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Are Owners bound to give credit for benefit obtained following Charterers’ repudiation?

News / / Are Owners bound to give credit for benefit obtained following Charterers’ repudiation?

Fulton Shipping Inc v. Globalia Business Travel S.A.U. (New Flamenco) [2014] EWHC 1547 (Comm)

In a significant case regarding measure of loss and mitigation of damages, the Commercial Court considered whether Owners, who were claiming damages for the Charterers’ early redelivery and repudiation of a time charterparty, had to give credit for the capital value of the vessel, sold by the Owners upon the Charterers’ repudiation for a greater sum than the value of the vessel at the contractual date of redelivery under the charterparty. Following a review of several leading authorities on this issue, the Commercial Court held that no such credit should be given since the benefit obtained by the Owners in realising the capital value of the vessel was not legally caused by the Charterers’ breach.

The background facts

The vessel was chartered under a charterparty on an NYPE form dated 13 February 2004. A dispute arose between the Owners and the Charterers as to whether they had agreed a binding extension to the term of the charterparty. 

The Charterers maintained that they were entitled to redeliver the vessel by 28 October 2007, whilst the Owners contended that the Charterers could only lawfully redeliver the Vessel on 2 November 2009. The vessel was redelivered on 28 October 2007. Shortly before redelivery of the vessel, the Owners entered into an agreement to sell the vessel.

The Owners commenced arbitration against the Charterers. The arbitrator held that there had been an agreement to extend the charterparty and that redelivery by the Charterers on 28 October 2007 was a repudiatory breach. It is the question of the quantum of Owners’ claim, however, that is of particular interest.

The numbers:

Net loss of profit for remaining period of the charterparty:  €7,558,375 
Proceeds for sale of vessel in 2007:  US$23,765,000 
Anticipated sale proceeds of vessel had it been sold in November 2009:  US$7,000,000   

In the arbitration, the Owners claimed damages in the amount of €7,558,375 for net loss of profit, which the Owners claimed they would have earned had the vessel not been redelivered early. The Charterers argued that credit should be given for the US$16,765,000 difference in sale proceeds which the Owners gained as a result of selling the vessel in 2007 rather than 2009. Charterers’ position was that the sale had been a mitigating act and they were, therefore, entitled to the benefit of that act.  

The arbitrator found that the sale of the vessel in October 2007 was caused by the Charterers’ breach and was made in reasonable mitigation of the Owners’ damages.  There was therefore no reason why capital savings could not and should not be taken into account when assessing the net loss suffered by the Owners. On the numbers set out above, this would have extinguished Owners’ claim. The Owners appealed the arbitrator’s finding to the Commercial Court.  

The Commercial Court decision

The question of law before the Commercial Court was whether an owner claiming damages for a charterer’s repudiation of a time charterparty must give credit for the capital value of the vessel sold at the time of the repudiation for a greater sum than the value of the vessel at the contractual date of redelivery. The Commercial Court held that, on the facts found by the arbitrator, and applying the legal principles outlined in full in the judgment, the Owners were not required to give credit to the Charterers for any benefit in selling the vessel in October 2007 (relative to its value in November 2009), because this benefit was not legally caused by the Charterers’ breach. 

In reviewing the relevant legal principles and authorities, the Court (Mr Justice Popplewell) took as the starting point the fundamental and uncontroversial principle that damages for breach of contract are intended to put the innocent party in the financial position it would have been in had the contract been performed; known as the “compensatory principle”. However, not all damages are recoverable and this principle is subject to considerations of causation, such that where a claimant’s losses are factually or legally too remote, they will not be recoverable.  

The Commercial Court indicated that there is no general rule that determines when a party in breach may obtain credit for a benefit received following his breach of contract.  The Court did, however, summarise a number of principles which emerged from its consideration of the numerous authorities, including The Elena D’Amico [1980]. In essence, the Court stated as follows:

(1)In order for a benefit to be taken into account in reducing the loss recoverable by the innocent party for a breach of contract, it is generally speaking necessary that the benefit is caused by the breach. It is not sufficient if the breach has merely provided the occasion for the innocent party to obtain the benefit, or merely triggered his doing so. 

(2)Whether a benefit is caused by a breach is a question of fact and degree that must be answered by considering all the relevant 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 which played a part in their occurrence. 

(3)The fact that a mitigating step by way of action or inaction may be a reasonable and sensible business decision with a view to reducing the impact of the breach does not of itself render it one that is sufficiently caused by the breach. A step taken by the innocent party that is a reasonable response to the breach and designed to reduce losses caused thereby may be triggered by a breach but not legally caused by the breach. Benefits flowing from a step taken in reasonable mitigation of loss are to be taken into account only if and to the extent that they are caused by the breach. 

(4)Where, and to the extent that, the benefit arises from a transaction of a kind which the innocent party would have been able to undertake for his own account irrespective of the breach, that is suggestive that the breach is not sufficiently causative of the benefit. 

(5)There is no requirement that the benefit must be of the same kind as the loss being claimed or mitigated, but such a difference in kind may be indicative that the benefit is not legally caused by the breach.

(6)Although causation between breach and benefit is generally a necessary requirement, it is not always sufficient. Considerations of justice, fairness and public policy have a role to play and may preclude a defendant from reducing his liability by reference to some types of benefit or in some circumstances even where the causation test is satisfied. In particular, benefits do not fall to be taken into account, even where caused by the breach, where it would be contrary to fairness and justice for the defendant wrongdoer to be allowed to appropriate them for his benefit because they are the fruits of something the innocent party has done or acquired for his own benefit.

In the present case, applying the principles above, the Court found that the fall in the value of the vessel between the relevant two dates was not caused by the Charterers’ breach but by the drop in the market as a result of the financial crisis. The effect of the drop in the market on the Owners was also not caused by the Charterers’ breach but by the decision of the Owners to sell the vessel. The decision to sell the vessel was legally independent of the Charterers’ breach. That breach only provided the context or occasion which enabled the Owners to sell the vessel and was therefore the trigger not the cause of the benefit obtained by the Owners.

The Court also held, on policy grounds, that it would be unfair and unjust to allow the Charterers to benefit from the Owners’ decision to sell the vessel at an opportune time when the market conditions favoured them, since this would allow the Charterers to appropriate the benefits of the Owners’ own investment in the vessel.

In addition, the Court found that the sale of the vessel was a type of transaction that the Owners were able to enter into irrespective of the Charterers’ breach of the charterparty.  For example, if the Charterers had not repudiated the charterparty, the Owners may have chosen to sell the vessel on terms which enabled the new owner to perform the remainder of the charterparty.  

On the basis of the above findings, the Court allowed the appeal, holding that the arbitrator had erred in law. In particular, the arbitrator’s finding that the sale of the vessel was caused by the Charterers’ breach and in reasonable mitigation of loss was not legally sufficient to establish the causal link between the Charterers’ breach and the benefit obtained by the Owners.

The Commercial Court has granted the Charterers leave to appeal to the Court of Appeal. 

Comment

Like many other cases that arose around the time of the global financial crisis, this case involves the Charterers’ repudiation of their charterparty with the Owners and the subsequent assessment of the Owners’ damages. This case is, however, unusual compared to many others since it involves an assessment of benefits obtained by the Owners from a sale of the vessel at the time of the Charterers’ repudiation, on which there was no directly applicable authority.  Further analysis by the Court of Appeal of the issues under consideration would be welcomed, given the important implications the case may have on the law on measure of loss and mitigation of damages in the context of repudiatory breach and termination of contracts. 

Rania Tadros

Rania Tadros Managing Partner

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