Limits on Contractual Damages

21/07/2008

The House of Lords has recently ruled that, in certain cases, the usual rule of foreseeability may not apply to questions of liability in contractual disputes.

In [i]Transfield Shipping v. Mercator Shipping, a ship owned by Mercator was returned late by Transfield, the charterers. Whilst Mercator had not objected to the voyage which caused the late return of the ship, they were forced to cut the price of the new charter subsequent to Transfield's charter. The daily rate Mercator had negotiated with the new charterer, Cargill, of US$39,500 had to be reduced to $31,500.

Mercator claimed the difference between the $8,000 per day loss for the duration of the new charter ($1,364,584.37) and the additional 9 days hire paid by Transfield, but Transfield contended successfully that it should only be liable for the difference in the daily rate between the two chartering arrangements for the nine days delay in returning the ship ($158,301.17).

In agreeing with Transfield, Lord Hoffman said that courts should first decide whether loss was the type for which the party committing the breach should fairly take responsibility. In the current case, he held that it would be impossible for Transfield to measure the loss arising from the new charterer's ability to cancel the contract.

He added that although the parties would have considered it probable that Mercator would enter into a subsequent chartering arrangement to follow Transfield's contract, that neither party could know when this arrangement would be made or what the terms of its length nor payment might be.

The appeal was allowed unanimously by the bench (Lords Walker, Rodger, Hope and Baroness Hale). Baroness Hale expressed reluctance at allowing the appeal, agreeing with limitations Lord Rodger stated in his judgment, neither of which applied to this particular case. The limitations mentioned by Lord Rodger centred on hypothetical circumstances in which the charterers might have had specific knowledge of the subsequent chartering arrangement as well as making the state of the market a relevant factor.

(Transfield Shipping v Mercator Shipping [2008] UKHL 48)

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