decision introduced an important refinement to the Hadley v Baxendale principles. While foreseeability remains central, the case establishes that even foreseeable losses may not be recoverable if the type of loss is not one for which the contract-breaker can reasonably be regarded as having assumed responsibility. This represents a shift from a purely probabilistic inquiry to one that also considers the allocation of risk between the parties.
2. Role of market understanding: The decision gives significant weight to established market expectations and industry practice in determining the scope of contractual liability. The longstanding understanding in the shipping market that damages for late redelivery are limited to the market rate/charter rate differential was treated as strong evidence of the parties’ presumed intentions.
3. Unquantifiable risks: The judgment emphasises that parties cannot reasonably be taken to have assumed liability for risks that are inherently unquantifiable at the time of contracting. The loss of a follow-on fixture depends on variables entirely outside the knowledge and control of the party in breach, making it inappropriate to impose such liability without specific contractual provision.
4. SAAMCO in contract: Lord Hoffmann’s extension of the SAAMCO “scope of duty” principle to breach of express contractual terms remains controversial. Baroness Hale expressly reserved her position on this broader ground, and academic opinion is divided. Practitioners should be aware that this aspect of the reasoning may be revisited in future cases.
5. Commercial certainty in charterparties: The decision restored commercial certainty in the charterparty market by confirming the conventional measure of damages for late redelivery. Parties wishing to impose or accept liability for consequential losses of this nature must make express provision in their contracts.

Verdict

The House of Lords unanimously allowed the appeal. The charterers’ liability was limited to the difference between the market rate and the charter rate for the nine-day period of overrun rather than the owners′claimed loss of profit on the Cargill fixture.

Source: Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48