In Fulton Shipping Inc of Panama v Globalia Business Travel S.A.U. (the New Flamenco) the Court of Appeal overturned the Commercial Court’s decision and upheld the decision of the arbitrator that an increased sale price, achieved by selling the Vessel two years early as a consequence of a repudiated time charter, was a benefit that should be set off against the Owner’s claim for damages.

Background

The case concerned a small cruise ship, the New Flamenco (the Vessel), which was owned by Fulton Shipping (the Owners) and time chartered to Globalia Business Travel (the Charterers) in 2004. The parties agreed in 2005 to extend the charter by 2 years with an option for a third year. In June 2007 the parties subsequently agreed to extend the time charter by a further two years up to November 2009. The Charterers subsequently disputed having entered into the second extension and redelivered the Vessel in October 2007. The Owners accepted the breach as having terminated the charter and, having no alternative employment for the Vessel, sold it that same month for USD $23,765,000. 

The Owners claimed damages of around USD $7,500,000 for the net loss of profits that they considered they would have earned during the two year extension, which sum took into account expenditure saved and what the Owners called “a reduction in the re-sale value” of USD $5,145,000. 

An arbitrator was appointed in March 2008 but claim submissions were not served until November 2011, with the hearing taking place in May 2013. In this time the financial crisis had hit. 

The Charterers argued that they were entitled to a credit for the whole difference in amount between her 2007 sale price (USD $23,700,000) and her value in 2009, calculated by the arbitrator to be USD $7,000,000. The arbitrator effectively agreed, declaring that the Charterers were entitled to a credit for the difference in value of USD $16,700,000 – an amount which exceeded the Owners’ loss of profit claim and resulted in the Owner recovering no damages for the Charterers' repudiation. 

The Owners appealed to the Commercial Court where Popplewell J carried out a review of a number of authorities and, whilst acknowledging that there was no general rule to determine when a wrongdoer obtains credit for a benefit received following a breach, ruled in this case the benefit obtained by the Owners should not be taken into account as it was not legally caused by the breach.

Decision of the Court of Appeal

Lord Justice Longmore considered Popplewell J's ruling at the Commercial Court, stating “it is notoriously difficult to lay down principles of law in the realm of mitigation of loss”, and recognised that Popplewell J’s use of the word “indicative” was itself indicative that “hard and fast” rules were difficult to set down.

Mitigation 

The Court of Appeal relied first on British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Limited. London Underground sued British Westinghouse for supplying electric turbines with insufficient power and efficiency. After using the turbines for some time, London Underground replaced them with turbines of a greater efficiency than those that would have been provided had the contract been complied with. It was held that London Underground had recovered compensation for their loss while using the old turbines, but thereafter all remaining loss was “wiped out” by the purchase of the more powerful turbines.

The Court used this case to demonstrate that if a claimant adopts mitigation measures which arise from the consequence of a breach, are in the ordinary course of business and those measures benefit the claimant, that benefit should be brought into account in assessing the claimant’s loss. 

Available Market 

The Court also considered whether there was an available market. In the New Flamenco case, the argument was that there was no alternative employment, and hence the Vessel was sold. The Court held that the measure of damages was prima facie to be ascertained by the difference in price between the contract price and the market value at the time the goods ought to have been delivered.

This ties in with the Elena D’Amico [1980] 1 Lloyds Rep 75, which found that where there was an available market, the claimant is confined to the difference between the contract and market rate of hire. If there is any delay caused by the claimant speculating on which way the market is going to go, this is for the account of the claimant, not the defendant - as any loss arising does so through the claimant not availing himself of the available market.

Lord Justice Longmore also agreed with the arbitrator’s reliance on the cases of Zodiac Maritime Agencies Ltd vs Fortescue Metals Group Ltd (the Kildare) [2011] 21 Lloyds Rep 360 and Glory Wealth Shipping Pte. Ltd v Korea Line Corporation (the Wren) [2011] 2 Lloyds Rep 370, both of which involved cases where, at the time of repudiation, there was no available market but the market subsequently revived. From these cases it was inferred that the claimants’ damages will be limited to whatever their actual losses are, because acceptance of the market rate at the date of breach (in these cases by spot chartering) is reasonable mitigation in circumstances where there is no available market.

Compensation for actual loss is the underlying principle. Similarly, therefore, where an owner decides to mitigate their loss by selling the vessel Lord Justice Longmore could not see why any benefit the owner gained from such a sale should not be taken into account in the same way. 

Causation 

Lord Justice Longmore disagreed with the judge’s eleventh principle which was it would be contrary to fairness and justice if the defendant could appropriate the relevant benefit when that benefit was “the fruit of something the innocent party has done or acquired for his own benefit”. It is worth being reminded of the fundamental principle that a claimant who sustains loss should be placed in the same situation as if the contract had been performed. In this case, the Owners had made a considerable profit from the sale of the Vessel - that profit arose from the consequences of the breach and should therefore be taken into account.

Conclusion

In conclusion, on the question of whether it is appropriate to take into account any “benefit” sustained by an owner when considering a claim for damages for loss of profits on earnings of hire under a time charter which has been repudiated by the charterer, the Court answered “yes, provided the acquisition of the 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.” 

Despite the initial acknowledgement of the difficulty in setting down principles of law in this area, the case does provide guidance and reiterates a number of basic but important principles in terms of mitigation, causation and loss recovery. There are however, still a wide number of varying factors to be taken into consideration and any case will be judged on its own circumstances.