Introduction

The UK Supreme Court has recently delivered its ruling on the appeal by the owners (the “Owners”) of the vessel New Flamenco (the “Vessel”) on the issue of the measure of damages for early redelivery under a time charterparty.  Our previous discussion of this case could be found in our newsletter in “Can the Defendant Set Off the Claimant’s Claim Against Gains Obtained by the Claimant After the Breach?” and “Can the Defendant Set Off the Claimant’s Claim Against Gains Obtained by the Claimant After the Breach? – Part II”.  This newsletter will look at the final decision of the Supreme Court and discuss its possible implication.

Background

In August 2005, the Owner of the Vessel (the appellant) extended its charterparty with the charterers (the “Charterers”, the respondent) for 2 years till October 2007.  The charterparty was then further extended by an oral agreement in mid-2007, expiring on 2 November 2009.  However, the Charterers disputed having made the oral agreement and maintained that they were entitled to redeliver the vessel on 28 October 2007.  The Charterers redelivered the Vessel in October 2007.  The Owners then commenced arbitration in London, at which the arbitrator found that there is a repudiatory breach by the Charterers for the early redelivery.  However, the real dispute between the parties is on the assessment of the quantum of the damages.

Such dispute arises because shortly before the redelivery in October 2007 (pre-financial crisis period), the Owners agreed to sell the Vessel to a third party for US$23,765,000.  The value of the Vessel, however, fell to only US$7,000,000 when the Vessel would have been redelivered to the Owners had the Charterers not been in breach (i.e. in November 2009, the post-financial crisis period). In assessing the quantum of the damages, the arbitrator held that the Charterers were entitled to a credit for the difference in value of the Vessel in 2007 and 2009, which amounts to US$16,765,000, and that such amount could be discounted from any damages payable by the Charterers in relation to the Owners’ claim for loss of profit.  This was more than the Owners' loss of profit and as a result the Owners could not recover any damage in respect of the Charterers' repudiation of the charterparty.

The Issue and the Appeals

The dispute had long been centered on the issue of whether, when assessing the Owners’ damages for loss of profits, the Charterers were entitled to a credit for the difference in the value of the vessel when sold in 2007, in comparison to its diminished value in 2009?  The arbitrator held in the affirmative, but the High Court (Popplewell J) disagreed. The matter was brought to the Court of Appeal in which it agreed with the arbitrator’s view and held that the Charterers could take credit on the basis that the Owners took a decision to mitigate their loss by selling the Vessel in October 2007 and there was no reason why the benefit secured could not be brought into account, in the same way that benefits secured by spot chartering a vessel during an unexpired term of charterparty would be.  The Owners made a final attempt (and they succeeded) to appeal to the Supreme Court.

The Supreme Court’s Decision and the reasoning

In the judgment given by Lord Clarke, the Supreme Court unanimously allowed the Owners’ appeal.  In short, the sale of the Vessel following the repudiation could not be taken into account when assessing damages because such sale was not caused by the breach or by a successful act of mitigation.

(i) The fall in values of the Vessel does not matter

The Supreme Court found that the fall in the value of the Vessel was irrelevant because the Owners’ interest in the capital value of the vessel had nothing to do with the interest injured by the Charterers’ repudiation of the charterparty.  This is not because the benefit must be of the same kind as the loss caused by the wrongdoer, but because the benefit was not caused either by the breach of the charterparty or by a successful act of mitigation.

Hence, the essential question is whether there is a sufficiently close link between the loss and the benefit, and not whether they are similar in nature.  The Supreme Court held that there is no such causal link and therefore the benefit cannot be taken into account when assessing loss suffered by the Owners.

The repudiation resulted in a prospective loss of income for a period of about two years. However, there was nothing about the premature termination of the charterparty which made it necessary to sell the Vessel, at all or at any particular time.  It could also have been sold during the term of the charterparty.  When to sell the Vessel was a commercial decision made at the Owners’ own risk, which was no part of the subject matter of the charterparty and had nothing to do with the Charterers’ breach.  In fact, the Owners would not have been able to claim the difference in the market value of the Vessel if the market value had risen between the sale in 2007 and the time the charterparty would have terminated in 2009.  At most, the premature termination of the charterparty is the occasion for selling the Vessel, but it was not the legal cause of it. There is equally no reason to assume that the relevant comparator is a sale in November 2009; there is no reason that a sale would necessarily have followed the lawful redelivery at the end of the charterparty term.

(ii) The Sale of the Vessel was not a mitigating either

Further, the sale of the Vessel was not on the face of it an act of successful mitigation. If there had been an available charter market, the loss would have been the difference between the actual charterparty rate and the assumed substitute contractual rate.  The sale of the Vessel would have been irrelevant. In the absence of an available market, the measure of the loss would be the difference between the contract rate and what was or ought reasonably to have been earned from employment of the vessel under spot charterparties.  The relevant mitigation in that context is the acquisition of an income stream alternative to the income stream under the original charterparty.  The sale of the Vessel was not itself an act of mitigation because it was incapable of mitigating the loss of the income stream.

Conclusion

The Supreme Court judgment clarified the difficulties that could arise in mitigation of loss and shred lights on the legal principles in the assessment of damages.  This would serve as guidance for similar cases in the future - charterers should be mindful of the potential claims for damages under early termination of charterparty whilst owners of vessels should consider the proper mitigation acts to protect their interests.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.