Palmali Shipping SA v. Litasco SA– QBD (Comm Ct), 1 October 2020
Palmali sought US$1.9 billion in damages from Litasco under a long-term contract of affreightment (COA). Palmali contended the COA gave it exclusive rights to carry oil products for Litasco between multiple ports in the Caspian Sea, Black Sea and the Mediterranean. Further, Palmali asserted the COA guaranteed Litasco would ship a minimum quantity of 400,000 MT (the Minimum Quantity Obligation), with a total monthly volume of 700,000 MT/month.
Palmali asserted the COA had existed for ten years, and the parties had jointly agreed to extend it for another five years. Litasco countered that the COA was not binding, citing numerous commercially implausible dictates of the agreement and contesting the contract extension.
Palmali alleged that Litasco breached the Minimum Quantity Obligation and claimed the loss of the profit Palmali “would have achieved if Litasco had provided up to 700,000 mt of Cargo per month”.
Palmali argued the voyages would have been completed using “own fleet” vessels, i.e., ships owned by companies within the same beneficial ownership as Palmali, and that Palmali would not have incurred any expenses in chartering such vessels. This meant Palmali did not credit freight or vessel hire cost for the additional cargo quantities.
Court documents included disclosure from Palmali of a series of Ship Management Agreements (SMAs) on a BIMCO standard form with the “own fleet” ship owning companies. These SMAs allowed Palmali to conclude charter parties relating to the vessel’s employment and collect and remit to the ship-owning company’s account freight and other payments. From there, Palmali would hold all monies payable to the owners in a separate bank account and would properly pay the owners for the use of their vessels. However, Palmali disputed this, stating the SMAs did not reflect the cost basis on which the vessels actually operated.
Litasco insisted Palmali had to credit freight and vessel hire in calculating lost earnings, and Palmali resisted. If, however, the Court decided to credit the “own fleet” shipowners for cargoes lifted with their vessels, Palmali was prepared to amend its claim under the transferred loss principle to recover the losses suffered by those companies.
The Court held that Palmali had introduced a triable issue in response to Litasco’s argument for quantifying the claim for loss of profits.
The “net loss approach” considered the expenses and benefits lost due to the breach, the costs avoided, and the non-collateral benefits gained. The law of damages did not distinguish between liability and its discharge, and unpaid liabilities could be considered losses for calculating damages.
Palmali argued that the Court should exclude liabilities that would have arisen if more cargoes had been lifted under the COA while assessing its “net loss.” Further, Palmali argued their accounting and the accounting of the other companies did not correctly reflect the economic realities of the situation. Citing the “compensatory principle,” Palmali sought to gain complete restitution for lost profits.
The Court acknowledged that calculating the “net loss” might be appropriate in some cases but determined the evidence Palmali submitted did not sufficiently support their claim. Therefore, there was no arguable case for Palmali which would establish an entitlement to claim damages, which excluded the liabilities of the additional voyages and would favor the ship-owning companies.
In addition, the Court stated Palmali could not argue that the common intention of the COA was to benefit the companies which it might contract to lift cargoes; Palmali was contracting for its own benefit, as the sole recipient of payments under the COA. Therefore, Litasco could not confer upon these companies the benefit of the COA, for Palmali decided to contract with them.
Finally, the Court ruled that while Palmali could sue for the loss of those benefits, it must give credit for any expenses it would have incurred in realizing them. The transferred loss in question was the loss of profits that the owning companies would have made under contracts with Palmali. This loss was not a result of interference with, or decrease in, the value of a legally protected interest of a third party; It was not even a loss from a contractual right. It was instead from the loss of opportunity to conclude a contract.
The Court refused Palmali’s transferred loss claim.