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Charterers awarded lucrative damages despite weak market

News / 29-11-2018 / China

A v. B [2018] EWHC 2325 (Comm)

This appeal from an LMAA arbitration award raised two questions in relation to the calculation of damages – can charterers claim for the loss of lucrative profits in an otherwise weak market, and can they claim wasted expenditure at the same time? The Court answered both questions with a clear yes.

The background facts

In July 2011, the Charterers time-chartered the Owners’ VLCC and sub-chartered her into a pool of similar tankers. Under the head charterparty, the Owners were obliged to ensure that a valid SIRE report would be registered at all times, and that the vessel would always be eligible for the business of at least three named oil majors. The sub-charterparty obliged the Charterers to ensure that, at all times, the vessel had a SIRE report that was not more than six months old. It also incorporated the terms of a separate pool agreement, which replicated the six-month requirement and also required that the vessel must maintain eligibility with at least four oil majors.

The following spring, Statoil inspected the vessel when she was discharging at Yingkou in China, and produced an unfavourable SIRE report. As a result, BP refused to allow the vessel to discharge at one of its terminals, with the result that the cargo in question had to be discharged elsewhere. The vessel was subsequently rejected by ExxonMobil, Total, and Petrobras.

The Charterers put the vessel off-hire on 26 October 2012, citing breach of the charterparty’s oil majors clause.

In the subsequent LMAA arbitration, the Charterers claimed damages for: (1) loss of profits, calculated with reference to two hypothetical voyages during the period from 26 September 2012 to 31 January 2013, which they said the vessel would have made but for the breach; and (2) wasted expenditure for hire and bunkers incurred between 22 July and 26 October. That amounted to US$3.5m in total.

The Tribunal found that the Owners had breached the oil majors clause because the vessel was not acceptable to at least four of the named oil majors, and because the SIRE report became more than six months old. The Charterers’ damages claim succeeded – both for lost profits and wasted expenditure – in the amount of US$3.3m.

The Commercial Court decision

The Owners challenged the award for serious irregularity on various grounds. All of these arguments failed to convince the Court, which typically sets a very high threshold for such challenges.

More importantly, the Court had to consider two questions of law in relation to the calculation of damages. The first concerned the scope of the compensatory principle, that is the basic rule that the party suffering the breach must be placed in the same financial position that they would have been in had the contract been performed properly.

Generally, a claimant cannot claim loss of profits and also claw back expenses that it incurred in reliance on the contract being performed. So it is often said that the compensatory principle gives the claimant a choice: it may claim wasted expenditure or lost profits, but not both.

The Court confirmed that as long as the wasted expenditure does not overlap with the lost profits, both can be claimed. In this case, the Tribunal had taken the time-charter-equivalent (“TCE”) rates for the two hypothetical voyages relied on by the Charterers as the basis for calculating lost profits. The TCEs were net amounts because they took into account bunkers and other expenses. The Tribunal then subtracted the cost of bunkers from 22 July to 26 September 2012, and the cost of hire from 22 July 2012 to 31 January 2013 from the total profit figure. Accordingly, the lost profits did not overlap with the wasted expenditure for bunkers and hire from 22 July to 26 October, and both heads were awarded.

The second question regarding damages was as follows: if the available market is generally weak and loss-making, must damages be calculated with reference to that market – such that only nominal damages can be awarded? Or can damages be assessed with reference to certain lucrative transactions that probably would have occurred but for the breach?

The manager of the pool acknowledged that the market rate had been low at the relevant time, such that if the vessel had operated at the same daily rate as comparable vessels in the pool, the Charterers would have made a loss. However, given the factual finding that it was reasonable to assume that the particularly lucrative fixtures could have been made, the Tribunal was content to take those as the basis for the lost profits. The Court agreed, holding that where there was a relevant market and certain lucrative fixtures “would probably have been performed”, there was no reason to reduce the damages below those likely profits, or on the basis of loss of chance principles.

Comment

This decision confirms that claimants can successfully claim for wasted expenditure and loss of profits arising out of the same facts, as long as the two do not overlap and the loss of profits is calculated as a net amount. The Court was also willing, in this case, to take into account the likelihood of particularly lucrative fixtures being performed, even though the market at the time was generally flat.

Carl Walker

Carl Walker Partner

Iain Preston

Iain Preston Claims Executive

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