Introduction

As a general contractual principle, the measure of damages for breach of contract is to place the party suffering loss in the same position as if the contract had been performed. There is a duty to mitigate the loss on the part of the innocent party following the breach of contract by the wrongdoer.

In the case of Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain [2014] EWHC 1547 (Comm) (the “New Flamenco Case”), the major issue is whether the benefit obtained by Fulton Shipping Inc (the “Owner”) after Globalia Business Travel SAU’s (the “Charterer”) repudiation of a time charter had to be deducted from the damages claimed.

Background
The New Flamenco Case was an appeal from an Arbitrator’s award. The vessel in question was a small cruise ship called the New Flamenco (the “Vessel”), which had been time chartered to the Charterer. The Arbitrator found that the Owner and the Charterer had reached an oral agreement in June 2007 extending the charterparty for a two-year period expiring in November 2009.

In view of the anticipatory repudiatory breach by the Charterer, the Owner sold the vessel for about US$23 million. Due to the collapse of Lehman Brothers and subsequent financial crisis in 2008, the value of Vessel when redelivered after the two-year extension would have been US$7 million.  Nevertheless, the Owner claimed damages of EUR7.5 million for the net loss of profits which it claimed would have been earned during the two-year extension.

The Arbitrator decided that the sale of the Vessel was caused by the Charterer’s breach and was reasonable mitigation.  However, the Owner had to give credit for around EUR11 million as the difference between the value of the vessel when sold and its value at the end of the two-year extension (i.e. at an amount higher than the profit loss claimed by the Owner, thereby resulting in no loss recoverable by the Owner).

The Decision
Popplewell J. of the Commercial Court allowed the Owner’s appeal, and commented that if the Arbitrator applied the correct principles of law he could not have reached the same conclusion, which indicated an error of law.

Key principles of laws
The Commercial Court summarised the following 11 principles of laws which were applicable to the New Flamenco Case:

1.         for a benefit to reduce the loss recoverable by the innocent party for a breach of contract, the benefit had to have been caused by the breach;

2.         determining causation involved considering all circumstances, including the nature and effects of the breach and the nature of the benefit and loss, the manner in which they occurred, and any pre-existing, intervening or collateral factors;

3.         it was not sufficient for the breach to have simply triggered the innocent party to obtain the benefit;

4.         the factual and legal enquiry and the conclusion reached should be the same whether the question was approached as one of mitigation of loss or measure of damage;

5.         a reasonable mitigating step by the innocent party was not necessarily a step caused by the breach;

6.         benefit flowing from a mitigating step were to be taken into account only if they were caused by the breach;

7.         benefit arising from a step which the innocent party would have been able to take irrespective of the breach was probably not sufficiently caused by the breach;

8.         the benefit did not need to be of the same kind as the loss being claimed or mitigated;

9.         whether a benefit was caused by a breach was a question of fact and degree;

10.     although causation between breach and benefit was generally a necessary requirement, it was not always sufficient; considerations of justice, fairness and public policy might preclude a defendant from reducing his liability even where the causation test was satisfied; and

11.     benefit would not be taken into account, even where they had been caused by the breach, where they were the fruits of something the innocent party had done for his own benefit.

Application of the principles
Having considered the above principles, the Court decided that the Owner was not required to give credit for the benefit of the sale of the Vessel as there was no causal link between the Charterer’s breach of contract and the benefit obtained, nor was the sale in mitigation of damages. The difference in the value of the Vessel between 2007 and 2009 was caused by the independent cause of downturn of the financial markets.

In the judgment, Popplewell J. observed that the breach merely provided the context or occasion for the Owner to realise the capital value of the Vessel, it was the trigger not the cause.

There was also freedom on the part of the Owner to exercise its right as owner to sell the Vessel and obtain the benefit at any time.  In addition, the benefit obtained by the Owner was capital benefit while the loss suffered was an income stream.

Implications
The New Flamenco Case was an important case, in which it highlighted that whether the benefit is caused by a breach is a question of fact and degree which must be answered by considering all the relevant circumstances to form a common sense overall judgment on the sufficiency of the casual nexus between “breach” and “benefit”.

The judgment of Popplewell J. is now being appealed to the Court of Appeal, we shall await and see whether the Court of Appeal will provide further insights as to this matter. In any event, the final results of this case would definitely create a great impact on the laws of contract, in particular, the assessment of damages.

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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.