Steamship Mutual has reported on a commercial court judgement concerning a challenge by Owners of a VLCC to an LMAA arbitration award, in which the court decided that in the right circumstances it could be possible for claimants to seek compensation for a loss of profits and for expenses and liabilities incurred.
The LMAA arbitration had found the owners liable in damages for breach of an oil major eligibility clause. The appeal, which was under sections 68 and 69 of the Arbitration Act 1996, provided a helpful illustration in relation to the calculation of damages, in particular as to whether charterers were entitled to compensation for losses relating to a potentially profitable fixture against a background of an otherwise soft market, and also whether they were entitled to claim for their wasted expenditure.
On July 4th 2011 the Owners’ vessel was time-chartered to Charterers and then sub chartered into a tanker pool, with the vessel being delivered into these charters on the same day. Both charters were on amended Shelltime 4 forms. There was also a third contract between Charterers and the Pool.
Under the terms of the head charterparty, the Charterers should provide and pay for all fuel and a minimum daily hire of $15,000 per day. The Owners were obliged to ensure that a valid report would be entered on the Ship Inspection Report Programme database (SIRE) at all times, and that the vessel would be eligible as from delivery for the business of at least three named oil majors.
Under the sub charterparty and under the Pool Agreement the Charterers were to ensure at all times that the vessel had a SIRE report that was not more than six months old. The Pool Agreement also required the vessel to maintain eligibility with at least four oil majors.
In March 2012 the vessel was inspected by Statoil when discharging at Yingkou in China and a critical SIRE report was produced.
In May 2012 the vessel was rejected as unacceptable to BP for discharge at one of its terminals, with the cargo having to be discharged offshore.
On September 12th 2012 the SIRE report reached six months old and the vessel was proposed and rejected by ExxonMobil.
The vessel was further rejected by Total and Petrobras.
On October 26th 2012 the Charterers notified the Owners that the vessel was off hire by virtue of breach of clause 50 of the charterparty. The Owners took control of the vessel immediately and on January 14th 2013 the vessel was formally redelivered to Owners under the head charter.
The matter was referred to LMAA arbitration. The Charterers claimed damages for loss due to the breach of the SIRE and oil majors eligibility clause. The damages claim totalled $3.27m, comprising a loss of profits, calculated by reference to two realistic but hypothetical voyages between September 26th 2012 to January 31st 2013.
It was argued that the vessel would have been employed were it not for the breach, wasted expenditure for hire and the bunkers incurred between July 22nd and October 26th.
The Tribunal found that the Owners were in breach of the oil major eligibility clause as the vessel was not acceptable to at least four of the named oil majors, and also because on September 26th the SIRE report became more than six months old.
The Charterers’ claim for damages succeeded in the sum of $3.27m, which included lost profits, bunkers and pool losses.
The Owners applied to the Commercial Court to challenge the award on the grounds of serious irregularity and on points of law, but their arguments failed to persuade the Court to overturn the arbitration award.
The Court considered two key issues:
1) Compensatory Principle
The Court had to grapple with questions of law relating to the proper calculation of damages. The compensatory principle was considered, namely the basic rule that charterers must be placed in the same financial position they would have been had the charterparty been performed and by extension that charterers should not be placed in a better position than if there had been no breach. The Owners argued that the Tribunal had over-compensated the Charterers, effectively providing them with a windfall that they would not otherwise have gained.
A claimant cannot normally claim loss of profits and also seek expenses incurred under the contract being performed. Claimants therefore would be expected to claim for wasted expenditure or lost profits, but not for both.
However, it was recognized by the court that there could be situations where wasted expenses leading up to a contract’s date of termination could be claimed, as well as loss of profit, where the latter is calculated net of the expenses incurred.
In the current case it was noted that the Tribunal’s calculations for lost profits had used time charter equivalent rates for the two voyages, which reflected the voyage revenues less bunker and other expenses, divided by the voyage duration in days. The Tribunal subtracted the bunker costs from July 2nd 2012 to September 26th 2012 and the cost of hire from July 22nd 2012 to January 31st 2013 from the total profit figure. Consequently, it was confirmed that, since the wasted expenditure for bunkers and hire from July 22nd 2012 to October 26th 2012 did not overlap with the lost profits, both could be claimed without contravening the compensatory principle.
The Court also considered whether, given the difficulties of separating the accounting and liabilities of any one vessel from the others in a pool, it was correct in law for the accounting position under the Pool Agreement to have been ignored by the Tribunal. Since the Charterers were not claiming for Pool distributions under the Pool Agreement, asking instead for what the vessel would have earned for the Pool, net of hire and bunkers, the issue did not fall to be determined.
2) Taking Account of the Market
The second issue was the relevance of the existence of an available market which was weak and loss-making and whether damages should be assessed by reference to that available market, or by reference to the lucrative fixtures which the Charterers contended they would have entered into but for the breach. Also, whether a discount should apply by reference to loss of chance principles.
Against the background of an admittedly soft market, one where the Pool manager and Tribunal acknowledged that other Pool vessels were loss-making, the Tribunal’s finding of fact was it was reasonable to calculate and assume that the lucrative fixtures would have gone ahead.
The Tribunal considered that there was an available relevant market, but that the vessel would probably have performed those fixtures but for the breach. Therefore it was not appropriate to reduce the recoverable damages below those profits or to discount the losses on the basis of loss of chance principles
Steamship Mutual observed that the case provided a helpful illustration of the application of an oil majors clause. The decision showed that it could be open to claimants to seek their loss of profits and also their expenses and liabilities incurred, provided that on the facts, there was no overlap or double compensation, and that the loss of profits was calculated as a net figure. The Court also assessed the probability of especially lucrative fixtures being available, even where the market was otherwise soft.