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Court Gives Important Guidance to Arbitrators

The High Court has ruled that, in assessing compensation payable following repudiation of contracts, it is necessary for arbitrators to consider hypothetically whether innocent parties would in fact have been able to meet their obligations had the breach not occurred.

ShipIn the context of a contract in respect of the bulk shipping of coal, arbitrators had awarded ship owners a total of more than $5.4 million to reflect profits that they would reasonably have expected to make under the agreement had it not been for a series of repudiatory breaches by the charterers.

The charterers argued unsuccessfully before the arbitration panel that the dramatic decline in the freight market that followed on the heels of the collapse of Lehman Brothers meant that the ship owners would in any event have been incapable of providing the vessels required to fulfil their side of the contract.

The Court noted that the case raised an issue of importance to the general law of contract and the assessment of damages for breach of contract in particular. Finding that the arbitrators had erred in law, the Court ruled  that it had been necessary for them to embark on a hypothetical assessment of what would have happened had there been no repudiation.

Although the ship owners were innocent parties, they bore the burden of proving the true extent of their loss and that required them to show that, had there been no repudiation, they would have been able to perform their obligations under the contract.

However, in dismissing the charterers’ challenge, the Court preferred the ship owners’ interpretation of the contract and noted that the arbitration panel had found as a fact that they would have been in a position to perform their side of the bargain had the charterers called upon them to do so. The charterers’ pleas that the panel’s decision was undermined by serious irregularities were also rejected.