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26 July 2017
The Supreme Court recently handed down its judgment in New Flamenco (Globalia Business Travel SAU of Spain v Fulton Shipping Inc). In this long-awaited decision, the court considered whether a benefit obtained by the owners relating to the sale of the vessel following the charterers' repudiatory breach of a charter should be taken into account in assessing the damages that the owners were entitled to recover.
The New Flamenco was a small cruise ship that was time chartered from February 2004 to October 2007. The charter period was extended by two years, but the charterers denied that they had agreed to any extension and redelivered the vessel at the end of the original period. The charterers were found to be wrong and in breach of the charter. Following redelivery, the owners terminated the charter on the basis that the charterers' conduct amounted to an anticipatory repudiation of the charter. Having terminated the contract, the owners sold the ship for a price that was significantly higher than the price that they would have achieved had they sold the vessel at the time when the vessel should have been redelivered.
The owners then claimed damages from the charterers for loss of profit during the extension period. The charterers argued that the owners were required to give credit for the difference in the price between that which they sold the vessel for after the early redelivery and the price for which the vessel could have been sold at the contractual redelivery date in November 2009. If allowed, this credit would have reduced the owners' claim for damages to a nominal amount.
The matter originated in an arbitration where the arbitrator held for the charterers and found that the owners' sale of the vessel shortly after the early redelivery was an act of mitigation that was caused by the charterers' repudiatory breach of the charter. Consequently, the arbitrator held that the benefit gained from selling the vessel should be taken into account when considering the net loss suffered by the owners.
The arbitrator's decision was appealed to the Commercial Court, which disagreed and decided in favour of the owners. Justice Popplewell found that the owners were not required to give credit to the charterers for the benefit they had obtained by selling the vessel in October 2007 as it "was not a benefit which was legally caused by the breach". He also found that the owners' decision to sell the vessel was driven by commercial factors which were independent of the repudiation of the charter. Indeed, the owners could have sold the vessel at any time. For this reason, Popplewell concluded that the capital benefit gained by the owners was of a different kind to the income loss as a result of the breach.
The Court of Appeal disagreed with Popplewell and reinstated the arbitrator's award. The view of the court was that as long as long as the act of mitigation "arises out of the consequences of the breach and is in the ordinary course of business and benefits the claimant", any benefit should be taken into account in assessing the amount of loss. The court highlighted that an important question in this context is whether there is an available market. If there is no available market, the prima facie measures of loss for an owner would be the "difference between contractual hire and the cost of earning that hire (crew, wages, cost of fuel, etc)". If an owner makes an additional profit by trading the vessel, that additional profit should also be taken into account in assessing damages. Further, if an owner decides to sell the vessel, the court was of the opinion that there was no sound reason why the benefit gained by selling the vessel at a high price should not be taken into account, as this a step taken in mitigation which had brought about a benefit to the owner.
The owners appealed to the Supreme Court, and in a unanimous judgment it overturned the Court of Appeal's judgment and restored Popplewell's ruling. In arriving at its decision, the court explained that the reason why the benefit did not need to be taken into account in assessing damages was because the benefit was not of the same nature as the loss caused by the charterers. The court found that the "the essential question is whether there is a sufficiently close link between the two". In this case, the premature redelivery of the vessel had not necessitated the sale of the vessel and it was not the legal cause of it. In Lord Clarke's words "there was nothing about the premature termination of the charterparty which made it necessary to sell the vessel either at all or at any particular time". The decision to sell the vessel had nothing to do with the charterers and had arisen solely as a result a commercial decision made by the owners.
Further, in dealing with the argument that the sale of the vessel should be considered as a mitigating act by the owners, the court held that realising the capital value of the vessel through a sale could not and did not mitigate the loss of the income stream for the two-year extension period of the charter. Even though the owners were able to sell the vessel at what was considered to be the peak of the market, it did not reduce or prevent the loss of the charter hire income stream that would have been earned during the extension period.
New Flamenco is an important decision and highlights the issues that can arise in relation to the measure of damages and mitigation in the context of a breach of contract. The Supreme Court's judgment provides interesting guidance on this area of law and sets out – at least to a certain extent – the boundaries of the law relating to mitigation and what types of acts by an innocent party can reduce the amount of damages recoverable arising from a breach of contract.
For further information on this topic please contact Chris Grieveson or Mads Ødeskaug at Wikborg Rein by telephone (+44 20 7367 0300) or email (firstname.lastname@example.org or email@example.com). The Wikborg Rein website can be accessed at www.wr.no.
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