We are now eight years on from the shockwave generated in the shipping markets as a result of the Lehman crash. One of the early casualties was Glory Wealth Shipping who found themselves involved in a number of disputes due to the default of their business partners. One such case involved Flame SA who repudiated a long term COA with Glory Wealth.
The dispute with Flame recently made its way back to the High Court having first been before that Court in 2013. Mr Justice Teare was the judge on both occasions. His first judgment (Flame SA v Glory Wealth Shipping Pte Ltd [2013] EWHC 3153 (Comm)) was the subject of much commentary as it involved a review of the authorities leading up to the controversial 3/2 decision of the House of Lords in the Golden Victory [2007] 2 Lloyds Rep 164. For those interested, see the in depth review of that case by David Winterton in the LMCLQ on 16 February 2015. In short, Flame argued unsuccessfully that Glory Wealth could not receive damages because as a result of their own deteriorating financial situation they would have been unable to perform the COA and earn the freight they were claiming they had lost as a result of Flame’s breach.
Under English law, damages for breach of a contract are usually based on what is called the “compensatory principle” – essentially that the innocent party ought to be placed in the position that he would have been in had the contract been performed. Post Golden Victory the law is that the party seeking damages has to prove on the balance of probabilities that, had there been no repudiation, they would have been able to perform their obligation when the time came for performance.
After losing in the High Court in 2013 Flame SA went back to the Tribunal. This time their argument was based on the fact that the freight due to Glory Wealth from Flame was already being diverted to other companies (principally because Glory Wealth were trying to avoid those funds being attached in New York by other creditors). Flame managed to persuade the arbitrators to find in their favour. The argument was that the freights on future shipments would never have been received by Glory Wealth so how could they possibly suffer a loss as a result of their non-payment?
On appeal back to the High Court/ Mr Justice Teare, this time by Glory Wealth as the appellant, the judge held that the Tribunal did not take into account that the right to receive freight is not just limited to the right to receive it into one’s bank account but also the right to give it away. What Glory Wealth had done in fact was to give the freight away to other companies. The fact that they had done that to avoid attachments of those funds by other creditors was not material. Flame’s breach had deprived Glory Wealth of the benefits of ownership of the right to freight under the underlying contract and, as such, Glory Wealth (and by extension its creditors) were entitled to an award in excess of US$3 million. The case citation is Glory Wealth Shipping PTE Ltd v Flame SA, February 23, 2016, [2016] EWHC 293 (Comm).
The collapse of shipping companies often leads to a long tail of litigation with administrators and receivers taking all possible steps to gather in outstanding debts due to the creditors. The Golden Victory case remains good law and creates considerable uncertainty. We expect to see more arguments about the quantum of damage recoverable after a repudiation of a long term contract where the innocent party is itself facing financial difficulties as a result of the poor market.
