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Court of Appeal considers damages arising on repudiation and the Owners duty to mitigate

In a recent significant case, the Court of Appeal has rejected the High Court’s novel attempt to circumvent the law relating to the damages that can be recovered following a repudiation of a contract.

In Fulton Shipping Inc. of Panama v Globalia Business Travel S.A.U. (the “New Flamenco”) [2015] EWCA Civ 1299, the Court of Appeal upheld the initial findings of the arbitrator that a benefit which arose from the sale of a vessel by the owners, following the charterers’ repudiation of a time charter, must be taken into account when assessing damages, since the sale was a step taken in mitigation.

The Facts

The New Flamenco (the “Vessel”) was chartered by her then owners on 13 February 2004, to the Defendants (“Charterers”). The Claimants (“Owners”) bought the Vessel on 4 March 2005, and entered into a novation agreement, assuming the rights and liabilities of the owners under the charterparty. Shortly following this, as the new Owners they agreed with Charterers to extend the charter for two years to 28 October 2007 (“Addendum A”). A further extension to the charter was then purported to have been agreed, which amended the termination date to 2 November 2009 (“Addendum B”).

Charterers disputed having made the agreement recorded by Addendum B and maintained their entitlement to redeliver the Vessel on 28 October 2007, in accordance with Addendum A. The Owners treated the Charterers as in anticipatory repudiatory breach and on 17 August 2007, accepted the breach as terminating the charterparty.

The Vessel was redelivered on 28 October 2007. Shortly before redelivery, the Owners entered into a Memorandum of Agreement for sale of the Vessel for USD 23,765,000. Owners then commenced arbitration against Charterers.

The Award

By the time of the hearing in May 2013, it was apparent that there was a significant difference between the value of the Vessel at October 2007 when Owners sold it, and at November 2009 when the Vessel should have been redelivered. The arbitrator found the November 2009 value of the Vessel to be USD 7,000,000 which is a fall in value of USD 16,765,000 from October 2007. The question here was whether the Charterers were entitled to a credit of USD 16,765,000 in respect of the benefit that accrued to the Owners by selling the Vessel in October 2007. The arbitrator found that the sale of the Vessel by the Owner in October 2007 was caused by the Charterers’ breach and was in reasonable mitigation of damages and therefore should be taken into account.

The Commercial Court Judgment

The question on appeal to the Commercial Court was whether the difference in value constituted a benefit which, on principles of mitigation and avoidance of loss, should be taken into account in the Owners’ claim for breach of contract. Popplewell J held that it should not. He gave particular emphasis to the fact that the Owners’ decision to sell an asset acquired before breach was not caused by the breach, rather it was independent of the breach.

The Court of Appeal Judgment

The Court of Appeal reversed Popplewell J’s decision, restoring that of the arbitrator. The key points from Lord Justice Longmore’s judgment are as follows:

Mitigation

If a claimant adopts, by way of mitigation, a measure which arises out of the consequences of the breach and is in the ordinary course of business and such measure benefits the claimant, that benefit is normally to be brought into account in assessing the claimant’s loss unless the measure is wholly independent of the relationship of the claimant and the defendant.

The usual measure of damages is the difference between the contract price and the market price at the time when the goods ought to have been delivered. However, this does not apply where there is no available market. Instead the measure of loss is the difference between the contractual hire and the cost of earning that hire. The shipowner cannot, however, claim this measure if he is able to mitigate his loss, and any additional loss or profit arising from such mitigation will be taken into account. He is not, in these cases, speculating on the market, rather he is just bringing into account the consequences of his decision to mitigate his loss.

If an owner mitigates his loss by selling a vessel, it is not easy to see why the benefit the owner secures by selling the vessel should not be brought into account just as much as benefits secured by spot chartering the vessel during the unexpired term of the charterparty are to be taken into account. Nor is there any reason why the value of that benefit should not be calculated by reference to the difference between the value of the vessel at the time of the sale and its value at the time when the charterparty was due to expire.

Causation

A sufficient formulation of the causative link required between breach (of the charterparty) and benefit (from the sale) is that the benefit must “arise from the consequences of the breach”.

Fairness and Justice

Although some authorities support the principle that it would be contrary to fairness and justice if the defendant were to be allowed to appropriate the relevant benefit when that benefit was the fruit of something which the innocent party has done or acquired for his own benefit, the arbitrator was entitled to remind himself of the even more fundamental principle that a claimant who sustains loss is to be placed in the same situation as if the contract had been performed. In this case, the Owners had made a considerable profit from the action they took by way of mitigation what would otherwise have been an undoubted loss. That profit arose from the consequence of the breach and should therefore be brought into account.

This decision is likely to be of interest in circumstances where an Owner makes a gain as a result of the Charterers’ repudiation. At the moment that seems unlikely given that shipping markets are at all time lows but if the market picks up then this case could be of considerable relevance if charters are entered into now, the market picks up and the Charterer falls into financial difficulties.

You are welcome to contact BDM Law to discuss any queries you may have in respect of the issues raised in the “New Flamenco”. We are currently advising clients of their options in relation to numerous potential repudiations by Charterers in the current difficult shipping market.

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