Article Review: Remoteness Re-invented? by David McLauchlan

McLauchlan, David, Remoteness Re-Invented? (January 31, 2010). Victoria University of Wellington Legal Research Paper No. 3. Available at SSRN: http://ssrn.com/abstract=1866167

"Remoteness Re-invented?" by David McLauchlan, a professor of law at the University of Wellington, discusses one of the most important cases in the recent times on damages in contract law- Transfield Shipping Inc v. Mercator Shipping Inc. (The Achilleas) [2008] UKHL 48. This blog post briefly reviews the article.

The Achilleas

Mercator Shipping (Mercator) was the owner of the ship the Achilleas. Mercator and Transfield Shipping (Transfield) entered into a time charter of the Achilleas at a daily rate of USD 16,750 and the latest date of redelivery was May 2.  On April 20, Mercator sent a notice for redelivery between April 30 and May 2. In the meanwhile, Mercator entered into a “follow-on” time charter (the second charter was to commence after redelivery by Transfield) with Cargill for four to six months at a daily rate of USD 39,500.  The huge difference in rates between the two charters was due to a dramatic rise in the market rates. Cargill had an option to cancel the time charter in case the vessel was not delivered it by May 8.

Despite the notice of redelivery, Mercator could not redeliver the vessel by May 2. It appeared that the vessel would be redelivered only by May 11. By May 5, it became apparent to Cargill that the vessel could not be delivered by May 8. Instead of exercising its right to cancel the time charter, Cargill renegotiated with Mercator to reduce the daily rate to USD 31,500, consistent with the fall in market prices.

Mercator sued Transfield for the difference between the original rate of USD 39,500 and the renegotiated rate of USD 31,500 (USD 8,000) for the entire period of the time charter (four to six months), which amounted to USD 1.4 million.

Transfield contended that that Mercator was not entitled to the claim as the damages was too remote and that Mercator was entitled only to the difference between the contract rate and market rate for nine days, that is, the due date for redelivery and the actual date of redelivery.

There were five judgements of the House of Lords some with different reasoning but with the consistent final decision that Mercator was not liable to the claim of USD 1.4 million as it was too remote.

Remoteness Re-Invented?

The author structured his article in the following manner:

A. Introduction
B. Academic Debates (consisting of case comments/ articles dealing with the case/ the subject)
C. Achilleas (discussing the decisions of the courts below and the four judgements in the House of Lords)
D.Effects of the Decision
E. Conclusion

According to the author, the decision by the House of Lords took the contract law scholars by surprise because the arbitral awards were by arbitrators with specialized knowledge in the field and the judgements by the High Court and the Court of Appeal were admittedly by judges with great commercial experience. In fact, one of the decisions in the Court of Appeal was by the renowned Rix, LJ. Nevertheless, the House of Lords overturned the decisions of the arbitral tribunal and the lower courts.

In Part B of the paper, the author discusses the various academic theories surrounding the determination of whether damages claimed was remote such as the instrumental promises theory, agreement-centric approach and the default rule approach. After a brief analysis, the author concludes that “from a practical point of view [the academic debates] should not matter” as long as it is recognized that “[r]easonable foreseeability will usually be necessary but it is certainly ‘not sufficient for liability’”.

In Part C, the author discusses the decision of the lower courts and judgements of by each of the five judges sitting in the House of Lords. The author notes that the judges were ultimately of the view that the owner was not entitled to the loss claimed but only for what the charterer conceded as the entitlement of the owner. In Part D, the author attempts to formulate the ratio of the majority as different reasoning was provided by the judges of the House of Lords. The ratio according to Mclauchlan is as follows:

“A loss may not be considered too remote even if it was of the type or kind that would have been within the reasonable contemplation of the parties as a not unlikely result of the breach. Defendants will escape liability for foreseeable loss if it cannot be reasonably be inferred that they accepted responsibility for that loss”.

The author explains that the court’s view meant that the plaintiff could recover damages for “unusual” losses on the basis of the knowledge of special circumstances only if it was established from an objective point of view that the defendant had accepted the contract with the special circumstance attached to it. The effect of the decision, according to the author, is:

“[W]hether or not a particular kind of loss is held to be foreseeable because of imputed knowledge or actual knowledge of special circumstances, the defendant can escape liability if the court is satisfied that it would be unreasonable to infer that the defendant accepted the responsibility for that loss.”

This, according to the author is a positive development because the judges would not longer hide behind “bland assertions” but would have to clearly spell out how there was assumption of the risk. The author also discusses a few categories of factors that might lead the court to conclude one way or the other.Another possible consequence of the judgement discussed in the article is that it courts might be reluctant to award damages which are substantially disproportionate to the consideration received because it may be possible to reasonably infer that the defendant never “agreed” to bear liability for such a loss.

Case Comments on the Decision:

• Adam Kramer, ‘An Agreement-Centred Approach to Remoteness and Contract Damages’ in Nili Cohen & Ewan McKendrick (eds), Comparative Remedies for Breach of Contract (Hart Publishing, Oxford and Portland 2005) 249;
• Andrew Tettenborn, ‘Hadley v Baxendale Foreseeability: A Principle Beyond Its Sell-by Date?’ (2007) 23 J of Contract L 120;
• Andrew Robertson, ‘The Basis of the Remoteness Rule in Contract’ (2008) 28 Legal Studies 172. 
• Edwin Peel, ‘Remoteness Revisited’ (2009) 125 LQ Rev 6

An Indian reader perusing this post might wonder about the position in India on this issue. We'll do a post in the near future on this.