Is there a claim where wrongful termination of a contract results in a windfall for the innocent party?

Dalwood Marine Co v Nordana Line A/S (The Elbrus) [2009] EWHC 3394 (Comm)

This case involved an appeal to the High Court from an arbitration award and related to the appropriate measure of damages recoverable by the owners as a result of the wrongful termination of a charterparty. Although the tribunal found that charterers had wrongfully terminated the charterparty, they concluded that owners had suffered no loss because, on any calculation, the early redelivery of the vessel resulted in owners earning more from the vessel than if charterers had fully complied with their charterparty obligations. Owners appealed to the Commercial Court under section 69 of the Arbitration Act 1996, which allows an appeal to the court on a question of law arising out of an arbitration award. Owners contended that the tribunal had made an error of law by taking into account earnings after the date when the repudiated charterparty would have ended. While the court dismissed the appeal, the case is a very useful restatement of the principles governing the assessment of damages in this context, as well as general principles of mitigation of loss.

The Elbrus was chartered on an amended NYPE 1993 form for a period of 5 7 months with an option, which was exercised, for a further 5 7 months. Charterers, however, wrongfully terminated the charter on 4 April 2005, and redelivered the vessel 39 days earlier than the fixed termination date of the charter, i.e. 13 May 2005.

On redelivery, owners claimed that there was no available market for the Elbrus off the West Coast of Africa, where she had been redelivered, and decided to proceed to dry dock. After her drydocking she was delivered into a new charter with Navimed on 6 May 2005, thereby overlapping with the original charter by 7 days. Under the Navimed charter, the vessel was fixed at a daily rate of US$18,100 compared to the original charter rate of US$10,800.

It should be noted that the Navimed charter contained a "freshly drydocked" clause and, had the original charterparty not been terminated early, the vessel would have missed her laycan under the Navimed fixture and Navimed might not have agreed to extend the cancelling date.

The tribunal held as follows:

1. the normal measure of damages for early redelivery under a time charter is the difference between the contract and the market rates of hire as at the date of the breach;

2. therefore, the measure of damages was the sum that would put the owners in the same financial position as if the charter had been performed;

3. there was no available market in this case;

4. the owners acted reasonably in proceeding to dry dock when faced with early redelivery, and then delivering her to Navimed, thereby ensuring that that fixture was not lost and earning the higher rate of hire under the Navimed fixture earlier than would otherwise have been the case; and

5. the various permutations of calculation of earnings for the vessel during the period from 4 April 2005 until the date when the vessel was likely to have been delivered to Navimed (had there been contractual termination) showed that owners "did not lose as a result of the cancellation of the charter party but in fact made a gain to a greater or lesser extent".

In the appeal owners argued that, as a matter of law, the tribunal should have assessed what the owners had lost under the original charterparty for the remaining 39 days of that charterparty and then deducted from that figure the amount the owners in fact earned during that period. Owners relied on two cases in support:

The Concordia C [1985] 2 LLR 55, where Mr Justice Bingham held that the correct measure of loss, in the case of repudiation of a voyage charter, was the net revenue that the owners would have earned under the original voyage charter less the net earnings under the substitute charter for the overlap period between the two fixtures.

The Noel Bay [1989] 1 LLR 361, where Mr Justice Staughton held that the owners were entitled to be placed in the same financial position as they would have enjoyed if the contract had not been breached. The judge also highlighted the common problem that almost invariably arises where there is a substitute fixture, namely that the substitute voyage lasts longer than the voyage under the original charter party. The solution commonly adopted is to take a proportion of the profits on the substitute voyage to set off against the profits lost on the original voyage: "otherwise one would be involved in calculations to the end of the ship's working life."

In response, the charterers relied on The Golden Victory [2007] 2 AC 353, where Lord Scott stated that an award of damages was designed to put the innocent party, insofar as possible, in the position he would have been in had the contract been performed. The charterers also argued that any benefit an innocent party gained from mitigating its loss should be taken into account in calculating damages. Thus, in this case, proper credit should be given for the benefit owners received as a result of the vessel being at their disposal much earlier than it would have been if the original charterparty had not been repudiated.

Commercial Court decision

In his judgment, Mr Justice Teare concluded that the cases mentioned above recognised that where the substitute voyage conferred a benefit on the owner which it would not have had if the charterparty had not been repudiated, account could be taken of that benefit when assessing damages. There was no reason in principle to limit the type of benefit that might be taken into account. Depending on the nature of such benefits, it might be necessary to calculate their financial value by referring to earnings after the notional date on which redelivery would have taken place under the original charterparty. Therefore, where the vessel was better placed for future employment at the end of the substitute charter than at the end of the original charter, that benefit might be calculated by reference to earnings at a period later than notional redelivery under the original charter.

The judge held that it was a matter for the fact-finding tribunal to assess the monetary value of any such benefits. Whilst other tribunals might not have been persuaded that being able to earn the higher rate on the Navimed fixture earlier than would otherwise have been the case was ultimately more beneficial to the owners, he did not consider the tribunal's decision in this case to demonstrate an error of law. The appeal was therefore dismissed.

Comment

The calculation of measure of damages in wrongful charterparty termination cases remains a very difficult issue, as was recognised by the judge in this case. As the most accurate calculation of the innocent party's losses would require taking into account earnings up to the end of a vessel's working life, and that is clearly impractical in all but the rarest of cases, the end-date for calculation of the measure of losses is usually set at the date the original charter would have ended. That said, where a party has managed to persuade arbitrators to apply different principles, as can be seen from this case, the courts will be very reluctant to (and may not consider themselves able to) interfere with the award. This is because English courts are inclined not to interfere in arbitration proceedings, in order to preserve party autonomy. Therefore, to demonstrate that the tribunal had erred in law, the owners would have had to show that the tribunal's interpretation of a point of law was obviously wrong or, if the point was of general public importance, that the tribunal's decision must be open to serious doubt.

Is there a claim where wrongful termination of a contract results in a windfall for the innocent party?

By: Ince & Co

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