Hapag-Lloyd AG v. Skyros Maritime Corporation and Agios Minas Shipping Company [2024] EWHC 3139 (Comm)

In a significant new case, the UK Commercial Court assessed damages following late redelivery of two vessels under time charterparties where, pursuant to the terms of MOAs signed with third party buyers for their sale, Owners could not charter the vessels and earn hire after redelivery.

The Court therefore awarded only token damages to Owners instead of market-based damages for the period of the overrun, which is most often the normal measure.

Key facts

The vessels in question, Skyros and Agios Minas were chartered by the defendant Owners to Hapag-Lloyd under two time charterparties.

Owners had entered into memoranda of agreements (“MOAs”), under which the vessels would be sold to third party buyers. The terms of the MOAs prevented Owners from chartering the vessels again after they had been redelivered under the charterparties. 

But the vessels were redelivered late; the Skyros by about two days, and the Agios Minas by about seven days. Charterers paid hire for the overrun period at the rates agreed in the charterparties. However, the market had risen significantly since the charterparties were entered into.

The arbitration

Owners commenced arbitration proceedings seeking, in the normal way, damages for the difference between the market rate and the hire rates under the charterparties for the period of the overrun.

Charterers’ position was that their breach did not cause any loss because Owners could not have chartered out the vessels even if they had been delivered on time, for the simple reason that the MOAs prevented it.

The Tribunal was asked to determine a preliminary issue as to whether Owners were in principle entitled to recover substantial, rather than merely nominal (or token), damages. The Tribunal decided that they could.

Appeal to the Commercial Court

Charterers appealed the Tribunal’s decision under section 69 Arbitration Act 1996, which allows for a challenge on a point of law.

The Court allowed Charterers’ appeal and held that the Owners were only entitled to nominal damages.

The key reasons given by the Court were as follows:

Applicability of the ‘orthodox’ usual measure of damages

The normal measure of damages for late redelivery under a time charter is the difference between the vessel’s charter rate and its market rate during the period of overrun. This allows an owner to be compensated for the loss of the opportunity to take advantage of the market rate during the period of overrun. However, if the owner did not actually lose the opportunity to charter the vessel during that period, then there can be no compensation of this kind.  

The MOAs prevented Owners from chartering the vessels and earning hire after they were redelivered. Charterers’ breach therefore made no difference to Owners as they could not have chartered the Vessels anyway.

The Court said that the assessment of damages does not require an answer to the question “why were the vessels not let?”. It only requires an answer to the question “Have Owners lost the opportunity to earn hire?”.

The answer to that question was ‘no’.

The ‘res inter alios acta’ doctrine did not apply

Owners’ position was that the terms of the MOAs should be disregarded because they were considered to be ‘res inter alios acta’, i.e. that they were entirely separate contracts that should not affect Owners’ recoverable loss, to which they had no relationship.

The Court considered the oft-cited decision in the Achilleas[1]. The outcome in that case was that the owner could not recover the loss that was actually suffered (being loss of a lucrative follow-on fixture) but could recover on the basis of the market rate that would have been available had it gone into the market at the time of the breach. Owners relied on this decision in support of their argument that they could recover the difference between the charter rate and market rate for the overrun period, as a matter of legal principle, and so the MOAs must be ignored.

The Court disagreed. The judge commented that the Achilleas did not (unfortunately for Owners), make it possible to recover sums that have not actually been lost. The Court emphasised that the validity of the basic compensatory principle of damages was never questioned in that case.

The Court also declined to follow the Privy Council decision in Wertheim that a distinct res inter alios acta rule applies in cases of late performance that permits the Court to take into account an onward contract when assessing damages.

But the Court did follow the Court of Appeal’s decision in Slater v. Hoyle & Smith, ruling that the res inter alios acta rule does not apply where either: (i) an onward contract (i.e. the MOA) is for the same specific goods as those delivered under the main contract (i.e. the charterparties); or (ii) the intended use of the same goods was known to, or at least contemplated by, the parties when the main contract was agreed.

Here, the MOAs were for same specific goods (the vessels). Therefore, the Court found that the MOAs must be taken into account when assessing damages and declined to accept that the res inter alios acta doctrineapplied.

Comment

This case is as a clear and helpful reminder of the fundamental compensatory principle in assessing damages for late delivery under a time charterparty.

The critical question in any late redelivery case is “have owners lost the opportunity to earn hire?”. If they have not, there was no loss, and, according to this decision, no recovery of market-based damages.

The case also reaffirms that the normal measure of damages for late redelivery of a time-chartered ship is the difference between the charter rate and the market rate for the vessel during the period of overrun. But, this is just a starting point. An owner will not always be entitled to recover these damages, as the facts of this case demonstrated. 

This is a fact-specific decision, which turned on the existence of the bespoke terms of the MOAs. It will not therefore apply in every late delivery claim, but as a matter of principle it is significant in confirming that the owner will not always recover market-based losses irrespective of its actual loss. 

As the Court itself made clear, the case is suitable for appeal. The Court granted permission to appeal on issues relating to damages, remoteness and res inter alios acta. A detailed analysis of the Achilleas judgment and its implications on the res inter alios acta doctrinewill no doubt be undertaken in the Court of Appeal, should Owners take up the opportunity. This is a space to be keenly watched.

[1] Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48

This case illustrates the complex relationship that can exist between proceedings brought against two different sea carriers arising out of the same event. French Courts addressed the following question: how can judgments issued in one of the proceedings be used in the other proceedings? Ultimately, the handling of circular recourses between cargo interests, sea carriers and stevedore companies depends on the interpretation of privity of contract and res judicata.

Continue Reading One event, two legal realities! Successful outcome for Reed Smith’s Paris shipping team in major cargo claim dispute

This article was originally published on Lloyd’s Maritime and Commercial Law Quarterly and is republished with permission.

In the latest of our series, which is annually published in the Lloyds Maritime and Commercial Law Quarterly Yearbook, Andrew Tetley and Antoine Guillemot have collated and reported on developments in French shipping law.

Sea carriers can be sued by consignees in French courts despite English jurisdiction clauses in their bills of lading 

In a judgment dated 14 December 2022 (No. 20-17.768), the French Supreme Court set out the legal regime under which consignees can sue foreign carriers in a French court despite the bill of lading containing a clause granting jurisdiction to a non-EU court.

In brief, the Supreme Court held that sea carriers can enforce clauses in bills of lading granting jurisdiction to a court outside the EU only if (i) the consignee has “specially accepted” them and (ii) they are formally readable.

The Supreme Court held that “special acceptance” cannot be found in the existence of any customary practices, previous business relations, or clauses referring to general conditions.

In the post-Brexit context that now exists, and contrary to the more favourable position for sea-carriers that applied pre-Brexit, this ruling will now apply to bills of lading that purport to grant jurisdiction to the courts of England and Wales. 

Download a PDF copy of the article.



Trading companies that seek to insulate their shipping risk by allocating their chartering activities to a separate entity will be reassured by a recent judgment of the English Court, in which it was decided that a letter of indemnity was enforceable only against the entity which had issued it, and not against a connected entity (or their exporter clients) as supposed undisclosed principals.

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Despite living in an age of instantaneous correspondence and fast contractual negotiations, parties may still assume that promises as important as parent company guarantees, require detailed written documents, wet-ink, or e-signature signatures in order to be enforceable. The English Courts have recently reaffirmed that this is not the case.

SFL Ace 2 Co Inc v DCW Management Ltd (formerly Allseas Global Management Ltd) (the “M/V Green Ace”)

Continue Reading The importance of email sign offs: the formalities of executing a parent company guarantee under the Statute of Frauds 1677

Following the Russian invasion of Ukraine on 24 February 2022, the UK, U.S. and EU were quick to impose economic sanctions on Russia. These sanctions have only increased in the intervening years, with an increasing number of Russian commodities the subject of restriction. However, until recently, Russian LNG was one area where sanctions took a “light touch” approach.

The U.S. and the UK moved quickly to prohibit the import of Russian LNG into their territories, but did not pass sanctions against the transportation of Russian LNG to other territories. Similarly, while the U.S. placed asset freeze sanctions on new Russian LNG projects such as the Arctic LNG 2 project, existing LNG infrastructure in Russia was not designated.

Continue Reading LNG sanctions on Russia – A fluid landscape

This article provides an overview of the legal issues related to the maritime recovery of reusable rockets, which is an emerging practice in the commercial space industry. It summarizes the current state of the space economy, the sources of space law in the U.S., and the regulations affecting the waters and the vessels involved in the recovery operations.

Continue Reading Recovering rockets at sea: the intersection of space law and maritime law

Following the recent dissolution of the French National Assembly, the country is preparing for early legislative elections. The political climate is tense for shipping companies with the two leading political parties in the polls considering abolishing the French tonnage tax regime.

Continue Reading French Tonnage Tax Regime: a prime target in the midst of legislative elections

Richard Gunn, the leading partner in Reed Smith’s Casualty and Admiralty team, sheds light on the intricacies of salvage operations amidst the recent Court of Appeal decision in Smit Salvage BV & Ors v Luster Maritime SA & Anr (The ‘Ever Given’). The case vividly illustrates the challenges of negotiating contracts in rapidly changing environments, particularly within the maritime domain. As the judgment delves into the blurred lines between offer and acceptance in contract law, it underscores the significance of clear communication and the unique nature of salvage operations.

Continue Reading The Ever Given Court of Appeal decision unveils contractual complexities in salvage agreements 

International obligations: climate change

At a United Nations climate conference in late 2023, participants championed the successes of climate commitments in previous years. Nevertheless, there was consensus that not enough action has occurred to enable participants to meet the goals of the Paris Agreement in 20151. This agreement set ambitious goals relating to climate change mitigation, including the goal to keep the rise in mean global temperature to below two degrees Celsius (above pre-industrial levels).The use of renewable energy sources, such as offshore wind, has generated significant traction as a fuel source of the future to help meet such goals.

Focus on offshore wind

The United States, a signatory to the Paris Agreement, has iterated ambitious climate goals, including through offshore wind projects. Specifically, President Biden aspires to power over 10 million homes using wind turbines by 20302. Moreover, offshore wind projects provide value beyond the environment alone—they also offer opportunities for job creation, economic growth, and valuable investments.

Challenges to offshore wind farms

Nevertheless, establishing offshore wind projects poses several challenges. Offshore wind farms largely depend on massive turbines that are assembled offshore. Their installation necessitates the use of foundation-laying vessels equipped with large cranes. Therefore, a significant challenge lies in the design and construction of suitable ships that can withstand harsh marine environments, navigate narrow channels, handle heavy loads, and still remain cost-effective and efficient. Due to their complexity, there are only a handful of wind turbine installation vessels in the world. Currently, existing vessels are being contracted and relocated globally, causing delays due to weather conditions and leading to supply shortages.

An examination of the functions of offshore services vessels sheds light on their complexity, and subsequent challenges in building them. The vessels are enormous to support large cranes that can lower massive offshore wind foundations into the water. These foundations need to be set in place, which the vessels accomplish by pounding foundational pieces into the seabed. After setting is complete, the work above water begins. The vessels place a tower on the foundation, and then situate a power generator on top of the tower. To accomplish these myriad tasks, the vessels drop stilts onto the seabed to lift the vessel above the ocean waves to create stability for construction.

U.S.-specific challenges

In the United States, the availability of offshore services vessels is conflated by the Jones Act, which is at the root of every U.S. offshore wind project. Generally speaking, the Jones Act requires that only US‐built, U.S.-owned and US‐registered vessels with a U.S. coastwise trade endorsement transport goods or passengers by water in the United States. Since no wind turbine installation vessels currently comply with these requirements, workarounds need to be employed, such as using a foreign-flagged installation vessel that brings the wind turbine components from a foreign port, for example in Canada. Clearly, workarounds pose challenges, like the prospect of a Canadian port being hundreds of miles away from an offshore site, increasing voyage and installation time. Smaller vessels that are Jones Act compliant are often used to bring equipment as well as offshore workers from a closer U.S. port to the offshore project site, relying on the so-called feeder solution. Challenges remain, such as completing the vessel-to-vessel transfers of large equipment at the offshore site, in sea and weather conditions that can be very difficult.

While the Jones Act creates a need for Jones Act compliant wind turbine installation vessels, it also places high barriers to entry into the construction market for such specialized assets. To qualify as a U.S. citizen owner, as required under the Jones Act, the entity that makes the investment must be controlled by U.S. citizens and be at least 75% U.S. owned at each tier in its corporate chain, up to its ultimate beneficial owners. Alternatively, the owner may be able to rely on the lease-financing exception to the Jones Act’s U.S. ownership requirements, but this requires bareboat chartering the vessel out at all times to a third party, which qualifies as a U.S. citizen, and acts as the owner of the vessel for the purposes of the project. Another barrier to entry is that the owner must use a U.S. shipyard, which increases significantly the cost of construction.

There have been several attempts at building Jones Act compliant offshore wind turbine installation vessels. To our knowledge, only one such project remains underway, with the goal of taking delivery of the first Jones Act compliant vessel of this kind at the end of this year.

Conclusion

Given the complexity of the Jones Act, as well as offshore wind farm construction generally, it is no surprise that legal challenges and disputes in such projects abound. This highlights the need for a robust legal framework and skilled representation for players in the market, at every stage of their offshore wind projects, from structuring to implementation. Ultimately, for a cleaner, more sustainable energy landscape that empowers communities and fosters economic growth, the success of offshore wind in the United States is pivotal.

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[1] United Nations Climate Change Conference (COP 28) (30 November-12 December, 2023).

[2] White House Fact Sheet: Biden-Harris Administration Announces New Actions to Expand U.S. Offshore Wind Energy (September 5, 2022).