1. The Achilleas – remoteness of damage
Presentation to Sjørettsforeningen
and Young CMI
Clare Calnan
Wednesday 18 April 2012

2. OUTLINE OF PRESENTATION
English rules on remoteness of damage for breach of contract
Damages for late redelivery under a period charter.
Decision in The Achilleas
Facts
Outcome
Analysis
Commentary
Subsequent cases
Has the position changed?
When one looks at the decision in the Achilleas one either thinks that it is "much ado about nothing" – a case that is peculiar to its own facts; or that it is an interesting case where the House of Lords might or did get it wrong or that it was the start of a movement in English law on the part of Judges and academic writers to develop a new rule on remoteness of damage in English contract law.
For my part I take the view that this is a case where the majority arbitrators came to the wrong conclusion as to whether the loss suffered was forseeable. Whilst the High Court and the Court of Appeal recognised that this was a question of fact and declined to disturb the finding the House of Lords recognised that this finding of fact might expose charterers to a type of loss that previously it had not been understood would be imposed on them. In other words the House of Lords was right but for the wrong reason.
Case is interesting because it shows how a common law system can in the pursuit of intellectual endeavour can cause quite a storm !

3. REMOTENESS OF DAMAGE UNDER ENGLISH LAW
Two aspects of remoteness
Causation – has the defendant caused the particular damage to the claimant?
Protection – to what extent is the claimant protected from the particular damage that has been suffered?
Causation is the dominant issue in tort whereas in contract the issue of protection is paramount.
Rules on remoteness in contract and tort are not the same.
4. In tort cases the questions that are addressed are is there a duty, has that duty been breached and what loss has been caused as a result. In contract the duty is easily identified by reference to the terms of the contract and so what one is looking at is what kind or type of loss is recoverable as a result of the breach.

4. REMOTENESS – Contract Rules (1)
Purpose of damages is to place the claimant as far as possible in the same position as he would have been had the contract been performed.
Damages recoverable are limited to the type or kind of losses that are in the contemplation of the parties at the time when the contract is formed.
Starting point is decision in Hadley v Baxendale (1854)
"...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 of the breach of it."
5. Damages which are not in the contemplation of the parties at the time when the contract is formed are considered as too remote. Thus the rules on remoteness are designed to answer the question what losses can be considered to be in the contemplation of the parties at the time when the contract is formed.

5. REMOTENESS – Contract Rules (2)
Rule restated in Victoria Laundry –v- Newman (1949)
Claimant is only entitled to recover such part of the loss that was at the time the contract was made was reasonably foreseeable as liable to result from the breach.
Reasonable foreseeability depends on knowledge, either imputed or actual. A reasonable person is taken to know what loss is liable to result from a breach of contract in the ordinary course. A defendant may also know of special circumstances outside the ordinary course of things of such a kind that a breach of those special circumstances would be liable to cause more loss.

6. REMOTENESS – Contract Rules (3)
Restated rule was qualified in The Heron II (1967)
Crucial question on remoteness is whether:
"on the information available to the defendant when the contract was made he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold the loss flowing naturally from the breach or that a loss of that kind should have been within his contemplation".
And then came The Achilleas

7. DAMAGES FOR LATE REDELIVERY
A charterer who fails to redeliver a ship at the end of an agreed charter period is in breach. If the order is given in the knowledge that redelivery will be late then the order is an illegitimate and the owner is not bound to perform it.
If an owner does perform the voyage either because he is obliged to or agrees to do so then he is entitled to damages to compensate for loss of opportunity to take advantage of the market during the period of overrun (The Gregos (1995))
6. Key feature is that the damages recoverable are limited to those suffered by the owners during the period of the overrun.

8. DAMAGES FOR LATE REDELIVERY
Where the market rate exceeds the charter rate at the time when the ship should have been redelivered then the Owner can recover as the difference between the two rates for the overrun period.
If the charter rate is greater than the market rate then the owner is entitled to be paid the charter rate up until the point when the ship is redelivered. (The London Explorer (1972))
7. This is explained on the basis that a charterer who is in breach is not entitled to take advantage of his own breach of contract rather than any remoteness principle.

9. The Achilleas - Facts
Ship chartered for 5 to 7 months at a daily hire rate of $13,000. Charter extended for a further period at a daily rate of $16,750.
Charterers gave notice of delivery and owners fixed vessel for a 4 to 6 month period at a rate of $39,500 per day with a cancelling date.
Vessel redelivered 9 days late. At the time of redelivery rates had fallen sharply. The new charterers threatened to cancel and owners were forced to negotiate a reduction in the hire rate to $31,500. A new charter was for a period of 191 days.

10. The Achilleas - Facts
Damages claimed by owners amounted to $1,364, being the difference between the hire rates for the original and subsequent charters for the entire 191 day period of the subsequent fixture.
Charterers asserted that the only losses recoverable were difference between charter and market rate during the 9 day overrun which amounted to $158,

11. The Achilleas - Outcome
Owners loss recoverable as not unlikely to result from breach of contract by delay in redelivery.
Reasonable person in the position of the charterers would not have understood that he would assuming liability for the risk of the type of loss in question.
Upheld decision of majority arbitrators.
Upheld decision of majority arbitrators
Allowed the appeal and overturned majority arbitrators
Majority Arbitrators Dissenting Arbitrator High Court Court of Appeal House of Lords
8. Majority arbitrators held that the loss was recoverable under the first limb of Hadley and Baxendale -
General Understanding in the shipping market was that liability was restricted to the difference between the market and charter rate for the overrun and any departure from this rule likely to give rise to serious commercial uncertainty which industry as a whole would find undesirable.

12. The Achilleas - Analysis
Unanimous decision of the House of Lords but five judgments delivered.
Two distinct approaches in the judgments:
"Broader approach" which sought to reposition contractual rules on remoteness
"Orthodox approach" which held that loss was not foreseeable.
Majority in favour of broader approach.
10. Some dispute about this. McGregor on Damages view is the ratio is reflected in the orthodox approach. Chitty on Contract treats the case as imposing a broader "assumption of responsibility" requirement as an additional and separate requirement of the remoteness rule.

13. The Achilleas – Broader Approach
To treat as the "starting point" of damages to place the innocent party in the position as if the contract had been performed is the wrong place to begin.
Before considering principles on which damages are calculated it is necessary to first decide what type or kind of loss the claimant is entitled to be compensated for.
This question is answered by asking whether loss is a type or kind for which the defendant has assumed responsibility.

14. The Achilleas – Broader Approach
Not sufficient that the type of loss is a foreseeable consequence of the breach of contract. The type of loss must also be within the reasonable contemplation of the parties at the time when the contract was made.
In the absence of special knowledge a type of loss is within the reasonable contemplation of the parties if, having regard to the terms of the contract against its commercial background and market expectations, the parties reasonably assumed liability for it.
Arbitrators erred in adopting only the foreseeability test. The loss of profits from the subsequent fixture beyond the overrun period was not within the reasonable contemplation of the parties because the charterers had not assumed liability for such losses arising from the loss of the fixture.
11. Although the parties would regard it as likely that the Owners would at some point during the charter enter into a forward fixture they would have no idea when that would be done or what its length or other terms would be. It is not enough that the charterer knew that there would be a follow on fixture what is needed is information necessary to enable the charterer to assess the extent of any liability. Party cannot be expected to assume responsibility for an unquantifiable risk.

15. The Achilleas – Orthodox Approach
Relevant test is forseeability. Was the loss sufficiently likely to result from the breach to make it proper to hold that it flowed naturally from the breach or would it have reasonably been contemplated by the contracting parties as being likely to happen in the ordinary course of things as a result of the breach?
Answer given is that the loss was not a type which at the time when the contract was made the parties would have contemplated as resulting in the ordinary course of things from late redelivery. Loss stemmed from an usual occurrence namely extreme market volatility within a short space of time.
12. The thinking that lies behind the theory that the appropriate measure of damages for late redelivery of the vessel is the difference between the charter rate and the market rate is that the availability of the market protects the owner if they lost a fixture. That is they could go into the market and find a substitute fixture.
14. Orthodox approach is based on ordinary foreseeability rule. This means that the parties would not have reasonably contemplated that an overrun of 9 days would, in the ordinary course of things cause the owners the kind of loss claimed. The loss claimed only because of the extremely volatile market conditions were made more extensive than either party could quantify at the time of contracting and arose from an arrangement with a third party about which the charterers knew nothing.

16. The Achilleas – Commentary
Outcome welcomed but the reasoning in the judgements has been the subject of criticism.
Orthodox approach has been questioned on the grounds that "forseeability" is a question fact and it was not open to the House of Lords to reverse a factual finding of the arbitrators.
In addition the fact that a loss may be extreme or extraordinary is not usually a bar to recovery where the type of loss is found to be foreseeable

17. The Achilleas – Commentary
Most criticism directed at the attempt to redefine the contractual rules on remoteness by reference to an "assumption of responsibility" test.
Some suggest that it is "much ado about nothing" and the case is of limited significance and peculiar to its own facts.
Other attacks made on the grounds that the reasoning is unsupported by authority and it confuses the test of remoteness in contract and tort.
Concern expressed that to replace external default rules of law with the implicit intention of the parties whilst attractive is impractical:
"Beguiling as it may seem, any approach which invites judges to use evidence they do not possess to seek answers that may not exist is likely to produce explanation which does not convince or results that do not please".
Hoffman's test is whether it was the objectively ascertained common intention of the parties that the contract breaker had assumed responsibility for the type of loss in question under the contract. Advanced two reasons for this test. The first is that it is logical to found liability for damages upon the intention of the parties because all contractual liability is voluntarily undertaken and second damages in tort are limited to those falling within the scope of duty assumed by the tortfeasor

18. THE ACHILLEAS – Subsequent Cases
Supershield Ltd –v- Siemens Building Technology FE Ltd (2010) CA held the orthodox approach on forseeability can be displaced where having considered the contract and commercial background the standard rule did not reflect the imputed intention of the parties. This can work both ways so that the party can be held liable if it is found that it has assumed responsibility for a loss is not foreseeable
"Sylvia" (2010) held that the orthodox approach remains the general test of remoteness applicable in the great majority of cases. In unusual cases, the context, surrounding circumstances or general understanding in the relevant market may make it necessary to specifically consider whether there has been an assumption of responsibility.
Owners in breach of their maintenance obligations under a charter as a result of which charterers lost the benefit of a profitable sub charter. Was the entire loss of profit claim recoverable or only the period for when Owners were in breach – answer yes.
The difference between the Sylvia and Achilleas was that in the Sylvia there was a market understanding or expectation that damages can be recovered for loss of a subcharter fixture. In the Achilleas the market understanding or expectation was that such losses were not recoverable

19. HAS THE POSITION CHANGED?
Liability of a time charterer who redelivers the vessel late where the market rate exceeds the charter rate is for the difference between the two rates for the period of the overrun.
Charterer is not liable for the loss of a subsequent fixture unless at the time when the contract was concluded he was aware that owners had re-fixed the vessel and that late redelivery would result in the loss of the subsequent fixture.
This measure will apply whether or not the last voyage orders are legitimate or illegitimate.
Where the market rate is less than the charter rate then the owner is entitled to the full charter rate up until the time of actual redelivery.

20. WHERE NEXT ON REMOTENESS?
No new generally applicable legal test of remoteness in contract cases.
Orthodox approach will continue to operate in majority of cases as the prima facie assumption of the parties' intentions.
Achilleas likely to be followed where the orthodox test leads to an unquantifiable, unpredictable, uncontrollable or disproportionate liability or where there is a clear evidence that such a liability would be contrary to market understanding and expectations.
15. So the arbitrators got it wrong and perhaps that is something that never changes depending on what side you sit on! But their mistake has led to a door being opened on the law on remoteness into which the intention of the parties and the commercial context in which bargains are made are beginning to play a more prominent role. Problem with The Achilleas is that the broader approach is probably not supported by sound legal theory. The danger therefore of where we now stand is that the law is not certain and that is most definitely a place where most lawyers do not like to find themselves.

21. OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE
Thank you for your attention!
OSLO ･ BERGEN ･ LONDON ･ SINGAPORE ･ SHANGHAI ･ KOBE