In a shock decision, the Supreme Court has allowed shipowners' appeal in the "NEW FLAMENCO". The Supreme Court held that the sale of the ship following the repudiation of the charterparty was not an act in mitigation, and was not relevant to the calculation of damages for breach of contract.

In a short and pithy Judgment, the Supreme Court has overturned a unanimous decision of the Court of Appeal which had permitted charterers to take advantage of a fortuitous drop in the capital value of the vessel to offset their liability in damages for repudiating the charterparty.

The facts of this matter are set out in our article on the first instance decision.

Permission to appeal was given essentially on the question of whether, in the context of calculating damages for their repudiatory breach of charterparty, charterers were entitled to take advantage of the capital gains owners earned in selling the vessel following her early redelivery.

This question arose because the market (capital) value of the vessel dropped in the period following the repudiation, and it was undisputed that the vessel would have had a lower capital value if it had been sold following redelivery in accordance with the charterparty terms.

As we reported at the time, the Court of Appeal answered this question in the affirmative, agreeing with the arbitrator that the sale of the vessel arose from the consequences of the breach, and the capital gains were to be taken into account when assessing damages, in the usual way.

The Supreme Court has now overturned this decision, and affirmed Judgment at first instance.

In doing so, the Supreme Court crucially approved Mr Justice Popplewell's reasoning that the benefit caused by the early sale of the vessel (whilst the market was still high) was not caused by the charterers' breach, but rather by the subsequent fall in the vessel's market value. In addition, the effect of the fall of the market was not caused by the charterers' breach, but by the owners' independent decision to sell the vessel.

The Supreme Court that this absence of a "relevant causal link" was fatal to charterers' case that the benefit caused by the sale of the vessel should be taken into account. The Supreme Court also reaffirmed the rule set out in The "WREN" and The "KILDARE" that, in the absence of an available market to charter the vessel, the measure of the loss is "the difference between the contract rate and what was or ought reasonably to have been earned from employment of the vessel under shorter charterparties, as for example on the spot market"

Comment

As Mr Justice Popplewell, the Judge at first instance, noted: "the search for a single general rule which determines when a wrongdoer obtains credit for a benefit received following his breach of contract or duty is elusive."

The real difficulty in weighing these points in applying the 'compensatory principle' in English law is underscored by the fact that this matter was overturned by a unanimous decision of the Supreme Court, appealing a unanimous decision of the Court of Appeal, which itself overturned an appeal from a High Court overturning an arbitration Award. However, the Supreme Court Judgment in this matter still provides helpful guidance, highlighting that the sale of the vessel was not an act in mitigation of owners' losses because it was "incapable of mitigating the loss of the income stream".

Trite though it may seem, in doing so the Supreme Court gave a timely reminder that like should only be compared with like.

Not all benefits will be taken into account when calculating damages for breach of contract, and in the absence of a relevant causal link an accidental or incidental benefit will not affect the calculation.