Like most branches of history, legal history has a habit of repeating itself. It is just over forty years since the House of Lords in Czarnikow Ltd. v. Koufos (The Heron II) [1969] 1 A.C. 350 gave five separate speeches, reaching the same conclusion by subtly different (exhaustively detailed) routes, concerning the application of contractual remoteness of damage principles derived from Hadley v. Baxendale (1854) 9 Exch. 341 to lost profit from breach of a charterparty. Four decades on, we have five more substantive speeches to ponder from a new generation of Law Lords, getting to grips once again with contractual remoteness, in Transfield Shipping Inc. v. Mercator Shipping Inc. (“The Achilleas”) [2008] UKHL 48.
Shipowners let their ship to charterers on a time charter, to end no later than 2nd May 2004. By April 2004 market rates had more than doubled, so the owners arranged a new charter with Cargill, promising delivery of the ship no later than 8th May, at the rate of $39,500 per day. The ship was delayed on its last voyage and, in breach of contract, was not redelivered by the charterers until 11th May; Cargill nonetheless agreed to take the ship but, as market rates had fallen sharply since April, only at the reduced daily rate of $31,500. The owners claimed damages from the charterers, at the rate of $8,000 per day ($39,500 minus $31,500) for the period of the six month Cargill charter, totalling over $1.3m. The charterers argued that this was too remote and that they were only responsible for damages at the prevailing market rate for the period of the delay in redelivery (just over $158,000), as was the settled understanding of the shipping industry and shipping lawyers. Despite this, the owners succeeded before arbitrators (with one dissent) and the majority award was upheld by Christopher Clarke J. and by the Court of Appeal, on the basis that loss of a follow-on fixture was loss of a type which the charterers ought to have realised when contracting was not unlikely to result from a delay in redelivery, under the first limb of Hadley v. Baxendale. The charterers appealed to the House of Lords.
The House unanimously allowed the charterers' appeal, holding that there is more to Hadley v. Baxendale than just a factual issue of probability or likelihood (as shown by the diversity of judicial attempts to generalise the test: “serious possibility”, “liable to result”, “not unlikely”, “natural and probable” etc.). For Lord Walker, “it is also a question of what the contracting parties must be taken to have had in mind, having regard to the nature and object of the business transaction”. The unusually volatile market after the contract was made and the fact that the charterers had no knowledge of the Cargill charter or control over its terms, meant that they would not have had this sort of loss in their contemplation when contracting.
However, their Lordships did not adopt identical reasoning in reaching this conclusion. Lord Rodger (with whom Baroness Hale agreed) approached the problem in orthodox remoteness terms, concluding that, “neither party would reasonably have contemplated that an overrun of nine days would ‘in the ordinary course of things’ cause the owners the kind of loss for which they claim damages.” In contrast, Lord Hoffmann (with support from Lord Hope and, to a lesser extent, Lord Walker) reached for a novel solution, in the form of his own “scope of the duty” reasoning invented in South Australia Asset Management Corporation v. York Montague Ltd. (“SAAMCO”) [1997] A.C. 191, which held that a negligent valuer was not liable for additional losses caused by the collapse of the property market, since they were “outside the scope of the liability which the parties would reasonably have considered the valuer was undertaking.” According to Lord Hoffmann, taking into account the “background of market expectations”, it is clear that the parties here “would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility. Such a risk would be completely unquantifiable”.
Baroness Hale boiled down the difference between the two approaches, albeit somewhat hesitatingly (“My Lords, I hope I have understood this correctly”) by explaining that, for Lord Hoffmann, “one must ask, not only whether the parties must be taken to have had this type of loss within their contemplation when the contract was made, but also whether they must be taken to have had liability for this type of loss within their contemplation then” (emphasis in original). The orthodox approach is an objective question of fact about what the parties contemplated, whereas Lord Hoffmann's “involves the interpretation of the contract as a whole against its commercial background and this, like all questions of interpretation, is a question of law”.
Since both approaches emphasised the same exceptional features of the case and led to the same result, in practice the difference between them may not much matter. But there are bigger theoretical issues at play. For many judges and commentators, Lord Hoffmann's SAAMCO test is beguiling sleight of hand, rephrasing the same problem – the normative question of whether particular loss should be compensable by the defendant – in the language of the scope of the defendant's underlying obligation or duty, without making it any easier to answer. One can imagine County Court judges cursing the introduction of this troublesome issue into previously straightforward contractual disputes.
Lord Rodger's approach, though more orthodox, raises the perennial remoteness problem of when loss of a much greater extent than usual becomes loss of a different type. Tort, at least in personal injury case, has disposed of the problem by adopting an all-embracing definition of the foreseeable type of harm, so that anything from death to whiplash or ME counts as the same type of harm. This generous solution is appropriate for tort disputes between strangers, but not between contracting parties who have the opportunity to disclose unusual risks. Their Lordships applied Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 K.B. 528 in which the defendant who was late delivering a boiler for a laundry was not liable for loss of profits on lucrative government dyeing contracts, only for lost profits on ordinary laundry contracts. But government contracts were different in kind from ordinary contracts, a distinction not really available when contrasting volatile and normal market movements. This also reminds us of another open question, raised by the case of the defective pig-food hopper Parsons (Livestock) Ltd. v. Uttley Ingham & Co Ltd. [1978] Q.B. 791 (bizarrely, repeatedly muddled up in the speeches with an earlier authority, Hill v. Ashington Piggeries Ltd. [1972] A.C. 441), namely which approach to the type/extent distinction should apply when a breach of contract causes physical damage? The claimant and the defendant are not strangers, but nor is the harm caused by special risks which the claimant could disclose to defendant in advance; the extent of the loss is as unexpected to the blameless claimant as to the blameworthy defendant.
Of course, the latter reflection applies equally to the owners, which prompts a moment of caution about the result. After all, it was clear that their decision to accept the lower charter rate from Cargill was a reasonable way of mitigating their loss. The terms of the Cargill charter were outside the charterers' control, but late redelivery of the ship was outside the owners', while the volatile market was outside the control of both. The result is more satisfactory if viewed as a product not of contractual interpretation, but of wider policy considerations. The charterer's breach was accidental not deliberate, it produced loss disproportionate to the benefit the charterer obtained from the charter and such loss, crucially, was regarded throughout the shipping field as irrecoverable. Perhaps in future decisions on contractual remoteness, these factors will be openly explored.
