Ask the expert: Ravi Jawani
Question: What is the relevance of the recent "Achilleas" ruling to the marine charter market?
Expert: Ravi Jawani, Legal consultant, Fichte & Co Legal Consultancy.
The Achilleas case
The 18-month dispute in the UK courts arose out of Transfield Shipping's (the charterer) late redelivering of the "Achilleas" vessel to Mercator Shipping (the shipowner) in accordance with the terms of its charterparty. The shipowner had already agreed on a subsequent charterparty with Cargill that was to commence no later than eight days after the vessel's redelivery date.
As a result of the late redelivery, the vessel was unable to meet the cancelling date originally agreed in the Cargill charter, which resulted in renegotiations of the delivery date with Cargill at a lower rate.
The damages claimed by the shipowner amounted to the difference between the daily hire rate originally agreed for the Cargill charter and the lower revised daily hire rate, against which the shipowner gave credit for the additional sums earned under the Transfield charter by reason of the late redelivery.
Observing the damage
The Cargill charter was for a period of about four to six months and the subsequent claim for hire lost over the period of time used within the Cargill charter amounted to approximately US$1.3 million.
The appellant charterer appealed against the decision of the UK's Court of Appeal to uphold an arbitrators' ruling on the damages to which the respondent shipowner was entitled following the late return of the ship which the charterers had sub-chartered for a final legitimate voyage.
The charterers had promised that the vessel would be redelivered no later than the 8th May 2004 but due to delays at the discharge port of the last voyage, the vessel was not returned until 11th May, by which time the charterers of the new fixture had agreed to an extension of the laycan at a much lower hire rate.
The rules of the game
Time charters frequently stipulate the date on which the ship must be delivered to the charterers - normally referred to as the "laycan" period - and the date of redelivery to the shipowners, often providing for a grace period for delivery and redelivery between certain dates.
The shipowners, Mercator Shipping, time-chartered their vessel to the charterers, Transfield Shipping Inc, to an amended NYPE 1946 form dated 22nd January 2003.
The "Achilleas" was chartered for a period of five to seven months at a daily hire rate of $13,500 and was fixed for a further five to seven months at a new daily hire rate of $16,750. The extended charter period was set to expire on 2nd May 2004.
The final judgement
The arbitrators and Court of Appeal concluded that the charterers would be liable for the difference between the contract rate and market rate for the entire charter period, applying the rule of Hadley v Baxendale, which argued that both parties were operating in the market and were aware of the volatility in rates.
Thus, the charterers should have contemplated that the shipowners would continuously employ their vessel and that a new charter would be fixed. The loss of hire for the new fixture fell within the first leg of Hadley v Baxendale as arising "naturally 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, i.e. by delay in redelivery".
While the industry eagerly anticipated the decision of the House of Lords, many were concerned over the potential outcome of the case. If the decision had been reversed, with the majority of the House of Lords adopting the first limb of Hadley v Baxendale - which holds charterers liable for the entire charter hire period - the implications for charterers would have been dire.
However, the judgement came as a sigh of relief to many in the industry as the opposite decision would have resulted in significant disruptions in the ordinary course of business in the freight charter market. Certainly the case will reinforce the exisiting precedent and stabilise the position of charterers in the future.