Transfield Shipping Inc (Appellants) v Mercator Shipping Inc (Respondents)

Contractual damages are not recoverable merely because the loss was reasonably foreseeable or because an intermediate event was not unlikely. The court must determine whether the type of loss, viewed at the time of contracting against the contract’s nature, commercial setting and the parties’ knowledge, fell within the responsibility fairly attributed to the defendant.

For late redelivery under a time charter, absent communicated special circumstances, the ordinary measure is the difference between the market and charter rates during the overrun. A loss spanning an entire follow-on fixture, caused by renegotiation after an extraordinary market fall, is too remote where the charterer knew neither the fixture’s terms nor the potential exposure. Foreseeability that some subsequent fixture might be missed does not establish responsibility for that unquantifiable loss.

The owners of the bulk carrier Achilleas chartered the vessel to the charterers until no later than 2 May 2004. The owners then agreed a follow-on charter at US$39,500 per day. The vessel was redelivered nine days late. Because market rates had fallen, the owners obtained an extension of the new charter’s cancelling date only by reducing its rate to US$31,500 per day.

The owners claimed US$1,364,584.37, representing the reduced earnings over the follow-on fixture. The charterers accepted liability of US$158,301.17, representing the market-rate differential during the nine-day overrun. A majority of the arbitrators awarded the larger sum. Christopher Clarke J upheld that award at [2007] 1 Lloyd's Rep 19, as did the Court of Appeal at [2007] EWCA Civ 901; [2007] 2 Lloyd's Rep 555.

The central issue before the House in Transfield Shipping Inc v Mercator Shipping Inc was whether reasonable foreseeability alone made the follow-on fixture loss recoverable, or whether the charterers could reasonably be treated as having assumed responsibility for that type of loss.

1. Appeal allowed unanimously. The charterers were liable only for the agreed US$158,301.17 market-rate differential during the nine-day overrun. The owners’ loss over the whole follow-on fixture was too remote.

2. Lord Hoffmann, Lord Hope and Lord Walker treated assumption of responsibility as fundamental to contractual remoteness. The foreseeability rules derived from Hadley v Baxendale (1854) 9 Exch 341 were not inflexible external rules. They ordinarily reflected the risks which reasonable parties would be taken to have accepted, but the contract’s nature, commercial setting and market understanding could show that a foreseeable type of loss had not been undertaken. The price and other contractual terms would normally reflect the scale and predictability of the accepted risks.

3. Per Lord Hoffmann, the correct inquiry concerned the kind of loss for which the contract-breaker had accepted responsibility, rather than merely the measure of all factually caused loss. Construed against the established shipping-market expectation, the charterers had not assumed the unquantifiable risk created by the duration and terms of an unknown future fixture. Lord Hope likewise held that reasonable foreseeability was insufficient: responsibility depended on knowledge enabling the contract-breaker to assess and provide for the relevant exposure.

4. Lord Rodger reached the same result through the ordinary-course analysis in Hadley v Baxendale and C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350. Missing some subsequent fixture might have been not unlikely, but the owners’ particular loss resulted from an unusually sharp market movement and was not the ordinary or likely consequence of nine days’ delay. Lord Walker agreed that the arbitrators had applied too crude a foreseeability test. Baroness Hale expressly preferred Lord Rodger’s narrower basis while allowing the appeal.

5. The market-rate differential during the overrun was the ordinary measure because it was known, controllable and quantifiable when the parties contracted. The position might differ where an owner communicates a specific, lengthy forward fixture and its delivery requirements when the charter is made. Lord Rodger treated that possibility as a matter potentially falling within the special-circumstances limb of Hadley v Baxendale, but the point did not arise for decision.

1. House of Lords: In Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48, the House unanimously allowed the charterers’ appeal and displaced the award of damages calculated over the follow-on fixture.
2. Court of Appeal: Ward, Tuckey and Rix LJJ upheld the Commercial Court and the majority arbitral award: [2007] EWCA Civ 901; [2007] 2 Lloyd's Rep 555.
3. Commercial Court: Christopher Clarke J upheld the majority arbitral decision: [2007] 1 Lloyd's Rep 19.
4. Arbitration: A majority awarded the owners US$1,364,584.37 for reduced earnings over the follow-on fixture. The dissenting arbitrator considered liability limited to the market-rate differential during the overrun.