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Shipping Law - Golden Victory has long-term consequences

By : John Passmore, Jeffrey Thomson

 

 

The practical consequences of the House of Lords’ decision regarding the Golden Victory are becoming clear. The Golden Victory (1) was chartered under a seven-year time charter, on a Shelltime 4 form. The owners were to receive base-rate hire plus a share of operating profits. The contract included a clause that allowed either party to cancel in the event of war between the United States and Iraq.

Charterers wrongfully redelivered the vessel after only three years; owners accepted the repudiation and claimed damages. After an award on liability, but before assessment of damages, the US invaded Iraq. The arbitrator found that, had the charterparty not been repudiated, charterers would have exercised their right to cancel, and he limited damages to the period before the invasion. This was upheld by the House of Lords (2): the general rule that damages should be assessed as at the date of breach was held to be flexible. It gives way to the overriding principle that damages must be compensatory, no more and no less, even in cases of repudiatory breach where there is an available market in which the innocent party can make a replacement contract.

The legal effects of the decision are wide ranging. There is no reason to think the ruling is restricted to cases about contractual contingencies, rather than political or other contingencies for which no provision is made.

Take a contract for the supply for 10 years of a gas pipeline of capacity X. In breach of contract, a pipe of capacity X-D is installed. A claim is made, but in year two, before damages are assessed, the owner’s gas concession is revoked by the government. For years two to 10, damages will be nominal. This will be the result even if there is an available market in the relevant services.

It has always been the law that in personal injury, the assessment of damages takes into account the progression of the injury and the changing prognosis up to the date of assessment. A similar point has arisen in claims against solicitors for the negligent conduct of litigation — such as an underlying claim which is negligently allowed to go time-bar red — where the basis of assessment is the amount of damages that would have been awarded at a notional trial. In these ‘loss of chance’ cases , facts discovered after the notional date of trial have been taken into account only if they were ‘unknown but knowable’ (3) . The Golden Victory provides an argument that all subsequently emerging facts must be taken into account.

What are the practical effects of the decision? Once breach has occurred, the onus is clearly on the innocent party to progress his claim expediently, if he wishes to limit his exposure to the uncertainty of future events. In a case such as the Golden Victory, a respondent might delay the assessment of damages until anticipated war breaks out.

The House of Lords recognised the potential for this kind of game playing and noted that one solution is for the claimant to push the reference forward by making prompt case-management applications to the tribunal. Another solution is for the claimant to seek to agree quantum earlier rather than later.

Postponing assessment will not always be to the contract breaker’s advantage. In a rising market, and where the contract provides for profitsharing, as in the Golden Victory, damages until cancellation will be inflated. The result is that parties to commercial disputes will have to identify the risks posed by contractual and other contingencies and balance these against any potential benefit in the movement of the market. They must then instruct their lawyers as to the time when they would prefer damages to be assessed.

Parties negotiating a long charterparty, or any other long-running commercial contract, should give careful thought to the wording of cancellation clauses. The reasoning of the House of Lords centred on the need to give the defendant credit for the uncertainty that the parties had voluntarily accepted by the war clause. If such uncertainty is restricted by the terms of the contract (for example, by a clause which operates only if war prevents performance) , the credit will be reduced, in many cases to nil.

Where the risks are such that a party will benefit from a here-and-now assessment of damages, a term might be incorporated by which rights to cancel, and all other events occurring after breach, are expressly excluded from the assessment of damages in the event of repudiation of the contract, or even lesser breaches. This approach may incur a cost. The rule against penalty clauses will have to be taken into account, perhaps by way of an express percentage discount in damages. Crucially, the discount will be valued at the date of contract. It might, therefore, represent good value for the removal of the risks now posed by cancellation clauses and other contingencies.

1. Golden Straight Corp v Nippon Yusen Kubushka Kaisha [2007] UKHL 12, March 28 2007
2. By a majority of three to two.
3. Dudarec v Andrews and others [2006] 2 All ER 856
Jeffrey Thomson and John Passmore are barristers at Hardwicke Building.

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