The House of Lords’ decision in Golden Strait Corporation v Nippon Yusen Kubishka Kaisha (2007) in May has important practical implications for the charter market and for London shipping litigators in particular, and could see an upsurge in the number of shipping disputes referred to arbitration.
The judgment revisited the question of the assessment of damages in circumstances where a contract is repudiated. Conventionally damages would be payable by the repudiating party, placing the injured party in the financial position it would have been in had the contract been performed. This much is trite law, but the opinions of the majority in the Lords have highlighted the relevance of future events to the assessment of the level of damages payable.
The Golden Victory was chartered out on long-term time charter. Contained in the charterparty was a clause affording the owner, Golden Strait Corporation, and charterers Nippon Yusen Kubishika Kaisha (NYKK), liberty to cancel should hostilities break out between any two or more of the countries listed, which included, inter alia, the US, the UK and Iraq.
On 14 December 2001, around three years into the charter period, NYKK repudiated the contract and tendered redelivery of the ship. Golden Strait accepted the repudiation and commenced arbitration proceedings. It sought damages of a sum that would put it in the same financial position as it would have been had the charter run its full seven-year period.
The arbitrator determined that NYKK’s repudiation had been accepted by Golden Strait. He went on to find that the earliest date for contractual redelivery of the ship would have been 6 December 2005. NYKK, seeking to avoid paying massive damages, then proposed to take redelivery of the ship on materially the same terms as before. It offered to pay damages for the period between the acceptance of the repudiation and the date the ship was redelivered to it. The offer was made on 7 February 2003. Golden Strait rejected this offer.
Being aware in February 2003 of the possibility of war breaking out between the US and the UK with Iraq, Golden Strait sought legal advice on the impact that war in the Gulf might have on its claim for damages, particularly in light of the cancellation provisions in the charterparty. The advice received was that, if Golden Strait rejected the offer and sought a determination of the quantum of damages, the arbitrator would ignore a later event of war, giving rise to the NYKK’s right to cancel, and would award damages for the full contractual period up to 6 December 2005.
The arbitrator found that Golden Strait’s rejection of the offer to settle did not amount to a failure to mitigate. He then went on to determine that the commencement of hostilities on 20 March 2003 was an event that would have allowed either party to cancel the charterparty, and that therefore that no damages were recoverable for the balance of the contractual period after 21 March 2003 (ie up to 6 December 2005). It is this finding that was the focus of the appeal by Golden Strait to the Lords.
In finding in favour of NYKK and holding that damages would not be payable in respect of the full contractual period (ie beyond 21 March 2003), the majority of the Lords (Lords Scott, Carswell and Brown) focused on the compensatory principle underpinning damages awards.
They considered that, to allow compensation to be paid in respect of a period (after 21 March 2003) where a frustrating event (the outbreak of war with Iraq on 20 March 2003) would have led to the proper termination of the contract, would be inconsistent with the overriding compensatory principle – ie to put Golden Strait in the same position as it would have been had the charterparty not been repudiated. The Lords considered it probable that the charterparty would have been cancelled (quite properly given the cancellation provisions) upon the outbreak of war.
Carswell held that the proper approach should be to consider whether a contract would “inevitably” have come to an end earlier than its due date. If it would have, then damages should be limited accordingly. The occurrence of the event that would have led inevitably to the termination of the contract was not in dispute in this matter. Hostilities in the second gulf war had commenced on 20 March 2003. There was no reason in deciding whether the contingent event had occurred to “…listen to conjecture on a matter which has become an accomplished fact…” (Lord Macnaghten in Bwllfa and Merthyr Dare Steam Collieries Ltd v Pontypridd Waterworks Co (1903)).
The majority in the Lords felt that the considerations of certainty and finality in relation to the occurrence of a future event had to yield to what was described by Carswell as “the greater importance of achieving an accurate assessment of the damages based on the loss actually incurred”, and so declined to allow Golden Strait’s appeal against the arbitrator’s award on damages.
The rule of English law
Lords Bingham and Walker dissented strongly from the above opinions.
There was evidence from both parties that, on 17 December 2001 (when the repudiation of the charterparty was accepted by Golden Strait), neither Golden Strait nor NYKK considered the risk of war with Iraq inevitable or even probable, but that it was merely “a possibility”. Bingham accepted that, had Golden Strait sold the ship with its charter on 17 December 2001, then the value it would have received for the ship in the open market would have included consideration for a period charter with almost four years left to run.
Bingham affirmed strongly the general rule of English law: that damages for breach of contract are assessed at the date of the breach. He observed that NYKK had not challenged this rule, but merely disputed its applicability in this instance. The basis of NYKK’s argument was the ‘Bwllfa principle’. NYKK submitted that there was no need for the arbitrator to speculate about what might have happened when assessing damages, when what actually happened was known.
In dealing with NYKK’s submission that Golden Strait would be unfairly overcompensated if it was to recover damages for the full charter period, Bingham remarked that, as a matter of law, contracts were made to be performed. In repudiating the contract, NYKK was taking the risk that the repudiation might prove disadvantageous to itself.
Waiting to see
The majority decision raises important practical issues. Carswell observed that, if the likelihood of a contingency has to be considered in the assessment of damages, then inevitably the occurrence of the contingency would be to the advantage of one of the parties, and that party would be tempted to put assessment of damages off until the outcome of the contingent event was known.
There is a real risk that this House of Lords judgment may present a golden opportunity for repudiators to delay determination of damages as they pursue or await the occurrence of any and every contingent event in an attempt to reduce the ultimate level of damages payable.
The probability is that this decision will lead to an increased number of charterparty disputes being referred to arbitration as parties jockey for the most advantageous terms on which to terminate charterparties.
Nigel Wagland is head of marine energy and trade and Kevin Oram is an associate director at Barlow Lyde & Gilbert