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Charterparty damages: Owners’ claim for wasted expenses fails

Omak Maritime Ltd v Mamola Challenger Shipping Co (The "Mamola Challenger") - Commercial Court (Teare J) - [2010] EWHC 2026 (Comm)

Omak Maritime Ltd v Mamola Challenger Shipping Co (The "Mamola Challenger") – Commercial Court (Teare J) - [2010] EWHC 2026 (Comm)

Following the 2008 freight market collapse, a number of cases have now reached the English courts regarding the approach to assessing damages arising out of early re-delivery and premature charter termination situations.

With a falling charter market, the focus in awarding damages has been to compensate the innocent party so as to place them financially in the same position as if the contract been performed: Robinson v Harman (1848) 1 Exch.850. As seen in The "Elbrus" [2009] EWCH 3394, and subject to issues of remoteness of loss and assumption or responsibilities (The "Achilleas" [2008] UKHL 48, see link) that will generally involve assessing lost hire/freight income against substitute earnings over the unfulfilled contract period.

But what if the innocent party is able to mitigate so as to place them financially in a better position than had the contract been performed? In this Commercial Court decision, on appeal from London Arbitration, after early termination by charterers of a five year time charter, owners were able to trade the vessel at a much improved market rate. There was accordingly no claim for damages based on lost income. However, before delivery owners had been required to make certain modifications to the vessel. They therefore sought to claim in damages from charterers for recovery of wasted expenditure.

The tribunal had agreed that such wasted expenditure could, as a matter of contract law, be recovered: C & P Haulage v Middleton [1983] 1WLR 1461. The tribunal reasoned that reliance on wasted expenses was a separate head of contractual loss and to be treated separately from loss of profit/income. It was not appropriate to bring into account the overall net financial position and to "mix" one basis of claim with another. Charterers appealed.

Before Teare J. Owners submitted the tribunal's approach had been correct. An innocent party could pursue two alternative courses in claiming damages for breach of contract. One was to protect a "negative" or "good faith reliance" interest, which concerning recovery of wasted expenditure in preparing for an unperformed contract. The other route was to protect a party's "positive" or "good faith expectation" interest which on Robinson v Harman principles, looked at lost profits.

There was some support for this alternative approach to loss. In Cullinane v British Rema [1954] 1 QB 292 the Court of Appeal held that damages in relation to a contract to purchase plant could be framed either on the basis of capital expended or loss of profits, but not both. Further, in Anglia Television v Reid [1972] 1 QB 60, where an actor repudiated a contract to take the leading role in a television production, the company successfully claimed wasted expenditure. The Court of Appeal held that pre-contractual expenditure was recoverable as long as within the contemplation of the parties that it was likely to be wasted if the contract was broken.

Charterers argued, however, that the tribunal's decision was wrong. Any award of damages for wasted expenses, where globally the innocent party had suffered no loss, breached the fundamental principle that an award for damages are compensatory – The "Golden Victory" 2007 2AC 353. Where the innocent party received any benefit flowing from the breach, that benefit had to be taken into account. There was no choice to be had for electing to claim on an alternative basis, which could ignore underlying compensatory principles.

Teare J. agreed with this analysis. The "reliance loss" authorities referred to by Owners only went so far. They did not examine the question of whether wasted expenditure could still be recovered when an award of damages might place the claimant in a better position than if the contract had been performed.

Further, there could be no independent principle enabling wasted expenditure to be recovered. In the situation of a loss making contract or bad bargain, such principle would be akin to underwriting a claimant's decision to enter the contract in the first place. If the contract was doomed to be loss making for the innocent party, it was difficult to understand why a defendant should pay damages in relation to expenditure costs. It was the decision to enter the contract, and not the breach, which caused the loss.

The principal of "reliance loss" was therefore only an alternative basis for putting forward a loss claim where it was clear the contract was not inevitably loss making, but where the claimant could not demonstrate to what extent the performance of a contract would have resulted in a profit. In such circumstances, as an alternative mode of recourse, a claimant could seek to recoup expenses incurred: so called reliance damages, or damages for wasted expenditure.

However, as here, if the net overall result was that owners, through successful mitigation steps, had not suffered any loss at all, then there was no basis whatsoever for an award of damages.

This decision reinforces the position that the approach of the English courts in assessing contractual damages will focus on compensating the innocent party with reference to comparison of what the financial outcome should have been under the contract, against what it was. If it is clear that the innocent part has financially benefited from a breach/termination situation, there will be no basis for trying to claim damages on alternative grounds.

Mike Burns, Partner
Weightmans LLP