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Charterers Recover Lucrative Damages for Breach of Charter in a Weak Market

  • 7 March 2019 7 March 2019
  • Marine

In a case which has potential ramifications for how parties formulate damages claims for breach of charterparty, A v B [2018] EWHC 2325, the High Court has upheld the decision of a Tribunal which concluded that charterers were entitled to recover lost profits calculated on the assumption they lost two lucrative potential fixtures, notwithstanding that the market at the time was "extremely soft" with similar vessels unfixed.

Charterers Recover Lucrative Damages for Breach of Charter in a Weak Market

The High Court also upheld the Tribunal's decision to award charterers damages for both loss of profits and wasted expenditure, confirming that in line with the compensatory principle, both are recoverable providing they do not overlap.

Background

Charterers time chartered a VLCC from owners. In turn, charterers placed the vessel in the S Pool, a pool of 5 other similar tankers, pursuant to a sub-charter and pool agreement.

Under an "oil major eligibility" clause in the head charterparty, owners guaranteed that a valid report would be registered on the SIRE system, and the vessel would also be eligible for the business of at least three named oil majors at all times. Subsequent to delivery, owners warranted that they would maintain the minimum level of vetting approvals as per the S Pool agreement.

The sub-charter from charterers to the S Pool similarly required charterers to ensure that the vessel had a valid SIRE report no more than 6 months old registered on the SIRE system. The sub-charter also incorporated the terms of the S Pool agreement, which required the vessel to be eligible for charter to a minimum of four oil majors.

On 10 March 2012, whilst the vessel was discharging at Yingkou, it was inspected by Statoil and a critical SIRE report was issued. As a result of this report, BP refused to allow the vessel to discharge at its Long Beach terminal. Subsequently, other oil majors rejected the vessel: ExxonMobil on 18 September, Chevron on 27 September, Total on 2 October, Petrobras on 8 and 18 October and BP on 19 October 2012.

On 26 October 2012, charterers placed the vessel off-hire pursuant to the oil major eligibility clause. Owners assumed control of the vessel from that point, with bunkers from that date for owners' account. The vessel was eventually redelivered to owners on 14 January 2013.

LMAA Arbitration

Charterers advanced a claim against owners in arbitration proceedings contending that as a result of owners' breach of the oil major eligibility clause, the vessel was not able to earn profits from two lucrative voyages that could otherwise have been undertaken; firstly a voyage from Dalia to Jamnagar for Shell, and then a voyage from Basrah to Long Beach for Valero. In addition to the claim for loss of profits, charterers claimed wasted expenditure for bunkers consumed between 26 September and 26 October 2012.

The Tribunal agreed that the owners were in breach of charterparty, as the vessel did not have a valid report on the SIRE system, and the vessel was not acceptable to at least four named oil majors.

On quantum, owners argued (citing the "Vicky 1") that charterers' claim should be discounted on the basis of the loss of chance principles because the market for VLCC's was weak.

However, the Tribunal awarded charterers USD 3,278,169, assessing their loss of profits by reference to the Shell and Valero fixtures, rather than to market averages of time charter equivalent rates. This was notwithstanding the fact that the Tribunal conceded there was "an extremely soft market for VLCCs with four of the [S] Pool vessels having been unfixed for lengthy periods".

The Tribunal concluded it was "reasonable to assume" the potential Shell and Valero fixtures would both have taken place. The Tribunal noted that the Shell fixture had been on subjects but had failed because Total (who operated the terminal at Dalia) rejected the vessel. The Tribunal also concluded that the Valero fixture would have likely taken place, citing evidence of an "excellent relationship" between the S Pool and Valero. The Tribunal concluded that although the market was soft, expert and factual evidence supported the position that the charterers "could indeed and probably would have performed" the Shell and Valero fixtures and charterers were entitled to damages calculated on the assumption they would have been performed.

High Court Appeal

The owners appealed the Tribunal's award on various grounds under sections 68 and 69 of the Arbitration Act 1996. The Court rejected owners' section 68 appeal that there had been "serious irregularity".

Owners' section 69 appeal addressed 3 issues of law concerning the calculation of charterers' losses:

  1. The owners argued that the Tribunal's award of wasted expenditure, in addition to loss of profit, was contrary to the compensatory principle. The Court rejected this ground of appeal, concluding that charterers would not be overcompensated provided there was no overlap in recovery.
  2. The owners submitted that as a matter of law, the Tribunal was wrong to ignore the accounting position under the pool agreement. The Court stated that the charterers were claiming for what the vessel would have earned for the S Pool (net of hire and bunkers) and agreed with the Tribunal that the accounting position between charterers and the S Pool was "for another day". It followed there was no error in law by the Tribunal.

  3. The owners submitted as there was an available market that was weak and loss making, the Tribunal erred in law by calculating damages on the assumption that performance of the Shell and Valero fixtures would have been performed, failing to assess damages on the basis of loss of chance principles. The Court held that the Tribunal's conclusion that the vessel would probably have performed the Shell and Valero fixtures in the absence of the owners' breach of contract was a finding of fact that could not be challenged under section 69 of the Arbitration Act, and there was no error of law founding a challenge to the Tribunal's decision that those losses should not be discounted for loss of a chance.

Comment

This case highlights the significant scope for dispute between parties as to the appropriate quantum of damages, in circumstances where, following a breach of charter, the innocent party is not able to agree or perform potentially lucrative fixtures.

The Court made it plain that an innocent party can claim for both i) wasted expenditure and ii) loss of profit, providing that these heads of claim do not overlap, in line with the compensatory principle. It also indicated that damages can be claimed for the loss of potentially lucrative fixtures even in a soft market.

This decision provides encouragement to claimants formulating damages claims, as they may be able to recover damages in excess of average time charter equivalent rates in weak markets, as long as they can provide good evidence that they would otherwise have been able to fix and perform more lucrative fixtures.  

End

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