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CALCULATING DAMAGES - RECENT DEVELOPMENTS IN …

CALCULATING DAMAGES - RECENT DEVELOPMENTS IN ENGLISH LAWByClive Aston, LMAA ArbitratorIn anydispute involving allegations of breach of a charterpartycontract threebroad 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 othertwo relate to so-called issues of quantum. Usually in anarbitration,questions of both liabilityandquantum are indispute: sometimes,though,the guiltyparty may admit liabilitybut deny that the innocent partysuffered the loss claimed orisentitled to recover the level of DAMAGES that they claim. It isnot, therefore, unusual to see arbitrations consider questionsof quantum only and for these to be argued just as strongly asanydisputes aboutliabilityin other established "orthodox"approachEnglishlaw has always recognised that there must be limits tothe types of loss thatan innocent party may recover for abreach of contract.

CALCULATING DAMAGES - RECENT DEVELOPMENTS IN ENGLISH LAW By Clive Aston, LMAA Arbitrator In any dispute involving allegations of breach of a charterparty

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Transcription of CALCULATING DAMAGES - RECENT DEVELOPMENTS IN …

1 CALCULATING DAMAGES - RECENT DEVELOPMENTS IN ENGLISH LAWByClive Aston, LMAA ArbitratorIn anydispute involving allegations of breach of a charterpartycontract threebroad 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 othertwo relate to so-called issues of quantum. Usually in anarbitration,questions of both liabilityandquantum are indispute: sometimes,though,the guiltyparty may admit liabilitybut deny that the innocent partysuffered the loss claimed orisentitled to recover the level of DAMAGES that they claim. It isnot, therefore, unusual to see arbitrations consider questionsof quantum only and for these to be argued just as strongly asanydisputes aboutliabilityin other established "orthodox"approachEnglishlaw has always recognised that there must be limits tothe types of loss thatan innocent party may recover for abreach of contract.

2 This is not merely for philosophicalreasons but also for pragmatic, mercantile reasons. Businessmenor women will not enter into contracts if they fear that theirexposure for any breach of thosecontracts may be unlimited. Byestablishing limits on the types of loss that may be recovered,2therefore, the law createslimits andadegreeof predictabilityas to the exposure of parties entering into contracts. Thisdoesnot, however, meanthat the position is entirelypredictable in every case but the approach to each case shouldat least be the same. It is probably right, too,thatthe lawshouldretain some degree of flexibility to deal withindividualor unique circumstances that may arise in a particular case orchanges in the way in which business is conducted. The startingpoint, though, for the assessment of DAMAGES remains the same ineach case, reflecting the orthodox approach to thequestion:indeed, until very recently it was theonlyapproach to very recently, the two leading authorities on thequestionof so-called "remoteness of damage in contract" dated back to1854 and shows just how well established they were!

3 In the 1854 case ofHadleyv. Baxendalethe Court heldthat: ..where two parties have made a contract which one ofthem has broken the DAMAGES which the other party ought toreceive in respect of such breach of contract should besuch as may fairly and reasonably be considered eitherarising naturally, to the usual course ofthings, from such breach of contract itself, or such as mayreasonably be supposed to have been in the contemplation ofboth parties, at the time they made the contract, as theprobable result to the breach of it. This passage has become known as the "first limb" of the test inHadley v. Baxendale. An innocent party may only, therefore,recover the losses that may fairly and reasonably be consideredto arise naturally from the breach or to have reasonably been inthe contemplation of the parties as flowing from the breach whenthey entered into the contract(note it is not when the breachoccurs).

4 This establishes a practical and realistic limit onthe DAMAGES for which the "guilty" party may be heldresponsible. If, therefore, a loss is totally unexpected the3guilty party will not be responsible for it: in this way thereasonable expectations of the partiesat the time they enteredinto the contractare protected on both Court inHadley v. Baxendalewent on, however, to establisha "second limb" of DAMAGES by stating: Now, if thespecial circumstances under which the contractwas made were actually communicated by the claimants to thedefendants and thus known to both parties, the damagesresulting from the breach of such a contract, which theywould reasonably contemplate, would be the amount of injurywhich should ordinarily follow from a breach of contractunder thesespecial circumstances so known , on the other hand, if these specialcircumstances were wholly unknown to the party breaking thecontract, he at the most would only be supposed to have hadin his contemplation the amount of injury which would arisegenerally, and in a great multitude of cases, notbeaffected by any specialcircumstances, from such a breachof contract.

5 So, if it is made known to one party by the other that a breachof the contract may lead to special and unexpected DAMAGES , theguilty party's liability may extendtothose special damagesbecause of the knowledge they have of them when entering intothe contract: this was part of the bargain that the parties knewthey were getting into when they , thisestablishes the importance of expectation and foreseeability,the guilty party's exposurebeing limited only to the specialcircumstances of which they have actual knowledge when enteringinto the test of recoverability of DAMAGES obviously servedmerchants well as there was no substantial change or addition tothese principlesuntil the case of the"Heron II"in 1969. TheHouse of Lords there held that the proper test is whether theloss in question is:4 The kind which the defendant, when he made the contract,ought to have realised was not unlikely to result from words "not unlikely".

6 Denoting a degree ofprobability considerably less than an even chance butnevertheless not very unusual and easily foreseeable. Applying this test to the earlier one ofHadley v. Baxendale,the generally accepted test for remoteness of loss was thereforewhether the loss claimed was of a kind or type which it wouldhave been within the reasonable contemplation of the parties atthe time the contract was made as being not unlikely to result,or which resulted from special circumstances known to theparties at the time they entered into the contract. The term"not unlikely", here,probably indicatesa prospectofoccurrencein the region of 20-25% remained the position for the next thirty years until thecase ofthe "Achilleas" in the"Achilleas"a time-chartered vessel was delayed during alegitimatefinalvoyageand redeliverednine dayslate. Thelate redelivery was a breach of contract whichpreventedtheownersfromdeliveringthe vessel within the laycanspread ofthe follow-on charter they had for the vessel.

7 The owners wereforced to renegotiate with the new charterers a substantiallyreduced rate of hire. The owners claimed the DAMAGES for thedifference between the original and renegotiated rates of hirefor the entire duration of the follow-on charter (4-6 months).The owners succeeded in the arbitration, Commercial Court andCourt of Appeal but lost in the House of Lords where it was heldthat they were not entitled to recover the difference betweenthe original and re-negotiated rates of hire and that theirdamages were limited to the difference between the market rate5of hire and the rate of hire agreed in the contract which wasbreached, limited to the nine days duringwhich the owners weredeprived of theuse of thevessel by late speeches in the House of Lords suggested a new, broaderapproach to the issue of DAMAGES . In the leading judgmentofthe House of Lords, Lord Hoffman, whilerecognising thattheorthodox approach would apply in the great majority of cases,nevertheless considered that it may not be sufficient in cases:".

8 In which the context, surrounding circumstances or generalunderstanding in the relevant market shows that a party wouldnot reasonably have been regarded as assuming responsibility forsuch losses. He consideredthat the "Achilleas" was such a case and that theparties would have considered losses arising from the loss of afollow-on fixturefor late redelivery by a mere nine daysas atype or kind of loss for which the charterers were not assumingliability. The particular circumstances in the "Achilleas"which led Lord Hoffman to conclude that the charterers had notassumed responsibility for the type of loss claimed were:(i)That the loss would be completely unquantifiable as theparties would have no idea when the owners would make afollow-on fixture or what its length or other terms wouldbe, and(ii)It would be contrary to what would have been theexpectations of the parties because the generalunderstanding in the shipping market was that liability forlate redelivery was restricted to the difference betweenthe market rate and the charter rate for the overrunperiod, at least among legal advisors and that there had6been auniform series of findings in previous cases inwhich judges had assumed that DAMAGES for late redeliverywould be assessed in this appears, therefore, that the 2009 case of the "Achilleas"added a further requirement to those ofHadley v.

9 BaxendaleandtheHeron II,namelythat the loss claimed be a type of loss forwhich the guilty party can reasonably be assumed to have implications of the"Achilleas" are potentially great(notonly in shipping cases but in any case where DAMAGES areclaimed)and it has become a standard submission in charterpartycasesto arguethat the losses claimed were not ones for whichthe guilty party assumed responsibility. This, of course, maymake itmuchmore difficultand unpredictablefor claimants torecover the losses that would previously have been awarded tothem. For this reason, the decision in the "Achilleas" has metwith a mixed reception from shipping lawyers and the writers ofleadingshipping text books, with some arguing that the casegoes too far by imposing a further restriction on the types ofloss that may be the "Achilleas"Evenin the short period of time sincethe House of Lordsjudgment was given in the "Achilleas", its effect has beenconsidered ina number of English Commercial Court cases.

10 Inthe case of the "Amer Energy" (2009) it was suggested that theHouse of Lords in the "Achilleas" were not intending to lay downsome completely new test as to the recoverability of DAMAGES incontract and remoteness different from the orthodox approach andthat the House of Lords itself had acknowledged that departure7from the normal principles of foreseeability would be the non-shipping case of Supershield Limited v. SiemensBuilding Technologies FE Limited(2010) the Court of Appealstated that the orthodox approach of "Hadley v. Baxendale"providesa standard rule that reflects the expectation ofparties that a contract breaker should ordinarily be liable tothe other party for damage resultingfrom his breach but onlyif, at the time of making the contract, a reasonable person inhis shoes would have had damage of that kind in mind as notunlikely to result from a Court of Appealconsidered the "Achilleas" to be authority for the propositionthat there may cases where the Court, on examining the contractand commercial background.


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