Contract Formation and Consumer Protection Presentation

(Slip Opinion)
OCTOBER TERM, 2018
1
Syllabus
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.
SUPREME COURT OF THE UNITED STATES
Syllabus
APPLE INC. v. PEPPER ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE NINTH CIRCUIT
No. 17–204.
Argued November 26, 2018—Decided May 13, 2019
Apple Inc. sells iPhone applications, or apps, directly to iPhone owners
through its App Store—the only place where iPhone owners may lawfully buy apps. Most of those apps are created by independent developers under contracts with Apple. Apple charges the developers a
$99 annual membership fee, allows them to set the retail price of the
apps, and charges a 30% commission on every app sale. Respondents, four iPhone owners, sued Apple, alleging that the company has
unlawfully monopolized the aftermarket for iPhone apps. Apple
moved to dismiss, arguing that the iPhone owners could not sue because they were not direct purchasers from Apple under Illinois Brick
Co. v. Illinois, 431 U. S. 720. The District Court agreed, but the
Ninth Circuit reversed, concluding that the iPhone owners were direct purchasers because they purchased apps directly from Apple.
Held: Under Illinois Brick, the iPhone owners were direct purchasers
who may sue Apple for alleged monopolization. Pp. 4–14.
(a) This straightforward conclusion follows from the text of the antitrust laws and from this Court’s precedent. Section 4 of the Clayton
Act provides that “any person who shall be injured in his business or
property by reason of anything forbidden in the antitrust laws may
sue.” 15 U. S. C. §15(a). That broad text readily covers consumers
who purchase goods or services at higher-than-competitive prices
from an allegedly monopolistic retailer. Applying §4, this Court has
consistently stated that “the immediate buyers from the alleged antitrust violators” may maintain a suit against the antitrust violators,
Kansas v. UtiliCorp United Inc., 497 U. S. 199, 207, but has ruled
that indirect purchasers who are two or more steps removed from the
violator in a distribution chain may not sue. Unlike the consumer in
Illinois Brick, the iPhone owners here are not consumers at the bot-
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APPLE INC. v. PEPPER
Syllabus
tom of a vertical distribution chain who are attempting to sue manufacturers at the top of the chain. The absence of an intermediary in
the distribution chain between Apple and the consumer is dispositive.
Pp. 4–7.
(b) Apple argues that Illinois Brick allows consumers to sue only
the party who sets the retail price, whether or not the party sells the
good or service directly to the complaining party. But that theory
suffers from three main problems. First, it contradicts statutory text
and precedent by requiring the Court to rewrite the rationale of Illinois Brick and to gut its longstanding bright-line rule. Any ambiguity in Illinois Brick should be resolved in the direction of the statutory
text, which states that “any person” injured by an antitrust violation
may sue to recover damages. Second, Apple’s theory is not persuasive economically or legally. It would draw an arbitrary and unprincipled line among retailers based on their financial arrangements
with their manufacturers or suppliers. And it would permit a consumer to sue a monopolistic retailer when the retailer set the retail
price by marking up the price it had paid the manufacturer or supplier for the good or service but not when the manufacturer or supplier
set the retail price and the retailer took a commission on each sale.
Third, Apple’s theory would provide a roadmap for monopolistic retailers to structure transactions with manufacturers or suppliers so
as to evade antitrust claims by consumers and thereby thwart effective antitrust enforcement. Pp. 7–11.
(c) Contrary to Apple’s argument, the three Illinois Brick rationales
for adopting the direct-purchaser rule cut strongly in respondents’ favor. First, Apple posits that allowing only the upstream app developers—and not the downstream consumers—to sue Apple would mean
more effective antitrust enforcement. But that makes little sense,
and it would directly contradict the longstanding goal of effective private enforcement and consumer protection in antitrust cases. Second, Apple warns that calculating the damages in successful consumer antitrust suits against monopolistic retailers might be
complicated. But Illinois Brick is not a get-out-of-court-free card for
monopolistic retailers to play any time that a damages calculation
might be complicated. Third, Apple claims that allowing consumers
to sue will result in “conflicting claims to a common fund—the
amount of the alleged overcharge.” Illinois Brick, 431 U. S., at 737.
But this is not a case where multiple parties at different levels of a
distribution chain are trying to recover the same passed-through
overcharge initially levied by the manufacturer at the top of the
chain, cf. id., at 726–727. Pp. 11–14.
846 F. 3d 313, affirmed.
Cite as: 587 U. S. ____ (2019)
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Syllabus
KAVANAUGH, J., delivered the opinion of the Court, in which GINSBREYER, SOTOMAYOR, and KAGAN, JJ., joined. GORSUCH, J., filed a
dissenting opinion, in which ROBERTS, C. J., and THOMAS and ALITO, JJ.,
joined.
BURG,
Cite as: 587 U. S. ____ (2019)
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Opinion of the Court
NOTICE: This opinion is subject to formal revision before publication in
the preliminary print of the United States Reports. Readers are requested
to notify the Reporter of Decisions, Supreme Court of the United States,
Washington, D. C. 20543, of any typographical or other formal errors, in
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press.
SUPREME COURT OF THE UNITED STATES
_________________
No. 17–204
_________________
APPLE INC., PETITIONER v. ROBERT PEPPER, ET AL.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE NINTH CIRCUIT
[May 13, 2019]
JUSTICE KAVANAUGH delivered the opinion of the Court.
In 2007, Apple started selling iPhones. The next year,
Apple launched the retail App Store, an electronic store
where iPhone owners can purchase iPhone applications
from Apple. Those “apps” enable iPhone owners to send
messages, take photos, watch videos, buy clothes, order
food, arrange transportation, purchase concert tickets,
donate to charities, and the list goes on. “There’s an app
for that” has become part of the 21st-century American
lexicon.
In this case, however, several consumers contend that
Apple charges too much for apps. The consumers argue,
in particular, that Apple has monopolized the retail market for the sale of apps and has unlawfully used its monopolistic power to charge consumers higher-thancompetitive prices.
A claim that a monopolistic retailer (here, Apple) has
used its monopoly to overcharge consumers is a classic
antitrust claim. But Apple asserts that the consumerplaintiffs in this case may not sue Apple because they
supposedly were not “direct purchasers” from Apple under
our decision in Illinois Brick Co. v. Illinois, 431 U. S. 720,
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APPLE INC. v. PEPPER
Opinion of the Court
745–746 (1977). We disagree. The plaintiffs purchased
apps directly from Apple and therefore are direct purchasers under Illinois Brick. At this early pleadings stage of
the litigation, we do not assess the merits of the plaintiffs’
antitrust claims against Apple, nor do we consider any
other defenses Apple might have. We merely hold that the
Illinois Brick direct-purchaser rule does not bar these
plaintiffs from suing Apple under the antitrust laws. We
affirm the judgment of the U. S. Court of Appeals for the
Ninth Circuit.
I
In 2007, Apple began selling iPhones. In July 2008,
Apple started the App Store. The App Store now contains
about 2 million apps that iPhone owners can download.
By contract and through technological limitations, the App
Store is the only place where iPhone owners may lawfully
buy apps.
For the most part, Apple does not itself create apps.
Rather, independent app developers create apps. Those
independent app developers then contract with Apple to
make the apps available to iPhone owners in the App
Store.
Through the App Store, Apple sells the apps directly to
iPhone owners. To sell an app in the App Store, app developers must pay Apple a $99 annual membership fee.
Apple requires that the retail sales price end in $0.99, but
otherwise allows the app developers to set the retail price.
Apple keeps 30 percent of the sales price, no matter what
the sales price might be. In other words, Apple pockets a
30 percent commission on every app sale.
In 2011, four iPhone owners sued Apple. They allege
that Apple has unlawfully monopolized “the iPhone apps
aftermarket.” App. to Pet. for Cert. 53a. The plaintiffs
allege that, via the App Store, Apple locks iPhone owners
“into buying apps only from Apple and paying Apple’s 30%
Cite as: 587 U. S. ____ (2019)
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Opinion of the Court
fee, even if ” the iPhone owners wish “to buy apps elsewhere or pay less.” Id., at 45a. According to the complaint, that 30 percent commission is “pure profit” for
Apple and, in a competitive environment with other retailers, “Apple would be under considerable pressure to substantially lower its 30% profit margin.” Id., at 54a–55a.
The plaintiffs allege that in a competitive market, they
would be able to “choose between Apple’s high-priced App
Store and less costly alternatives.” Id., at 55a. And they
allege that they have “paid more for their iPhone apps
than they would have paid in a competitive market.” Id.,
at 53a.
Apple moved to dismiss the complaint, arguing that the
iPhone owners were not direct purchasers from Apple and
therefore may not sue. In Illinois Brick, this Court held
that direct purchasers may sue antitrust violators, but
also ruled that indirect purchasers may not sue. The
District Court agreed with Apple and dismissed the complaint. According to the District Court, the iPhone owners
were not direct purchasers from Apple because the app
developers, not Apple, set the consumers’ purchase price.
The Ninth Circuit reversed. The Ninth Circuit concluded
that the iPhone owners were direct purchasers under
Illinois Brick because the iPhone owners purchased apps
directly from Apple. According to the Ninth Circuit, Illinois Brick means that a consumer may not sue an alleged
monopolist who is two or more steps removed from the
consumer in a vertical distribution chain. See In re Apple
iPhone Antitrust Litig., 846 F. 3d 313, 323 (2017). Here,
however, the consumers purchased directly from Apple,
the alleged monopolist. Therefore, the Ninth Circuit held
that the iPhone owners could sue Apple for allegedly
monopolizing the sale of iPhone apps and charging higherthan-competitive prices. Id., at 324. We granted certiorari.
585 U. S. ___ (2018).
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APPLE INC. v. PEPPER
Opinion of the Court
II
A
The plaintiffs’ allegations boil down to one straightforward claim: that Apple exercises monopoly power in the
retail market for the sale of apps and has unlawfully used
its monopoly power to force iPhone owners to pay Apple
higher-than-competitive prices for apps. According to the
plaintiffs, when iPhone owners want to purchase an app,
they have only two options: (1) buy the app from Apple’s
App Store at a higher-than-competitive price or (2) do not
buy the app at all. Any iPhone owners who are dissatisfied with the selection of apps available in the App Store
or with the price of the apps available in the App Store are
out of luck, or so the plaintiffs allege.
The sole question presented at this early stage of the
case is whether these consumers are proper plaintiffs for
this kind of antitrust suit—in particular, our precedents
ask, whether the consumers were “direct purchasers” from
Apple. Illinois Brick, 431 U. S., at 745–746. It is undisputed that the iPhone owners bought the apps directly
from Apple. Therefore, under Illinois Brick, the iPhone
owners were direct purchasers who may sue Apple for
alleged monopolization.
That straightforward conclusion follows from the text of
the antitrust laws and from our precedents.
First is text: Section 2 of the Sherman Act makes it
unlawful for any person to “monopolize, or attempt to
monopolize, or combine or conspire with any other person
or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations.”
26 Stat. 209, 15 U. S. C. §2. Section 4 of the Clayton Act
in turn provides that “any person who shall be injured in
his business or property by reason of anything forbidden in
the antitrust laws may sue . . . the defendant . . . and shall
recover threefold the damages by him sustained, and the
cost of suit, including a reasonable attorney’s fee.” 38
Cite as: 587 U. S. ____ (2019)
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Opinion of the Court
Stat. 731, 15 U. S. C. §15(a) (emphasis added). The broad
text of §4—“any person” who has been “injured” by an
antitrust violator may sue—readily covers consumers who
purchase goods or services at higher-than-competitive
prices from an allegedly monopolistic retailer.
Second is precedent: Applying §4, we have consistently
stated that “the immediate buyers from the alleged antitrust violators” may maintain a suit against the antitrust
violators. Kansas v. UtiliCorp United Inc., 497 U. S. 199,
207 (1990); see also Illinois Brick, 431 U. S., at 745–746.
At the same time, incorporating principles of proximate
cause into §4, we have ruled that indirect purchasers who
are two or more steps removed from the violator in a
distribution chain may not sue. Our decision in Illinois
Brick established a bright-line rule that authorizes suits
by direct purchasers but bars suits by indirect purchasers.
Id., at 746.1
The facts of Illinois Brick illustrate the rule. Illinois
Brick Company manufactured and distributed concrete
blocks. Illinois Brick sold the blocks primarily to masonry
contractors, and those contractors in turn sold masonry
structures to general contractors. Those general contractors in turn sold their services for larger construction
projects to the State of Illinois, the ultimate consumer of
the blocks.
The consumer State of Illinois sued the manufacturer
Illinois Brick. The State alleged that Illinois Brick had
engaged in a conspiracy to fix the price of concrete blocks.
According to the complaint, the State paid more for the
concrete blocks than it would have paid absent the pricefixing conspiracy. The monopoly overcharge allegedly
flowed all the way down the distribution chain to the
——————
1 Illinois Brick held that the direct-purchaser requirement applies to
claims for damages. Illinois Brick did not address injunctive relief, and
we likewise do not address injunctive relief in this case.
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APPLE INC. v. PEPPER
Opinion of the Court
ultimate consumer, who was the State of Illinois.
This Court ruled that the State could not bring an antitrust action against Illinois Brick, the alleged violator,
because the State had not purchased concrete blocks
directly from Illinois Brick. The proper plaintiff to bring
that claim against Illinois Brick, the Court stated, would
be an entity that had purchased directly from Illinois
Brick. Ibid.
The bright-line rule of Illinois Brick, as articulated in
that case and as we reiterated in UtiliCorp, means that
indirect purchasers who are two or more steps removed
from the antitrust violator in a distribution chain may not
sue. By contrast, direct purchasers—that is, those who
are “the immediate buyers from the alleged antitrust
violators”—may sue. UtiliCorp, 497 U. S., at 207.
For example, if manufacturer A sells to retailer B, and
retailer B sells to consumer C, then C may not sue A. But
B may sue A if A is an antitrust violator. And C may sue
B if B is an antitrust violator. That is the straightforward
rule of Illinois Brick. See Loeb Industries, Inc. v. Sumitomo Corp., 306 F. 3d 469, 481–482 (CA7 2002) (Wood, J.).2
In this case, unlike in Illinois Brick, the iPhone owners
are not consumers at the bottom of a vertical distribution
chain who are attempting to sue manufacturers at the top
of the chain. There is no intermediary in the distribution
chain between Apple and the consumer. The iPhone
owners purchase apps directly from the retailer Apple,
who is the alleged antitrust violator. The iPhone owners
pay the alleged overcharge directly to Apple. The absence
of an intermediary is dispositive. Under Illinois Brick, the
——————
2 Thirty States and the District of Columbia filed an amicus brief
supporting the plaintiffs, and they argue that C should be able to sue A
in that hypothetical. They ask us to overrule Illinois Brick to allow
such suits. In light of our ruling in favor of the plaintiffs in this case,
we have no occasion to consider that argument for overruling Illinois
Brick.
Cite as: 587 U. S. ____ (2019)
7
Opinion of the Court
iPhone owners are direct purchasers from Apple and are
proper plaintiffs to maintain this antitrust suit.
B
All of that seems simple enough. But Apple argues
strenuously against that seemingly simple conclusion, and
we address its arguments carefully. For this kind of retailer case, Apple’s theory is that Illinois Brick allows
consumers to sue only the party who sets the retail price,
whether or not that party sells the good or service directly
to the complaining party. Apple says that its theory accords with the economics of the transaction. Here, Apple
argues that the app developers, not Apple, set the retail
price charged to consumers, which according to Apple
means that the consumers may not sue Apple.
We see three main problems with Apple’s “who sets the
price” theory.
First, Apple’s theory contradicts statutory text and
precedent. As we explained above, the text of §4 broadly
affords injured parties a right to sue under the antitrust
laws. And our precedent in Illinois Brick established a
bright-line rule where direct purchasers such as the consumers here may sue antitrust violators from whom they
purchased a good or service. Illinois Brick, as we read the
opinion, was not based on an economic theory about who
set the price. Rather, Illinois Brick sought to ensure an
effective and efficient litigation scheme in antitrust cases.
To do so, the Court drew a bright line that allowed direct
purchasers to sue but barred indirect purchasers from
suing. When there is no intermediary between the purchaser and the antitrust violator, the purchaser may sue.
The Illinois Brick bright-line rule is grounded on the
“belief that simplified administration improves antitrust
enforcement.” 2A P. Areeda, H. Hovenkamp, R. Blair, &
C. Durrance, Antitrust Law ¶346e, p. 194 (4th ed. 2014)
(Areeda & Hovenkamp). Apple’s theory would require us
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APPLE INC. v. PEPPER
Opinion of the Court
to rewrite the rationale of Illinois Brick and to gut the
longstanding bright-line rule.
To the extent that Illinois Brick leaves any ambiguity
about whether a direct purchaser may sue an antitrust
violator, we should resolve that ambiguity in the direction
of the statutory text. And under the text, direct purchasers from monopolistic retailers are proper plaintiffs to sue
those retailers.
Second, in addition to deviating from statutory text and
precedent, Apple’s proposed rule is not persuasive economically or legally. Apple’s effort to transform Illinois Brick
from a direct-purchaser rule to a “who sets the price” rule
would draw an arbitrary and unprincipled line among
retailers based on retailers’ financial arrangements with
their manufacturers or suppliers.
In the retail context, the price charged by a retailer to a
consumer is often a result (at least in part) of the price
charged by the manufacturer or supplier to the retailer, or
of negotiations between the manufacturer or supplier and
the retailer. Those agreements between manufacturer or
supplier and retailer may take myriad forms, including for
example a markup pricing model or a commission pricing
model. In a traditional markup pricing model, a hypothetical monopolistic retailer might pay $6 to the manufacturer
and then sell the product for $10, keeping $4 for itself. In
a commission pricing model, the retailer might pay nothing to the manufacturer; agree with the manufacturer that
the retailer will sell the product for $10 and keep 40 percent of the sales price; and then sell the product for $10,
send $6 back to the manufacturer, and keep $4. In those
two different pricing scenarios, everything turns out to be
economically the same for the manufacturer, retailer, and
consumer.
Yet Apple’s proposed rule would allow a consumer to sue
the monopolistic retailer in the former situation but not
the latter. In other words, under Apple’s rule a consumer
Cite as: 587 U. S. ____ (2019)
9
Opinion of the Court
could sue a monopolistic retailer when the retailer set the
retail price by marking up the price it had paid the manufacturer or supplier for the good or service. But a consumer
could not sue a monopolistic retailer when the manufacturer or supplier set the retail price and the retailer took a
commission on each sale.
Apple’s line-drawing does not make a lot of sense, other
than as a way to gerrymander Apple out of this and similar lawsuits. In particular, we fail to see why the form of
the upstream arrangement between the manufacturer or
supplier and the retailer should determine whether a
monopolistic retailer can be sued by a downstream consumer who has purchased a good or service directly from
the retailer and has paid a higher-than-competitive price
because of the retailer’s unlawful monopolistic conduct.
As the Court of Appeals aptly stated, “the distinction
between a markup and a commission is immaterial.” 846
F. 3d, at 324. A leading antitrust treatise likewise states:
“Denying standing because ‘title’ never passes to a broker
is an overly lawyered approach that ignores the reality
that a distribution system that relies on brokerage is
economically indistinguishable from one that relies on
purchaser-resellers.” 2A Areeda & Hovenkamp ¶345, at
183. If a retailer has engaged in unlawful monopolistic
conduct that has caused consumers to pay higher-thancompetitive prices, it does not matter how the retailer
structured its relationship with an upstream manufacturer
or supplier—whether, for example, the retailer employed a
markup or kept a commission.
To be sure, if the monopolistic retailer’s conduct has not
caused the consumer to pay a higher-than-competitive
price, then the plaintiff ’s damages will be zero. Here, for
example, if the competitive commission rate were 10 percent rather than 30 percent but Apple could prove that
app developers in a 10 percent commission system would
always set a higher price such that consumers would pay
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APPLE INC. v. PEPPER
Opinion of the Court
the same retail price regardless of whether Apple’s commission was 10 percent or 30 percent, then the consumers’
damages would presumably be zero. But we cannot assume in all cases—as Apple would necessarily have us
do—that a monopolistic retailer who keeps a commission
does not ever cause the consumer to pay a higher-thancompetitive price. We find no persuasive legal or economic
basis for such a blanket assertion.
In short, we do not understand the relevance of the
upstream market structure in deciding whether a downstream consumer may sue a monopolistic retailer. Apple’s
rule would elevate form (what is the precise arrangement
between manufacturers or suppliers and retailers?) over
substance (is the consumer paying a higher price because
of the monopolistic retailer’s actions?). If the retailer’s
unlawful monopolistic conduct caused a consumer to pay
the retailer a higher-than-competitive price, the consumer
is entitled to sue the retailer under the antitrust laws.
Third, if accepted, Apple’s theory would provide a
roadmap for monopolistic retailers to structure transactions with manufacturers or suppliers so as to evade antitrust claims by consumers and thereby thwart effective
antitrust enforcement.
Consider a traditional supplier-retailer relationship, in
which the retailer purchases a product from the supplier
and sells the product with a markup to consumers. Under
Apple’s proposed rule, a retailer, instead of buying the
product from the supplier, could arrange to sell the product for the supplier without purchasing it from the supplier. In other words, rather than paying the supplier a
certain price for the product and then marking up the
price to sell the product to consumers, the retailer could
collect the price of the product from consumers and remit
only a fraction of that price to the supplier.
That restructuring would allow a monopolistic retailer
to insulate itself from antitrust suits by consumers, even
Cite as: 587 U. S. ____ (2019)
11
Opinion of the Court
in situations where a monopolistic retailer is using its
monopoly to charge higher-than-competitive prices to
consumers. We decline to green-light monopolistic retailers to exploit their market position in that way. We refuse
to rubber-stamp such a blatant evasion of statutory text
and judicial precedent.
In sum, Apple’s theory would disregard statutory text
and precedent, create an unprincipled and economically
senseless distinction among monopolistic retailers, and
furnish monopolistic retailers with a how-to guide for
evasion of the antitrust laws.
C
In arguing that the Court should transform the directpurchaser rule into a “who sets the price” rule, Apple
insists that the three reasons that the Court identified in
Illinois Brick for adopting the direct-purchaser rule apply
to this case—even though the consumers here (unlike in
Illinois Brick) were direct purchasers from the alleged
monopolist. The Illinois Brick Court listed three reasons
for barring indirect-purchaser suits: (1) facilitating more
effective enforcement of antitrust laws; (2) avoiding complicated damages calculations; and (3) eliminating duplicative damages against antitrust defendants.
As we said in UtiliCorp, however, the bright-line rule of
Illinois Brick means that there is no reason to ask whether
the rationales of Illinois Brick “apply with equal force” in
every individual case. 497 U. S., at 216. We should not
engage in “an unwarranted and counterproductive exercise to litigate a series of exceptions.” Id., at 217.
But even if we engage with this argument, we conclude
that the three Illinois Brick rationales—whether considered individually or together—cut strongly in the plaintiffs’ favor here, not Apple’s.
First, Apple argues that barring the iPhone owners from
suing Apple will better promote effective enforcement of
12
APPLE INC. v. PEPPER
Opinion of the Court
the antitrust laws. Apple posits that allowing only the
upstream app developers—and not the downstream consumers—to sue Apple would mean more effective enforcement of the antitrust laws. We do not agree. Leaving
consumers at the mercy of monopolistic retailers simply
because upstream suppliers could also sue the retailers
makes little sense and would directly contradict the
longstanding goal of effective private enforcement and
consumer protection in antitrust cases.
Second, Apple warns that calculating the damages in
successful consumer antitrust suits against monopolistic
retailers might be complicated. It is true that it may be
hard to determine what the retailer would have charged in
a competitive market. Expert testimony will often be
necessary. But that is hardly unusual in antitrust cases.
Illinois Brick is not a get-out-of-court-free card for monopolistic retailers to play any time that a damages calculation might be complicated. Illinois Brick surely did not
wipe out consumer antitrust suits against monopolistic
retailers from whom the consumers purchased goods or
services at higher-than-competitive prices. Moreover, the
damages calculation may be just as complicated in a retailer markup case as it is in a retailer commission case.
Yet Apple apparently accepts consumers suing monopolistic retailers in a retailer markup case. If Apple accepts
that kind of suit, then Apple should also accept consumers
suing monopolistic retailers in a retailer commission case.
Third, Apple claims that allowing consumers to sue will
result in “conflicting claims to a common fund—the
amount of the alleged overcharge.” Illinois Brick, 431
U. S., at 737. Apple is incorrect. This is not a case where
multiple parties at different levels of a distribution chain
are trying to all recover the same passed-through
overcharge initially levied by the manufacturer at the top
of the chain. Cf. id., at 726–727; Hanover Shoe, Inc. v.
United Shoe Machinery Corp., 392 U. S. 481, 483–484
Cite as: 587 U. S. ____ (2019)
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Opinion of the Court
(1968). If the iPhone owners prevail, they will be entitled
to the full amount of the unlawful overcharge that they
paid to Apple. The overcharge has not been passed on by
anyone to anyone. Unlike in Illinois Brick, there will be
no need to “trace the effect of the overcharge through each
step in the distribution chain.” 431 U. S., at 741.
It is true that Apple’s alleged anticompetitive conduct
may leave Apple subject to multiple suits by different
plaintiffs. But Illinois Brick did not purport to bar
multiple liability that is unrelated to passing an
overcharge down a chain of distribution. Basic antitrust
law tells us that the “mere fact that an antitrust violation
produces two different classes of victims hardly entails
that their injuries are duplicative of one another.” 2A
Areeda & Hovenkamp ¶339d, at 136. Multiple suits are
not atypical when the intermediary in a distribution chain
is a bottleneck monopolist or monopsonist (or both)
between the manufacturer on the one end and the
consumer on the other end. A retailer who is both a
monopolist and a monopsonist may be liable to different
classes of plaintiffs—both to downstream consumers and
to upstream suppliers—when the retailer’s unlawful
conduct affects both the downstream and upstream
markets.
Here, some downstream iPhone consumers have sued
Apple on a monopoly theory. And it could be that some
upstream app developers will also sue Apple on a monopsony theory. In this instance, the two suits would rely on
fundamentally different theories of harm and would not
assert dueling claims to a “common fund,” as that term
was used in Illinois Brick. The consumers seek damages
based on the difference between the price they paid and
the competitive price. The app developers would seek lost
profits that they could have earned in a competitive retail
market. Illinois Brick does not bar either category of suit.
In short, the three Illinois Brick rationales do not per-
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APPLE INC. v. PEPPER
Opinion of the Court
suade us to remake Illinois Brick and to bar directpurchaser suits against monopolistic retailers who employ
commissions rather than markups. The plaintiffs seek to
hold retailers to account if the retailers engage in unlawful anticompetitive conduct that harms consumers who
purchase from those retailers. That is why we have antitrust law.
*
*
*
Ever since Congress overwhelmingly passed and President Benjamin Harrison signed the Sherman Act in 1890,
“protecting consumers from monopoly prices” has been
“the central concern of antitrust.”
2A Areeda &
Hovenkamp ¶345, at 179. The consumers here purchased
apps directly from Apple, and they allege that Apple used
its monopoly power over the retail apps market to charge
higher-than-competitive prices. Our decision in Illinois
Brick does not bar the consumers from suing Apple for
Apple’s allegedly monopolistic conduct. We affirm the
judgment of the U. S. Court of Appeals for the Ninth
Circuit.
It is so ordered.
Cite as: 587 U. S. ____ (2019)
1
GORSUCH, J., dissenting
SUPREME COURT OF THE UNITED STATES
_________________
No. 17–204
_________________
APPLE INC., PETITIONER v. ROBERT PEPPER, ET AL.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE NINTH CIRCUIT
[May 13, 2019]
JUSTICE GORSUCH, with whom THE CHIEF JUSTICE,
JUSTICE THOMAS, and JUSTICE ALITO join, dissenting.
More than 40 years ago, in Illinois Brick Co. v. Illinois,
431 U. S. 720 (1977), this Court held that an antitrust
plaintiff can’t sue a defendant for overcharging someone
else who might (or might not) have passed on all (or some)
of the overcharge to him. Illinois Brick held that these
convoluted “pass on” theories of damages violate traditional principles of proximate causation and that the right
plaintiff to bring suit is the one on whom the overcharge
immediately and surely fell. Yet today the Court lets a
pass-on case proceed. It does so by recasting Illinois Brick
as a rule forbidding only suits where the plaintiff does not
contract directly with the defendant. This replaces a rule
of proximate cause and economic reality with an easily
manipulated and formalistic rule of contractual privity.
That’s not how antitrust law is supposed to work, and it’s
an uncharitable way of treating a precedent which—
whatever its flaws—is far more sensible than the rule the
Court installs in its place.
I
To understand Illinois Brick, it helps to start with the
case that paved the way for that decision: Hanover Shoe,
Inc. v. United Shoe Machinery Corp., 392 U. S. 481 (1968).
Hanover sued United, a company that supplied machinery
2
APPLE INC. v. PEPPER
GORSUCH, J., dissenting
Hanover used to make shoes. Hanover alleged that
United’s illegal monopoly in the shoe-making-machinery
market had allowed it to charge supracompetitive prices. As
damages, Hanover sought to recover the amount it had
overpaid United for machinery. United replied that Hanover hadn’t been damaged at all because, United asserted,
Hanover had not absorbed the supposedly “illegal overcharge” but had “passed the cost on to its customers” by
raising the prices it charged for shoes. Id., at 487–488,
and n. 6. This Court called United’s argument a “ ‘passingon’ defense” because it suggested that a court should
consider whether an antitrust plaintiff had “passed on”
the defendant’s overcharge to its own customers when
assessing if and to what degree the plaintiff was injured
by the defendant’s anticompetitive conduct. Id., at 488.
This Court rejected that defense. While §4 of the Clayton Act allows private suits for those injured by antitrust
violations, we have long interpreted this language against
the backdrop of the common law. See, e.g., Associated
Gen. Contractors of Cal., Inc. v. Carpenters, 459 U. S. 519,
529–531 (1983). And under ancient rules of proximate
causation, the “ ‘general tendency of the law, in regard to
damages at least, is not to go beyond the first step.’ ”
Hanover Shoe, 392 U. S., at 490, n. 8 (quoting Southern
Pacific Co. v. Darnell-Taenzer Lumber Co., 245 U. S. 531,
533 (1918)). In Hanover Shoe, the first step was United’s
overcharging of Hanover. To proceed beyond that and
inquire whether Hanover had passed on the overcharge to
its customers, the Court held, would risk the sort of problems traditional principles of proximate cause were designed to avoid. “[N]early insuperable” questions would
follow about whether Hanover had the capacity and incentive to pass on to its customers in the shoe-making market
United’s alleged monopoly rent from the separate shoemaking-machinery market. 392 U. S., at 493. Resolving
those questions would, in turn, necessitate a trial within a
Cite as: 587 U. S. ____ (2019)
3
GORSUCH, J., dissenting
trial about Hanover’s power and conduct in its own market, with the attendant risk that proceedings would become “long and complicated” and would “involv[e] massive
evidence and complicated theories.” Ibid.
Illinois Brick was just the other side of the coin. With
Hanover Shoe having held that an antitrust defendant
could not rely on a pass-on theory to avoid damages, Illinois Brick addressed whether an antitrust plaintiff could
rely on a pass-on theory to recover damages. The State of
Illinois had sued several manufacturers of concrete blocks,
alleging that the defendants’ price-fixing conspiracy had
enabled them to overcharge building contractors, who in
turn had passed on those charges to their customers,
including the State. Recognizing that Hanover Shoe had
already prohibited antitrust violators from using a “passon theory” defensively, the Court declined to “permit
offensive use of a pass-on theory against an alleged violator that could not use the same theory as a defense.” 431
U. S., at 735. “Permitting the use of pass-on theories
under §4,” the Court reasoned, would require determining
how much of the manufacturer’s monopoly rent was absorbed by intermediary building contractors and how
much they were able and chose to pass on to their customers like the State. Id., at 737. Allowing pass-on theories
would, as well, allow “plaintiffs at each level in the distribution chain” to “assert conflicting claims to a common
fund,” which would require “massive efforts to apportion
the recovery among all potential plaintiffs that could have
absorbed part of the overcharge—from direct purchasers
to middlemen to ultimate consumers.” Ibid. Better again,
the Court decided, to adhere to traditional rules of proximate causation and allow only the first affected customers—the building contractors—to sue for the monopoly
rents they had directly paid.
There is nothing surprising in any of this. Unless Congress provides otherwise, this Court generally reads statu-
4
APPLE INC. v. PEPPER
GORSUCH, J., dissenting
tory causes of action as “limited to plaintiffs whose injuries are proximately caused by violations of the statute.”
Lexmark Int’l, Inc. v. Static Control Components, Inc., 572
U. S. 118, 132 (2014). That proximate cause requirement
typically bars suits for injuries that are “derivative of
misfortunes visited upon a third person by the defendant’s
acts.” Id., at 133 (internal quotation marks omitted). So,
for example, if a defendant’s false advertising causes harm
to one of its competitors, the competitor can sue the false
advertiser under the Lanham Act. But if the competitor is
unable to pay its rent as a result, the competitor’s landlord
can’t sue the false advertiser, because the landlord’s harm
derives from the harm to the competitor. Id., at 134; see
also, e.g., Bank of America Corp. v. Miami, 581 U. S. ___,
___–___ (2017) (slip op., at 10–11); Dura Pharmaceuticals,
Inc. v. Broudo, 544 U. S. 336, 346 (2005); Holmes v. Securities Investor Protection Corporation, 503 U. S. 258, 268–
270 (1992). This Court has long understood Illinois Brick
as simply applying these traditional proximate cause
principles in the antitrust context. See Associated Gen.
Contractors, 459 U. S., at 532–535, 544–545.1
II
The lawsuit before us depends on just the sort of pass-on
theory that Illinois Brick forbids. The plaintiffs bought
apps from third-party app developers (or manufacturers)
in Apple’s retail Internet App Store, at prices set by the
developers. The lawsuit alleges that Apple is a monopolist
——————
1 For this reason, it’s hard to make sense of the suggestion that Illinois Brick may not apply to claims for injunctive relief, ante, at 5, n. 1.
Under our normal rule of construction, a plaintiff who’s not proximately
harmed by a defendant’s unlawful conduct has no cause of action to sue
the defendant for any type of relief. Lexmark Int’l, Inc. v. Static Control
Components, Inc., 572 U. S. 118, 135 (2014) (although a plaintiff that
“cannot quantify its losses with sufficient certainty to recover damages
. . . may still be entitled to injunctive relief,” the requirement of proximate causation “must be met in every case”).
Cite as: 587 U. S. ____ (2019)
5
GORSUCH, J., dissenting
retailer and that the 30% commission it charges developers for the right to sell through its platform represents an
anticompetitive price. The problem is that the 30% commission falls initially on the developers. So if the commission is in fact a monopolistic overcharge, the developers
are the parties who are directly injured by it. Plaintiffs
can be injured only if the developers are able and choose to
pass on the overcharge to them in the form of higher app
prices that the developers alone control. Plaintiffs admitted as much in the district court, where they described
their theory of injury this way: “[I]f Apple tells the developer . . . we’re going to take this 30 percent commission . . .
what’s the developer going to do? The developer is going
to increase its price to cover Apple’s . . . demanded profit.”
App. 143.
Because this is exactly the kind of “pass-on theory”
Illinois Brick rejected, it should come as no surprise that
the concerns animating that decision are also implicated.
Like other pass-on theories, plaintiffs’ theory will necessitate a complex inquiry into how Apple’s conduct affected
third-party pricing decisions. And it will raise difficult
questions about apportionment of damages between app
developers and their customers, along with the risk of
duplicative damages awards.
If anything, plaintiffs’
claims present these difficulties even more starkly than
did the claims at issue in Illinois Brick.
Consider first the question of causation. To determine if
Apple’s conduct damaged plaintiffs at all (and if so, the
magnitude of their damages), a court will first have to
explore whether and to what extent each individual app
developer was able—and then opted—to pass on the 30%
commission to its consumers in the form of higher app
prices. Sorting this out, if it can be done at all, will entail
wrestling with “ ‘complicated theories’ ” about “how the
relevant market variables would have behaved had there
been no overcharge.” Illinois Brick, 431 U. S., at 741–743.
6
APPLE INC. v. PEPPER
GORSUCH, J., dissenting
Will the court hear testimony to determine the market
power of each app developer, how each set its prices, and
what it might have charged consumers for apps if Apple’s
commission had been lower? Will the court also consider
expert testimony analyzing how market factors might
have influenced developers’ capacity and willingness to
pass on Apple’s alleged monopoly overcharge? And will
the court then somehow extrapolate its findings to all of
the tens of thousands of developers who sold apps through
the App Store at different prices and times over the course
of years?
This causation inquiry will be complicated further by
Apple’s requirement that all app prices end in $0.99. As
plaintiffs acknowledge, this rule has caused prices for the
“vast majority” of apps to “cluster” at exactly $0.99. Brief
for Respondents 44. And a developer charging $0.99 for
its app can’t raise its price by just enough to recover the
30-cent commission. Instead, if the developer wants to
pass on the commission to consumers, it has to more than
double its price to $1.99 (doubling the commission in the
process), which could significantly affect its sales. In
short, because Apple’s 99-cent rule creates a strong disincentive for developers to raise their prices, it makes plaintiffs’ pass-on theory of injury even harder to prove. Yet
the court will have to consider all of this when determining what damages, if any, plaintiffs suffered as a result of
Apple’s allegedly excessive 30% commission.2
Plaintiffs’ claims will also necessitate “massive efforts to
apportion the recovery among all potential plaintiffs that
——————
2 Plaintiffs haven’t argued (and so have forfeited in this Court any
argument) that Apple’s imposition of the 99-cent rule was itself an
antitrust violation that injured consumers by raising the price of apps
above competitive levels. They didn’t mention the 99-cent rule in their
complaint in district court or in their briefs to the court of appeals.
And, as I’ve noted, they concede that they are seeking damages “based
solely on” the 30% commission. Brief in Opposition 5.
Cite as: 587 U. S. ____ (2019)
7
GORSUCH, J., dissenting
could have absorbed part of the overcharge,” including
both consumers and app developers. Illinois Brick, 431
U. S., at 737. If, as plaintiffs contend, Apple’s 30% commission is a monopolistic overcharge, then the app developers have a claim against Apple to recover whatever
portion of the commission they did not pass on to consumers. Before today, Hanover Shoe would have prevented
Apple from reducing its liability to the developers by
arguing that they had passed on the overcharge to consumers. But the Court’s holding that Illinois Brick doesn’t
govern this situation surely must mean Hanover Shoe
doesn’t either. So courts will have to divvy up the commissions Apple collected between the developers and the
consumers. To do that, they’ll have to figure out which
party bore what portion of the overcharge in every purchase. And if the developers bring suit separately from
the consumers, Apple might be at risk of duplicative damages awards totaling more than the full amount it collected in commissions. To avoid that possibility, it may
turn out that the developers are necessary parties who will
have to be joined in the plaintiffs’ lawsuit. See Fed. Rule
Civ. Proc. 19(a)(1)(B); Illinois Brick, 431 U. S., at 739
(explaining that “[t]hese absent potential claimants would
seem to fit the classic definition of ‘necessary parties,’ for
purposes of compulsory joinder”).3
——————
3 The
Court denies that allowing both consumers and developers to
sue over the same allegedly unlawful commission will “result in ‘conflicting claims to a common fund’ ” as Illinois Brick feared. Ante, at 12.
But Apple charged only one commission on each sale. So even assuming for argument’s sake that the 30% commission was entirely illegal,
Apple can only be required to pay out in damages, at most, the full
amount it received in commissions. To their credit, even plaintiffs have
conceded as much, acknowledging that because “there is only one 30%
markup,” any claim by the developers against Apple would necessarily
be seeking “a piece of the same 30% pie.” Brief in Opposition 12. It’s a
mystery why the Court refuses to accept that sensible concession.
8
APPLE INC. v. PEPPER
GORSUCH, J., dissenting
III
The United States and its antitrust regulators agree
with all of this, so how does the Court reach such a different conclusion? Seizing on Illinois Brick’s use of the
shorthand phrase “direct purchasers” to describe the
parties immediately injured by the monopoly overcharge
in that case, the Court (re)characterizes Illinois Brick as a
rule that anyone who purchases goods directly from an
alleged antitrust violator can sue, while anyone who
doesn’t, can’t. Under this revisionist version of Illinois
Brick, the dispositive question becomes whether an “intermediary in the distribution chain” stands between the
plaintiff and the defendant. Ante, at 6. And because the
plaintiff app purchasers in this case happen to have purchased apps directly from Apple, the Court reasons, they
may sue.
This exalts form over substance. Instead of focusing on
the traditional proximate cause question where the alleged overcharge is first (and thus surely) felt, the Court’s
test turns on who happens to be in privity of contract with
whom. But we’ve long recognized that antitrust law
should look at “the economic reality of the relevant transactions” rather than “formal conceptions of contract law.”
United States v. Concentrated Phosphate Export Assn.,
Inc., 393 U. S. 199, 208 (1968). And this case illustrates
why. To evade the Court’s test, all Apple must do is
amend its contracts. Instead of collecting payments for
apps sold in the App Store and remitting the balance (less
its commission) to developers, Apple can simply specify
that consumers’ payments will flow the other way: directly
to the developers, who will then remit commissions to
Apple. No antitrust reason exists to treat these contractual arrangements differently, and doing so will only
induce firms to abandon their preferred—and presumably
more efficient—distribution arrangements in favor of less
efficient ones, all so they might avoid an arbitrary legal
Cite as: 587 U. S. ____ (2019)
9
GORSUCH, J., dissenting
rule. See Copperweld Corp. v. Independence Tube Corp.,
467 U. S. 752, 763, 772–774 (1984) (rejecting an “ ‘artificial
distinction’ ” that “serves no valid antitrust goals but
merely deprives consumers and producers of the benefits”
of a particular business model).
Nor does Illinois Brick come close to endorsing such a
blind formalism. Yes, as the Court notes, the plaintiff in
Illinois Brick did contract directly with an intermediary
rather than with the putative antitrust violator. But
Illinois Brick’s rejection of pass-on claims, and its explanation of the difficulties those claims present, had nothing to
do with privity of contract. Instead and as we have seen,
its rule and reasoning grew from the “general tendency of
the law . . . not to go beyond” the party that first felt the
sting of the alleged overcharge, and from the complications that can arise when courts attempt to discern
whether and to what degree damages were passed on to
others. Supra, at 2–3. The Court today risks replacing a
cogent rule about proximate cause with a pointless and
easily evaded imposter. We do not usually read our own
precedents so uncharitably.
Maybe the Court proceeds as it does today because it
just disagrees with Illinois Brick. After all, the Court not
only displaces a sensible rule in favor of a senseless one; it
also proceeds to question each of Illinois Brick’s rationales—doubting that those directly injured are always the
best plaintiffs to bring suit, that calculating damages for
pass-on plaintiffs will often be unduly complicated, and
that conflicting claims to a common fund justify limiting
who may sue. Ante, at 11–13. The Court even tells us
that any “ambiguity” about the permissibility of pass-on
damages should be resolved “in the direction of the statutory text,” ante, at 8—ignoring that Illinois Brick followed
the well-trodden path of construing the statutory text in
light of background common law principles of proximate
cause. Last but not least, the Court suggests that the
10
APPLE INC. v. PEPPER
GORSUCH, J., dissenting
traditional understanding of Illinois Brick leads to “arbitrary and unprincipled” results. Ante, at 8. It asks us to
consider two hypothetical scenarios that, it says, prove the
point. The first is a “markup” scenario in which a monopolistic retailer buys a product from a manufacturer for $6
and then decides to sell the product to a consumer for $10,
applying a supracompetitive $4 markup. The second is a
“commission” scenario in which a manufacturer directs a
monopolistic retailer to sell the manufacturer’s product to
a consumer for $10 and the retailer keeps a supracompetitive 40% commission, sending $6 back to the manufacturer. The two scenarios are economically the same, the
Court asserts, and forbidding recovery in the second for
lack of proximate cause makes no sense.
But there is nothing arbitrary or unprincipled about
Illinois Brick’s rule or results. The notion that the causal
chain must stop somewhere is an ancient and venerable
one. As with most any rule of proximate cause, reasonable
people can debate whether Illinois Brick drew exactly the
right line in cutting off claims where it did. But the line it
drew is intelligible, principled, administrable, and far
more reasonable than the Court’s artificial rule of contractual privity. Nor do the Court’s hypotheticals come close
to proving otherwise. In the first scenario, the markup
falls initially on the consumer, so there’s no doubt that the
retailer’s anticompetitive conduct proximately caused the
consumer’s injury. Meanwhile, in the second scenario the
commission falls initially on the manufacturer, and the
consumer won’t feel the pain unless the manufacturer can
and does recoup some or all of the elevated commission by
raising its own prices. In that situation, the manufacturer
is the directly injured party, and the difficulty of disaggregating damages between those directly and indirectly
harmed means that the consumer can’t establish proximate cause under traditional principles.
Some amici share the Court’s skepticism of Illinois
Cite as: 587 U. S. ____ (2019)
11
GORSUCH, J., dissenting
Brick. They even urge us to overrule Illinois Brick, assuring us that “modern economic techniques” can now mitigate any problems that arise in allocating damages between those who suffer them directly and those who suffer
them indirectly. Brief for State of Texas et al. as Amici
Curiae 25. Maybe there is something to these arguments;
maybe not. But there’s plenty of reason to decline any
invitation to take even a small step away from Illinois
Brick today. The plaintiffs have not asked us to overrule
our precedent—in fact, they’ve disavowed any such request. Tr. of Oral Arg. 40. So we lack the benefit of the
adversarial process in a complex area involving a 40-yearold precedent and many hard questions. For example, if
we are really inclined to overrule Illinois Brick, doesn’t
that mean we must do the same to Hanover Shoe? If the
proximate cause line is no longer to be drawn at the first
injured party, how far down the causal chain can a plaintiff be and still recoup damages? Must all potential claimants to the single monopoly rent be gathered in a single
lawsuit as necessary parties (and if not, why not)? Without any invitation or reason to revisit our precedent, and
with so many grounds for caution, I would have thought
the proper course today would have been to afford Illinois
Brick full effect, not to begin whittling it away to a bare
formalism. I respectfully dissent.
The Asian Journal of Shipping and Logistics 33(4) (2017) 245-251
Contents lists available at ScienceDirect
The Asian Journal of Shipping and Logistics
Journal homepage: w w w .elsevier.com/locate/ajsl
A Case Study on the Recovery Criteria of Reliance Damage in Marine Transport Contract
and Charterparty
Jung Sun LEEa , Je Hyun LEEb
a
b
Assistant Professor,Gyeongnam National University of Science and Technology, Korea, E-mail:sunnylee@gntech.ac.kr (First Author)
Professor, Hannam University, Korea, E-mail:ljh69@hnu.ac.kr (Corresponding Author)
ARTICLE INFO
ABSTRACT
Article history:
Contracts bind the parties of a contract to the terms of the agreement. When one party breaches the
contract, the other party can suffer losses and claim damages, to be recovered from the breaching
person. To measure the damage, three measures are used: expectation damage, reliance damage
(wasted expenditure), and restitution. In this study, we have attempted to verify the concept of
measure of damage and the recovery criteria of reliance damage, based on three cases. Furthermore,
this paper discusses the direction of court judgments regarding the criteria measuring reliance
damage through case analysis. The two recent cases of CJ Logistics and Fulton showed that the
court considers causation and mitigation as criteria for wasted expenditure (reliance damage) under
British law. Further case research regarding causation and mitigation under the marine transport
contract and charterparty is needed to establish the trend in court judgments and then to provide
countermeasures to the parties.
Received 25 August 2017
Received in revised form 30 November 2017
Accepted 1 December 2017
Keywords:
Reliance Damage
Wasted Expenditure
Expectation Damage
Mitigation
Causation
Copyright © 2017 The Korean Association of Shipping and Logistics, Inc. Production and hosting by
Elsevier B.V. T h i s i s a n o p e n a c c e s s a r t i c l e u n d e r t h e C C B Y – N C – N D l i c e n s e
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
1. Introduction
A contract is a legal agreement to bind two parties. Each party performs
a certain duty during the period of the contract. However, breach of
contract often occurs unexpectedly. A breach of contract means one party
to the contract fails to perform contractual obligations within the time
specified in the contract. If one party fails to perform while the other party
fulfills its duties under the contract, the other party can seek damages due
to the first party’s breach.
Damages are designed to compensate the innocent party for losses by
the breach of contract rather than to punish the defendant. An assessment
of compensation begins with identifying the economic losses suffered by
the innocent party by the breach of contract. However, the party claiming
the breach of contract (the plaintiff) must prove that it has suffered loss or
damage as a result of the defendant’s breach and also that these were
unavoidable. The award of damages compensates the plaintiff for his loss
suffered, or in legal terms, places the plaintiff in the same situation,
insofar as money can do so, he would have been in if the contract had
http://dx.doi.org/10.1016/j.ajsl.2017.12.008
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Peer review under responsibility of the Korean Association of Shipping and Logistics, Inc.
246
A Case Study on the Recovery Criteria of Reliance Damage in Marine Transport Contract and Charterparty
been performed. Thus, an award of damages cannot place the plaintiff in a
better position than he would have been in had the contract been
performed.
Generally, the purpose of such damages is to place the claimant in the
position he would have been in had the contract not been breached. This
involves the projection of the so-called ‘expectation damage’ and
‘reliance damage’, which are compensatory damages. ˍ Compensatory
damage is the most common legal remedy and is a monetary award to
compensate the aggrieved party (non-breaching party) for losses.
The appropriate measure of damage by a breach of contract to protect
the interest of an innocent party under classical theory is clear in principle.
The expectation measure of damage clearly follows from the very
recognition of a contractual obligation. If the law recognizes that, by
virtue of a legally binding contract, the promisor has incurred an
obligation to provide a specified performance to the innocent party, the
innocent party must be entitled to the value of the performance, less the
saving of the cost of his own performance. The appropriate measure of
damage under the reliance theory is not as straightforward in principle. It
is to put the plaintiff in the position he would have been in if he had not
entered the contract, and this may be a matter of conjecture. The measure
can relate to opportunity cost or work done or sums expended. It is
usually regarded as a major obstacle in the reliance theory that the
expectation measure is the normal measure of damage in contract law.
However, it is reasonably clear, first, that the appropriate measure of
damage to satisfy the reliance interest should not exceed the expectation
measure.
Researches on the conceptual explanations of expectation and reliance
damages have been carried out based on the contract law. However, there
are not many studies on the damage calculation in marine transportation
contracts and charter contracts. Recently articles on the interpretation of
mitigation have been published in relation to the results of the judgments
of Omak Case and New Flamenco Case in the UK, but academic papers
are still in short. In academic research, Victor Goldberg (2015) discussed
mitigation on the New Flamenco case. Andrew Dyson (2014) discusses
mitigation by discussing the breach date rule. As a result of previous
studies, there are not many studies on the calculation of damages related
to marine transportation and charter contracts. Therefore, in this study, I
would like to give advice on how the parties involved in the transportation
practice should deal with the calculation of damages based on the trend of
judgments of three recent case cases.
Recently, international cases related to cost calculation in marine
transportation and charterparty have been witnessed. There are few studies
concerning reliance damage (wasted expenditure) in charterparty or
maritime transport. There are no studies on damage measures related to
charterparty. Using three recent cases, we will consider the measure of
damage in charterparty. However, these three cases show the results of
different judgments. Therefore, by comparing the three cases, we will try
to enhance the perspectives of the parties by examining the criteria of
wasted expenditure in court, including conceptualization of the wasted
expenditure as reliance damage.
The remainder of this paper is organized as follows. Section 2 describes
the basic theory regarding measure of damages by breaching contract.
Section 3 verifies the three cases related to wasted expenditure as reliance
damage and considers the trend of judgments. The final section
summarizes and concludes.
2. Measure of Damage and Recovery Criteria of Damage
Any breach of contract gives innocent party legal right to seek remedy
against damages from party in breach. Substantial damages (as opposed to
‘nominal damages ˎ ’) are monetary compensation for loss suffered as
consequence of other party’s breach. To obtain substantial damages from
other party, innocent party must show that they have suffered loss as
result of breach. Normal aim of court is to put the innocent party in
position they would have been in had the contract been properly
performed. Normal measure is loss of expectation and reliance loss may
be sought where loss of expectation is difficult to prove.
Fuller and Perdueˏ first proposed that there were three different types of
contract damages: (1) expectation damages; (2) reliance damages; and (3)
restitution damages.ː
2.1. Measure of Damage
2.1.1. Expectation Damage
When one party breaks a contract, typically the other party is awarded
expectation damages. Expectation damages are meant to put the other
party in the position they would have been in had the contract been
fulfilled. These are damages that are intended to cover what the innocent
party expected to receive from the contract. Calculations are usually
straightforward as they are based on the contract itself or market values.
The aim of expectation damage is to recover the profits that would have
been made had the contract been performed. Finally, expenses that the
innocent party accumulates in trying to mitigate damages can also be
recovered from the breaching party. In other words, expectation damage is
compensation that tries to place the harmed party in the position it would
have been in had the breach not occurred. Normally, the breacher has to
pay the amount that makes the innocent party the value of his contract in
every case. This is the value that the economic market places on contracts,
because it is to obtain this value that the contracts that are used in
economic markets are made. Generally, a court may award expectation
damages to a plaintiff to protect his expectation of receiving the
defendant’s performance. This is the most common award of damages.
There are, however, established limitations on expectation damage.ˑ
Expectation damages can only be recovered if it can be calculated to a
reasonable certainty. Where damages cannot be calculated to a reasonable
certainty, the injured party will only be able to recover nominal damages.
Typically, the issue of certainty arises in cases where the damages
suffered are in the form of lost profits. However, an injured party has an
obligation to try to mitigate damages. In fact, the injured party will not be
allowed to recover for any damages that could have been mitigated.
2.1.2. Reliance Damage (Wasted Expenditure)
Reliance damages are designed to place the plaintiff in the position he
_____________
ˎ
Nominal damage: If a plaintiff can prove that the defendant did, in fact, breach the
contract, but is otherwise unable to establish their particular loss or damage, a court may
award an order of nominal damages. The purpose of an award of nominal damages is to
acknowledge that breaching party has infringed innocent party’s legal rights.
ˏ
The landmark Yale Law Journal article on damages for breach of contract by Professor
Lon Fuller and law student William Perdue, Jr., has played a large part in defining the type
of damages associated with promissory estoppel.
ː
David G. Epstein, Melinda Arbuckle, Kelly Flanagan, “Contract Law’s Two “P.E.’s”:
_____________
Promissory Estoppel and the Parol Evidence Rule”, Baylor Law Review, p.407.
ˍ
ˑ
Graham Virgo, “The principles of the law of restitution”, 2006, Oxford Scholarship.
Case of Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. Ch. 1854).
A Case Study on the Recovery Criteria of Reliance Damage in Marine Transport Contract and Charterparty
would have enjoyed if the contract had never been made, which may be a
better position than if the contract had been performed. The basis of the
claim allows a plaintiff to recover money he essentially wasted due to the
defendant’s breach of the contract. Thus, the aim of reliance damage is to
put the innocent party into a position he would have been in had the
contract never been made.
Wasted expenditure loss is one of the methods for assessing recovery of
damages for breach of contract. A party may seek to claim damages based
on the expenses incurred in anticipation of the contract being performed.
This is also known as reliance loss. Wasted expenditure loss might be
claimed, for example, where it is impossible to calculate what the profits
would have been had the contract been performed or if the contract would
have proven unprofitable because of a subsequent drop in the market.
An action for the recovery of wasted expenditure is frequently referred
to as an action for the recovery of reliance damage and will usually result
in the plaintiff being put in the same position he was in before the contract
was made. ˒ Reliance damage will only be awarded in circumstances
where expectation damages are inadequate or cannot be established. If a
defendant can prove that a plaintiff would not have recovered his
expenditure if the contract had in fact been performed, the court will not
order an award of reliance damage. As discussed above, a plaintiff cannot
be placed in a better position than he would have been in had the contract
been performed.
Although expectation loss is the normal measure for assessing damages
for breach of contract a claimant may claim reliance loss where it is not
possible to calculate what his profits would have been if the contract had
been performed, or if he made a bad bargain and expectation – based
damage would not lead to a substantial recovery. It has been held that
expectation loss and reliance loss are mutually exclusive, so as to prevent
double recovery. The claimant should not recover his gross profits
expected under the contract as well as the wasted expenditure incurred in
reliance of the contract, which he intended to meet from the gross profit.
2.1.3. Restitution
In contrast to expectation and reliance interests, the discussion
regarding restitution interest in a breach of contract case pertains to
whether there can be a recovery of gains (i.e., benefits conferred to a party)
made from a breach of contract rather than the losses of the victim. In the
case of restitution, the court orders restitution if it orders the breaching
party to pay back to the other person the amount the aggrieved party
initially paid, to make the aggrieved party “whole” again.
Restitution, also known as restitutionary damage୓, is a type of remedy
that is calculated based on the gains of the defendant, rather than the
plaintiff’s losses. Restitution basically requires a defendant to forfeit gains
that he had unlawfully obtained to the plaintiff. In contract law, restitution
is used the most. Restitution in contract law is designed to restore the
injured party, or the party who suffered damages, to the position they had
before the formation of the contract. Parties that want restitution cannot
seek lost profits or earnings caused by the breach. To obtain restitution,
the plaintiff must include this claim in the initial complaint. Also,
_____________
˒
Marc Owen, “breach of contract-damages for wasted expenditure”, The Cambridge Law
247
restitution will not be awarded if the amount cannot be calculated with
certainty.
Restitution damages are also used when the use of expectation damages
is not practical. Restitution is usually awarded where one party has
provided a benefit to the other party and it is awarded to repay the party
providing the benefit the reasonable value of the benefit it gave. However,
the underlying factor is that a plaintiff cannot be awarded an amount
greater than the loss or damage that he has suffered as a result of the
breach in the restitution.
2.2. The Recovery Criteria of Damage
2.2.1. Causation
Causation should be applied in determining whether a breach of
contract is the cause of a particular loss, as applied in the law of
negligence. In common law, causation is a question that “must be
determined by applying common sense to the facts of each particular
case”, and it is a question that is informed by value judgments and policy
considerations.୔ For the purposes of the law of negligence, the question
of whether the requisite causal connection exists between a particular
breach of duty and a particular loss or damage is essentially one of fact, to
be resolved, on the balance of probabilities, as a matter of common sense
and experience. ୕ In a case of breach of contract, as in the position in
negligence, where the evidence is suggestive of multiple possible causes
of a particular item of loss claimed, it is sufficient that the breach of
contract was cause of the plaintiff’s loss. The particular loss or damage
claimed by the innocent party must be caused by the other party’s breach
of contract for that loss or damage to be recoverable. ୍ୌ It arises where
either the claimant is arguing that he lost some opportunity by virtue of
the breach or where some event happens after the breach that worsens the
losses.
2.2.2. Remoteness
Even if it might be thought that a particular item of loss is caused by the
breach of contract, there comes a point where the law says some losses are
too remote and, therefore, cannot be recovered from the contract
breaker.ˍˍ Thus, if a claimant’s losses are too remote, damages cannot be
recovered. They must be “within the reasonable contemplation” of the
parties and it must be made clear that the claimant will not recover all
losses: the defendant will recover the reasonably foreseeable or potentially
damaging loss. He will only recover those losses that are reasonably
foreseeable or, potentially, those for which the defendant has assumed
responsibility. Everyone, and the facts, must be recognized as natural and
routine, including the possibility of loss of expectation.
The well-known rule regarding remoteness of damage in the contract
context is that, “Where two parties have made a contract that one of them
has broken, the damages that the other party ought to receive in respect of
such breach of contract should be such as may fairly and reasonably be
considered either arising naturally, i.e., according to the usual course of
things, from such breach of contract itself, or such as may reasonably be
supposed to have been in the contemplation of both parties, at the time
they made the contract, as the probable result of the breach of it.”ˍˎ
Journal, 1985, p.24.
_____________
˓
Fridman states that, where the plaintiff has prepaid the entire amount of the contract, and
˔
Edmund Finnane, “Remedies-Contract Law: a practical guide”, 2013, p.14.
the other party has willfully breached the contract, there has been a total failure of such
˕
Greg Waugh, “Damages for Breach of Contract”, p.6.
consideration, and a claim for recovery of the money is based on restitutionary principles.
ˍˌ
Greg Waugh, “Damages for Breach of Contract”, p.6.
ˍˎ
Edmund Finnane, “Remedies-Contract Law: a practical guide”, 2013, p.15.
248
A Case Study on the Recovery Criteria of Reliance Damage in Marine Transport Contract and Charterparty
2.2.3. Mitigationˍˏ
The principle of mitigation applies to contract claims. In some cases,
there is an express term in a contract requiring a party, or all parties, to
mitigate their loss following breach. But even without such a term there is
a “duty” on the part of a party claiming damage to mitigate its loss, failing
which their damage will be reduced.ˍː The mitigation principle may lead
to a reduction in the plaintiff’s damage for failure to mitigate. It may also
affect the quantification of damage where the plaintiff has taken
reasonable steps to mitigate. Further, the taking of reasonable steps to
mitigate may actually increase the plaintiff’s loss, and the additional
amounts will be allowed as part of damage if the plaintiff’s actions were
reasonableˍˑ.ˍ˒ Where a party aggrieved by a wrong fails to minimize the
loss or has contributed to the occurrence of the loss, the recoverable
damage may be limited by the duty to mitigate loss or by a similar
principle available under the applicable law.ˍ˓
The breachee who refuses to mitigate will not be able to recover full
expectation damage. He can only recover expectation damage minus what
would have been saved had he mitigated. This is the law‘s way of
attempting to prevent waste; the plaintiff must take reasonable steps to
mitigate the loss and the defendant has the burden of proving that the
plaintiff failed to mitigate.
Thus, the rule of mitigation displaces the factual assessment of the
claimant’s breach position and replaces it with the position that the
claimant would have been in if he had acted reasonably. The question as
to whether the claimant acted “reasonably” is closely related to legal
causation. Causation and mitigation have been described as “two sides of
the same coin”. Central to the concept of legal causation is the notion that
a “cause” is “something that interferes with or intervenes in the course of
events that would normally take place”.᧭᧴
2.2.4. Compensatory Principle
At the root of all cases involving the assessment of damage is the
fundamental “compensatory principle”.ˍ˕ˎˌ
_____________
ˍˏ
The mitigation is considered in several rules and laws as follows: Article 77 of the
CISG also explains the obligation of mitigation from the party claiming breach of contract.
Next, on section 7.4.8 of the PICC, the defaulting party shall not be liable for the extent to
which alleged damage has been alleviated if the affected party has taken significant steps in
the infringement of the affected party. Under PECL Section 9.505, the defaulting party
shall not be held liable for damages incurred by the creditor to the extent to which the
creditor has taken reasonable measures. Article 350 of the Restatement of Contract-Second
Act of the United States of America also states that except where the victim fails to make
reasonable efforts to avoid losses, the victim may be exposed to excessive risk, you cannot
be compensated for losses that could be avoided without a numerical value.
ˍː
Edmund Finnane, “Remedies-Contract Law: a practical guide”, 2013, p.17.
ˍˑ
Damages are assessed as if the claimant acted reasonably, if in fact it did not act
The compensatory principle is a fundamental concept in contract law
and compensatory damage is the most common breach of contract remedy.
It provides that parties claiming compensation for breach of contract can
only recover their actual loss.
When compensatory damage is awarded, a court orders the person who
breached the contract to pay the other person enough money to get what
they were promised in the contract, elsewhere. This principle provides that
damages are awarded to place the innocent party in the same position, but
in no better position, than he would have been in had the contract been
performed.
Compensatory damages merely respond to the financial loss that may
flow from the breach of the claimant’s primary right to performance and
not to the breach itself.୎୍ However, while the principle is easy to state, its
application in practice reveals several difficulties.
3. Case Study Related to Wasted Expenditure as Reliance Damage
This study examines three cases that have recently been judged on the
criteria that affect the measure of reliance damage in marine and charter
contracts.
3.1. Case 1: A.P.Moller v CJ Logistics (Supreme Court 2016.5.27,
2014DA67614)
3.1.1. Facts
The plaintiff A.P. Moller Maersk, who chartered a vessel M/V Maersk
Mytilini, made a contract to use the container terminal in Gwangyang Port
with CJ on December 8, 2005. The maneuvered ships arrived in
Gwangyang Port on October 20, 2007 through Singapore, Singkang, and
Dalian, and it was scheduled to depart bound for Busan Port, Tanjung and
Suez Canal, Port Said, Piraeus, Konstanz, etc. after shipment on the same
day. The vessel Mytilini was scheduled to stop over while unloading and
loading the container cargoes in those ports. CJ Logistics (Defendant)
completed the unloading and loading of 1854 containers as soon as the
vessel arrived in Gwangyang port. However, at around 14:20 pm, the
vessel’s departure time, an employee of CJ Logistics caused an accident in
which the boom of 3 cranes crashed into the vessel, requiring repair of the
vessel before departing. The 1854 containers loaded on the vessel were
scheduled to deliver in different ports and the freight of cargo is all
different. Moreover, the plaintiff found that it was virtually impossible to
transport the cargo by 23:30 pm of November 13, 2007, after completing
the vessel repair. Therefore, the cargo was transshipped to the plaintiff’s
alternative vessels i.e., the ASTOR, Maersk Boston and AXEL Maersk,
and the plaintiff received the freight after transportation. Finally, the
plaintiff then proceeded to claim for damage against the defendant.
reasonably. If the claimant acted reasonably then all actual costs and benefits resulting from
its conduct will be taken into account.
ˍ˒
ˍ˓
Edmund Finnane, “Remedies-Contract Law: a practical guide”, 2013, p.18.
Koji Takahashi, “Damages for Breach of a Choice-of-court Agreement”, Private
International Law, Volume 10, 2008, p.86.
ˍ˔
Andrew Dyson & Adam Kramer, “There is no “Breach Date Rule”: Mitigation,
850 at 855 and remains as valid now as it was then. The rule of the common law is that
where a party sustains a loss by reason of a breach of contract, he is, so far as money can
Difference in Value and Date of Assessment”, Law Quarterly Review, 2014, p.263.
do it, to be placed in the same situation, with respect to damages, as if the contract had
ˍ˕
been performed.”
This principle was affirmed by the House of Lords (as it was then known) in the well-
known case of the “Golden Victory” (2007) where it was said: “The fundamental principle
ˎˌ
governing the quantum of damages for breach of contract is long established and not in
charters”, p.1.
Clive Aston, LMAA President, “The compensatory principle of damages in voyage
dispute. The damages should compensate the victim of the breach for the loss of his
ˎˍ
contractual bargain. The principle is succinctly stated by Parke B Robinson v Harman 1 Ex
Journal of Obligations and Remedies, 2003, p.67, 69.
Catherine Mitchell, ‘Promise, Performance and Damages for Breach of Contract’,
A Case Study on the Recovery Criteria of Reliance Damage in Marine Transport Contract and Charterparty
3.1.2. Decisions of the Courts
The judgments of the first, second and third courts were the same. Since
the governing law for the previous contract of the terminal use is British
law, the extent of damages must be judged in accordance with British law.
Under British law, the purpose of damages is to put the party into a
position he would have been in had the contract not been breached; it
protects the expectation interest and puts the party in the same position,
but in no better position.
There are several ways to calculate the repudiatory loss as follows:
expectation or loss of bargain, reliance or wasted expenditure, and
restitution. According to the precedent of the British Court, a party can be
compensated for damage by referring to the expense that it made if it is
impossible to calculate the lost profits. And a party may seek to claim
damage based on the expense it incurred in anticipation of the contract
being performed.
Considering the fact that the plaintiff completed the transportation by
transshipment of the cargoes to three other vessels owned by the plaintiff,
it is not true that the plaintiff has lost the profits of the freight for the
cargo. It is extremely difficult to calculate the individual freight for each
cargo since the 1854 containers shipped were scheduled to unload in
different ports. Therefore, if the accident had not occured, there would be
no data to judge how much profit the plaintiff would have been able to
obtain from these vessels. So, it is difficult to calculate the expectation
loss and to apply the measure of wasted expenditure is possible.
Even though defendant CJ Logistics said, ‘The plaintiff has completed
the transportation and received the freight, which is the measure to reduce
the loss caused by the breach of contract, so the plaintiffs didn’t suffer a
loss equivalent to the charter fee’, the court judged that the defendant’s
allegations, based on Omak Maritime Ltd. v Mamola Challenger Ltd.
[2011], could not be accepted because it is the defendant’s responsibility
to demonstrate that the plaintiffs were not harmed by such mitigation
measures.
Even if the alternative vessels that shipped the transshipment from the
vessel Mytilini were supposed to operate using the scheduled routes, it
cannot be judged that the plaintiff did not suffer any loss. In other words,
the freight earned is in a price relationship with the alternative vessels and
has nothing to do with the crushed vessel. According to the defendant’s
complaint, it creates a strange conclusion when no damage is caused to a
shipping company with a large number of alternative vessels.
In sum, since it is hard to calculate or prove the losses under different
loading and unloading ports of the 1854 containers, a claim for wasted
expenditure is allowed as compensation for damage. But to prevent
damage based on wasted expenditure under British law, the defendant
must prove that the breached contract is deficit. However, there is no
assertion or proof regarding defendant CJ Logistics. If the plaintiff did not
have other vessels or the vessels were not capable of additional shipments,
the plaintiff would have had to arrange an alternative vessel separately
and, in that case, would have actually spent the charter and fuel costs.
Moreover, if the alternative vessel had not been arranged, the plaintiff
would have been liable for damages to the shippers in the contract of
carriage.
3.2. Case 2: Globalia Business Travel S.A.U. v Fulton Shipping Inc. of
Panama
3.2.1. Facts
Fulton Shipping Inc. (“Owners”) bought the 1973-built small cruise
249
ship New Flamenco, which they had previously managed. The Vessel was
chartered in 2004 by Globalia Business Travel (“Charterers”) from Fulton.
In 2007, the parties met to negotiate an extension. The owners alleged that,
in that meeting, a two-year extension of the charter was agreed (up to
November 2009). The charterers, who disputed having reached the
agreement, redelivered the Vessel in October 2007. The ship owners sued
for breach of contract. Damage was calculated by reference to the net loss
of profits that they alleged that they would have earned during the
additional two-year period. In reality, however, at the time of redelivery
there were no equivalent substitute time charter fixtures available.
Therefore, the ship owners sold the vessel for US$ 23,765,000 in October
2007. If the vessel had been sold when the charter was contractually due
to end in 2009, the value would have been only US$7 million. The ship
owners had made a US$16.7 million profit as a direct result of the
charter’s breach of contract. The argument of the claimants was that, the
difference in value was legally irrelevant and should not be taken into
account in assessing the damages payable by the charterers. Hence the
defendants were liable to make good the loss of profits incurred by the
claimants.
3.2.2. Decisions of the Courts
By the time of the arbitration hearing in 2013, it was clear that, due to
the 2008 financial crisis, the value of the vessel in 2009 would have been
approximately US$7 million – significantly lower than her actual 2007
sale price. The charterers argued, therefore, the owners had benefited from
the charterers’ breach and should give credit for the difference between
the vessel’s sale price and her 2009 value. Owners argued that the
difference in value was legally irrelevant. The arbitrator agreed with
Charterers, with the effect that the owners recovered no damages because
the credit for the sale exceeded the owners’ loss of profit claim applying
the ‘compensatory principle’.
On first-instance decision, the Commercial Court overturned the
arbitrator’s decision, holding that the benefit the owners achieved through
the higher 2007 sale price had not been legally caused by the breach but,
rather, by market fluctuations and by the owners’ independent commercial
decision to sell the vessel when they did. The court held that although
factually the breach caused the mitigation and the mitigation caused the
benefit or sale, this was not “legally sufficient to establish the necessary
causative link between breach and benefit”. Thus, the owners’ decision to
sell the vessel was a decision made independently of the breach.
The charterers appealed to the Court of Appeal. The court held that the
important question in this area of law was whether there was an available
market. If there was not, then the prima facie measure of damage for an
innocent owner was the difference between the contractual hire and the
cost of earning that hire, less any amount that the owner could earn by
reason of trading the vessel. If, rather than trading the vessel, the owners
decided to sell it – and it was reasonable for them to do so – there was no
sound legal reason not to take into account the benefit of a sale of the
vessel at the top of the market, since the sale was both an act of mitigation
and the benefit that the owners received. Thus, for any benefit to be taken
into account in assessing damage, the court held that it was sufficient to
show that it arose in the ordinary course of business from the
consequences of the breach that occurred.
The Supreme Court preferred the approach in the Commercial Court
and allowed the owners’ appeal on the basis that the alleged benefit was
legally irrelevant: the fall in value of the vessel was not caused by the
charterers’ breach, or by a successful act of mitigation. The Supreme
Court stated that the essential question was whether there was a
250
A Case Study on the Recovery Criteria of Reliance Damage in Marine Transport Contract and Charterparty
sufficiently close link between the loss and the benefit rather than whether
they were similar in nature, and the absence of this relevant causal link
precluded the charterers from setting off the difference in market value
against the owners’ claim. Thus, if a benefit is to be brought into account,
it must have been caused by a breach of charterparty or by a successful act
of mitigation. That was not the case here. The difference in value of the
vessel was caused by the financial crash in 2008, rather than by the
charterers’ breach. The ship sale was a type of transaction that the owners
were able to enter into, irrespective of the charterers’ breach of the
charterparty. That breach may have provided an occasion that enabled the
owners to sell the vessel, but the decision to sell the vessel was legally
independent of the charterers’ breach. If the charterers had not repudiated
the charterparty, the owners could have chosen to sell the vessel on terms
that enabled the new owner to perform the remainder of the charterparty.
In fact, the owners had themselves purchased the vessel during the
currency of the charterparty. There was no reason to assume that a sale
would have followed from the lawful delivery at the end of the
charterparty and, had the value of the vessel risen between 2007 and 2009,
the owners would not have been able to claim that positive difference in
value as an additional head of claim. The sale of the vessel was also not an
act of mitigation, because it was incapable of reducing the loss of the
owners’ income stream. The only relevant loss was a loss of income, not a
loss of capital.
3.3. Case 3: Globalia Business Travel S.A.U. v Fulton Shipping Inc. of
Panama
3.3.1. Facts
Mamola Challenger Shipping Co. contracted to charter Mamola
Challenger to Omak Maritime Ltd. (Omak) for five years. Omak in turn
planned to subcharter the ship to Shell Nigeria Exploration & Production
Co. Ltd. (Shell Nigeria) for use in the oil industry. The charterparty was a
good deal for Omak because the charter hire was set at US$13,700 per day,
which was US$7,500 less than the market rate of US$21,347. Moreover,
the owner agreed to install an extra crane on board for free. It accordingly
incurred expenses preparing for this charter, for example, by removing a
crane from another vessel to install it on the Mamola Challenger.
However, Shell Nigeria ultimately refused to subcharter the vessel
because the National Petroleum Investment Management Services would
not approve the deal. Omak subsequently repudiated the charterparty and
the owner elected to terminate.
As a result, the money the owner had spent on removing the crane and
otherwise preparing for the charterparty was wasted. However, the
termination of the contract freed the owner to enter more lucrative
contracts. The vessel was delivered for the first such charterparty only a
week after the owner terminated the contract with Omak. The increased
profit that the owner would receive during the five years that they had
planned to charter the vessel to Omak was calculated to exceed the
expenses that were discarded while preparing for it. At the time of the
repudiation, Mamola did not suffer any direct loss as they were able to
take advantage of the fact that the then prevailing market rate of hire was
higher than the charterparty rate of hire. Nonetheless, Mamola made a
claim for the expenses incurred in making the modifications before
delivery, in accordance with the charterparty.
3.3.2. Decision of Courts
Traditionally, contractual damages have been awarded for either a loss
of bargain (expectation loss) or in respect of expenses incurred in reliance
on the assumption that the contract would be properly performed (reliance
loss). The latter basis of damages was taken by the arbitral tribunal as
applicable to the facts and it was held that they were entitled to claim for
the expenses incurred. The owner, nevertheless, claimed US$675,000
damages for their wasted expenditure, and was awarded US$86,534 by a
LMAA tribunal.
The Court of Appeal considered that the sum of damages that an injured
party was entitled to was equal to the benefit it expected to earn from
performance of the contract less the costs it would have had to have
incurred in order to earn that benefit. These costs would include not only
any sum he would have had to pay to the party in breach but also any
expenses he would have had to incur in preparation for performance of the
contract. It was only in this way that damages could be calculated so as to
comply with the fundamental principle. Applying this reasoning to the
facts, assessment of Mamola’s net overall position demonstrated that no
loss had in fact been suffered. This was because, as a consequence of the
repudiation, Mamola was able to hire the vessel out at a higher rate than
the charterparty rate of hire. Accordingly, in determining the quantum of
damages, the benefit obtained from the repudiation outweighed the
expenses incurred and, as such, no net loss had been suffered.
Accordingly, the plaintiff was not entitled to be placed in a better
position than he would have been in if the contract had not been breached.
The Court of Appeal accordingly held that: “To award substantial
damages, measured by wasted expenditure, where the owners have, as a
result of the charterers’ breach, been able to trade the vessel at the higher
market rates and have ‘more than recuperated’ their loss, would be wrong
in principle. Such an award would place the owners in a better position
than they would have been in had the contract been performed. Moreover,
damages for breach of contract are intended to compensate for loss
suffered and the owners have, as a result of their own efforts to mitigate
their loss, suffered no loss.”
4. Conclusions and Implications
In breach of contract, an aggrieved party is entitled to bring an action
for compensatory damages in relation to expectation damage and reliance
damage. The practitioner needs to assess whether a reliance or expectation
damage claim should be made.
In all three cases analyzed in this study, the expectation damage can not
be calculated, so it is a matter of calculating the wasted expenditure as the
reliance damage. These cases refer to mitigation as a criterion for
estimating wasted expenditure as the reliance damage.
According to the principle of compensation, in the case of a breach of
contract, the innocent party must take steps to minimize the loss by breach
of contract (mitigation), and the profits gained from such action shall be
calculated in the compensation for damages, and that such profits should
not be reimbursed that exceed the initial profit (principle of
compensatory). Based on this mitigation law, the Omak Case among the
three cases, did not recognize the wasted expenditure incurred in the high
court. Of course, this case needs to observe the judgment of the final court.
However, in the CJ Logistics Case ruled by the court of Korea, CJ
Logistics claimed that the measures taken by the owner to reduce the loss
did not have to be compensated to the owner who had not suffered
damage as one of mitigation like Omak Case. However, this argument
was not accepted over the course of three trials and the courts made a
judgment that the defendant CJ Logistics should compensate the damage
A Case Study on the Recovery Criteria of Reliance Damage in Marine Transport Contract and Charterparty
to the plaintiff A.P. Moller.
In the Fulton Case, the Supreme Court ruling in 2017 stipulated that the
shipowner’s actions taken for mitigation should be compensated for by
determining that there is no causation with the result of contract breach.
Considering the three cases in marine transport and charter contracts,
the wasted expenditure as the reliance damage is considered in calculating
the damages that are not possible to apply to expectation damage. Also,
the principle of the British law is that innocent parties cannot expect
excess profits from mitigation, and it was once again confirmed that the
innocent party should take mitigation measures to minimize the loss, as a
criterion to be recognized as the wasted expenditure in calculating the loss
in relation to the recent reliance loss. However, in the two cases of CJ
Logistics and Fulton, it is concluded that the causation as a result of the
breach of the contract must be taken into consideration in determining the
mitigation.
In this study, we have attempted to investigate the measure of damages
of three marine transport and charter contracts and the concept of wasted
expenditure as reliance damage. Moreover, this paper attempts to discuss
the direction of the court’s judgments through case analysis, given a
shortage of research papers for concerning damage measures related to
marine transport and charter contracts. Through this research, we
identified the criteria of the court’s judgments in breach of contract, which
are based on British law. In British law, mitigation and the compensatory
principle are major factors used for measuring damage. In recent cases,
causation is also an important factor when the result of the mitigation is
judged. It is necessary to have consistent direction of the judgments
through continuous observation. Through such continuous observation, it
will be possible to provide countermeasures to parties involved in
maritime transport and charter contracts after breach of contract.
Furthermore, research on mitigation and causation criteria of wasted
expenditure is warranted.
251
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