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MAESTRO BULK LTD v. COSCO BULK CARRIER LTD (The “Great Creation”) [2014] EWHC 3978(Comm)
This month’s case will touch upon one of the “hot” topics that has arisen in the shipping industry as a result of the COVID-19 pandemic and that is no other than that of early redelivery by Charterers. Early redelivery stems as an “epidemic” amongst the chartering community when there are falling hire rates in an aim to fix alternative vessels at lower rates. The situation during the pandemic where both the hire and bunker prices have been falling, has created the perfect environment for this course of action by the charterers to blossom. Although the case before us evolved during a rising market, The Great Creation was fixed at almost one half of the prevailing market rate, as a result of early redelivery.
A. General Principles in awarding damages for early redelivery:
Even though in practice, Arbitration Tribunals will consider each case on its own facts, there are some key principles that are followed in awarding damages in each case of early redelivery. These are the following:
- The general rule for breach of performance under a charterparty (including failing to redeliver the vessel as per agreement) is that the breaching party has to put the innocent party (that is the “non -breaching” party which is often the party bringing the claim) back into the position that the latter would have been, had the breaching party performed the contract as they should.
- The innocent party has to demonstrate that they have acted fairly and reasonably in mitigating their losses resulting from the said breach of contract. In these cases, the extent to which owners will be seen to have acted reasonably in mitigating their losses will depend on the facts of each case but generally speaking one of the most important factors is to show that they were actively trying to find a substitute fixture for their vessel.
- Οwners’ claim for damages for breach of redelivery provisions will essentially be a claim for loss of profit that they would have earned if the charter was performed to completion as per the agreed contract terms (i.e. in the present case, the agreed redelivery provisions).
With the above general guidelines in mind, we will consider the facts and the decision of The Great Creation.
B. The Great Creation -The Facts:
The MV “Great Creation” (hereafter referred to as “the Vessel”), was chartered by Maestro Bulk Ltd (the “Charterers”) from Cosco Bulk Carrier Co. Ltd (the “Owners”) under a time charterparty on amended NYPE terms dated 16th November 2009 for a period of minimum 4 months and maximum 5 months plus 15 days in Charterers’ option. The daily hire rate was US$18,500. The Vessel was delivered to Charterers on 29th November 2009.
The notice provisions in the charterparty provided as follows:
“On redelivery charterers to tender 20/15/10/7 days approximate and 5/3/2/1 days definite notice”.
The arbitrators determined that the margin allowed for the word “approximate” in the above clause was two days and this was accepted by the High Court. That meant that a 20 day notice could mean 18 days and a 2 day margin on a 7 day approximate notice would mean a 5-day definite notice.
According to the above duration of the charterparty, the earliest date of redelivery of the Vessel was 29th March 2010 and the latest date was 14th May 2010 (inclusive of the additional 15 days option). For the purposes of this discussion, this will be referred to as the “permitted redelivery period”.
The Charterers intended to employ the Vessel on a final voyage but due to various delays, they realised that this would not be possible and prompted to redeliver the Vessel earlier (although within the permitted redelivery period). In doing so, the Charterers served the following Notices of Redelivery:
- On 13 April 2010, they served a 20-day approximate Notice of Redelivery. This showed their intention to redeliver on 1 May, that is 18 days later (according to the Tribunal, as mentioned above, the word approximate meant a margin of 2 days).
- On 14 April 2010, they served the 15/10/7 approximate Notices of Redelivery.
- On 16 April 2010, they served the 3/2/1 definite Notices of Redelivery.
The Vessel was redelivered on 19 April 2010 (that is only 6 days after service of the 20-day approximate Notice of Redelivery). This meant that the Charterers were effectively 12 days early (18 days allowed minus 6 days taken). At that time, the Owners were able to fix the Vessel on new employment on 21 April 2010 (for delivery on 30 April 2010) by taking the only fixture that was reasonably on offer at the time, albeit at a rate which was significantly below the market rate.
C. The Decision:
The Owners sued the Charterers in arbitration for losses suffered as a result of the early redelivery of the Vessel. It was common ground between the parties that by application of fundamental English law principles (as mentioned above) the measure of damages for Charterers’ breach, should put the Owners back in the position they would have been in, if there had been no breach by the Charterers- that is if the Vessel was redelivered as stipulated under the Charterparty. The parties however disagreed on what that position should be in terms of recoverable damages.
Their arguments were respectively the following:
The Owners argued that if the Charterers intended to redeliver on 19th April 2010, they should have tendered Notice of Redelivery on about 31st March 2010. If this was done, they would have had the time to fix her at a higher hire rate (in line with the market rate) and they demanded damages corresponding to the difference between the hire the Owners would have received under that notional fixture they could have fixed the Vessel at (in line with market rates) and the new fixture she was actually fixed at (below market rate) for the duration of the notional/prospective fixture. Therefore their measure of damages focused, in fact, on the argument that if the Charterers intended the Vessel to be redelivered on 19th April as she was, they should have given them notice on 31st March, so that they would have the opportunity to look for a more profitable fixture. They considered these damages as their “loss of opportunity” to fix the Vessel at the going market rate as a result of the short (only 6 days) notice of redelivery instead of the agreed notice period.
The Charterers contended that the Owners could not recover for “loss of opportunity” damages because they were too remote. They argued that the Owners were only entitled to recover damages for the 12 day period remaining (from their 20-day approximate Notice) after the date of actual redelivery of the Vessel, at the rate of the existing Charterparty- that is at US$18,500 per day less any higher rate earned in mitigation for that period. Since the new fixture rate was lower than the Charterparty rate, there was no such allowance.
The Arbitration Tribunal decided in favour of the Owners but the High Court, on 15th December 2014, overturned that decision and allowed Charterers’ appeal.
The High Court was asked to decide on the following question of law:
“Where a time charterparty provides for charterers to give notice of redelivery, what is the correct approach to damages when redelivery takes place with insufficient notice(s)?”
Mr Justice Cooke acknowledged the Charterers’ position that on 31st March they would not have tendered a 20-day approximate Notice of Redelivery because they had no intention to redeliver the Vessel on 19th April. As such, the Charterers’ Redelivery Notice on 13th April was honest and based on reasonable grounds. In the words of Cooke J, “the true nature of the breach did not lie in a failure to give the approximate 20 day notice on 31st March, but in a failure to give that notice as at 13th April”. The Tribunal was therefore wrong in awarding damages to Owners on the basis of a hypothetical notice from Charterers (on or about 31st March) which would not have been given in any event.
The High Court agreed with the Charterers in that the correct measure of damages should be the hire payable under the existing Charterparty for the period remaining after redelivery based on the approximate 20-day Notice of Redelivery- that is for the remaining 12 days taking the fixture up to 1st May 2010. They also accepted that the word “approximate” would justify a 2-day margin in favour of the Charterers reducing the notice period from 20 to 18 days.
It was further held that any additional hire earned by Owners over this 12-day period would have to be offset against the total amount of damages but since the new hire earned was below the market rate, no such amounts were offset in this case.
D. The key legal and practical implications of The Great Creation:
- It is the first time that the High Court has decided on the measure of damages in cases where the Charterer fails to give timely notices in accordance with the Charterparty provisions. Please note that this decision has not been appealed and stands as good law although it can be distinguished on its facts depending on differing circumstances.
- There is now High Court authority for the interpretation of the word “approximate” in agreed notice periods under a charterparty and that is to be given an allowance/margin of 2 days.
- Although the giving of valid redelivery notices is not a condition precedent for an effective redelivery under English law, the prima facie rule is that the Charterers must abide by the redelivery notification requirements under the charterparty. As such, they should tender redelivery notices in accordance with the agreed charterparty terms. The purpose of redelivery notices is to give the owners sufficient time, prior to the date of redelivery to plan their vessel’s next employment/fixture. Therefore, if no redelivery notices are tendered or the charterers give less notice than that which is stipulated in the charterparty, and as a result the owners suffer loss on the date of actual redelivery, then the charterers will be in breach of contract.
- This case is now authority for the proposition that loss of a business opportunity for higher earnings based on prospective market rates will be difficult to recover from Charterers since in this case it was decided that it was too remote. Cooke J stated at paragraph 59 that: “It is the unpredictable and unquantifiable element introduced by the various possible lengths of follow-on charter that make the potential liability disproportionate and commercially unacceptable as a basis for assessing damages to be paid for inadequate notices…”.
- Except where this decision can be distinguished on its facts, in cases of early redelivery, the Owners will only be able to recover damages for the period remaining from the total agreed notice period under the charterparty at the agreed rate of that charterparty.
We hope that you have found the above article useful.
Should you wish to read the full High Court judgment you may find this appended here (PDF).
Maria Stavropoulou
Solicitor (England & Wales), Greek Lawyer (Athens Bar Association)