Coals from Newcastle
Posted on 19th March 2018 at 16:38
The brief report of London Arbitration 26/17 [(2017) 987 LMLN 3] is a reminder of how damages are assessed in a charterparty claim when supply chain or other sale contract difficulties force Charterers to release a vessel for which they cannot present cargo.
The basic principles are that damages are:
1. Assessed at the time of the breach;
2. Confined to matters that either (i) arise in the usual way or (ii) are such as, when the fixture was made, the parties must reasonably have reckoned would be the probable result of the breach;
3. Compensatory - they put the claiming party into the same position as if the fixture had been performed.
Point (1) sometimes has to yield to point (3), so occasionally things that unexpectedly happen after the breach are taken into account.
Based on the Gencon 1994 form, the vessel was fixed to lift coal in Australia for carriage to China, and on arrival at Newcastle she tendered NOR on 11 February 2015.
Laytime started at 23:12 hours on the same day, and on expiry the vessel went on demurrage (at what seems to have been $6,500 PDPR) 3.18 days later, at 03:28 hours on 15 February. No cargo appeared, and after Charterers’ candid messages that none would, and that the vessel could be traded elsewhere, at 11:34 hours on 2 March Owners wrote to Charterers accepting the situation as ending the charterparty due to Charterers’ admitted breach.
Demurrage and damages
In arbitration later Owners claimed:
(a) demurrage from the end of laytime (i.e. 03:28 hours on 15 February) to 11:34 hours on 2 March, when they had ended the charterparty, and that claim succeeded in full; and
(b) damages for the difference between the profit they would have made on the subject voyage and what they did in fact make on a substitute fixture.
Owners thus calculated the freight they would have earned if the charterparty had been performed, less the costs of earning that, such as bunkers and lubes and port and other voyage-specific expenses. They then deducted from that the result of a similar calculation for the voyage under the replacement fixture, and that yielded what they had lost.
This is usually straightforward, and the loss probably falls under both 2(i) and 2(ii) above. Owners’ inability to get another fixture that pays as well as the one breached is something either that follows normally from Charterers’ last-minute default or that both must have reckoned the probable result.
However, for the voyage that would have taken place, Owners had included in their earnings figures the first part of the period running from the start of laytime, i.e. the 3.18 hours from 11.12 hours on 11 February to 03:28 hours on 15 February. In this they seem to have confused a demurrage calculation with a damages claim.
The former is timeline-based, and perhaps Owners were also distracted by the old adage about a vessel once on demurrage always being on demurrage.
The latter though is compensatory, and leaves the claimant as he would have been if the contract had been performed. If that had happened Charterers would have been entitled to the full 3.18 days of laytime, so they should certainly have credit for that, and in reckoning their gains Owners should not have included it.
The Tribunal therefore rightly excluded it and reduced Owners’ damages claim by (3.18 x $6,500 =) $20,670.
The Tribunal’s acceptance of the rest of Owners’ claim means that Charterers were not able to raise any (or any successful) point that Owners should have done better in getting other employment for the vessel. Defaulting Charterers sometimes say that Owners should have secured a more favourable alternative fixture than they did, so to that extent they have failed to mitigate their loss, an argument that mostly depends on what was available to the vessel at the time.
The charterparty said demurrage was payable 45 days after completion of discharge and submission of a fully documented claim. Owners however sought to claim interest on demurrage from an earlier date, arguing that Charterers could not rely on the charterparty terms, as they had repudiated it.
The Tribunal rejected that and awarded interest on demurrage in line with the charterparty payment provisions, so again matching what would have happened if the contract had been performed.
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