Singapore Court of Appeal
The “Asia Star”  SGCA 12: Judgment delivered by VK Rajah JA, 19 March 2010  SGCA 12
Kelvin Chia Partnership for the Appellant Shipowners
Shook Lin & Bok LLP for the Respondent Charteres
BREACH OF CONTRACT TO CARRY CARGO: WHETHER PLAINTIFF ACTED REASONABLY IN MITIGATION OF LOSS: MEASURE OF DAMAGES FOR BREACH OF CONTRACT TO CARRY CARGO: REQUIREMENT TO NOTIFY THE DEFAULTING PARTY OF INTENDED MEASURES IN MITIGATION
The aggrieved party must take all reasonable steps in order to mitigate the loss caused by the defaulting party’s breach and cannot recover damages which were avoidable but were sustained as a result of its own unreasonable action or inaction.
However, the duty to mitigate has limits and does not oblige an aggrieved party to incur great expense or to put itself through great inconvenience in order to mitigate the losses resulting from the defaulting party’s breach.
To meet the objective standard of reasonableness, where the aggrieved party has to incur substantial additional expenditure in chartering a replacement vessel so as to mitigate its loss, the aggrieved party should notify the defaulting party of the measures it intends to take in mitigation of the breach unless such communication is impractical.
This note has been contributed by Ang & Partners, the international contributors to this website for Singapore
The Respondents, Pacific Inter-Link Sdn Bhd (“Pacific”), entered into a voyage charterparty with the Appellants, the owner of the Asia Star (“Shipowners”). It was agreed that the vessel would load a minimum cargo of 21,500mt of refined palm oil for carriage to and delivery at ports in the Middle East, Turkey and Black Sea. The cargo to be carried was purchased by Pacific from 3 suppliers - Indomas, Pamin and Pacoil - which appeared to be related to Pacific. Pacific entered into a further contract to sell 21,500mt of palm oil to one Agrima. The agreement with the 3 suppliers was not entered into with the specific intention of fulfilling the agreement with Agrima.
On 19 January 2004, the vessel’s tanks were found to be unsuitable to receive the cargo. On the same day, Pacific sent the Shipowners a solicitors’ notice holding them responsible for their breach of the charterparty in failing to provide a vessel with suitable tanks. Pacific further suggested that the Shipowners could discharge their obligations under the charterparty by substituting the Asia Star with a more suitable vessel, to which the Shipowners’ response was that no substitute vessel was available. On 20 January 2004, the Shipowners informed Pacific that the vessel’s tanks had been cleaned and invited Pacific to inspect the tanks and determine whether they were suitable to carry the cargo. Pacific did not respond and no cargo was loaded onto the vessel.
Pacific had on 19 January 2004 and even before the Asia Star had been found unfit to receive the cargo, begun attempts to find an alternative vessel to carry the cargo. One vessel, the Puma, was able to start loading at a suitable time and could load twice the amount of cargo as the Asia Star. Pacific, however, took the view that the freight rate, demurrage and other charges proposed by the Puma’s owners were commercially unviable. On 20 January 2004, Pacific made a counterproposal on laycan, freight, additional charges and demurrage. However, the owners of the Puma did not respond. On 21 January 2004, Pacific attempted to find an alternative vessel (although with different requirements so that Pacific could carry additional cargo to other ports of discharge) but was unsuccessful.
Neither Indomas, Pamin, Pacoil nor Agrima were informed of the difficulties faced by Pacific in respect of the Asia Star.
On 22 January 2004, Indomas cancelled all sale contracts with Pacific on the basis that the contractual shipment date had not been complied with. Indomas refused to withdraw the cancellation or have the cargo shipped on board a different vessel, the Chembulk Barcelona. Pacific claimed that it suffered a loss of profit amounting to US$698,889.88 as a result of the cancellation of the Indomas contracts.
On 23 January 2004, Agrima informed Pacific that it intended to cancel the bulk of the sale contracts relating to shipments on the Asia Star. While Agrima subsequently agreed to part of the cargo being shipped on board the Chembulk Barcelona, it cancelled the contracts in respect of the remainder and purchased some palm oil from the domestic Turkish market instead. Agrima made a claim for US$969,200.00 against Pacific for the additional expense of obtaining cargo from the Turkish market, which, after negotiation, was reduced to US$823,800.00.
Pamin and Pacoil agreed to extend the shipment date and that the cargo be shipped on board the Chembulk Barcelona in February 2004. In return, Pacific had to pay the additional storage and heating costs and other expenses arising from the delay, together with contractual interest, although Pacific did manage to reduce the storage costs by a third. The amount finally claimed by Pamin amounted to US$209,990.83.
Pacoil also required Pacific to pay additional charges under the contracts. As the Pacoil cargo had deteriorated due to the delay, it had to be re-processed to bring it back to its original condition. The additional charges and cost of reprocessing the cargo amounted to MYR$558,467.31.
The Assistant Registrar’s decision
The Shipowners were found to be in breach of contract. The Assistant Registrar assessing damages found that, on a balance of probabilities, Pacific’s loss was caused by the Shipowners’ breach. However, Pacific had failed to act reasonably to mitigate its loss. It was held that Pacific should have chartered an alternative vessel, the Puma, to carry the cargo to the discharge ports. However, the Assistant Registrar also held that Pacific did not have sufficient cargo to fill the Puma’s larger cargo capacity.
The Assistant Registrar awarded US$302,000.00 in damages, being the difference between the total freight amount that would have been paid to the Puma and the total freight amount for the charter of the Asia Star.
The decision of the High Court
On appeal to the High Court, the Judge there found that Pacific was not obliged to incur extraordinary expenditure or to do anything other than in the ordinary course of business, and was entitled to try and negotiate with the owners of the Puma for the best possible terms. Pacific had therefore acted reasonably to mitigate its loss.
The High Court further held that the usual measure of damages where a shipowner fails to perform a contract to carry cargo is the difference between the market and charter rates of freight, or relates to the value of the goods at the port of discharge. Alternatively, where the charterer has been able to load the goods on another vessel, he is entitled to claim the costs incurred.
As a result of these findings, the award of damages to Pacific was increased nearly fivefold.
The Shipowners appealed to the Court of Appeal.
Mitigation and the reasonableness inquiry.
1. The Court of Appeal set out the basic rules relating to mitigation, namely:-
a. That the aggrieved party must take all reasonable steps to mitigate the loss consequent on the defaulting party’s breach, and cannot recover damages for any loss which it could have avoided but failed to avoid due to its own unreasonable action or inaction.
b. The aggrieved party who goes beyond what the law requires of it and avoids incurring any loss at all will not be entitled to recover any damages.
c. The aggrieved party may recover any expenses incurred in the course of taking reasonable steps to mitigate its loss.
d. The evaluation of the aggrieved party’s conduct in mitigation ought to start from the date of the defaulting party’s breach, and the burden of proving that the aggrieved party has failed to fulfil its duty to mitigate falls on the defaulting party.
2. The Court stated that while it is difficult to identify a single theoretical justification for the principle of mitigation, the central inquiry in the context of mitigation is whether the aggrieved party acted reasonably to mitigate its loss (“the reasonableness inquiry”).
3. The Court further held that the reasonableness inquiry is largely factual, and the courts have considerable discretion in evaluating the facts in order to arrive at a commercially just determination.
Mitigation – Breach of contract of carriage of goods by sea
4. The Court observed that where a contract of carriage of goods by sea is breached as a result of the shipowner’s failure to provide the charterer with the promised vessel, the usual mitigation measures involve:-
a. The aggrieved party, the charterers, engaging an alternative vessel to carry the same goods. If a substitute vessel is available on reasonable terms, the charterer ought to mitigate its loss by engaging that vessel. If the charterer cannot obtain a vessel of the same size as that originally chartered, it is entitled to take the next best reasonable option that is available, which may include chartering a larger vessel if a failure to do so will cause greater loss to the defaulting party.
b. Alternatively, the charterer obtaining substitute goods at the intended place of delivery.
5. The charterer need only act reasonably in deciding which of these measures to adopt, but will usually be bound to adopt the least costly option.
6. However, the Court observed that case precedents provide limited guidance as they are specific to their particular factual matrices.
Mitigation – Pacific’s decision not to charter the Puma
7. In the present case, the questions to be answered by the Court were:-
a. Whether it was reasonable for Pacific to persist in seeking even lower freight rates for the Puma, given that chartering the vessel on the terms offered by her owners would have allowed Pacific both to mitigate its loss as well as reduce the damages payable by the Shipowners; and having regard to the potential damages which Pacific would have to pay to Agrima if, as a result of the Shipowners’ default, it failed to deliver the palm oil due under the contracts with Agrima.
b. Whether Pacific’s reasons for rejected the terms offered for the charter of the Puma justified the Judge’s decision to increase the damages claimable by Pacific from the Shipowners.
As to (a)
8. The Court of Appeal restated the proposition of law that the duty to mitigate had limits and could not oblige an aggrieved party to incur great expense or to put itself through great inconvenience in mitigating the losses resulting from the defaulting party’s breach.
9. What amounts to too great an expense for the aggrieved party to incur or too great a risk of the aggrieved party’s money is a question of fact.
10. Therefore, the issue of reasonableness did not turn on Pacific’s conduct in negotiating with the Puma’s owners, but on the question of whether the sum of US$399,500.00 which Pacific would have had to pay if it had chartered the Puma was proportionately so large an additional upfront cost as ultimately to warrant Pacific’s decision not to charter her.
11. The Court held that Pacific could have afforded the additional US$399,500.00 to charter the Puma with relative ease, and that Pacific was aware that it was the Shipowners who would ultimately bear the additional cost of securing alternative transport. In the circumstances, it was not reasonable for Pacific to persist in seeking even lower freight rates for the Puma.
a. The sum of US$399,500.00 had to be assessed objectively against the total value of the Agrima contracts of US$11,691,300.00, the supply contracts of US$10,137,500.00, and Pacific’s expected profit of approximately US$1,553,800.00.
b. The potential expected loss viewed from Pacific’s perspective would have been far greater than the additional outlay required of Pacific if it had chartered the Puma in mitigation of the Shipowners’ breach.
c. Pacific’s argument that it was impecunious and that it was concerned that the additional expenditure of US$399,500.00 would put a severe strain on its financial resources was rejected.
12. The Court further held that the Judge should have considered a further important issue, namely, whether Pacific should have notified the Shipowners of the option of chartering the Puma at the freight rate offered by her owners, giving the Shipowners the chance of objecting should it consider the option to be unreasonable. This notification would serve two purposes:-
a. first, to prevent the Shipowners from subsequently arguing that Pacific had not taken steps to mitigate its loss or that such measures were unreasonable.
b. second, to prevent ‘economic wastage’ arising from unreasonable steps being unilaterally taken by Pacific.
13. The Court of Appeal was of the view that in order to meet the objective standard of reasonableness, where the aggrieved party has to incur substantial additional expenditure in chartering a replacement vessel so as to mitigate its loss, it should notify the defaulting party of the available mitigation options and the option which it proposes to take, save for cases whether the situation renders such communication impractical.
As to (b).
14. The Court of Appeal held that the reasons for Pacific’s rejection of the charter terms for the Puma, namely its impecuniosity, exposure to dead freight and the risk entailed by having to obtain additional cargo, could not justify the Judge’s decision to increase damages claimable by Pacific from the Shipowners. The decisive factor in Pacific’s decision was the freight rate for the charter of the Puma.
15. The Shipowners’ appeal was allowed with costs and the decision of the Assistant Registrar reinstated.