Introduction

In our previous newsletter “Can the Defendant Set Off the Claimant’s Claim Against Gains Obtained by the Claimant After the Breach?” we discussed the ruling of the English Commercial Court in Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain [2014] EWHC 1547 (Comm).  The case was subsequently brought to the English Court of Appeal (the “Court of Appeal”) in Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain [2015] EWCA Civ 1299 (the “New Flamenco Appeal”), which reversed the Commercial Court’s decision.  This newsletter will look at the decision of the Court of Appeal and discuss its possible implication.

Background

The New Flamenco Appeal was about measure of damages for early redelivery under a time charterparty when the charter still had two years to run.  In view of the anticipatory repudiatory breach by Globalia Business Travel SAU (the “Charterer”), Fulton Shipping Inc (the “Owner”) sold the vessel for US$23,765,000 in 2007.  Due to the collapse of Lehman Brothers and subsequent financial crisis in 2008, the value of the vessel when redelivered after the two-year extension would have been US$7 million, a fall in value of US$16,765,000.  Nevertheless, the Owner claimed damages of EUR7.5 million for the loss of profits which it claimed would have been earned during the two-year extension.  The arbitrator found that the sale of the vessel by the Owner was caused by the Charterer’s breach and was in reasonable mitigation of damage and that the capital savings of US$16,765,000 should be brought into account in considering the net loss suffered by the Owner.

Popplewell J. of the English Commercial Court then allowed the Owner’s appeal against the arbitrator’s decision, the reasoning of which has been discussed in our previous newsletter.  The New Flamenco Appeal was an appeal from the decision of Popplewell J. of the English Commercial Court brought by the Charterer.  The question in this Appeal was whether that US$16,765,000 difference constituted a benefit which, on principles of mitigation and avoidance of loss, should be brought into account in the Owner’s claim for the Charterer’s breach of contract by making an early redelivery.

On Appeal

The Court of Appeal allowed the Charterer’s appeal and in effect upheld the arbitrator’s decision.  Having considered the judgments in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] A.C. 673 and Staniforth v Lyall (1830) 7 Bing. 169, the Court of Appeal held that if a claimant adopted by way of mitigation a measure which arose out of the consequences of the breach and was in the ordinary course of business and such measure benefited the claimant, that benefit should normally be brought into account in assessing the claimant's loss unless the measure was wholly independent of the relationship of the claimant and the defendant.

One important question to be considered was whether there was an available market.  The Court of Appeal was of the view that when there was an available market, the measure of damages was prima facie to be ascertained by the difference between the contract and market rate of hire; on the other hand, when there was no available market (as in this case), the prima facie measure of loss was the difference between the contractual hire and the cost of earning that hire.  In the latter case, it would not be reasonable for the owner to claim that prima facie measure if he was able to mitigate that loss by trading his vessel if opportunities to trade that vessel arose.  If the owner traded the vessel and made additional losses or additional profits, such losses or profits should be taken into account and he would only recover the amount of hire after he had given credit for the sale price.

Bearing in mind that the central issue has always been whether the actual sale was caused by the breach and was by way of mitigation, the Court of Appeal ruled that the fall in the value of US$16,765,000 constituted a benefit which should be brought into account in the Owner’s claim for the Charterer’s breach of contract.

Implications

Although the Court of Appeal overturned the decision of the English Commercial Court, the Court of Appeal in effect affirmed 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”.  Further, whether there was an available market would be a determining factor on whether benefits obtained should be taken into account when assessing damages.

It should also be noted that the Court of Appeal stated that the doctrine of mitigation may require an owner to sell the vessel he has hired out to a hirer or a charterer if the vessel is redelivered early and, if so, the owner will only be able to recover the amount of hire after he has given credit for the sale price he could have obtained if he had sought to sell after the breach.  Vessel owners should therefore be reminded to seek legal advice before they take any steps to mitigate their losses when the charterers repudiate the charterparty.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: shipping@onc.hk

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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.