Palmali Shipping v Litasco
Palmali Shipping SA v Litasco SA
English Commercial Court: Foxton J:  EWHC 2581 (Comm): 1 October 2020
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2020/2581.html
John Russell QC, Jessica Wells and Fiona Whiteside (instructed by Lax & Co LLP) for Palmali (Owners)
Charles Béar QC and Tom Bird (instructed by Debevoise & Plimpton LLP) for Litasco (Charterers)
CONTRACT OF AFFREIGHTMENT (“COA”): OWNERS CLAIMING FOR LOSS OF PROFIT DUE TO CHARTERERS’ FAILURE TO PERFORM SHIPMENTS: OWNERS HAD OPTION TO USE OWN COMPANY GROUP FLEET VESSELS OR THIRD PARTY CHARTERED IN VESSELS TO PERFORM SHIPMENTS: WHETHER OWNERS HAD TO ACCOUNT FOR EXPENSES OF OWN FLEET TO PERFORM SHIPMENTS WHEN QUANTIFYING DAMAGES TO REFLECT NET LOSS OF PROFIT IN SAME WAY AS WHEN INCURRING FREIGHT, DEMURRAGE AND PORT CHARGES WHEN USING THIRD PARTY VESSELS TO PERFORM SHIPMENTS: CHARTERERS’ SUMMARY JUDGMENT APPLICATION
In granting Charterers’ summary judgment application, the High Court held that where claiming for an alleged failure to perform a COA, Owners who had the option to use vessels from their own fleet as well as third party vessels must account for the expenses of their own fleet vessels performing shipments when quantifying net loss of profit, in the same way as freight, demurrage and port fees are to be deducted from gross revenue for shipments performed using third party vessels. Accordingly, Owners’ claim as pleaded had no realistic prospect at trial of establishing an entitlement to claim damages calculated on a basis which did not reflect the liabilities which the undertaking of additional voyages under the COA would have generated in favour of their own fleet owning companies.
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
Palmali as Owners contended that a COA gave it the exclusive right to carry oil products to be shipped by Litasco as Charterers between various ports in the Capsian Sea/Black Sea/Mediterranean range up to a total monthly volume of 700,000 metric tonnes (“MT”) and obliged Litasco to ship a minimum monthly quantity of 400,000 MT. Palmali further contended that the COA was orignally for a period of 10 years but that the parties had agreed to extend it for a further 5 years.
Litasco denied that the COA was enforceable but, even if it was ever binding, denied it was extended. Litasco also challenged the way in which Palmali sought to quantify its alleged damages. Litasco maintained that, for any shipments not performed by Palmali’s own fleet vessels due to the alleged breach, Palmali had to deduct from the gross revenue the expenses that would have been incurred to perform the shipments, in the same way as applied for unperformed shipments for which Palmali would have utilised third party vessels.
The judge first summarised the background (above), the case as advanced by Palmali (above) and then identified that Litasco’s summary judgment application sought to address the assumption made by Palmali about not having to pay any freight or hire in respect of its so-called “own fleet” when performing voyages under the COA.
In response to Litasco’s enquiries in regard to Palmali’s assumption, Palmali had disclosed Ship Management Agreements (“SMAs”). The SMAs indicated that Palmali had to account to various group ship-owning companies for the revenues generated and discharge the expenses incurred through employment obtained for the vessels by Palmali.
The judge noted that, on the above basis, Litasco’s position was that Palmali’s assumption, that no expenses would be incurred in obtaining the services of its “own fleet”, was misconceived. Palmali contended that damages should be assessed on the basis that no liabilities to the owning companies needed to be brought into account because the owning companies would never be paid.
The judge identified that determining the loss which a claimant has suffered for the purposes of awarding damages involves a “net loss approach”, which takes account of expenses caused or benefits lost by the breach and also expenses saved and other benefits obtained as a result of the breach.
Palmali’s argument that, when calculating its “net loss”, the court should ignore the liabilities which it accepted would have come into existence if further cargoes had been lifted under the COA, involved a very significant departure from the conventional position. The argument did not therefore, in the judge’s view, reflect the economic reality of the situation.
The judge also pointed out that recovery should be denied when this would (as in this case) lead to the claimant reaping a windfall, where the liability would never be discharged and the expense never paid (fn.1).
The judge, accordingly, granted Charterers’ summary judgment application on the above basis.
This judgment is a reminder that damages for breach of contract are intended to put the innocent party in the position, so far as money can do it, as if the party in breach had performed its obligations, but no more.
Owners in this case, in effect, inflated their claim amount by seeking the gross freight lost for the allegedly missed voyages, which would be to ignore the compensatory principle, as explained above.
The judge astutely accepted the reality that Owners were accountable for the operational costs incurred to perform voyages such that the usual net loss approach to assessing damages applied.
Footnote 1: McGregor on Damages (20th Edition), para. 10-30, and Biffa Waste Services Ltd v Maschinenfabrik Ernst Hese GmbH  PNLR 5