A B The GA
A v B (The “GA”)
English Commercial Court: Sir Ross Cranston:  EWHC 2325 (Comm): 7 September 2018
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2018/2325.html
Vasanti Selvaratnam QC and Ravi Aswani (instructed by Bentleys, Stokes & Lowless) for A (Owners)
Christopher Hancock QC and Richard Greenburg (instructed by Thomas Cooper LLP) for B (Charterers)
TIME CHARTERPARTY: AMENDED SHELLTIME 4 FORM: VLCC OIL TANKER CHARTERED-IN THEN SUB-CHARTERED TO POOL: OIL MAJOR ELIGIBILITY CLAUSE (“OMEC”) BY WHICH VESSEL GUARANTEED AT ALL TIMES (1) TO HAVE A VALID SHIP INSPECTION REPORT (“SIRE”) PROGRAMME REPORT REGISTERED ON THE SIRE SYSTEM AND NOT MORE THAN SIX MONTHS’ OLD, AND (2) TO BE ELIGIBLE FOR BUSINESS FROM AT LEAST FOUR OIL MAJORS: VESSEL BECAME UNEMPLOYABLE DUE TO CRITICAL SIRE REPORT FOLLOWED BY LAPSE OF SIRE REPORT: VESSEL PLACED OFF-HIRE DUE TO BREACH OF GUARANTEES THEN LATER REDELIVERED TO OWNERS: QUANTIFICATION OF CLAIM FOR LOSS AND DAMAGE CAUSED BY BREACHES OF OMEC: WHETHER NET LOSS OF PROFITS AND WASTED COSTS COULD BOTH BE CLAIMED: WHETHER LOSS OF PROFITS DAMAGES WERE TO BE DISCOUNTED ON LOSS OF CHANCE BASIS: ARBITRATION ACT 1996 SECTION 69 APPLICATION TO APPEAL AWARD ON POINTS OF LAW
In the context of an application to challenge an arbitration award awarding Charterers certain damages for a vessel’s failure to comply with the terms of an “Oil Majors Eligibility Clause”, the High Court held, in dismissing the application, that:
(1) the tribunal’s identification and application of the compensatory principle in awarding net loss of profits and wasted expenditure (on hire and bunkers), where both of them each related to different periods of time, was not obviously wrong and was in line with the leading texts (Chitty and McGregor) as the loss of profits was calculated net of the expenses incurred to earn those profits; and
(2) as there was an available market and Charterers’ losses were calculated on the basis of profitable fixtures that probably would have been performed, there was no error of law in the tribunal’s conclusion that those losses should not be discounted for loss of chance.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, LMAA Supporting Member and International Contributor to DMC’s Case Notes
Owners time chartered their VLCC crude oil tanker “GA” to Charterers on an amended Shelltime 4 form dated 4 July 2011 which was later amended to include an obligation for Owners to comply with the requirements of the VLCC pool into which Charterers entered “GA” on a materially similar form and subject to a pool management agreement.
The charter and the sub-charter included an oil major eligibility clause (“OMEC”) which required “GA” at all times to have (1) a valid Ship Inspection Report Programme (“SIRE”) report not more than six months’ old registered on the SIRE system, and (2) the approval for business of at least four oil majors.
“GA” was delivered into the charter and the sub-charter on 4 July 2011. Following delivery, a critical SIRE report was issued by Statoil after inspecting “GA” on 10 March 2012, which impacted adversely on the employability of “GA”. The SIRE report later lapsed on 10 September 2012, when it became six months old, which made “GA” unemployable in the open market.
Charterers placed the vessel off-hire on 26 October 2012 and later redelivered her to Owners on 14 January 2013. Charterers claimed and were awarded by a London arbitral tribunal damages of USD3,278,169 for net loss of profit (USD679,037 for two voyages that could not be performed between 21 October 2012 and 31 January 2013) and wasted costs (USD2,599,132 for hire and bunkers expended between 22 July 2012 and 26 October 2012) caused by Owners’ breaches of the OMEC in the charter.
As regards the loss of profit, but for the breach of charter, the first charter “GA” would have obtained (commencing about 26 September 2012 for loading on or about 21 October 2012) was for a laden leg between Dalia, Angola and Jamnagar, India (“the Shell fixture”). The second voyage was to follow the first, and was for a laden leg between Basrah, Iraq and Long Beach, California (“the Valero fixture”), which would have ended about 31 January 2013.
Owners obtained leave to appeal to the High Court on the following two questions:
(1) Whether it was consistent with the compensatory principle for the tribunal to award both loss of profits and wasted expenditure (on hire and bunkers)?
(2) Whether, where there is an available market which is weak and loss-making, damages should be assessed by reference to that available market or by reference to lucrative fixtures which Charterers contend they would have entered into but for the breach, discounted by reference to loss of chance principles?
The judge considered and addressed the two questions as follows:
(1) Loss of Profits, Wasted Expenditure & Compensatory Principle
Owners took the position that Charterers had been over-compensated, so should only have been awarded damages of USD679,037. The damages award of USD3,278,169 was contrary to the compensatory principle and had arisen, argued Owners, from the tribunal not engaging with the central case relied on by Owners: The “Mamola Challenger” (fn.1). The judge identified that the starting point in considering Owners’ submissions is the basic rule (the so-called compensatory principle) that Charterers must be placed in the same financial position they would have been if the charter had been performed (fn.2). The corollary of that rule is that Charterers must not be placed in a better position than they would have been in, had the breach of contract not occurred. Placing Charterers in the same financial position as they would have been in if the contract had been performed involves comparing their actual position and the one which they would have been in had the charter been properly performed. The judge noted that, in The “Mamola Challenger”, the owners incurred expenses in preparing the vessel for the time charterers, who repudiated the charterparty at the outset of the five year period. The owners sued the time charterers for the expenses and were met by the argument that they had suffered no net loss since during that period they had entered various fixtures rendering a profit in excess of the level of the expenses. While the tribunal had awarded the expenses, Teare J reversed their decision on the appeal. The position was that, given the profit the owners had made from the fixtures, to have awarded them the wasted expenses as well would have placed them in a better position than they would have been in if the contract had been performed.
In this case, the tribunal’s finding on Charterers' actual position was that they had incurred wasted expenditure on hire and bunkers of USD2,599,132 from the time the vessel was on the United States West Coast on 22 July until the vessel was placed off hire on 26 October. The tribunal had found that, had the Owners performed the charterparty, the Charterers would probably have earned profits of USD679,037 from the Shell and Valero fixtures. That was the loss for which Charterers claimed indemnification against Owners, on the basis that they were liable down the line to Sub-Charterers (the Pool). While the charter and the sub-charter were not entirely back-to-back, Owners were in breach of OMEC in two important respects: the SIRE report meant that the vessel was not acceptable to four of the oil majors, and on 10 September it became more than six months old.
While there were cases in which claimants had to make an election between claiming wasted expenditre or loss of profit (fn.3), where to award both would have put the claimants in a better position than they would have been in had the contract been performed, that was not invariably so. The judge noted that the leading texts recognise situations where the wasted expenses up to the contract’s date of termination can be claimed, along with the loss of profit thereafter, if the latter is calculated net of the expenses incurred and there is no overlap in recovery (fn.4).
For that to apply, the net loss of profits must have been calculated by deducting from the expected gross returns (revenue) the cost of performance. Here, the cost of performance was (1) the actual expenditure (hire, bunkers, etc for Charterers’ account under the charter) incurred up to the date of off-hire, and (2) the further expenditure (ditto) which would have been incurred if the contract had properly run its full course. Compensation of a claimant in that type of case, considered the judge, requires the award of both the wasted expenditure and the net loss of profits, and there is nothing inconsistent in so doing. In this case, the judge noted that the tribunal had taken the notional profit figures for the Shell and the Valero voyages from Charterers’ expert. That expert had used the time charter equivalent (“TCE”) rates for the two voyages. In outline, the TCE is calculated by deducting bunkers and other expenses from the voyage revenues and then dividing by the voyage duration in days. As such, the TCE rate is the net voyage charter revenue earned on a daily basis over the duration of the voyage. As then explained in the tribunal’s reasons, in calculating the notional voyage profit, the cost of bunkers from 22 July to 26 September 2012 – the period of an approach voyage from the United States West Coast towards Angola, the vessel having been fixed on subjects on the latter date – and the cost of hire from 22 July 2012 to 31 January 2013, had been subtracted from the total profit figure.
In other words, as the judge noted, the profit figure of USD679,037 was a net figure. In awarding Charterers’ losses, the tribunal added to the net lost profit figure for the notional voyages the wasted expenditure for bunkers and hire from 22 July to 26 October. In the judge’s view the tribunal’s identification and application of the compensatory principle was not obviously wrong, with the award of lost profits and wasted expenditure on hire and bunkers here being in line with the leading texts (fn.4), having thereby avoiding overlap in recovery.
(2) Available Market, Profitable Fixtures & Loss of Chance
Owners’ case on loss of chance began with the principle that where a claimant’s loss depends on the hypothetical action of a third party, success depended on showing a real or substantial chance, rather than a speculative one, of the third person conferring the benefit (fn.5).
In Owners’ submission, quite apart from the uncertainties associated with any fixture, there was in this case the tribunal’s acknowledgment that the market was soft, as well as evidence about the state of the market and of closely comparable vessels in the Pool in which the “GA” was entered under the sub-charter. There is no rule of law, Owners submitted, that loss of chance principles cannot apply simply because there is a market, as the tribunal had stated. Moreover, the tribunal had also stated that it was “reasonable to calculate” and “reasonable to assume” that the Charterers would have been able to fix the Shell and the Valero voyages, not that it was more likely than not that those two fixtures would have been performed. That was an error of law, and in the circumstances it was wrong in law for the tribunal not to discount the two fixtures for loss of chance, such that only nominal damages should have been awarded.
The starting point in considering these submissions, said the judge, is what Sir Anthony Clarke MR said in The “Vicky 1” (fn.6):
“ There are many cases in which courts or arbitrators have to determine what rate of profit would have been earned but for a tort or breach of contract. As I see it, in a case of this kind, where the court has held that the vessel would have been profitably engaged during the relevant period, where there is a relevant market and where the court can and does make a finding as to the profit that would probably have been made (and has been lost), there is no place for a discount from that figure to reflect the chance that the vessel would not have been employed.”
Sir Anthony went on to contrast a case where it was not shown that the vessel would have been profitably employed, but only that it might have been. In those circumstances, he said, it might be possible to approach the problem as a loss of a chance.
In this case, considered the judge, there could be no doubt that the tribunal had found that there was an available market, and that (despite the way it might have expressed it) “GA” would probably have performed the Shell and the Valero fixtures in the absence of Owners’ breach of contract. As such, the judge considered it was not permissible to challenge the factual findings through a section 69 application. Accordingly, the judge held that, since there was an available market and Charterers’ losses were calculated on the basis of fixtures that probably would have been performed, there was no error of law founding a section 69 challenge in the tribunal’s conclusion that those losses should not be discounted for loss of chance, with Sir Anthony Clarke MR’s analysis in The “Vicky 1” being directly in point.
The rationale of the judgment on the first question appears to be that The “Mamola Challenger” was distinguishable from the present case. The charter in that case was repudiated from the outset, so that none of the charter was performed, whereafter the owners earned during the period of the unperformed charter a profit in excess of the expenses incurred to prepare the vessel for the repudiated charter. By contrast, in this case there had been substantial performance of the charter period before “GA” ran into trading difficulties, due to the adverse SIRE report which later lapsed, following which the vessel went off-hire, making the vessel unemployable for the remainder of the charter period.
The result was that between 22 July 2012 (when trading difficulties began to be experienced) and 26 October 2012 (when the vessel was placed off-hire) the hire paid by Charterers and the cost of bunkers represented wasted expenditure, in that it was incurred without the ability to generate revenue. Thereafter, “GA” was unable to perform two back-to-back profitable voyage charters with Shell and Valero, from the gross lost revenue of which the hire, bunkers and other voyage expenditures would have to be deducted (as they would have necessarily been incurred in order to earn that revenue) in order to calculate the net lost profits.
As to the second question, while the tribunal had not expressed itself in the clearest terms, the judge considered that its finding was that the Shell and the Valero fixtures would probably have been performed but for Owners’ breach, such that the loss of chance principle did not apply on the facts. That approach was in accordance with precedent that awards should not be construed in an overly literalistic manner. However, where an award is fairly understood to make a factual finding that it is less than certain, on the balance of probabilities, that fixtures would have been performed, loss of chance would have to be factored in to determine the damages to be awarded. It is a potentially tricky task to quantify such damages and it may result in only nominal damages being recovered.
Footnote 1:  EWHC 2026 (Comm),  1 Lloyd’s Rep 47
Footnote 2: Robinson v Harman (1848) 1 Exch 850, 855; 154 ER 363, 365, per Parke B; Bunge SA v Nidera BV  UKSC 4,  Bus LR 987, , 
Footnote 3: Cullinane v British "Rema" Manufacturing Co Ltd  1 Q.B. 292; Anglia Television Ltd v Reed  1 QB 60, 63-64, per Lord Denning MR
Footnote 4: McGregor on Damages, 20th Edition, 2017, para 4-024; Chitty on Contracts, 32nd Edition, 2017, paras 26-029, 44-423
Footnote 5: Allied Maples v Simmonds & Simmonds  1 WLR 1602, 1611, per Stuart-Smith LJ
Footnote 6:  EWCA Civ 101,  2 Lloyd’s Rep 45