Legal Briefing

Liability: Transfield revisted

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Technology, Media and Telecoms | 01 June 2010

In IHL169 we wrote of the effect of the House of Lords judgment in Transfield Shipping Inc v Mercator Shipping Inc [2008] (also referred to as The Achilleas), which cast some doubt on the application of the traditional rule on remoteness set out in Hadley v Baxendale (1854).

In short, Transfield found that types of loss arising from a breach of a commercial contract were not recoverable, even though reasonably foreseeable, if the parties did not intend the party in breach to have assumed liability for them when the contract was formed. This led to some confusion as to how Hadley was to be applied going forward and was of particular interest in the IT industry where liability is often a critical issue.

However, the recent Sylvia Shipping Co Ltd v Progress Bulk Carriers Ltd [2010] has considered the judgment in Transfield and has clarified the law in this area. Although a shipping case (like Transfield), the principles apply equally to IT contracts.

Facts

Sylvia Shipping Co, the owners of the vessel ‘Sylvia’ (the owners), chartered the vessel to Progress Bulk Carriers (the charterers) in an agreement dated 22 February 2000. The agreement was initially for two to four months, but was later extended. The last extension was dated 13 June 2003, under which the charter period was extended for a further period of 11 to 13 months, at the charterers’ option, at a hire rate of $5,900 per day.

On 11 March 2004, the vessel loaded with cargo in Anacortes, Washington, for discharge at Port-Alfred in Quebec. On 30 March, the charterers entered into a sub-charter with a company called Conagra for the carriage of a cargo of wheat from Baie-Comeau (in Quebec) to Casablanca, with a start date of between 14 and 22 April.

The vessel arrived at Port-Alfred on 14 April. On 15 April, a Port State Control (PSC) inspection was carried out, which found three structures in the holds to be wasted. Discharge and cleaning of the holds was completed on 16 April and, on the same day, the Canadian Food Inspection Agency rejected four of the vessel’s five holds for the loading of grain and grain products. In response, the owners appointed the contractors who had cleaned the holds to carry out descaling work.

On 19 April, the vessel arrived at Baie-Comeau. The holds were inspected again by the PSC and were found to still be unsafe. The PSC then issued a detention order due to structural wastage. Repairs were started and, on 22 April, Conagra cancelled the sub-charter.

The next day, the charterers entered into a substitute arrangement with York Ltd (York) for a one-time charter trip to Lome (in Togo), which was due to leave between 29 April and 3 May.

Hold repairs were accepted as complete on 26 April 2004 and the charterers were able to make the York arrangement. They subsequently brought a claim against the owners for the losses arising from not being able to complete the Conagra fixture (which had a higher value than the York fixture).

An arbitration tribunal found in favour of the charterers. It held that the owners had not exercised due diligence in ensuring that the steel work within the hold was suitably maintained and that, had the owners taken appropriate steps in time, the Conagra fixture could have been met by the charterers. As such, the tribunal considered the loss of the Conagra fixture to be a reasonably foreseeable result within the first limb of Hadley and awarded the charterers $273,706.12. This was the value of the Conagra contract (held to be worth $804,222.05) less the amount the charterers earned under the York contract over the number of days that the Conagra contract would have run for (calculated at $530,515.93).

The owners appealed, arguing that, pursuant to Transfield, loss of a sub-charter was too remote and that the recoverable damages were limited to the difference between the charter and the market rate during the period of delay.

Judgment

Hamblen J, in finding in favour of the charterers and upholding the arbitration tribunal’s decision, gave a useful summary of the issues and judgments of the five law lords in Transfield, and concluded that there were two approaches taken.

The first, the orthodox approach, was taken by Lord Rodger and Baroness Hale, and followed the principles laid down in Hadley. The second, the so-called ‘broader approach’, was taken by Lords Hoffmann and Hope (and supported to some extent by Lord Walker, the fifth law lord), and this added another layer onto the traditional rules on remoteness. The question, they held, was not only whether the parties must be taken to have had this type of loss within their contemplation when the contract was made, but also whether they must be taken to have assumed liability for this type of loss.

Hamblen J held that Transfield had resulted in an amalgam of the orthodox and broader approaches. He stated that:

‘The orthodox approach remains the general test of remoteness applicable in the great majority of cases. However, there may be “unusual” cases, such as The Achilleas itself, in which the context, surrounding circumstances or general understanding in the relevant market, make it necessary specifically to consider whether there has been an assumption of responsibility.

This is most likely to be in those relatively rare cases where the application of the general test leads or may lead to an unquantifiable, unpredictable, uncontrollable or disproportionate liability, or where there is clear evidence that such a liability would be contrary to market understanding and expectations.

In the great majority of cases it will not be necessary specifically to address the issue of assumption of responsibility. Usually the fact that the type of loss arises in the ordinary course of things or out of special known circumstances will carry with it the necessary assumption of responsibility.

The orthodox approach, therefore, remains the “standard rule” and it is only in relatively unusual cases, such as The Achilleas itself, where a consideration of assumption of responsibility may be required.’

Hamblen J was keen to stress that there was no new generally applicable legal test on remoteness in damages. It has, according to his judgment, been argued on several occasions recently, and has resulted in confusion and uncertainty.

Comment

Although not the first case to consider the application of Transfield, this judgment is a useful summary of its application going forward and gives comfort that the broader approach taken by Lords Hoffmann and Hope (and supported by Lord Walker) will only apply in very limited circumstances.

In IHL169, we suggested that it would be dangerous for suppliers to rely on Transfield as customers and suppliers, and the courts, have never doubted that all reasonably foreseeable losses that are not expressly excluded are recoverable. Further, in IHL179, we noted that an argument based on Transfield in GB Gas Holdings Ltd v Accenture (UK) Ltd & ors [2009] had been rejected on similar grounds.

The judgment in Sylvia Shipping confirms that the traditional approach to remoteness, as per Hadley, will apply in all but the most exceptional of cases. It seems, therefore, that the rule set out over 150 years ago remains alive and well.