Omak Maritime v Mamola Challenger Shipping
English High Court
Omak Maritime Ltd v Mamola Challenger Shipping Co
Queen’s Bench Division (Commercial Court): Teare J:  EWHC 2026 (Comm): 4 August 2010
Timothy Young QC, instructed by Stephenson Harwood, for the Defendant charterer, Omak Maritime Ltd
Timothy Brenton QC and Charles Holroyd, instructed by MFB Solicitors, for the Claimant shipowner, Mamola Challenger Shipping Co
TIME CHARTERPARTY: BREACH OF CONTRACT BY CHARTERER: MARKET RATE OF HIRE HIGHER THAN CONTRACT RATE OF HIRE: SHIPOWNER’S CLAIM FOR WASTED EXPENDITURE: RELATION WITH PRINCIPLE IN ROBINSON V HARMAN
The Court held that reliance damages(1) should rationally be explained as a species of expectation damages(2), and its award should not put the claimant in a position better than that he would have been in had the contract been performed. On the facts, as the market rate of hire was higher than the contract rate of hire at the time of breach, the Shipowner “more than recuperated” its loss of hire under the charterparty and its wasted expenses. Therefore, no reliance damages should have been awarded.
This note has been contributed by Ken To-ching Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon).
The Defendant, Omak Shipping Ltd (“the Charterer”), agreed to charter the vessel of the Claimant, Mamola Challenger Shipping Co (“the Shipowner”), for 5 years. Pursuant to the charterparty, the Shipowner incurred various expenses in installing a crane onto the chartered vessel.
Originally, the vessel was to be sub-chartered to a Nigerian company. However, that Nigerian company failed to enter into the sub-charterparty, and the Charterer failed to perform the fixture. The Shipowner accepted the conduct of the Charterer as a repudiatory breach. At that time, the market rate of hire was higher than the contract rate of hire. The Shipowner subsequently concluded a number of short-term fixtures with other parties.
As a result of the Charterer’s repudiation, the expense incurred by the Shipowner in installing the crane was wasted. The Shipowner claimed damages for such expenses.
The dispute was referred to LMAA arbitration. The tribunal held that the Shipowners suffered “no net loss” and the higher market rate of hire meant that they “more than recuperated the losses they claim”. Nevertheless, they allowed the Shipowner’s claim for expenses wasted in installing the crane.
The Charterer appealed to the High Court on the ground that the arbitral tribunal erred in law in allowing the claim for wasted expenses.
Teare J allowed the Charterer’s appeal.
The Court noted that the “fundamental principle governing the quantum of damages for breach of contract” enunciated by Parke B in Robinson v Harman (1848) 1 Exch 850 was that the innocent party to a breach of contract is to be placed - so far as money can do it - in the same position as if the contract had been performed. The corollary is that an award of damages should not put the claimant in a better position than he would have been in had the contract been performed: Wertheim v Chicoutimi Pulp  AC 301. With respect to the claim for wasted expenses, the issue before the Court, on which there was no binding precedent, was whether, and if so, how should the principle in Robinson v Harman applied to such a claim for reliance damages.
Teare J reviewed authorities from America, Canada and Australia. Despite dicta to the contrary, he held that reliance damages are not aimed at putting the claimant in a position as if there had been no contract. Rather, reliance damages should rationally be explained as a species of expectation damages, and their recovery should be governed by the principle in Robinson v Harman.
His reasoning was twofold. Firstly, as a contract creates an expectation in the claimant of receiving the defendant’s performance, the award of damages for breach of contract should protect such expectation (usually for the loss of net profit). Therefore, even in cases where the performance would not result in a profit for the claimant, but would have allowed him to recoup expenses incurred, he would still be entitled to recover damages for that amount in accordance with Robinson v Harman: Commonwealth of Australia v Amann Aviation (1991) 66 ALJR 123.
This would mean that the award of reliance damages should not put the claimant in a position better than that he would have been in had the contract been performed. Otherwise, the defaulting party would become an insurer of the claimant’s loss under the contract: Learned Hand CJ in L. Albert & Son v Armstrong Rubber Co. (1948) 178 Fed Rep 182.
Secondly, in cases of bad bargains, the wasted expenses incurred by the claimant are losses flowing from entering into contract, not from the defendant’s breach. Rather, the breach saved the claimant from incurring further losses: Bowlay Logging Limited v Domtar Limited  4 WWR 105; C&P Haulage v Middleton  1 WLR 1461. Therefore, in these cases, it is open to the defendant to prove that the claimant would not be able to recover those expenses even if the contract had been performed. It is also fair that, as a result of his wrong-doing in breaching the contract, the defendant should bear that burden of proof.
Expectation damages and reliance damages are simply two manifestations of the general principle of Robinson v Harman. Although cases like Anglia TV v Reed  1 QB 60 suggested that the claimant was entitled to elect between a claim for expectation loss and a claim for reliance loss, the Court considered that such language as “election” was inappropriate; there was no “election” between two inconsistent remedies. All that was meant was that a claimant may choose to frame his claim for damages on the reliance basis rather than on the expectancy basis. In both cases, the court would have to make a comparison between the claimant’s position after the breach and what it would have been had the contract been performed.
Therefore, in the present case, the tribunal erred in law in awarding damages for the Shipowner’s wasted expenditure. The earnings made by the Shipowner from the substitute employment “more than recuperated the losses” it claimed. Those earnings not only expunged the loss of earnings it suffered as a result of the Charterer’s breach of contract, but also the wasted expenses. No damages should have been awarded, and the Charterer’s appeal was allowed.
This decision is an attempt to settle the debate on the justification for reliance damages under English law. Comments in cases like Anglia TV that a claimant can elect between a claim for reliance damages and a claim for expectation damages create an impression that these are two different ways of awarding damages. This is also the opinion of Treitel in a case note cited by the Court: (1992) 108 LQR 229.
However, it is important to recognise that a contract primarily creates an expectation interest, namely, that the contract would be performed. This is also the reason why parties to a contract rely on it. Therefore, reliance interest (and thus reliance damages) must be derivative in nature. This analysis of reliance damages also helps to explain why the defendant can reduce the damages by proving that the claimant would not have been able to recover the wasted expenses even if the contract had been performed. Therefore, this aspect of the decision is correct.
(1) Reliance damages are the measure of compensation awarded to a person who has suffered economic loss from acting in reliance on a party who failed to fulfil its legal obligations.
(2) Expectation damages are damages recoverable from a breach of contract. Their purpose is to put the party not in breach in the position it would have been in, had the contract been fulfilled.