Laurence Marron Solicitors
Offering you a quick, more personal and value for money service on matters relating to shipping, marine insurance and international trade.


26 November 2020
lm@laurencemarron.com
Tel: +44 (0)20 7868 2019

 
Home About Us What we do Newsletter Newsletter signup Contact Us

Newsletter Archive

Sea Views

Issue 2 - Spring 2008

Below is the paper presented by Laurence Marron at a commercial law seminar organized by the University of Westminster in February 2008.

The cost of draining the last drop
A review of the Court of Appeal decision in The Achilleas

Introduction
The scenario is not uncommon. The end of a time charterparty is approaching and the charterers of "ANNA" find themselves in a position where the rate of hire currently prevailing in the market for a ship like "ANNA" is significantly higher than the daily hire rate which the charterers are contracted to pay under the current charterparty. "ANNA" concludes what was originally intended by the charterers to be her final voyage under this time charterparty - the charterers are now within the range permitted by the charterparty for redelivery to the owners. But there are, in fact, another two weeks before the final redelivery date under the current charterparty - given the hire rate differential, it is very tempting for the charterers to try for one more voyage and use the maximum time possible at the present charterparty rate of hire - and, to quote Lord Justice Rix, "...drain the last drop and more of profit at a time of raised market rates..".

But what if something goes wrong on that additional voyage so that what was expected to take a maximum of two weeks and allow redelivery by the final redelivery date actually takes far longer and results in "ANNA" being redelivered to her owners well after that final redelivery date? Would the owners be entitled to claim damages from the charterers for the charterers' failure to redeliver "ANNA" by the final redelivery date indicated in the contract? If so, would the owners' damages be limited to the difference between the charterparty rate of hire and the market rate of hire for the period of the overrun (ie the period between the final redelivery date and the actual redelivery date) or would the owners of "ANNA" be entitled to claim damages based on the loss of their next fixture?

These were the issues before the Court of Appeal in The Achilleas.

The facts

The facts are neatly outlined in the judgment of Lord Justice Rix, but for ease of references, they are as follows.

By a charterparty dated 22 January 2003, the owners let their ship Achilleas to the charterers for a period of about five to seven months at a daily rate of hire of US$13,500. By an addendum to the contract, the hire rate was increased to US$16,750 per day and the charter period extended by a further five/seven months so that the latest redelivery date was midnight on 2 May 2004.

The charterers ordered Achilleas on her final voyage (a voyage which Lord Justice Rix described as "pushing it"). During April 2004, the charterers, in accordance with the charterparty provisions, gave to the owners a series of notices regarding approximate redelivery dates and followed those approximate notices with, on 20 April, a definite redelivery notice indicating redelivery between 30 April and 2 May. In reaction to that definite notice, the owners concluded a charterparty with Cargill for a 4/6 month period at a daily hire rate of US$39,500, a fixture which contained a cancellation date of 8 May.

Things then started to go wrong. A series of delays followed and towards the end of April, the owners became concerned that they might not be able to meet the 8 May cancellation date in the subsequent fixture with Cargill. On 5 May, with their ship still not redelivered by the charterers, the owners negotiated with Cargill an extension to the cancellation date to 11 May, but in return had to reduce the daily hire rate on the contract from US$39,500 to US$31,500 in accordance with the market rate prevailing at that time.

Achilleas was finally redelivered on 11 May and was immediately delivered into the new charter with Cargill.

The owners claimed damages for the loss of the original Cargill hire rate, at US$8,000 per day, over the period of the Cargill fixture (a period of 191 days), a figure over US$1.3M. The charterers disputed the owners' right to claim damages on this basis and argued that any damages recoverable by the owners should be assessed on the basis of the market rate of hire for the period of the overrun only.

The law on redelivery
The issue of loss of fixture damages had never previously come before the court so there was no binding decision specifically on this issue.

It is only comparatively recently that redelivery has been carefully analysed in the courts. A closely related issue has been whether the last voyage was "legitimate" or "illegitimate". A legitimate voyage is one which is reasonably expected to be completed within the redelivery date. An illegitimate voyage is one which could not reasonably be expected to be completed within such date. An illegitimate last voyage order from a charterer is itself a breach of contract and may be refused by the owner - even if not refused, the breach could be reflected in damages (provided the breach had not been waived).

In The London Explorer [1971] 1 Lloyd's Rep 523, the ship was sent on a legitimate last voyage but, because of a series of strikes, she was redelivered to her owners some three months after the final redelivery date. The market rate during those three months was, in fact, lower than the charterparty rate and the charterers argued that they should pay the charterparty rate only up to the final redelivery date and the lower market rate thereafter as that rate would be the measure of owners' losses. This argument was rejected by the House of Lords who held, on the basis of a contractual provision (a clause which appears in most, if not all, charterparties) that the charterers would pay hire at the charterparty rate until the ship's redelivery. However, there was no agreement among the members of the House as to whether a redelivery after the final redelivery date was a breach of charter at all. Lord Reid suggested that there was a presumption in favour of a charterer which extended the charter period to the end of the last legitimate voyage. Lord Morris considered that a charterer must redeliver within a reasonable time of any final redelivery date.

Indeed, until the Court of Appeal decision in the Peonia [1991] 1 Lloyd's Rep 100, the generally held view was that a charterer committed no breach in redelivering the ship after the final redelivery date if the last voyage had been a legitimate one. Until then, it was assumed that only a late redelivery following an illegitimate last voyage would amount to a breach by the charterer.

In the Peonia, the charterers ordered the ship on an illegitimate final voyage, one which was clear to conclude after the charterparty final redelivery date of 11 June 1988. The owners rejected the illegitimate order and called for a fresh, legitimate order or payment of hire at the (higher) market rate for the duration of the proposed voyage outside the charter period. When the charterers refused either, the owners terminated the contract.

Lord Justice Bingham said "...every time charter must have a final terminal date...by which ...the charterer is contractually obliged to redeliver the vessel...". Thus, redelivery by the final redelivery date is a strict obligation on the charterer and it is now recognized that damages are available to an owner for late redelivery by a charterer, even at the end of a legitimate last voyage.

The decision in The Achilleas

The Court of Appeal found in favour of the owners.
On the facts, the loss of the Cargill fixture at the daily rate of US$39,500 was a loss which was liable, in the ordinary nature of things, to result from the charterers' breach in failing to redeliver the vessel by the contractual redelivery date. Such was a type of loss which ought reasonably to have been foreseen by the charterers as not unlikely to arise in the event of a late redelivery of the chartered vessel. Such a loss was not too remote on the Hadley v Baxendale principles.

Lord Justice Rix said, at paragraph 93
"...a charterer of time chartered tonnage knows that a new fixture is very likely to be entered into by the owner of his chartered vessel so as to follow as closely as possible to the redelivery of the vessel...

And continued, at paragraph 96

"...the refixing of the vessel at the end of the charterers' charter was not merely "not unlikely", it was in truth highly probable....the nature of the chartering market was at all times an open book to the charterers: it was their own business, in which they were experienced...

The charterers had argued that damages for late redelivery should be limited to the overrun period measure unless the owners can show that at the time of contract, the owners had given the charterers special information of their follow-on fixture. That contention was rejected as being undesirable and uncommercial. Lord Justice Rix said, at paragraph 119

"...undesirable because it puts the owners too much at the mercy of their charterers who can happily drain the last drop and more of profit at a time of raised market rates taking the risk of late redelivery, knowing that they will never have to pay their owners more than the current market rate for the overrun period...

....uncommercial because if it is demanded that the charterers need to know more than they already do in the ordinary course of things, when they already know that a new fixture, in all probability fixed at or around the time of redelivery, will follow on their own charter, then the demand is for something that cannot be provided..."

Discussion

1. Does the decision impose too great a burden on the charterer? Counsel for the charterers argued that "a charterer guilty only of a short late redelivery is not to be faced in law with uncapped loss of profit claims based on unknown contracts of unknown length made at unknown times...". The overrun measure was, according to charterers' counsel, simple, straightforward, easily applied and, being based on market rates, objective.

By contrast, the loss of fixture measure depended on the private arrangements of the owners. Nearly every redelivery would be plagued by uncertainty, imposing an unfair risk on the charterers.

2. Given that there is a strict obligation upon a charterer, even at the end of a legitimate voyage, to redeliver the ship by the final redelivery date, is it desirable that that charterer, under such a strict obligation, should nevertheless face unlimited damages in the event of a breach which might arise through no fault on his part?

Compare the situation under a voyage charterparty where a charterer fails to load/discharge cargo within the permitted laytime.

3. What of illegitimate final voyages? Lord Justice Rix acknowledged that late redelivery at the end of an illegitimate voyage raises special problems. If the voyage is not performed (because, for example, the owner called for a fresh legitimate order which the charterer declined to give), then the issue of damages for a lost fixture would not arise. But what if it is performed? Can the owners still claim for a loss of fixture? Or would the acceptance by the owner of an illegitimate last voyage order from the charterer be interpreted as a deemed waiver by the owner of a claim for a lost fixture due to late redelivery?

4. Consider the effect on sub-charters. Will the liabilities be back-to-back? Is there a risk that the loss of fixture claim, which the owner presents to his charterer, cannot be passed on by the charterer to any sub-charterer, thus leaving the head charterer exposed to a claim which was, in effect, caused through the fault of a sub-charterer anyway?

5. In the case of the Achilleas, the charterers had, in fact, given a definite redelivery notice to the owners and it was in reliance on that definite notice that the owners concluded the ship's next fixture with Cargill. However, that fact appears not to have been a deciding factor in the Court of Appeal's decision. So even if no definite redelivery notice has been given by the charterer, so that the owners have not yet fixed a firm follow-on charter, nevertheless, any late redelivery would deprive the owners of the opportunity to fix their ship for her next employment. Is the owner to be entitled to claim for such hypothetical loss? Would such a claim have to be evidenced by a series of reports from shipbrokers on the various contracts which the owners might have been able to conclude?

6. Consider a rising market between the final redelivery date and the actual redelivery date so that the owners actually benefit through the late redelivery of their ship (the later, the better) in that by delaying the concluding of a subsequent fixture (because of the late redelivery), owners secure a higher rate than they would have done had the vessel been redelivered on time by the charterers.


Laurence Marron
23 February 2008

 

 

 

The contents of this bulletin are not intended to be a substitute for legal advice on any of the specific issues discussed in it.

 
   

Laurence Marron Solicitors, 68 Lombard Street, London EC3V 9LJ    
Tel: +44 (0)20 7868 2019    Mobile: +44 (0)7745 978 911  
Authorised and Regulated by the Solicitors Regulation Authority (SRA Number 471907)