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“Achilleas” Transfield Shipping Inc. -v- Mercator Shipping Inc

5th Jun 2009

[2009] 1 AC 61; [2008] 3 WLR 345; [2008] 2 Lloyd’s Rep. 275; [2008] 4 All ER 159; [2008] 2 All ER (Comm) 753; [2008] 1 All ER (Comm) 685; [2007] 2 Lloyd’s Rep. 555; [2007] 1 Lloyd’s Rep. 19; [2007] 1 All ER (Comm) 379

Dominic Kendrick Q.C. and Benjamin Parker acted for the appellants. The leading decision of the House of Lords on the rules of remoteness of damage in the law of contract.

The House of Lords unanimously allowed the Charterers’ appeal from the decision of the Court of Appeal reported at [2007] 2 Lloyd’s Rep 555.

In speeches of fundamental importance to the assessment of contractual damages and the law of contract generally, they held that compensation for late redelivery of a vessel at the end of a charterparty was limited to the difference between the charter rate and the market rate of hire for the period of the delay.

Contrary to the position taken by Rix LJ in the Court of Appeal (with whom Ward and Tuckey LJJ agreed), the shipowners were not entitled to damages for the loss of profits they would have made on a subsequent fixture that was lost as a result of the delay. These profits were too remote and irrecoverable in law.

Lord Hoffmann, who gave the leading speech, explained that remoteness in contract law is not (as might previously have been thought) concerned simply to identify the types of loss that were in the reasonable contemplation of the parties as likely to occur. Invoking the principle of assumption of responsibility, he held that remoteness is concerned rather with determining the appropriate scope of a contract-breaker’s liability. The court must interpret the contract as a whole, against its commercial background, “to reflect the liabilities which the parties may reasonably be expected to have assumed and paid for”. Like all issues of contractual interpretation, that is a question of law not fact.

The charterers in The Achilleas could not reasonably be taken to have assumed the risk of the owners’ loss of profit on a follow-on fixture. Such risk was completely unquantifiable, since the charterers would have no idea when the owners would make a forward fixture, or what its length and terms would be. Absent an assumption of responsibility by the charterers and the communication of special knowledge to them before the contract was entered into, they were responsible only for the market rate during the overrun period.

In determining the scope of contractual liability, The Achilleas shifts the focus to identifying the types of loss for which a contract-breaker assumes responsibility. It is now the leading case on remoteness in contract law, particularly for commercial disputes, and reformulates significantly the classic tests in Hadley v. Baxendale and The Heron II.

The Charterers were represented in the House of Lords by Dominic Kendrick QC and Benjamin Parker.