Glory Wealth Shipping v Korea Line Corporation
Glory Wealth Shipping Pte Limited v Korea Line Corporation
English High Court: Queen’s Bench Division (Commercial Court): Blair J:  EWHC 1819 (Comm): 22 June 2011
Mr Charles Priday, instructed by Winter Scott LLP, for the Claimant charterers
Mr David Lewis, instructed by DLA Piper UK LLP, for the Respondent owners
TIME CHARTERPARTY: WRONGFUL TERMINATION BY CHARTERERS: ASSESSMENT OF DAMAGES: NO AVAILABLE MARKET FOR BALANCE OF CHARTER PERIOD AT TIME OF TERMINATION: EFFECT OF REVIVAL OF MARKET AT A LATER STAGE
The Commercial Court held that while the usual measure of damages for the premature wrongful termination of a time charterparty was the difference between the contract rate and the market rate for the balance of the charter period at the time of termination, this rule did not and could not apply in cases where there was no available market at the time of termination. In such cases, damages should be assessed on the basis of actual losses suffered by the innocent party, subject to the usual rules on mitigation of losses. The revival of an available market at a later stage would not in itself provide a correct measure of damages. It was only a factor to be taken into account in the assessment, and might be relevant to the question of mitigation.
This note has been contributed by Ken To-ching Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong.
The present case concerned a time charterparty on an amended NYPE form entered into between Korea Line Corporation, the Shipowners, and Glory Wealth Shipping, the Charterers in February 2008. The charter was for a minimum of 36 months to maximum 38 months. The Vessel was delivered to the Charterers in June 2008 and was therefore due for redelivery between June and August 2011.
In November 2008, the Charterers purported to make early redelivery of the Vessel, which the Shipowners accepted as a repudiatory breach entitling them to terminate the charterparty. Subsequently, the Shipowners fixed the Vessel only on the spot market.
The dispute was referred to LMAA arbitration, and the Charterers conceded their breach of the charterparty. The only issue was the amount of damages payable. Parties agreed that when the charterparty was terminated in November 2008, there was no available market for a period charter of a duration that corresponded to the balance of the charterparty. Evidence showed, however, that, an available market for the purpose of assessing damages arose in June/July 2009, although the market for a 2-year charter was at that time fragile and only in early stages of recovery.
The Shipowners argued that damages should be calculated on a “hybrid basis”, i.e. initially by reference to losses on a substitute fixture the vessel had contracted in the spot market up to July 2009, and subsequently by reference to market rates for the balance of the charter period. The Charterers disagreed. They argued that such “hybrid claim” was wrong in law. As the market rate was very low in July 2009, being in only the early stages of recovery, it would result in a windfall for the Shipowners. In cases where there was no available market at the date of termination of the charterparty, one should look at the Shipowners’ actual loss, that is, what sum would put the Shipowners in the same financial position that they would have been in had the charterparty been performed.
In their award in October 2010, the arbitrators allowed the Shipowners’ claim on a “hybrid basis” and awarded them US$15.7 million as damages for the wrongful repudiation. They held that, in assessing damages for the balance of a repudiated charter by reference to the market rate of a time charter of a duration equivalent to that balance, the law intended to facilitate comparison as far as possible on a “like-for-like” basis. Thus, it was logical that once a viable market could be identified, that would become the criterion for determining loss. Such an approach also allowed damages to be quantified relatively quickly.
The Charterers obtained leave from Burton J. to appeal against the arbitrator’s decision under s.69 of the Arbitration Act 1996. The issue before the Court was framed as follows: What was the correct measure of damages for a charterer’s repudiation of a time charter where there was, at the date of termination of the charter, no market for the unexpired period and such a market only revived at a much later stage?
Blair J. allowed the Charterers’ appeal.
The general rule was that, in cases of premature wrongful termination of a time charter, damages would be assessed at the time of termination as the difference between the contract rate for the balance of the charter period and the market rate for chartering a substitute vessel for the same period: see The Elena D’Amico  1 Lloyd’s Rep 75. This was justified as ‘deemed mitigation’, or on the basis that this represented the loss which might fairly and reasonably be considered as arising naturally from the breach. If the owner or charterer (as the case may be) decided not to take advantage of a market which was available at that time, this was his own business decision independent of the repudiatory breach of contract. This was so whether or not that decision was reasonable, and the actual facts of the case were usually irrelevant: see Lord Bingham in The Golden Victory  2 AC 353, para.10.
However, the Elena D’Amico method of assessing damages was only a prima facie rule or a rule of thumb on causation and mitigation. It obviously could not apply when there was no market at the time of termination of the charterparty. In such situations, it was held in Zodiac Maritime Agencies Ltd v Fortescue Metals Group Ltd  EWHC 903 (Comm) that there could be no ‘deemed mitigation’. Even if an available market emerged at a later stage, an owner’s decision not to take advantage of that market was not necessarily one which was independent of the wrongful termination; there was no basis for requiring the shipowners to go back to the term market at the end of every spot voyage, or to disregard short time charters in case the market for longer charters emerged in the meantime. Unfortunately, the decision in the Zodiac case came too late to be cited to the arbitrators in this case.
As held in The Griparion  1 Lloyd’s Rep 533, when the Elena D’Amico method of assessing damages could not apply, the court – when assessing damages - would consider the underlying questions: What loss had this breach caused as its normal and direct consequence? And what conduct should be presumed to be unreasonable? Damages should be assessed by reference to the Shipowners’ actual loss, subject to the question of mitigation. In cases like the present, where damages fell to be assessed before the end of the contractual period, while the revival of the market did not in itself provide the correct measure of damages, it was nevertheless a factor to be taken into account in calculating future loss. Courts might consider the market conditions to be such that the owner should have taken advantage of the reviving market to mitigate its loss. The Charterers in the present case, however, had accepted that the Shipowners had properly mitigated their loss, and so this issue did not arise.
Thus, a “hybrid claim” for damages was not permissible in law, and the arbitrators had approached the issue by applying the wrong principle. As the Shipowners had reserved the right to amend the Points of Claim to claim actual loss insofar as their primary claim for damages on a “hybrid basis” was rejected, the case would be remitted to the arbitral tribunal for re-consideration.
Although there was some discussion in the judgment (see paras.28-29), the actual methodology to be used in assessing damages was not entirely clear. Blair J. commented that if damages were assessed on the basis of the loss actually suffered and crystallised on each voyage, this seemed like the “running assessment of the state of play” which Lord Bingham disapproved in The “Golden Victory”, para.23. The more preferable method seemed to be to assess actual loss up to the date of the decision, project forward a trading forecast, and assess future loss accordingly.