When should a benefit arising from a breach of contract be taken into account in assessing a claimant’s loss? The English Court of Appeal’s decision in Fulton Shipping Inc of Panama v Globalia Business Travel S.A.U.1 contains useful guidance on the relevant principles of mitigation.

The issue of mitigation, particularly in circumstances where there is no available market, can be complex. In this judgment, the Court of Appeal has taken a ‘back to basics’ approach.

The decision was in the context of a chartered vessel that was redelivered early and subsequently sold. However it is of wider interest to any potential claimant in light of the duty to take all reasonable steps to mitigate loss arising as a result of breach of contract.

The fundamental principles of recovering damages for breach of contract are:

  • Damages for breach of contract are intended to put the innocent party (the claimant) in the same financial position as if the contract had been performed.
  • A claimant must take all reasonable steps to mitigate their loss.
  • If they do so, gains or losses arising from the mitigation should be taken into account when assessing damages.

Background

The parties agreed a charterparty between them until 2009 but the charterers asserted an intention to redeliver the vessel early in 2007. The owners treated this as an anticipatory breach of contract and terminated the charterparty. Following termination, and in circumstances where there was no available market for a replacement fixture, the owners sold the vessel for around US$23 million and commenced London arbitration proceedings against the charterers, seeking damages for the loss of profits that would have accumulated during the remainder of the charterparty.

At the arbitration, it was established that the value of the vessel at the agreed time for redelivery in 2009 would only have been US$7 million, due to the collapse in the shipping market. The arbitrator found that the profit made by the owners by selling the vessel in 2007 arose from the charterers’ breach, and that the difference between the higher sale price obtained in 2007 and the price that would have been achieved in 2009 should be taken into account when determining the owners’ loss.

The owners appealed to the English Commercial Court which overturned the award in a complex judgment, following which the charterers were granted leave to appeal to the Court of Appeal.

The decision

Whilst noting that it was “notoriously difficult” to formulate clear and unwavering principles when it comes to mitigation, the Court of Appeal unanimously held that the benefit derived by the owners from selling the vessel in 2007 should properly be taken into account in assessing the owners’ loss.

The key principle established was: “if a claimant adopts by way of mitigation a measure which arises out of the consequences of the breach and is in the ordinary course of business and such measure benefits the claimant, that benefit is normally to be brought into account in assessing the claimant’s loss unless the measure is wholly independent of the relationship of the claimant and the defendant. That should be a principle sufficient to guide the decision of the fact-finder in any particular case.”

The Court of Appeal went on to consider the application of this principle to cases where there is an available market and cases where there is not, coming to the following conclusions:

  • Where there is an available market, the measure of loss is the difference between the contract price and the market price at the time of the breach. Where the claimant elects not to take advantage of the available market but instead takes speculative actions, any benefit (or loss) arising from such speculative actions will not affect the calculation of damages as they are considered to arise independently from the relevant breach.
  • Where there is no available market, the position is different. In time charterparty cases, the basic measure of loss is the difference between the hire received and the owners’ costs in earning that hire. However where owners are able to mitigate such loss by selling the vessel, this should be taken into account when calculating damages.

Conclusion

This judgment is a succinct and helpful clarification of when a benefit to an innocent party can be brought into account when measuring damages for breach of contract. The message from the Court of Appeal is that an extensive analysis of causation is not required. All that must be shown is that the benefit arose “out of the consequences” of the breach. In this case the fundamental factual finding of the arbitrator that the profit gained by the owners from selling the vessel arose from the consequences of the charterers’ repudiation was pivotal to the decision to uphold the appeal.