Transfield Shipping Inc v Mercator Shipping Inc
Encyclopedia
The Achilleas or Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48 is an English contract law
case, concerning remoteness of damage.
ship, The Achilleas. Transfield was meant to have the ship for five to seven months, and return it no later than midnight, May 2, 2004. Mercator contracted to let the ship to another charterer (Cargill
International SA) on May 8, 2004 at £39,500 a day for four to six months. But Transfield did not return the ship until May 11. With two weeks to go they got a job to carry coals from Qingdao
, China
across the Yellow Sea
to Tobata and Oita
, Japan
. Since it was returned late, the new charterer, Cargill, agreed to take the ship, but only at £31,500 a day, since the market in the goods they were shipping had fallen sharply.
The question was how much Transfield should pay to Mercator for returning the ship late. Transfield argued they should only pay an amount reflecting the difference between the first contract rate and the market rate for daily hire during the delay, at the market rate prevailing then. This would make $158,301.17. Mercator argued Transfield should pay the amount they had lost on the new chartering contract because of the late return, which adding up the cost over the months would be $1,364,584.37.
The dissenting arbitrator, however, concluded that a reasonable person in Transfield's position would not have understood he was assuming liability for the risk of the type of loss that occurred. The shipping market's general understanding was that liability was restricted to the difference between the market rate and the charter rate for the period of lateness and
Lord Hoffmann (with whom Lord Hope gave a concurring judgment) noted that it had always been assumed that damages for late delivery were the difference between market and charter rate. As to the core issue in this case, he said this.
He stated that the majority of arbitrators had applied too crude a test of what the type of foreseeable loss was. The industry's common understanding was crucial to Hadley v Baxendale. The question was not simply, what was a probable loss, but what the parties had in mind, or what was in their contemplation, regarding the nature of the business transaction. He noted Goff J's statement in Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] Lloyd’s Rep 175, 183, asking what a reasonable person would have thought his responsibility was.
Lord Hoffmann said one should look at "the background of market expectations". Liability for the next contract would be "completely unquantifiable". And according to Lord Reid in Koufos v C Czarnikow Ltd (The Heron II), the question was if short delay, resulting in extraordinary loss was
In this case it was not. It was contrary to the principle in Victoria Laundry (Windsor) v Newman Industries to think that Transfield was going to be liable for any loss, however enormous when it had no knowledge or control over what contract Mercator might be making next. To work out what is "in the parties contemplation" and what is not, Lord Hoffmann said,
On the nature of the "contemplation" rule, Lord Hoffmann said the following,
Lord Hope
agreed. He noted Blackburn J said in Cory v Thames Ironworks Co saying if the damage were exceptional and unnatural it would be harsh to make a party liable for it, because had he known he would have pushed for more time in the first place.
Lord Rodger and Baroness Hale on the other hand, decided the case on the more narrow ground, that the rule in Hadley was simply a question of what is foreseeable or ‘likely’. Lord Rodger said at [53],
Lord Walker agreed with everyone.
English contract law
English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
case, concerning remoteness of damage.
Facts
Transfield Shipping was a charterer. It hired use of Mercator'sMercator Lines
Mercator Group is an Indian Shipping Corporation with diversified interests in Transportation, Dredging, Oil and Gas, Ship Management services, Marine Logistics and Offshore services. Mercator Lines Ltd is the parent company and is the second largest private sector shipping company in India based...
ship, The Achilleas. Transfield was meant to have the ship for five to seven months, and return it no later than midnight, May 2, 2004. Mercator contracted to let the ship to another charterer (Cargill
Cargill
Cargill, Incorporated is a privately held, multinational corporation based in Minnetonka, Minnesota. Founded in 1865, it is now the largest privately held corporation in the United States in terms of revenue. If it were a public company, it would rank, as of 2011, number 13 on the Fortune 500,...
International SA) on May 8, 2004 at £39,500 a day for four to six months. But Transfield did not return the ship until May 11. With two weeks to go they got a job to carry coals from Qingdao
Qingdao
' also known in the West by its postal map spelling Tsingtao, is a major city with a population of over 8.715 million in eastern Shandong province, Eastern China. Its built up area, made of 7 urban districts plus Jimo city, is home to about 4,346,000 inhabitants in 2010.It borders Yantai to the...
, China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
across the Yellow Sea
Yellow Sea
The Yellow Sea is the name given to the northern part of the East China Sea, which is a marginal sea of the Pacific Ocean. It is located between mainland China and the Korean Peninsula. Its name comes from the sand particles from Gobi Desert sand storms that turn the surface of the water golden...
to Tobata and Oita
Oita
-Companies:*Oita Asahi Broadcasting, a Japanese broadcast network in Oita Prefecture, Japan*Oita Broadcasting System, a television company based in Ōita Prefecture, Japan-Education:*Oita Junior College, a private junior college in Ōita, Ōita Prefecture, Japan...
, Japan
Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
. Since it was returned late, the new charterer, Cargill, agreed to take the ship, but only at £31,500 a day, since the market in the goods they were shipping had fallen sharply.
The question was how much Transfield should pay to Mercator for returning the ship late. Transfield argued they should only pay an amount reflecting the difference between the first contract rate and the market rate for daily hire during the delay, at the market rate prevailing then. This would make $158,301.17. Mercator argued Transfield should pay the amount they had lost on the new chartering contract because of the late return, which adding up the cost over the months would be $1,364,584.37.
Arbitration
The arbitrators of the case, by a majority, decided in favour of Mercator. They held that the loss from getting a lower price on the next chartering contract was within the first rule in Hadley v Baxendale as arising "naturally, i.e. according to the usual course of things, from such breach of contract itself". It fell within that rule because it was damage "of a kind which the [charterer], when he made the contract, ought to have realised was not unlikely to result from a breach of contract [by delay in redelivery]".The dissenting arbitrator, however, concluded that a reasonable person in Transfield's position would not have understood he was assuming liability for the risk of the type of loss that occurred. The shipping market's general understanding was that liability was restricted to the difference between the market rate and the charter rate for the period of lateness and
"any departure from this rule [is] likely to give rise to a real risk of serious commercial uncertainty which the industry as a whole would regard as undesirable".
House of Lords
The House of Lords allowed Transfield's appeal, holding unanimously that the loss of profits in the next charter was not within the rule in Hadley v Baxendale. However, their Lordships divided on the interpretation of the rule.Lord Hoffmann (with whom Lord Hope gave a concurring judgment) noted that it had always been assumed that damages for late delivery were the difference between market and charter rate. As to the core issue in this case, he said this.
"The case therefore raises a fundamental point of principle in the law of contractual damages: is the rule that a party may recover losses which were foreseeable ("not unlikely") an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses?"
He stated that the majority of arbitrators had applied too crude a test of what the type of foreseeable loss was. The industry's common understanding was crucial to Hadley v Baxendale. The question was not simply, what was a probable loss, but what the parties had in mind, or what was in their contemplation, regarding the nature of the business transaction. He noted Goff J's statement in Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] Lloyd’s Rep 175, 183, asking what a reasonable person would have thought his responsibility was.
“The test appears to be: have the facts in question come to the defendant’s knowledge in such circumstances that a reasonable person in the shoes of the defendant would, if he had considered the matter at the time of making the contract, have contemplated that, in the event of a breach by him, such facts were to be taken into account when considering his responsibility for loss suffered by the plaintiff as a result of such breach.”
Lord Hoffmann said one should look at "the background of market expectations". Liability for the next contract would be "completely unquantifiable". And according to Lord Reid in Koufos v C Czarnikow Ltd (The Heron II), the question was if short delay, resulting in extraordinary loss was
"sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within [Transfield's] contemplation".
In this case it was not. It was contrary to the principle in Victoria Laundry (Windsor) v Newman Industries to think that Transfield was going to be liable for any loss, however enormous when it had no knowledge or control over what contract Mercator might be making next. To work out what is "in the parties contemplation" and what is not, Lord Hoffmann said,
"the only rational basis for the distinction is that it reflects what would have been reasonable and have been regarded by the contracting party as significant for the purposes of the risk he was undertaking."
On the nature of the "contemplation" rule, Lord Hoffmann said the following,
"I agree that cases of departure from the ordinary foreseeability rule based on individual circumstances will be unusual, but limitations on the extent of liability in particular types of contract arising out of general expectations in certain markets, such as banking and shipping, are likely to be more common. There is, I think, an analogy with the distinction which Lord Cross of Chelsea drew in Liverpool City Council v IrwinLiverpool City Council v IrwinLiverpool City Council v Irwin [1976] is a leading English contract law case, concerning the basis on which courts may imply terms into contracts.-Facts:...
[1977] AC 239, 257-258 between terms implied into all contracts of a certain type and the implication of a term into a particular contract... It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken. It must be in principle wrong to hold someone liable for risks for which the people entering into such a contract in their particular market, would not reasonably be considered to have undertaken."
Lord Hope
David Hope, Baron Hope of Craighead
James Arthur David Hope, Baron Hope of Craighead, is a Scottish judge and Deputy President of the Supreme Court of the United Kingdom, having previously been the Second Senior Lord of Appeal in Ordinary.-Early life:...
agreed. He noted Blackburn J said in Cory v Thames Ironworks Co saying if the damage were exceptional and unnatural it would be harsh to make a party liable for it, because had he known he would have pushed for more time in the first place.
Lord Rodger and Baroness Hale on the other hand, decided the case on the more narrow ground, that the rule in Hadley was simply a question of what is foreseeable or ‘likely’. Lord Rodger said at [53],
‘it is important not to lose sight of the basic point that, in the absence of special knowledge, a party entering into a contract can only be supposed to contemplate the losses which are likely to result from the breach in question - in other words, those losses which will generally happen in the ordinary course of things if the breach occurs. Those are the losses for which the party in breach is held responsible - the stated rationale being that, other losses not having been in contemplation, the parties had no opportunity to provide for them.’
Lord Walker agreed with everyone.
See also
- Remedies in English law
- Remoteness in English law
- Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 Ex Ct
- Victoria Laundry (Windsor) v Newman Industries [1949] 2 KB 528
- Koufos v C Czarnikow Ltd or The Heron II [1969] 1 AC 350
- Parsons (Livestock) Ltd v Uttley Ingham & Co LtdParsons (Livestock) Ltd v Uttley Ingham & Co LtdParsons Ltd v Uttley Ingham & Co Ltd [1978] QB 791 is an English contract law case, concerning remoteness of damage. In it, the majority held that losses for breach of contract are recoverable if the type or kind of loss is a likely result of the breach of contract...
[1978] 1 QB 791 - South Australia Asset Management Co v York Montague [1996] 3 All ER 365
- Attorney General of Belize v Belize Telecom LtdAttorney General of Belize v Belize Telecom LtdAttorney General of Belize v Belize Telecom Ltd [2009] is a case on which the Privy Council gave advice, relevant for contract law, company law and constitutional law...
[2009] UKPC 11
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