Zodiac Maritime v Fortescue Metals
Zodiac Maritime Agencies Limited v Fortescue Metals Group Limited
Queen’s Bench Division (Commercial Court): David Steel J:  EWHC 903 (Comm): 28 April 2010
Andrew Baker QC and Malcolm Jarvis, instructed by Ince & Co, for the Claimant shipowner, Zodiac Maritime
David Allen QC and Michael Collett, instructed by Clyde & Co, for the Defendant charterer, Fortescue Metals Group
CONSECUTIVE VOYAGE CHARTERPARTY: WRONGFUL EARLY TERMINATION BY CHARTERER: DAMAGES: WHETHER “AVAILABLE MARKET” WHEN CHARTERPARTY TERMINATED: WHETHER SUBSEQUENT EMERGENCE OF MARKET DURING THE BALANCE OF CHARTER PERIOD RELEVANT TO THE ASSESSMENT OF DAMAGES
The Court held that FMG, the charterer under a consecutive voyage charterparty, had wrongfully repudiated it. The normal measure of damages, that is, the difference between the market rate of hire and the contract rate of hire for the balance of the charter period, could not be applied here as there was no available market at the time of breach. Further, the later emergence of an available market is irrelevant to this method of assessing damages. Thus, whilst the shipowner was expected to make reasonable mitigation, its damages would depend on its actual losses.
This note has been contributed by Ken To-ching Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and supplemented by extracts from an article entitled ‘Damages – Fixed or limited’, written by Robert Gay, a solicitor with the international law firm, Hill Dickinson LLP.
The present case involved a consecutive voyage charterparty (“the CVC”) between the claimant shipowner, Zodiac Maritime (“Zodiac”), managers of a fleet of dry bulk carriers, and the defendant charterer, Fortescue Metals Group (“FMG”), an Australian iron ore producer. The CVC was a contract for 5 years for consecutive voyages from Western Australia to China to be performed by m/v “Kildare, a Capesize bulk carrier. The contractual cargo was iron ore concentrates in bulk, to be loaded at Port Hedland, although FMG did have the option to load either coal or iron ore for other discharge ports within India/Japan range.
In November 2008, FMG attempted, without success, to renegotiate the freight rate, and then sent a message advising that under “current circumstances” - namely that FMG’s had customers cancelled all of their freight arrangements with the company as a result of global economic meltdown - it would not be able to honour their freight commitments under the CVC from 1 December 2008.
In December 2008, Zodiac was informed by FMG’s port agents that FMG did not intend to load a cargo onto the vessel. There was also a telephone conversation between Mr Forrest, FMG’s CEO and Captain Zingher, Zodiac’s Managing Director, the exact content of which was disputed. FMG argued that Mr Forrest had said that it had no choice but to temporarily suspend or delay the charterparty due to unforeseen circumstances; and Zodiac argued that it was informed that FMG was terminating the CVC as it was not in a financial obligation to honour its obligations under it.
The CVC was finally terminated in January 2009. Zodiac subsequently employed the vessel on the spot market but then, in June 2009, agreed with other charterers - Guofeng - to substitute the vessel for the original one under another ongoing charterparty between them (“the Guofeng charter”). This charter had been originally concluded in November 2007, for a period of some seven and a half years.
Zodiac claimed for demurrage and damages arising out of the alleged wrongful termination of the CVC by FMG. The demurrage claim was later conceded.
The only issues before the Court, therefore, were whether FMG had repudiated the CVC by its communications and conduct between November 2008 and January 2009, and, if so, the measure of damages payable.
David Steel J held that, on the facts, FMG had repudiated the CVC. The rest of this note is, therefore, concerned only with the second issue, the measure of damages to which Zodiac were entitled.
With regard to the assessment of damages, under English law there is a rule that where a charterparty has been repudiated, and there is an “available market” in which it is possible to re-fix for a period roughly equal to the period which the repudiated charterparty still had to run, then the law expects the party who is not in breach to re-fix for that period.
It is clear from the caselaw that this rule sets a limit to the damages which can be recovered. If there is an “available market” and a shipowner chooses not to re-fix for a period equal to the remainder of the repudiated charterparty but instead (for example) trades the vessel on the spot market and (as it may turn out) suffers greater losses than he would have suffered if he had re-fixed for the equivalent period, then his damages will be restricted to the amount which he would have lost if he had re-fixed for the equivalent period. His additional losses will be treated as having resulted from his own independent decision instead to take his chance on the spot market.
What is left unclear by the case law is whether this rule only sets a limit, or rather establishes a fixed measure of damages. Consider the position of a shipowner who does not re-fix for the period equivalent to the remainder of the repudiated charterparty and who (in the event) does better than he would have done if he had re-fixed for the equivalent period. (Perhaps he even does better than he would have done under the repudiated charterparty, so that in the end he does not suffer a loss at all.) If the rule establishes a fixed measure of damages, then the shipowner may be able to recover the amount which he would have lost if he had re-fixed for the equivalent period, even if he has not actually suffered any loss at all. If the rule does not establish a fixed measure of damages but only a limit, then the shipowner will not be able to recover any more than his actual losses.
It is clear from the points which were argued on behalf of Zodiac that Zodiac’s legal advisers were intending to argue that the rule established a fixed measure of damages, so that Zodiac would be able to recover on the basis of a fixture for 4½ years at the rate obtainable in about January 2009, which would have produced an award of damages perhaps US$20m higher than Zodiac’s actual losses. However, because of other specific points which the Judge did decide, he did not need to determine whether the rule of law did establish a fixed measure of damages, or only a limit.
The first point which the Judge decided is the most significant, with regard to what counts as an “available market” for the purpose of this rule. In this respect, the Court accepted expert evidence to the effect that, at the time in question, January/February 2009, owners were not willing to fix at current rates (equivalent to about US$24,000 per day) for longer than one or at most two years, while charterers would not be willing to fix at any higher rate. On this basis, the Judge held that there was no “available market” for a 4½ year fixture. In effect, the judgment decides that in order for there to be an “available market” it is not enough that it would have been possible, for an owner who was absolutely determined to fix his vessel for a long period, to find a fixture for his vessel. Rather, there is only an “available market” if there is a price which would attract both willing sellers and willing buyers.
The Court also had to consider whether the emergence of a market later during the balance of the charterparty was relevant for the assessment of damages. It was common ground that a year after the repudiation, in about February 2010, there was an “available market” for fixtures of about 3½ years, that is, equivalent to the balance (a year after the repudiation) of the repudiated charterparty. The Judge held that this was irrelevant. In effect, the judgment decided that the ‘available market’ rule only applied if there was an “available market” to re-fix for the equivalent period immediately after the repudiation. The rule cannot apply at a later stage. If there is no “available market” immediately after the repudiation, then the shipowner will recover damages based on whatever his actual losses were.
Finally, the Court held that Zodiac had entered into negotiation with Guofeng as a result of the termination of the CVC. The decision to employ the vessel under the Guofeng charter was “part of a continuous dealing with the situation in which [Zodiac] found itself” (British Westinghouse v Underground Electric  AC 673), or “sufficiently closely connected with the breach” (The Fanis  1 Lloyd’s Rep 633). Therefore, Zodiac’s earnings under the Guofeng charter had to be deduced from the damages it would receive.
As a result, Zodiac’s damages were to be assessed by comparing what it would have earned under the charterparty which FMG had repudiated with what Zodiac actually received as the earnings of the vessel (including what Zodiac would receive under the Guofeng charterparty up to about July 2013, when the repudiated charterparty would have terminated). In considering what Zodiac would have earned under the repudiated charterparty, the Judge made a small deduction (1.5%) in respect of “catastrophic contingencies” such as the possibility that the vessel might become a total loss before July 2013. It is not apparent whether the Judge expected a similar deduction to be made from the amount in respect of Zodiac’s future earnings from the other charterparty.