CALCULATING DAMAGES

- RECENT DEVELOPMENTS IN ENGLISH LAW

By
Clive Aston, LMAA Arbitrator

In any dispute involving allegations of breach of a charterparty

contract three broad questions arise:
- Has there been a breach of the charterparty?
- What losses has the innocent party suffered?, and
- What losses may the innocent recover from the "guilty" party?
The first question involves issues of liability while the other
two

relate

to

arbitration,

so-called

questions

of

issues
both

of

quantum.

liability

Usually

and

quantum

in

an

are

in

dispute: sometimes, though, the guilty party may admit liability

but deny that the innocent party suffered the loss claimed or is
entitled to recover the level of damages that they claim.

It is

not, therefore, unusual to see arbitrations consider questions

of quantum only and for these to be argued just as strongly as
any disputes about liability in other cases.
The established "orthodox" approach
English law has always recognised that there must be limits to
the types of loss that an innocent party may recover for a
breach

of

contract.

This

is

not

merely

for

reasons but also for pragmatic, mercantile reasons.

philosophical
Businessmen

or women will not enter into contracts if they fear that their
exposure for any breach of those contracts may be unlimited.

By

establishing limits on the types of loss that may be recovered,

2
therefore, the law creates limits and a degree of predictability
as to the exposure of parties entering into contracts.
does

not,

however,

mean

that

the

position

is

This

entirely

predictable in every case but the approach to each case should

at least be the same. It is probably right, too, that the law
should retain some degree of flexibility to deal with individual
or unique circumstances that may arise in a particular case or
changes in the way in which business is conducted.

The starting

point, though, for the assessment of damages remains the same in

each case, reflecting the orthodox approach to the question:
indeed, until very recently it was the only approach to it.
Until very recently, the two leading authorities on the question
of so-called "remoteness of damage in contract" dated back to
1854 and 1969. This shows just how well established they were!
In the 1854 case of Hadley v. Baxendale the 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 passage has become known as the "first limb" of the test in
Hadley v. Baxendale.

An innocent party may only, therefore,

recover the losses that may fairly and reasonably be considered

to arise naturally from the breach or to have reasonably been in
the contemplation of the parties as flowing from the breach when
they entered into the contract (note it is not when the breach
occurs).
the

This establishes a practical and realistic limit on

damages

responsible.

for

which

the

"guilty"

party

may

be

held

If, therefore, a loss is totally unexpected the

3
guilty party will not be responsible for it: in this way the
reasonable expectations of the parties at the time they entered
into the contract are protected on both sides.
The Court in Hadley v. Baxendale went on, however, to establish
a "second limb" of damages by stating:
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.
But, on the other hand, if these special
circumstances were wholly unknown to the party breaking the
contract, he at the most would only be supposed to have had
in his contemplation the amount of injury which would arise
generally, and in a great multitude of cases, not be
affected by any special circumstances, from such a breach
of contract.
So, if it is made known to one party by the other that a breach
of the contract may lead to special and unexpected damages, the
guilty party's liability may extend to those special damages
because of the knowledge they have of them when entering into
the contract: this was part of the bargain that the parties knew
they

were

establishes

getting

into

when

the importance

of

they

contracted.

expectation and

Again,

this

foreseeability,

the guilty party's exposure being limited only to the special

circumstances of which they have actual knowledge when entering
into the contract.
This

test

of

recoverability

of

damages

obviously

served

merchants well as there was no substantial change or addition to

these principles until the case of the "Heron II" in 1969.

The

House of Lords there held that the proper test is whether the
loss in question is:

4
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 was therefore
whether the loss claimed was 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

parties at the time they entered into the contract.

"not

unlikely",

here,

probably

indicates

to

the

The term

prospect

of

occurrence in the region of 20-25% upwards.

This remained the position for the next thirty years until the
case of the "Achilleas" in 2009.
The broader approach
In the "Achilleas" a time-chartered vessel was delayed during a
legitimate final voyage and redelivered nine days late.

The

late redelivery was a breach of contract which prevented the

owners from delivering the vessel within the laycan spread of
the follow-on charter they had for the vessel.

The owners were

forced to renegotiate with the new charterers a substantially

reduced rate of hire.

The owners claimed the damages for the

difference between the original and renegotiated rates of hire

for the entire duration of the follow-on charter (4-6 months).
The owners succeeded in the arbitration, Commercial Court and
Court of Appeal but lost in the House of Lords where it was held
that they were not entitled to recover the difference between
the

original

and

re-negotiated

rates

of

hire

and

that

their

damages were limited to the difference between the market rate

5
of hire and the rate of hire agreed in the contract which was
breached, limited to the nine days during which the owners were
deprived of the use of the vessel by late redelivery.
The speeches in the House of Lords suggested a new, broader
approach to the issue of damages.

In the leading judgment of

the House of Lords, Lord Hoffman, while recognising that the

orthodox approach would apply in the great majority of cases,
nevertheless considered that it may not be sufficient in cases:
"...in which 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.
He considered that the "Achilleas" was such a case and that the
parties would have considered losses arising from the loss of a
follow-on fixture for late redelivery by a mere nine days as a
type or kind of loss for which the charterers were not assuming
liability.

The

particular

circumstances

in

the

"Achilleas"

which led Lord Hoffman to conclude that the charterers had not
assumed responsibility for the type of loss claimed were:
(i)

That the loss would be completely unquantifiable as the

parties would have no idea when the owners would make a
follow-on fixture or what its length or other terms would
be, and

(ii) It

would

be

expectations

contrary
of

the

to

what

parties

would

have

because

been

the

the

general

understanding in the shipping market was that liability for

late redelivery was restricted to the difference between
the

market

rate

and

the

charter

rate

for

the

overrun

period, at least among legal advisors and that there had

6
been

uniform

series

of

findings in previous

cases in

which judges had assumed that damages for late redelivery

would be assessed in this way.
It appears, therefore, that the 2009 case of the "Achilleas"
added a further requirement to those of Hadley v. Baxendale and
the Heron II, namely that the loss claimed be a type of loss for
which the guilty party can reasonably be assumed to have assumed
responsibility.
The implications of the "Achilleas" are potentially great (not
only

in

shipping

cases

but

in

any

case

where

damages

are

claimed) and it has become a standard submission in charterparty

cases to argue that the losses claimed were not ones for which
the guilty party assumed responsibility.

This, of course, may

make it much more difficult and unpredictable for claimants to

recover the losses that would previously have been awarded to
them.

For this reason, the decision in the "Achilleas" has met

with a mixed reception from shipping lawyers and the writers of

leading shipping text books, with some arguing that the case
goes too far by imposing a further restriction on the types of
loss that may be recovered.
After the "Achilleas"
Even

in

the

short

period

judgment

was

given

in

the

of

time

since

"Achilleas",

the
its

House
effect

of

Lords

has

been

considered in a number of English Commercial Court cases.

In

the case of the "Amer Energy" (2009) it was suggested that the
House of Lords in the "Achilleas" were not intending to lay down
some completely new test as to the recoverability of damages in
contract and remoteness different from the orthodox approach and
that the House of Lords itself had acknowledged that departure

7
from the normal principles of foreseeability would be unusual.
In

the

non-shipping

Building
stated

Technologies

that

provides

case

the

FE

orthodox

standard

rule

of

Supershield

Limited

(2010)

approach
that

of

Limited
the

Court

"Hadley

reflects

v.

the

v.

Siemens

of

Appeal

Baxendale"

expectation

of

parties that a contract breaker should ordinarily be liable to

the other party for damage resulting from his breach but only
if, at the time of making the contract, a reasonable person in
his shoes would have had damage of that kind in mind as not
unlikely

to

result

from

breach.

The

Court

of

Appeal

considered the "Achilleas" to be authority for the proposition

that there may cases where the Court, on examining the contract
and commercial background, decides that the standard approach
would not reflect the expectation or intention reasonably to be
imputed to the parties.
These cases have now all been reviewed at length in the case of
the "Sylvia" for which judgement was given on 18th March 2010.
The

case

involved

time

charter

party.

In

March

2004

the

Charterers entered into a sub-voyage charter for the carriage of

a cargo of wheat from Baie Comeau to Casablanca with a laycan
spread

of

14-22

April

2004.

The

vessel

had

discharged

its

previous cargo by 16th April 2004 and sailed to Baie Comeau where
it arrived on 19th April.

There, the holds were inspected by

Port State Control who issued a detention order for structural

wastage in three of the cargo holds.

Repairs began on 22nd April

and were completed on 26th April.

By then, though, the sub-

charterers had cancelled the sub-charter on 22nd April and the

Charterers

were

obliged

to

enter

into

less

lucrative

substitute fixture for a time-charter trip with delivery at Baie

Comeau between 29th April and 3rd May 2004.

The arbitrators found

8
that

the

owners

maintenance

of

had

the

not

exercised

vessel

in

due

breach

under

the

diligence

of

their

in

the

contractual

maintenance

obligations

charterparty

with

the

Charterers.

The dispute was as to whether the loss of the sub-

charter was "foreseeable" within the first limb of Hadley v.

Baxendale.

The

arbitrators

found

that

it

was

and

that

the

Charterers were entitled to damages based on the difference in

earnings under the original sub-charter and substitute one, a
loss of some US$273,706.12.
The Court reviewed all of the case law on the subject at length
in

order

to

"Achilleas"
recovering

determine
applied

the

whether

so

damages

as

the

to

broader

prevent

claimed

for

approach

the
the

of

Charterers
loss

of

the
from
sub-

charterparty because the Owners had not assumed responsibility

for

such

losses.

"Achilleas"
suggested

by

was

It
not

many

as

concluded

that

significant

commentators

and

the

as

effect

first

that

it

of

the

thought

and

resulted

combination of the orthodox and broader approach.

in

The orthodox

approach would remain the general test of remoteness applicable

in the great majority of cases.

However, there may be "unusual"

cases, such as the "Achilleas" itself, in which the context,

surrounding circumstances or general understanding of the market
make it necessary to consider whether there was an assumption of
responsibility.

This would most likely be in those relatively

rare cases where the application of the general test leads or

may lead to an unquantifiable, unpredictable, uncontrollable or
disproportionate liability or where there is clear evidence that
such a liability would be contrary to market understanding and
expectations.

In most cases, though, the broader approach of

the Achilleas would not apply.

important

to

make

it

clear

The Court concluded that it was

that

there

was

no

new

generally

9
applicable legal

test

of

remoteness

in

damages and

that

the

orthodox rules still apply.

With regard to the "Sylvia" itself, the Court found that this
was not one of those "unusual" cases where it might be said that
the assumption of responsibility had to be addressed by applying
the broader approach.

The arbitrators had found that the loss

claimed by the Charterers was within the first limb of Hadley v.

Baxendale as being fairly and reasonably considered as arising
naturally from the breach of contract by the Owners and to have
been within the contemplation of the parties at the time they
made the contract as the probable result of the breach of it.
In upholding the arbitrators' decision, the Court in the Sylvia
found that there was nothing surprising about the arbitrators'
conclusion.

A vessel is chartered in order to be traded.

The

nature and purpose of a time charter is to enable the charterers

to use the vessel during the period of the charter for trading
in

whatever

manner

they

think

earning capacity of the vessel.

fit

in

order

to

exploit

the

Trading will frequently involve

sub-letting and time charters include an express liberty to do

so.

The trading of the vessel will often involve fixtures for

the carriage of specific cargoes, usually by voyage charter, but

sometimes by time charter trip.

The lifting of such cargoes

will almost invariably involve a laycan or a cancelling date.

This is all part of ordinary vessel trading.

As such, the Court

found that it would be well within the reasonable contemplation

of an owner that delay of significance in arriving or being
ready to load at the designated load port may result in the loss
of a fixture and that the profit on such a fixture would be
within the reasonable contemplation of the parties.

10
The Court went on to hold that there was no finding of any
general

market

understanding

or

expectation

that

damages

for

delay during the cancelling of the time charter are limited to

the difference between charter and market rates during a period
of delay.
damages

To the contrary, the general understanding is that

may

be

recovered

for

loss

of

fixture

in

such

circumstances and the measure of damages recoverable for the

lost voyage fixture is a well recognised measure of damages in
such cases.
In addition, this was not a case where the resulting liability
was likely to be unquantifiable, unpredictable, uncontrollable
or disproportionate.

Whereas a follow-on fixture made at the

end of a charter could be for any period, long or short, the

loss of a sub-charter during the currency of a time charter can
never be for a longer period than the time charter itself.

The

loss of a voyage fixture within the course of a charterparty

will, therefore, result in a loss within reasonable and fixed
confines.

It may be that market movements will mean that it is

a large loss but it will be a loss based on a trading voyage.

The Court therefore upheld the arbitrators' award.
Conclusion
As a result of the important judgment in the case of the Sylvia
the effect of the "Achilleas" decision may now be seen in its
proper

perspective

particular

as

applying

circumstances.

In

in
the

only
vast

limited
majority

and
of

very
cases,

therefore, the traditional, orthodox approach to the calculation

of

damages

remains

unchanged

and,

hopefully,

those in the shipping trade such as yourselves.

predictable

to