Breach of contract: appropriate damages

Damages for failure to perform contract of affreightment (COA) recoverable by shipowner even though freight payments would not have been received directly by shipowner; arbitration tribunal wrong to hold that there had been no loss.

Background

This was an appeal by Glory Wealth Shipping Pte Ltd (GWS) from a London arbitration award.

In 2008 GWS entered into a COA with Flame S.A. (Flame) for shipments of coal in the period from 2009 to 2011. Flame failed to perform. GWS’s damages claim for 2009 to 2010 had been dealt with in a previous award. The current dispute related to Flame’s failure to perform the six shipments scheduled for 2011.

GWS claimed damages for loss of freight. Flame argued that GWS suffered no loss as it would have directed payment to third parties who were not agents of GWS and the freight would never have been transferred to, or held to the account of, GWS.

There were two key issues in dispute in the arbitration:

• Had GWS suffered any loss?
• Was the COA unenforceable on the grounds that GWS intended to perform it in an illegal manner?

In relation to the first point, the tribunal held:

• GWS’s lost profit was in excess of US$3 million.
• All payments made and received under the COA would have been through two related companies, Evensource and First Goal.
• These companies were held to not be GWS’s agents, and were not holding any freight paid to GWS’s order. The purpose of using these companies was to avoid Rule B attachments, and possibly evade creditors generally. There was no evidence that any money would have found its way back to GWS.
• Accordingly, GWS had suffered no loss.

The illegality point related to the purported intention to evade creditors, but this argument failed and was not appealed. GWS appealed to the High Court on the ‘no loss’ point.

Decision

Mr Justice Teare held that GWS did indeed suffer a loss and was entitled to damages in excess of US$3 million.

In coming to this decision, he made the following points:

• GWS had a contractual right to payment of freight from Flame.
• Attached to this right was the right to dispose of the freight however it saw fit. There was a value in that right, which was incidental to its ownership of the right to freight.
• Due to Flame’s breach of the COA, GWS had been deprived of that right.
• Accordingly, GWS had suffered a loss. That loss was the lost net profit of over US$3 million. The value of the right was not diminished merely because GWS would have ordered payment to a third party.

Teare J ordered that the tribunal’s award be set aside and replaced with an award in GWS’s favour in the sum of US$3 million. 

Implications

The tribunal’s decision was very much rooted in the compensatory principle, which underpins the assessment of damages for breach of contract under English law. In particular, the tribunal held that GWS would never have received the freight and it would not have been held to its order by agents nor later transferred to them, so it suffered no loss. At first glance, this makes sense.

However, the High Court noted that a right of ownership of an asset includes the ability to dispose of it however the owner thinks fit, including by giving it away. The act of giving something away does not decrease the value of the asset. Accordingly, if the asset (and accordingly the right of disposal) is lost due to a party’s breach, a real loss is suffered which gives a right to damages.

On this analysis, the decision can be reconciled with the compensatory principle. Damages are assessed based on actual loss – here, of a right of disposal to the value of the net lost profit.