The Supreme Court has recently handed down its much awaited judgment in the case of Globalia Business Travel S.A.U (formerly TravelPlan S.A.U.) of Spain -v- Fulton Shipping Inc of Panama [2017] UKSC 43 and reinstated the decision of Popplewell J, placing an important limit on the mitigation of damages.

Background

The small cruise ship, the “NEW FLAMENCO”, was chartered by the claimant owners (owners) to the defendant charterers (charterers). The charterers, in repudiatory breach of contract, redelivered the vessel to the owners two years early in 2007. The owners proceeded to sell the vessel in October 2007 for $23.7m, which, it turned out, was an extremely good price, as thanks to the effects of the global financial crisis, two years later (when the vessel should have been redelivered) it was valued at only $7m.

The owners claimed damages calculated by reference to the net loss of profits during the remaining two year period, amounting to $7.5m. The claim was referred to arbitration and in the first instance the arbitrator decided that the charterers had indeed breached the agreement, but in selling the “NEW FLAMENCO” at a higher than expected price the owners had in fact mitigated their loss. It was decided that the charterers were entitled to a credit of the huge sum of $16.7m and therefore the owners were not entitled to recover anything in damages. Unsurprisingly, the owners appealed and the case proceeded to the Supreme Court.

The key question for the appeals was whether the difference in value constituted a benefit which, on the principles of mitigation, should be taken into account when calculating an award of damages.

In the original Commercial Court appeal, Popplewell J disagreed with the arbitrator and found in favour of the owners. He found that the difference in value of the vessel was caused by the fall in the market which occurred irrespective of the charterer’s breach. The benefit which the owners had so shrewdly obtained had absolutely nothing to do with the charterer’s breach - it was a fortunate consequence of their own commercial judgement. Popplewell J commented that, unlike in the present case, there must be a direct connection between the breach of contract and the benefit enjoyed by the innocent party.

The Court of Appeal unanimously disagreed and reinstated the arbitrator’s decision, focusing on the decision of the House of Lords decision in British Westinghouse Electric and Manufacturing Co Ltd -v- Underground Electric Railways Co of London Ltd [1912] AC 673.

Finally... the Supreme Court decision

In a short and snappy judgment, the Supreme Court unanimously favoured the decision of Popplewell J and allowed the owners’ appeal. They found that the fall in the value of the vessel was irrelevant because it had nothing to do with the damage caused by the charterer’s repudiatory breach. Lord Clarke stated that the appropriate test is that of causation - and he could not find that the difference in the value of the vessel was caused by the repudiation of the contract. The owners had decided to sell the vessel in 2007 on a purely commercial basis and this was not in any way influenced by the actions of the charterers. As Popplewell J said, ‘the breach merely provided the context or occasion for the owners to realise the capital value of the vessel. It was the trigger not the cause.’

Essentially, the Supreme Court found that the sale of the vessel was not an act of mitigation. Mitigation of loss could have taken the form of the acquisition of an alternative income stream (i.e. alternative charters) but the sale of the vessel simply represented the exercise of the owners’ rights over the vessel and those rights existed entirely independently of the contract and its termination. Therefore, the repudiatory breach could not be taken into account when assessing damages.

Upshot for commercial parties

Whilst on the face of it this seems like a sensible commercial decision, the Supreme Court has effectively placed a limit upon the type of actions that may be regarded as mitigation. However, despite the ruling from the Supreme Court, a few questions remain - such as when or in what circumstances will a different kind of benefit ever mitigate a loss? Can like only ever be compared with like?

The crucial point for commercial contracting parties to bear in mind when dealing with the question of mitigation is whether there is a sufficiently close link between the benefit which was obtained and the loss caused by the wrongdoer. It should be shown that the benefit which is argued should constitute a mitigation has been caused by the breach of the contract or by a successful act of mitigation - in effect that without the breach, the mitigation would not have happened.

This decision shows that careful attention must be paid to the link between an innocent party’s action post-breach of contract, and its right to full recovery of damages. There are clearly minefields which can arise when a party seeks to argue there has been a successful mitigation of loss where there has been a breach of contract. Doubtless more clarification will be provided in future cases which seek to apply the mitigation dance of the “NEW FLAMENCO”.