The “NEW FLAMENCO” – Assessing damages under English law

E-Bulletin – July 2017

Re: The “NEW FLAMENCO”1 – Assessing damages under English law

1 GLOBALIA BUSINESS TRAVEL S.A.U. OF SPAIN (Respondent) v FULTON SHIPPING INC OF PANAMA (Appellant) [2017] UKSC 43

Introduction

This case went right up to the Supreme Court. The court was called upon to decide what the correct measure of damages were in circumstances where an innocent party, Owners here, obtained a capital windfall by the sale of the subject vessel (“New Flamenco“) which the guilty party, Charterers, alleged was a step in mitigation, would not have occurred had it not been for their breach i.e. causation was established and thus the windfall should be credited to them so as to reduce Owners’ damages claim.

The question was an important one for if answered in Charterers favour it would extinguish Owners’ claim in its entirety. Consequently, the guilty party would reap the benefit of the windfall.

Facts

In 2004 New Flamenco was time chartered on an NYPE 1993 form to Charterers. In 2005 the charter was extended for two years, expiring on 28 October 2007 (recorded in addendum A). Owners asserted there was a further two-year time extension, agreed orally, to November 2009 (reflected in addendum B). Charterers disputed the existence of the said oral agreement, refused to sign addendum B, and maintained they could redeliver the New Flamenco on 28 October 2007.

Owners treated Charterers as in repudiatory breach and accepted the breach on 17 August 2007, terminating the charter. Charterers redelivered the vessel on 28 October 2007 (pursuant to addendum A). Shortly before redelivery Owners entered into an MOA selling the vessel for US$ 23,765,000.

The arbitrator found New Flamenco would have been worth US$7,000,000 if redelivered in November 2009 when she should have been delivered if it were not for the breach (pursuant to addendum B, which the arbitrator found was an agreement validly concluded).

Tribunal’s decision

Mr Hamsher was appointed as sole arbitrator. Owners claimed the net loss of profit they would have earned during the extended two-year charter period, namely €7,558,375. Charterers asserted that Owners had to give credit for the difference in the value of the vessel when sold following the repudiatory breach and when it would have been sold following redelivery. The difference being US$ 16,765,000. Owners maintained the difference in value was legally irrelevant and should not be taken into account.

The Tribunal decided in Charterers favour on the basis that the sale was a step taken by Owners in reasonable mitigation of their loss and should be accounted for.

The High Court’s decision2

2 [2014] EWHC 1547 (Comm)

3 Ditto at paragraph 64(1); Bradburn v Great Western Railway (1874) LR 10 Exch 1, British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railway Co of London Ltd [1912] AC 673, The Elena D’Amico [1980] 1 Lloyd’s Rep 75 and other authorities.

4 Ditto at paragraph 64 (3); The Elena D’Amico [1980] 1 Lloyd’s Rep 75.

5 Ditto at paragraph 64 (10); Palatine Graphic Arts Co Ltd v Liverpool City Council [1986] QB 335; Parry v Cleaver [1970] AC 1.

6 [2015] EWCA Civ 1299.

The High Court provided a comprehensive judgment referring to numerous authorities. Essentially it found that the benefit / capital windfall was not legally caused by the breach;3 the breach may have been the trigger for the sale but not the direct cause of it.4 Owners could have sold the vessel at any stage, they did not have to sell it on breach; the Tribunal had not found that a failure to do so would have been a failure of Owners to reasonably mitigate their loss. Further, although causation was a necessary requirement it was not always sufficient – more may be required, such as considerations of justice, fairness and public policy.5

The Court of Appeal’s decision6

The Court of Appeal disagreed with the High Court, largely on the basis that like the Tribunal they viewed the sale as an act of mitigation. The court placed emphasis on the fact there was no available market to spot charter the vessel in mitigation so the alternative was to sell the vessel in mitigation, which they regarded Owners had done. The sale arose out of the breach, was in the ordinary course of business, and such a benefit should normally be taken into account.

Supreme Court’s decision

The court emphasised at the outset that damages issues arose out of legal principles devised to give effect to the principle of compensation.

Unlike the Tribunal and Court of Appeal’s finding, the Supreme Court did not regard the sale of the vessel as an act of mitigation nor that it arose due to the breach. Owners could have sold the vessel at any stage. It was an independent commercial decision of theirs to do so when they did but they could have sold it during the currency of the charter, or at any stage.

It thus in essence boiled down to causation – the fall in value was regarded as irrelevant as it related to Owners’ interest in the vessel and nothing to do with Owners’ interest injured by the breach. There had to be a sufficiently close link between the benefit and loss however they did not have to be of the same kind.

By virtue of the same principle, if the market value rose and Owners would have received more for New Flamenco when she would have been redelivered in 2009, Owners would not have been entitled to claim the difference.

Consequently, there was no causal link for the capital value to be taken into account; whether the vessel was sold when it was in 2007, or when she would have been redelivered in 2009.

The appeal was accordingly allowed. The court found the Tribunal had erred in principle and the High Court order setting aside the arbitration award providing Charterers with credit for €11,251,677 was restored.

Conclusion

The Supreme Court’s decision, which was comparatively short to the comprehensive judgment of the High Court which it followed, appears at face value to be a clear-cut one; namely one of causation – the benefit was not caused by the breach and did not arise following a step in mitigation, thus it did not have to be taken into account.

However, one cannot lose sight of the compensatory principle which was obviously at forefront of the Supreme Court’s mind when passing judgment, and which was alluded to by the High Court when highlighting the insufficiency of causation alone, considerations of justice, fairness and public policy to play a role.

After all, why should a guilty party benefit from an innocent party’s decision, following the former’s breach, in respect of which the innocent party happens to receive a substantial windfall and so much so that the guilty party need not pay any compensation at all to the innocent party? Consequently, one cannot deny that policy, fairness and justice considerations played a role in the decision.

Nonetheless, the writer is of the view that one could safely say that the sale was not a mitigating step caused by the breach, as Owners did not have to sell the vessel, nor was it a step they would have been legally required to take in order to mitigate their loss (as decided by the Tribunal).

With thanks to Lara McDonnell, a Barrister at 33 Bedford Row, for her assistance in drafting this bulletin.

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