In Fulton Shipping Inc v Globalia Business Travel SAU (2015), the Court of Appeal clarified the law in relation to when a defendant is entitled to credit from a benefit acquired by the claimant after a breach of contract.  The principle to be applied is that where the claimant receives the 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 is normally credited against the claimant's loss.

Background

In June 2007, Globalia Business Travel ("GBT") allegedly made an oral agreement with a shipowner, Fulton Shipping Inc ("FS"), to extend to November 2009 the term of an existing agreement to charter a ship. GBT denied having agreed such an extension and redelivered the ship in October 2007.  FS treated the early redelivery as an anticipatory breach and terminated the contact.  The agreement provided for disputes to be resolved by arbitration.

In the absence of an available chartering market in 2007, FS agreed to sell the ship for USD 23,765,000. Due to the financial crisis, the value of the ship declined significantly from October 2007, when FS sold it, and November 2009, when the ship would have been returned to the owners had GBT not breached the agreement. The arbitrator found that the ship's value in November 2009 would have been USD 7,000,000.

The arbitrator found that the sale of the vessel in October 2007 was caused directly by GBT's breach and was in reasonable mitigation of damage. Therefore, FS had acquired a benefit of USD 16,765,000, being the difference in the value of the vessel in 2007 and 2009, and this benefit was brought into account in considering the net loss suffered. However, on appeal to the High Court, Popplewell J set out 11 principles that he considered emerged from the relevant authorities, finding that the benefit could not be taken into account in assessing loss because FS's decision to sell the vessel was independent of the breach and that there was an insufficient causal link between the breach and the benefit obtained.

GBT appealed. The issue for the Court of Appeal was whether the difference in the value obtained in 2007 and the value of the vessel in 2009 constituted a benefit which, applying principles of mitigation and avoidance of loss, should be considered when assessing the damages due to FS.

Decision

The Court of Appeal allowed the appeal, holding that there is one principle to provide guidance when considering whether the defendant is entitled to credit from a benefit received by the claimant following a breach of contract, and not 11 principles as set out by Popplewell J.  That principle is that the benefit received by the claimant can be taken into account where the acquisition of that benefit arose out of the consequences of the breach in the ordinary course of business and by way of mitigation of the claimant's loss.

An important question for the Court of Appeal was whether there had been an available market. Where there is no available market, the prima facie measure of loss in hire contracts is the difference between the contractual hire and the cost of earning that hire, including crew wages, cost of fuel etc. However, Longmore LJ said that it would not be reasonable for a shipowner to claim this measure if he was able to mitigate the loss by another means, in this case by selling the ship. The underlying principle is compensation for actual loss, and there was no reason why under this principle, the benefit obtained by FS in selling the ship should not be taken into account. The sale was not entirely independent of the breach but was a direct consequence of it, and was done by way of mitigation.

Comment

This decision is a helpful clarification of the law regarding when a defendant will be entitled to credit from a benefit obtained by the claimant following the defendant's breach of contract, an area in which Longmore LJ commented that "it is notoriously difficult to lay down principles of law".  Although decided in the specific context of a charterparty, it potentially has general application to all contracts.