Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) (2008)

Every answer on remoteness starts with Hadley v Baxendale: damages are recoverable for loss arising naturally from the breach, or loss within the parties' contemplation when they contracted. The Achilleas asks whether that is the whole test. The owners here proved a loss that was, on the arbitrators' findings, a "not unlikely" result of the breach — and still recovered nothing for it.

The Lords agreed on the result but not fully on the reason, and that split is what makes the case examinable. Lord Hoffmann and Lord Hope said remoteness turns on the loss for which the contract-breaker assumed responsibility. Lord Rodger and Baroness Hale decided it on the orthodox ground that this loss was not within the parties' reasonable contemplation. Know both.

The Achilleas, a bulk carrier, was let on time charter; an addendum of 12 September 2003 extended it at US$16,750 a day, with the latest redelivery date 2 May 2004. By April 2004 market rates had more than doubled. The owners fixed the ship for a follow-on charter at US$39,500 a day, with a cancelling date of 8 May.

The charterers sent the ship on a last voyage, which was delayed; she was redelivered on 11 May, nine days late. By then rates had fallen, and to keep the new fixture the owners agreed to cut its rate to US$31,500 a day.

The owners claimed the US$8,000 a day lost over the whole follow-on fixture: US$1,364,584.37. The charterers said the owners could recover only the difference between market rate and charter rate for the nine days of overrun: US$158,301.17.

The majority arbitrators found for the owners, holding the loss fell within the first rule in Hadley v Baxendale. The dissenting arbitrator said the general understanding in the shipping market was that liability was limited to the overrun measure. Christopher Clarke J and the Court of Appeal upheld the majority. The charterers appealed.

Lord Hoffmann put the point of principle this way: is the foreseeability rule "an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses?"

The appeal was allowed unanimously. The owners were limited to the overrun measure; the loss on the follow-on fixture was too remote.

Lord Hoffmann: assumption of responsibility

"It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken."

Foreseeability can be an exclusive as well as an inclusive principle: the South Australia and Mulvenna cases "shows that it may also be an exclusive principle and that a party may not be liable for foreseeable losses because they are not of the type or kind for which he can be treated as having assumed responsibility." [The verb "shows" is as reported.]

Applied here, the parties "would have considered losses arising from the loss of the following fixture a type or kind of loss for which the charterer was not assuming responsibility." Such a risk "would be completely unquantifiable". The rules in Hadley v Baxendale "are not so inflexible; they are intended to give effect to the presumed intentions of the parties and not to contradict them."

Whether a type of loss is one for which a party assumed responsibility "involves the interpretation of the contract as a whole against its commercial background, and this, like all questions of interpretation, is a question of law." So the arbitrators' finding of foreseeability, a question of fact, did not settle the matter.

Lord Hope: the same approach

"Assumption of responsibility, which forms the basis of the law of remoteness of damage in contract, is determined by more than what at the time of the contract was reasonably foreseeable." The test in contract is narrower than in tort. "The question is whether the loss was a type of loss for which the party can reasonably be assumed to have assumed responsibility."

Lord Rodger: ordinary contemplation

Lord Rodger decided the case on the orthodox Hadley v Baxendale ground, and said he had not found it necessary to explore the assumption-of-responsibility point. The parties would reasonably contemplate that, for the most part, the market would protect owners who lost a fixture, since they could find substitute employment. He held that "neither party would reasonably have contemplated that an overrun of nine days would "in the ordinary course of things" cause the owners the kind of loss for which they claim damages." The loss arose "only because of the extremely volatile market conditions". "It was, accordingly, too remote to give rise to a claim for damages for breach of contract."

He added two caveats: a general claim for loss of business might lie in some markets, and the result might differ if the owners had told the charterers of a forward charter, bringing the second limb of Hadley v Baxendale into play.

Lord Walker

Lord Walker allowed the appeal for his own reasons and for the further reasons given by Lord Hoffmann, Lord Hope and Lord Rodger.

Baroness Hale: doubts

Baroness Hale agreed only hesitantly. She called Lord Hoffmann's approach "an interesting but novel dimension to the way in which the question of remoteness of damage in contract is to be answered". She said: "I am not immediately attracted to the idea of introducing into the law of contract the concept of the scope of duty which has perforce had to be developed in the law of negligence." And she concluded: "if this appeal is to be allowed, as to which I continue to have doubts, I would prefer it to be allowed on the narrower ground identified by Lord Rodger, leaving the wider ground to be fully explored in another case and another context."

A charterer who redelivers late is liable, in the ordinary case, for the difference between market rate and charter rate for the overrun period, not for the owner's loss on a lost or renegotiated follow-on fixture. The majority reasoning (Lord Hoffmann and Lord Hope, with Lord Walker agreeing) is that remoteness asks whether the loss is of a type for which the contract-breaker, judged objectively against the commercial background and market understanding, assumed responsibility; a foreseeable ("not unlikely") loss may still be excluded. Lord Rodger and Baroness Hale reached the same result on the narrower ground that the loss was not within the parties' reasonable contemplation in the ordinary course of things.

• Direct question: Discuss the rule of remoteness of damages in contract with reference to recent developments. Start with Hadley v Baxendale and s. 73, then use The Achilleas to show the assumption-of-responsibility gloss, and Baroness Hale's doubts.
• Problem question: late delivery causes the innocent party to lose an unusually profitable contract with a third party, of which the defaulting party knew nothing. Apply both routes: not within ordinary contemplation (Lord Rodger), and not a type of loss for which responsibility was assumed (Lord Hoffmann).
• Remember the court: this is an English House of Lords decision. In an Indian answer, use it as persuasive authority on how s. 73 may be read, not as binding law.