Transfield Shipping Inc v Mercator Shipping Inc

The House considered the proper test for remoteness of damage in contract, examining whether foreseeability alone (the "not unlikely" test from The Heron II) imposes an external rule of liability or whether the scope of recoverable loss is determined by the objective construction of the contract and the allocation of risk between the parties. The court held that the question whether a type of loss is one for which the party assumed responsibility is a matter of contractual interpretation in its commercial context; foreseeability is necessary but not sufficient. Applying those principles to a time charter, the House concluded that the charterers were not to be taken to have assumed liability for the owners' loss of profit on a subsequent follow-on fixture caused by volatile market movements, and the claim based on that loss was therefore too remote.

Background and facts:

• The Achilleas was let to the charterers under a time charter with a final redelivery date of 2 May 2004. The owners fixed a follow-on fixture for the vessel at a much higher rate with new charterers whose cancelling date was 8 May 2004. The charterers' legitimate last voyage overran and the vessel was not redelivered until 11 May 2004. Because market rates had fallen before the owners obtained an extension of the follow-on fixture, the owners had to accept a reduced rate and claimed the shortfall from the charterers.

Procedural posture:

• The arbitrators (majority) awarded damages to the owners; Christopher Clarke J and the Court of Appeal [2007] EWCA Civ 901, [2007] 2 Lloyd's Rep 555 upheld that award. The charterers appealed to the House of Lords.

Nature of the claim:

• The owners sought damages equal to the difference between the original follow-on fixture rate and the reduced rate secured after the extension (a large loss over the term of the follow-on fixture). The charterers contended damages should be limited to the difference between the market rate and the charter rate for the period of the overrun.

Issues framed by the court:

• Whether the remoteness rule in contract operates as an external legal rule imposing liability for losses which were merely foreseeable ("not unlikely"), or whether remoteness is to be resolved by construing what losses the parties, in their commercial context, objectively assumed responsibility for; and whether the owners' loss from the follow-on fixture was within the scope of such assumed responsibility.

Court's reasoning and decision:

• The House reviewed authorities including Hadley v Baxendale, Victoria Laundry, The Heron II and South Australia Asset Management (SAAMCO) and emphasised that determining the recoverability of a type of loss requires construing the contract as a whole in its commercial setting. Foreseeability is a factual question, but the question whether a loss is of a kind for which the defendant assumed responsibility is a matter of law (contract interpretation). Applying those principles and having regard to market practice and the commercial background, the House concluded the charterers had not assumed liability for loss arising from the owners' arrangements with third parties and the highly volatile market movement that produced the claimed loss; the loss was too remote. The appeal was allowed.

Appeal allowed. The House held that remoteness of damage in contract must be resolved by construing the contract in its commercial context to ascertain the losses the parties are to be taken to have assumed responsibility for; foreseeability alone is not decisive. On those principles the owners' claim for loss of profit on the follow-on fixture was too remote because the charterers had not assumed responsibility for that kind of loss.

Majority award for the owners by arbitrators; judgment for the owners at first instance (Christopher Clarke J) reported [2007] 1 Lloyd's Rep 19; Court of Appeal upheld the award [2007] EWCA Civ 901, reported [2007] 2 Lloyd's Rep 555; appeal to the House of Lords allowed [2008] UKHL 48.