CALCULATING DAMAGES – Recent developments in English Law

1. CALCULATING DAMAGES – Recent developments in English Law by CLIVE ASTON LMAA Arbitrator

2. CLIVE ASTON - LMAA ARBITRATOR 1. Liability and Quantum • In any dispute involving a breach of contract 3 questions arise: • Has there been a breach of contract? • What losses has the innocent party suffered: • What losses can the innocent party recover from the guilty party? Usually Arbitrators consider all 3 questions but it is not unusual for Arbitrators to consider questions of quantum (the calculation of loss) alone.

3. CLIVE ASTON - LMAA ARBITRATOR 2. The Established or “Orthodox” Approach to Damages • English law recognises that there must be limits to the types of loss an innocent party may recover for breach of contract, otherwise • Business people will not enter into contracts of their exposure is unlimited • Business people seek limitation and predictability • The orthodox approach is based on 2 important cases on recoverability and “remoteness of damage in contract”, one from 1854 and the other from 1969.

4. CLIVE ASTON - LMAA ARBITRATOR 3. Hadley v. Baxendale (1854) • English Court held that: “where two parties have made a contract which one of them has broken the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result to the breach of it.” • This is the so-called “first limb” of the test in Hadley v. Baxendale (note the important reference to the time of the contract). • It covers most claims for damages. • If a loss is totally unexpected the guilty party may not be liable for it.

5. CLIVE ASTON - LMAA ARBITRATOR 4. The “Second Limb” of Hadley v. Baxendale • The Court established a so-called “second limb” of damages that could be recovered: “Now, if the special circumstances under which the contract was made were actually communicated by the claimants to the defendants and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which should ordinarily follow from a breach of contract under these special circumstances so known and communicated.” • If one party makes known that the time of making the contract to the other that a breach of contract may cause special and unexpected damages the guilty party may be liable because this knowledge was part of the bargain they entered into when contracting.

6. CLIVE ASTON - LMAA ARBITRATOR 5. The Heron II (1969) • The House of Lords added to the test of Hadley v. Baxendale that the test to recover damages is whether the loss in question is: “The kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from the breach... the words "not unlikely"... denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable.” • Applying this test to the earlier one of Hadley v. Baxendale, the generally accepted test for remoteness of loss required that: • The loss claimed is of a kind or type which it would have been within the reasonable contemplation of the parties at the time the contract was made as being not unlikely to result, or which resulted from special circumstances known to the parties at the time they entered into the contract. • The term “not unlikely”, here, probably indicates a prospect of occurence in the region of 20-25% upwards.

7. CLIVE ASTON - LMAA ARBITRATOR 6. The Achilleas” (2009): A New Broader Approach to Damages? • The “Achilleas” was redelivered nine days late under a time charter. • The Owners  missed the laycan for the vessels next fixture of 4-6 months time charter • The Owners had to agree a reduced rate of hire for the vessel’s next fixture. • The Owners claimed the difference between the original and re-negotiated rate of hire for the next fixture for the 4-6 month period. • The Charterers admitted liability for the difference between charter and market rate of the nine days only • Owners succeeded in arbitration, Commercial Court and Court of Appeal but lost in the House of Lords

8. CLIVE ASTON - LMAA ARBITRATOR 7. The “Achilleas” / Continued • Leading judgment recognized that orthodox approach will apply in most cases but that it might not apply 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.” • In the “Achilleas” the parties would not have considered at the time the contract was made that the Charterers were assuming responsibility for loss of a follow on fixture, because:

9. 8. The “Achilleas” / Continued • Loss completely unquantifiable as the parties had no idea when Owners would make a follow on fixture, for how long it would be and what its terms would be. • Loss was contrary to general understanding that liability for late redelivery was limited to the difference between market and charter rate for the period of overrun (9 days) • In addition to the requirements of Hadley v. Baxendale and the “Heron II”, the “Achilleas” suggests the further requirement that the loss claimed be of a type for which the guilty party may reasonably be understood to have assumed responsibility. • Makes recovery more difficult.

10. 9. After the “Achilleas” • Amer Energy (2009) : Suggests the House of Lords not laying down any new test for recoverability of damages as it recognised that orthodox approach would usually apply. • Supershield Limited v. Siemens Building Technology (2010): Hadley v. Baxendale reflects standard rule of expectation of parties. Broader approach limited to cases where on examining the contract and commercial background the standard approach does not reflect expectation or intention reasonably attributed to the parties. • The “Sylvia” (18.3.2010) CLIVE ASTON - LMAA ARBITRATOR

11. CLIVE ASTON - LMAA ARBITRATOR 10. The “Sylvia” (2010) • Time charter party • Vessel detained by Port State Control and missed the cancelling date of a voyage c/p between Charterers and sub-charterers • Charterers claimed difference between sub c/p freight and lower rate obtained for replacement fixture • Arbitrators found Owners had breached maintenance obligation of time charter • Was the loss of the sub c/p foreseeable within the first limb of Hadley v. Baxendale– arbitrators say yes and award loss of earnings. • On appeal to the Commercial Court, the Owners argued for the broader approach of the “Achilleas” on basis that Owners had not assumed responsibility for such losses.

12. CLIVE ASTON - LMAA ARBITRATOR 11. The “Sylvia” continued • Court held that: • The effect of the Achilleas not as significant as first thought • Generally the orthodox approach applies but in unusual cases surrounding circumstances or general understanding of market may require consideration of whether there was an assumption of responsibility • Unusual if orthodox approach leads to unquantifiable, unpredictable and disproportionate liability or evidence that recovery is contrary to market understanding • Facts of “Sylvia” were not unusual – arbitrators found the loss claimed was within first limb of Hadley v. Baxendale: • Time charter allows charterers to trade the vessel and sub-let it. • Delay may cause vessel to miss sub c/p cancelling date and loss of earnings to charterers: this is within the reasonable contemplation of the parties • No different market understanding • Losses predictable and quantifiable

13. 12. Conclusion • The effect of the Achilleas is much more limited than first seemed • In vast majority of cases the rules of recovery of damages remain as before based on the well established cases of 1854 and 1969