Palmali Shipping SA v Litasco SA

On a summary judgment application concerning contractual damages, the court must determine whether the pleaded case has a realistic prospect of success without conducting a mini-trial. Loss is generally assessed by a net loss approach, taking account of liabilities generated by performing the contract, even where those liabilities remain unpaid. A liability may be excluded where there is an arguable basis for concluding that it will never be discharged and that allowing recovery would create a windfall.

The broader transferred-loss principle is confined to cases where the known object of the contract was to benefit the relevant third party or class. It does not ordinarily enable a contracting party to recover profits which associated companies might have earned under contracts subsequently made with it.

Palmali claimed approximately US$1.9 billion from Litasco for alleged breaches of a long-term contract of affreightment. It claimed loss of profits arising from alleged breaches of exclusivity and minimum-quantity obligations.

Litasco sought reverse summary judgment on the pleaded method of quantifying loss, arguing that Palmali had failed to account for liabilities to associated vessel-owning companies. Palmali sought permission to amend its Particulars of Claim, including to claim damages for breach of the minimum-quantity obligation and to advance a transferred-loss claim for losses allegedly suffered by associated companies.

The court also considered the adequacy of the proposed pleading and consequential case-management directions.

1. Summary judgment. The court applied the principles in The LCD Appeals [2018] 4 CMLR 23, Easyair Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch) and Swain v Hillmann [2001] 1 All ER 91. Summary judgment was appropriate where the pleaded method of calculation had no realistic prospect of success, although it did not dispose of the damages claim altogether. [19]-[20], [26]-[27]
2. The correct approach to damages was a net-loss calculation. It required account to be taken of the rights, obligations, assets and liabilities arising from the proposed performance. An unpaid liability could constitute recoverable loss. Palmali therefore could not calculate its loss on the assumption that liabilities to vessel-owning companies would be ignored. [30]-[32]
3. The court recognised a possible qualification where it was sufficiently arguable that a liability would be waived, forgiven or never discharged, since otherwise recovery could produce a windfall. Palmali’s evidence did not establish an arguable case that the recorded inter-company liabilities would never be discharged. [34]-[40]
4. The transferred-loss amendment was refused. The broader principle described in Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 AC 85 and Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 was limited by Swynson Ltd v Lowick Rose LLP [2017] UKSC 32 and BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596 to cases involving a known object or common intention to benefit the relevant third party or class. The contract was made for Palmali’s benefit, and any benefit to associated companies would arise from later arrangements made by Palmali. [44]-[56]
5. Permission was granted to amend to plead damages for breach of the minimum-quantity obligation because the proposed methodology was comprehensible and sufficiently arguable at that stage. The proposed amendments concerning the exclusivity calculation were refused as presently unhelpful. The February 2021 trial fixture was vacated, with a further hearing directed concerning the future progress of the action. [57]-[71]

This was a first-instance decision. The judgment records that an earlier ruling by HHJ Pelling QC concerning the pleaded minimum-quantity damages claim was subject to an application for permission to appeal.