Shipping Litigation Briefing January 2007 Contents Introductory Note Redelivery under time charter Defining the charter period Measure of damages The “Achilleas” Ship sale and purchase Delivery date Termination and measure of damages for late delivery Summary 02 02 02 02 03 03 Introductory Note This is a legal briefing about damages for late redelivery under time charters and late deliveries under MoAs. The recent High Court decision of the Achilleas1 makes it clear that the scope for significant damages claims is much wider than many in the Industry have previously thought possible. With charter hire rates still strong in some markets, time charterers and MoA sellers have been keen to fix the longest possible last voyages to maximise their profits. Obviously such strategies risk charter redelivery dates being overrun and MoA cancelling dates being missed. In both cases, the ensuing claims of the innocent chartering owners and MoA buyers may convert those intended profits into much larger losses. In the important recent case of the Achilleas, the English High Court has ruled that, where a charterer redelivers late and the owner loses a follow-on fixture as a result, the owner can recover not only market hire in the overrun period until actual redelivery, but also the lost hire above that actually earned over the entire follow-on charter period, which was six months in that case. It is therefore vital for charterers and owners alike to understand the legal implications of missed charter redelivery dates and MoA cancelling dates. This briefing note will examine some of those issues upon which the parties’ rights and obligations ultimately turn. 04 04 1 The Achilleas  EWHC 3030 (Comm) 1 December 2006 LITIGATION BRIEFING WATSON, FARLEY & WILLIAMS SHIPPING LITIGATION GROUP "PERHAPS SURPRISINGLY, PRIOR TO THE ACHILLEAS DECISION IN DECEMBER 2006, THE ENGLISH COURTS HAD NOT DECIDED A CASE WHERE [LOSS OF PROFIT DAMAGES FROM SUBSEQUENT FIXTURES] WERE BEING CLAIMED." Redelivery under time charter Defining the charter period The first issue is to determine the last date upon which redelivery may take place. The extent of the charter period will depend on the express or implied wording in the charterparty. If the charter is stated to be for a simple defined period, for example “eight months”, there is a presumption in favour of implying a reasonable margin and a charterer will not be considered in breach if redelivery takes place within the reasonable margin. Use of the word “about” reinforces this presumption. The extent of the implied margin will be determined by the express charter period. For example a margin of five days was implied into a charter for “duration 4 to 6 months”2 whilst 10 or 11 days were implied under a consecutive voyage charter for “thirty months…”3. However, where the charter provides for the vessel to be redelivered between certain dates or a margin is already expressly provided for it is unlikely any additional margin will be implied4. Wording such as “3 months plus or minus up to 15 days in charterer’s option” is now the norm and gives certainty as to the final date on which re-delivery must be given (i.e. 3 months plus 15 days) which is clearly defined from the moment the broker’s recap has been issued. Measure of damages The following three significant principles are now established: 1. Assuming there is no fault on the owner’s part, the charterer will be in breach of the charterparty if the vessel is not redelivered by the end of the charter period (including any express or implied margin) even if at the time of making the order for the final voyage the charterer reasonably expected that the vessel would be redelivered by the end of the charter period5. In other words the charterer will be in breach whether the last voyage orders were legitimate or illegitimate at the time they were given. 2. If the market rate drops below the charter rate in the period during which the vessel ought to have been redelivered and is redelivered (the overrun period) the charterer will pay hire at the charter rate for the overrun period6. 3. If the market rate rises above the charter rate during the overrun period the charterer will be liable to owners for that increased rate of hire for the overrun period7. Charterers can be protected from damages by “last voyage clauses” which, if clearly expressed, can provide protection when both legitimate or illegitimate last voyages overrun the charter period8. In addition to damages covering the overrun period, a further issue arises as to damages for lost profits on charters fixed in reliance upon prompt redelivery but which the owner is subsequently unable to fulfil and/or is forced to renegotiate owing to the late redelivery from the previous charter. Alternatively, the owner may have lost the opportunity to fix the vessel’s follow-on employment at the time that the owner would normally have fixed that employment assuming there had been no breach. Where rates fall in the overrun period, the losses (i.e. the difference in the rate of hire obtainable for the lost fixture and obtained for the actual follow on fixture/s) could be very substantial. Perhaps surprisingly, prior to the Achilleas decision in December 2006, the English Courts had not decided a case where such damages were being claimed. In all the reported cases dealing with damages for late redelivery, damages had been awarded only for the difference between market and contractual hire earned in the overrun period itself. Furthermore, leading textbooks do not address the possibility of damages other than during the overrun period and give the impression that subsequent fixture damages are not available. The “Achilleas” In the Achilleas case, an owner claimed for lost overrun hire and lost profits on a four - six month follow-on charter caused by a late redelivery of some eight days. Before it became clear that the vessel was going to be redelivered late, the owner had fixed a four - six month follow-on charter with Cargill. Thereafter, when it became clear to the owner that the vessel was going to be redelivered late and was as a result going to miss the cancelling date in the follow-on charter, the owner managed to negotiate an extension to that cancelling date but only at a reduced rate of hire of US$8,000 per day less than that originally contracted for, reflecting a market fall in hire rates in the intervening period since the owners had first gone firm with Cargill. The owner’s renegotiation of the Cargill fixture produced a loss of some US$1.3m over the balance of the 7 8 2 3 4 5 6 The Democritos  2 Lloyd’s Rep 149 The Berge Tasta  1 Lloyd’s Rep. 422 Watson Steamship v Merryweather (1913) 18 Com. Cas. 294 and The London Explorer  1 Lloyd’s Rep. 523 The Peonia  1 Lloyd’s Rep. 100 The London Explorer (see supra). Ibid. The Peonia (see supra) and The World Symphony  2 Lloyd’s Rep 115 at 118 LITIGATION BRIEFING WATSON, FARLEY & WILLIAMS SHIPPING LITIGATION GROUP 02 "...LEADING TEXTBOOKS DO NOT ADDRESS THE POSSIBILITY OF DAMAGES OTHER THAN DURING THE OVERRUN PERIOD AND GIVE THE IMPRESSION THAT SUBSEQUENT FIXTURE DAMAGES ARE NOT AVAILABLE." Cargill charter, a huge sum compared to the US$150,000 or so lost in the 8 day overrun period. By 2:1 majority, the presiding London arbitration tribunal awarded owners their principal claim for damages of US$1.3 million. The Achilleas case came to the High Court by way of appeal on a point of law from the arbitration award9. For the purposes of the appeal, the Court accepted the tribunal’s factual findings that it was not unlikely that a late redelivery might result in missed dates for “(a) a subsequent fixture, (b) a dry docking and (c) a sale of the vessel”. Indeed, the arbitration tribunal had expressly found that with market emphasis on owners achieving almost continuous employment the above results were accepted hazards for late redelivery. The tribunal also accepted that parties actively engaged in the shipping market knew that market charter hire rates could go up and down rapidly. The tribunal had also found on the facts that the need to renegotiate the terms of a follow-on fixture in the event of a late redelivery would have been in the reasonable contemplation of the parties when entering into the time charter. We suggest that the same factual assumptions would apply in most late redelivery cases. On appeal, the charterers submitted that there had never been a recorded case where damages had been awarded in respect of lost profits for late redelivery and it was well recognised (by such cases and the textbooks) that the prima facie measure of late redelivery damages is the difference between the market rate and the charter rate for the overrun period. The charterers therefore suggested that the Court should not depart from these “statements of high authority” unless clearly satisfied that they were wrong. The charterers further submitted that lost profits covering a later period than the overrun period were too remote to be recovered unless the owners had specifically informed the charterers when or before entering into the time charter that they intended to enter into a subsequent fixture of the type which they actually entered into and that it was critical that redelivery take place on time. The High Court, upholding the majority tribunal decision, found that the difference between market and charter rates in the overrun period was only a prima facie measure of damages and subordinate to the general principle that damages for breach of contract should place the owner in the same position as he would have been in if the contract had been performed. In this case, the Court accepted that the owner’s loss in the overrun 9 period was “only a fraction of the true loss caused by the breach”. Secondly, the Court found that, depending on the specific facts, an owner’s loss in respect of a follow-on fixture could be regarded as being in the reasonable contemplation of the parties at the time of entering a time charter so that such a loss was not too remote to be recovered even where an owner had not expressly brought home the risk of such a loss to the charterer when negotiating the charter. To conclude, the lessons to be learned from the Achilleas decision for charterers are to consider very carefully their possible exposure to damages claims for late redelivery before fixing their last voyage. If that voyage overruns, through no fault of their own, they may be liable to substantial damages in the event of a market fall occurring shortly prior to the contractual redelivery date (when owners usually fix their follow-on employment). If their charter is for a long period, that alone will be evidence of their being on notice of owners’ practice to fix for long periods. The lesson for owners is to ensure carefully to document their attempts to fix the follow-on fixture, both for the purposes of mitigation and to assemble evidence of prevailing market rates. In the Achilleas case, the owner fixed the follow-on fixture and only later had to renegotiate it after learning that redelivery was to be delayed. There is no reason why a damages claim for a lost opportunity to fix a follow-on fixture could not also be claimed in circumstances where owners are prevented from fixing the follow-on employment at the time they would have usually done so because they have already learned of the anticipated late redelivery prior to fixing. But in such circumstances, owners would need to assemble cogent evidence of the fixture they would have been able to get had only their vessel’s position been what it ought but for charterers’ breach. In those circumstances, owners should obtain from their brokers as much contemporaneous market evidence of available fixtures as they can. Ship sale and purchase Delivery date MoAs for the sale of vessels invariably specify a period in which delivery is expected to take place and whilst sellers are not generally obliged to deliver within that period, delivery must take place before the cancelling date that will also be specified in the MoA. The MoA will usually also provide a mechanism for the seller to request an extension of the time for delivery and an There is a limited right of appeal to the High Court from an arbitration award where the award is either (i) “open to serious doubt”, where it also raises a matter of “general public importance” or (ii) “obviously wrong” (s. 69 Arbitration Act 1996). LITIGATION BRIEFING WATSON, FARLEY & WILLIAMS SHIPPING LITIGATION GROUP 03 alternative cancelling date with the buyer given an option of rejecting the seller’s proposals within a specified amount of time or accepting the new date without prejudice to any claims for damages they may have (see for example NSF 1993 clause 5). Termination and measure of damages for late delivery The MoA will provide for the buyers’ right to cancel the MoA and to have the deposit (including accrued interest) returned to them in full if the sellers fail to deliver by a specified cancelling date (see for example clause 14 of the NSF ’67 ’87 and ’93). However, in a buoyant market, where the market price of the vessel is higher than the MoA price, the buyers may not want to cancel if the cancelling date is missed. In circumstances where the seller fails to deliver on time but the buyers accept delivery at a later date, the buyers can usually only claim damages where they can show they delay to have been caused by the “proven negligence” of the seller (the words in NSF 1987 and 1993). These words have not been judicially defined in the context of NSF, but we consider that it would be no easy task for an MoA buyer to show such negligence, unless the last voyage were clearly illegitimate. Provided the MoA seller assembles evidence to support a reasonably held belief, at the time of fixing the final voyage, that that voyage would be completed prior to the cancelling date, he will effectively be insulated against claims in the event of subsequent delay. Damages will be measured by reference to the difference between the market value of the vessel at the contractual delivery date and the actual delivery date. In addition, it is now well established that buyers are entitled to recover lost profits (on missed lucrative fixtures for example) for the period from the contractual delivery date to the date of actual delivery10. As with redelivery under time charters, however, an important question remains as to whether or not MoA buyers are entitled to recover not only damages representing lost earnings in the overrun period between the cancelling date and actual delivery under the MoA but also lost earnings for the first charter fixed to commence on delivery or which could have been fixed before the cancelling date but was lost once it became clear that delivery was going to be delayed. The Achilleas case, as well as general contractual principles, suggest that such damages may not be too remote to be recoverable. Therefore MoA sellers should not assume that they can fix the longest possible last voyages in order to maximise earnings in the belief that such a voyage will be extremely profitable for them even if they have to pay damages for the lost earnings of their buyer covering, say, a small overrun of a few days. Summary The possibility of recovering of lost profits on subsequent fixtures, in disputes under both time charters and MoAs has shifted the balance somewhat in favour of owners and MoA buyers. We strongly recommend that whichever side you are on you consult closely with your lawyers both when entering into MoAs and charterparties and in the event of actual and anticipated late redeliveries in order to ensure certainty and to minimise loss. Quite apart from anything else, the Achilleas case illustrates that to follow general market perceptions or the views of textbook writers is to little avail where such views or practices do not actually reflect the law. Only your lawyers can advise you of that. If you wish to discuss the contents of this update please speak to your usual contact at Watson Farley & Williams or one of the people listed below. Contacts Andrew Hutcheon email@example.com +44 (0) 20 7814 8000 Charles Buss firstname.lastname@example.org +44 (0) 20 7814 8000 Peter Flint email@example.com +44 (0) 20 7814 8000 Raja Bose firstname.lastname@example.org +(65) 6532 5335 Steven Burkill email@example.com +66 (0) 2665 7800/7878 Alfred E Yudes firstname.lastname@example.org +1 212 922 2200 Christopher Belisle email@example.com +1 212 922 2200 Maren Brandes firstname.lastname@example.org +49 (0) 40 8080 3440 Watson, Farley & Williams 15 Appold Street London EC2A 2HB Tel: +44 (0) 207 814 8000 Fax: +44 (0) 207 814 8141/2 www.wfw.com 10 The Great Marine No. 2  2 Lloyd’s Rep. 250 WATSON, FARLEY & WILLIAMS LONDON ATHENS PARIS NEW YORK SINGAPORE BANGKOK ROME HAMBURG All references to ‘Watson, Farley & Williams’ and ‘the firm’ in this brochure mean Watson, Farley & Williams LLP and/or its affiliated undertakings. Any reference to a 'partner' means a member of Watson, Farley & Williams LLP or a member or partner in an affiliated undertaking, or an employee or consultant with equivalent standing and qualification. , This briefing is produced by Watson, Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situations described may not apply to your circumstances. If you require advice or have questions or comments on its subject, please speak to your usual contact at Watson, Farley & Williams.