Contract Law

Transfield Shipping Inc. v. Mercator Shipping Inc.

[2008] UKHL 48; [2009] 1 AC 61

Facts

Mercator chartered its vessel, The Achilleas, to Transfield.
Transfield was required to return the vessel by a specified date.
It returned the vessel approximately nine days late.
During the charter, Mercator had agreed to a profitable follow-on charter with another party.
Because of the delay, the next charterer demanded a reduction in the hire rate for the entire subsequent charter period.
Market rates had fallen sharply.
Mercator accepted the reduced rate and claimed the entire loss from Transfield.
The claimed loss was far greater than the ordinary market difference for the nine-day overrun.

Whether the late-returning charterer was liable for the entire reduced income under the subsequent charter.
Whether reasonable foreseeability alone determines remoteness.

Hadley v. Baxendale remains the starting point.
A foreseeable kind of loss may nevertheless be unrecoverable where, objectively construed, the defendant cannot reasonably be regarded as having assumed responsibility for that risk.
The court must consider:
commercial background;
market understanding;
contractual allocation of risk;
proportionality between breach and alleged liability.
The assumption-of-responsibility analysis is especially relevant where market practice indicates a narrower liability.

A charterer would ordinarily know that late delivery could prevent the owner from using the vessel elsewhere.
Therefore, loss for the period of the overrun was foreseeable.
However, the extraordinary loss claimed arose because:
a separate future charter had been negotiated;
the market collapsed;
the next charterer required a reduced rate for months, not merely nine days.
Evidence of shipping-market practice showed that damages for late return were ordinarily calculated by comparing:
the charter rate; and
the market rate, for the actual period of delay.
A reasonable charterer would not normally understand that a short delay exposed it to fluctuations affecting an entire later charter.
The majority therefore considered that Transfield had not assumed responsibility for that exceptional risk.
The case does not abandon foreseeability.
It adds that foreseeability must sometimes be assessed through the contractual and commercial allocation of responsibility.

Transfield was liable only for the market-rate difference during the nine-day overrun.
It was not liable for the entire loss under the subsequent charter.
Use this case for: a foreseeable loss may still be too remote where the defendant did not objectively assume responsibility for it.