[2] Since it was returned late, the new charterer, Cargill, agreed to take the ship, but only at $31,500 a day, since the freight market had fallen sharply.

Mercator argued Transfield should pay the amount they had lost on the new chartering contract because of the late return, which adding up the cost over the months would be $1,364,584.37.

The dissenting arbitrator, however, concluded that a reasonable person in Transfield's position would not have understood he was assuming liability for the risk of the type of loss that occurred.

[4] In concluding his opinion, Rix LJ stated that the argument that: "damages for late redelivery should be limited to the overrun period measure unless the owners can show that, at the time of the contract, they had given their charterers special information of their follow-up fixture, is both undesirable and uncommercial.

"[4]The House of Lords reversed Court of Appeal's decision, holding unanimously that the loss of profits in the next charter was not within the rule in Hadley v Baxendale.

He noted Goff J's statement in Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] Lloyd’s Rep 175, 183, asking what a reasonable person would have thought his responsibility was.

“The test appears to be: have the facts in question come to the defendant’s knowledge in such circumstances that a reasonable person in the shoes of the defendant would, if he had considered the matter at the time of making the contract, have contemplated that, in the event of a breach by him, such facts were to be taken into account when considering his responsibility for loss suffered by the plaintiff as a result of such breach.” Lord Hoffmann said one should look at "the background of market expectations".

It was contrary to the principle in Victoria Laundry (Windsor) v Newman Industries[8] to think that Transfield was going to be liable for any loss, however enormous, when it had no knowledge or control over what contract Mercator might be making next.

He noted Blackburn J said in Cory v Thames Ironworks Co[9] saying if the damage were exceptional and unnatural it would be harsh to make a party liable for it, because had he known he would have pushed for more time in the first place.

Lord Rodger and Lady Hale on the other hand, decided the case on the more narrow ground, that the rule in Hadley was simply a question of what is foreseeable or ‘likely’.