Keeping the Benefits of a Breach

July 2014

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This Commercial Court case explores the extent to which a party is required to mitigate its loss as a matter of contract law following the repudiation of a charterparty. The Court held that the owners of the M/V “New Flamenco” (the “Vessel”) were not required to give the charterers any credit for the benefit in realising the capital value of the Vessel in October 2007 (upon early redelivery in breach of charterparty) vis-à-vis the originally negotiated redelivery date of (up to) November 2009.

Fulton Shipping Inc (“Owners”) bought the Vessel (a small cruise ship, built in 1972) from her former owners in March 2005 and purportedly entered into a novation agreement with Globalia Business Travels S.A.U. (“Charterers”), under which they (i) assumed the rights and liabilities of her former owners under the relevant NYPE form of charterparty and (ii) extended the charter period by two years (to October 2009). Charterers disputed that such agreement had been reached and redelivered the Vessel in October 2007.

In arbitration, the Tribunal found that an agreement to extend the charter had indeed been reached and had to decide how to calculate damages in respect of Charterers’ breach for early redelivery.

The Vessel was redelivered on 28 October 2007 and, shortly before that date, the Owners entered into a Memorandum of Agreement for sale of the Vessel for US$23,765,000.

Whereas had the Vessel been sold when she should have been redelivered, the price that would have been realised would have been substantially less (approximately US$7,000,000) because the market had fallen between 2007 and 2009.

The Owners advanced their claim for damages for early redelivery by reference to the net loss of profits which they alleged they would have earned during the additional two year extension. Such profits were detailed in a schedule (i) identifying the revenue which would have been earned under the charterparty; and (ii) giving credit for the costs and expenses which would have been incurred in operating the Vessel in providing the charterparty service for those two years, but which had been saved as a result of the sale of the Vessel. The amount claimed was EUR7,558,375 (approx. US$10,330.000).

Charterers had argued that the sale was by way of mitigation of Owners’ loss and that Charterers were entitled to benefit from that mitigation.

Owners initially submitted that they were entitled to damages for a net loss of profit over the additional two years, less expenditure saved, and they should only be required to reduce their claim to take into account the would-be reduction on the re-sale value of the Vessel in 2009. In an “about-turn”, Owners later sought to argue that actually the drop in the shipping market between 2007 and 2009 was irrelevant to the assessment of damages. Owners tried to retract their claim submission to the effect that credit should be given to the Charterers to take into account the would-be reduction on the re-sale value of the Vessel in 2009 but this was refused by the Tribunal.

The Tribunal held that Charterers were in fact entitled to a credit, taking into account the difference between the value of the Vessel in 2007 vis-à-vis 2009. This credit amounted to EUR 11,251,677 (approximately USD 16,765,000). The effect of this on Owners claim was that it was reduced to less than zero. Owners appealed the decision of the Tribunal.

 

The Commercial Court

 

The issue for determination was whether Owners had to give credit for the capital value, having sold the Vessel upon repudiation in 2007 for a greater sum, than the value of the Vessel upon the charterparty redelivery date (2009).

 

In essence, Owners argued:

 

  • the benefit enjoyed by Charterers (i) arising out of the breach; and (ii) out of mitigation, could only be taken into account if it was the same kind of loss as that being claimed by Owners;
  • in the above regard, capital value of the Vessel was separate and quite distinct from the loss of an income stream;
  • alternatively, mitigation could not apply to the exercise of rights obtained by Owners for their own benefit and prior to the breach (i.e. Owners’ pre-existing proprietary rights); and
  • alternatively, the benefit was not sufficiently causally linked to the breach. 

The Commercial Court (Popplewell J) agreed with Owners. The benefit obtained by Owners through selling the Vessel earlier than her contractual re-delivery date should not be taken into account because it was not a benefit which was legally caused by the breach:

 

      1. The difference in the value of the Vessel was not caused by Charterers’ breach. Owners’ decision to sell the Vessel was theirs to make and a purely commercial consideration.
      2. Owners’ decision to sell the Vessel was causative of the capital benefit and it did not matter that this flowed from a mitigating step.
      3. The difference in the sale prices of the Vessel was indicative of the fact that the benefit was not legally caused by Charterers’ breach.
      4. The sale of the Vessel was the type of transaction which it was open to Owners to enter into, irrespective of Charterers’ breach of charterparty. Any profit subsequently realised could not therefore be taken into account.
      5. It was the contractual right to an income stream which was lost, vis-à-vis the change in capital value of the Vessel.
      6. Allowing Charterers to take the benefit of Owners’ decision to sell the Vessel would be tantamount to allowing Charterers to reap the reward of Owners’ investment in a way that would be unjust.
      7. The arbitrator had applied the law incorrectly.


Appeal

Charterers have been granted permission to appeal this matter to the Court of Appeal.

In granting this permission, Popplewell J admitted that the law in this area could benefit from being tested “with a sharper and clearer focus”.

It is noteworthy that Popplewell J did not consider other cases such as The Kildare [2011] 2 LLR and The Wren [2011] 2 LLR which appear at odds with his decision. These cases appear to suggest that where benefits are derived from subsequent transactions concluded by the Owners of a vessel following a repudiated charter, they are to be taken into account to reduce the damages award.

 

We are grateful to Eric Eyo of Campbell Johnston Clark for this article.