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Owners must give credit for benefit obtained following Charterers’ repudiation

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Fulton Shipping Inc of Panama v. Globalia Business Travel S.A.U. (New Flamenco) [2015] EWCA Civ 1299 

In a significant judgment from the Court of Appeal, the principle by which an owner is bound to give credit for benefit obtained following a charterer’s repudiation has been confirmed. We have previously reported on the Commercial Court decision, which has now been overturned. The Court of Appeal held that where a claimant acquires a benefit as a result of doing something by way of mitigation which arises out of the consequences of the breach and is in the ordinary course of business, that benefit should normally be brought into account when assessing the claimant’s loss.  

The background facts

The Charterers repudiated a time charter by redelivering the vessel early, in October 2007, rather than when the charterparty was due to come to an end in November 2009. There was no available market for a replacement charterparty in October 2007 and the Owners sold the vessel for USD23,765,000. Had the Owners sold the vessel in November 2009, when the charterparty was due to come to an end, her value would have been USD7,000,000. Accordingly, the Owners had made a ‘gain’ of USD16,765,000 by selling the vessel in 2007 rather than 2009.

The Owners claimed damages from the Charterers for loss of profit for the remaining charter period of almost two years in the amount of €7,558,375. 

The Charterers argued that the Owners had in fact suffered no loss and should give credit for the ‘gain’ of USD16,765,000 (just over €11 million). This credit would wipe out the Owners’ claimed loss of profits.

The arbitrator found in favour of the Charterers and held that credit should be given. The Commercial Court found in favour of the Owners and held that no credit should be given since the benefit obtained by the Owners was not caused by the Charterers’ breach. 

The question of law before the Court of Appeal was whether the difference in the price obtained for the vessel when sold, and the value of the vessel at the contractual redelivery date, constituted a benefit which, on the principles of mitigation and avoidance of loss should be brought into account in the Owners’ claim for the Charterers’ breach of contract by making early redelivery. 

The Court of Appeal decision

The Court of Appeal allowed the Charterers’ appeal and held that the benefit should be taken into account provided the benefit arose out of the consequences of the breach in the ordinary course of business and by way of mitigation of the Owners’ loss. 

In bringing the appeal, the Charterers submitted (among other points) that a finding of fact had been made in the arbitration that the benefit of the sale had been caused by the Charterers’ breach and had been gained by the Owners in mitigation of their loss. The Charterers also submitted that where there was no available market, the actual trading of the vessel (in mitigation of loss) would always be taken into account, and there is no reason why the sale of a vessel (in mitigation of loss) should be treated any differently. 

The Owners’ key submissions, aside from supporting the Commercial Court finding that the fall in the value of the vessel was not caused by the Charterers’ breach, were that fluctuations in capital assets should not be taken into account by way of mitigation and  that before any benefit could be brought into account by way of mitigation, it has to be of the same ”kind” or “type” as the loss. 

Principles of mitigation 

The Court considered the relevant principles of mitigation in the light of the relevant authorities. Specifically, the Court considered that these provided support for the rule that, where a claimant does take steps to mitigate its loss and those steps are successful, the defendant is entitled to the benefit accruing from the claimant’s action. 

Available market 

The Court confirmed that the issue of whether there was an available market affected this principle, specifically, the measure of damages where there is an available market is to be ascertained by calculating the difference between the contract rate of hire and the market rate of hire achieved (Elena D’Amico [1980]). However where, as in the present case, there is no available market, the Owners cannot substitute the vessel immediately and any alternative mitigation, such as chartering the vessel on the spot market during the unexpired term of the charterparty, will be brought into account (the Kildare [2011] and the Wren [2011]).

The Court considered that, where there was no available market, an owner may equally decide the most reasonable thing to do to mitigate its losses is to sell the vessel. If, in so doing, an owner acquires a benefit from the sale made at the top of a falling market, there seems no sound reason not to take into account that benefit when it is that sale which was both the cause of the benefit and the act of mitigation.  

Accordingly, the Court found that the benefit acquired by the Owners from the sale of the vessel following the Charterers’ breach did arise from the consequences of the breach. The benefit acquired by the sale of the vessel arose in the ordinary course of business, and the sale of the vessel where there was no available market was by way of mitigation of the Owners’ loss. Accordingly, that benefit had to be brought into account when assessing the Owners’ damages. 

Comment

The judgment takes into account the commercial reality facing owners where charterers are in repudiatory breach and there is no available market, in particular the limited means by which owners can mitigate their loss. The analysis undertaken of the Commercial Court decision has clarified that there is just one principle to provide guidance when considering whether a defendant is entitled to credit from a benefit acquired by the claimant following a breach of contract. This is as follows: Where a claimant acquires a benefit as a result of doing something by way of mitigation which arises out of the consequences of the breach and is in the ordinary course of business, that benefit should normally be brought into account when assessing the claimant’s loss. 

Rania Tadros

Rania Tadros Managing Partner

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