In the recent case of Fulton Shipping Inc v Globalia Business Travel S.A.U (New Flamenco) (2014) the Commercial Court considered whether owners of a cruise vessel claiming damages for the repudiatory breach of a time charterparty should be required to give credit to the charterers for the fact that the breach occasioned the timely sale of the vessel for a higher value than would have been achieved two years later, had the charterers not breached the contract.  Popplewell J discerned a number of general principles from case law to apply when determining whether benefits derived by an innocent party following a repudiatory breach of contract serve to reduce the damages owed by the party in breach. In Fulton, the Court held that the benefit obtained by the owners in selling the vessel should not reduce the damages awarded to the owners because the benefit was not legally caused by the breach.

Background

From February 2004, a small cruise ship called the New Flamenco (the "Vessel") was chartered by its owners, Fulton Shipping Inc ("Fulton") to Globalia Business Travel ("Globalia").

The parties met in June 2007 to negotiate a potential extension to the charter. Fulton alleged that an agreement had been reached at this meeting that the Vessel would be chartered to Globalia for a further two years until November 2009. Globalia disputed the existence of any such extension agreement. Fulton treated Globalia as being in repudiatory breach of contract and in August 2007 elected to terminate the contract with Globalia. Globalia re-delivered the Vessel to Fulton in October 2007 and in the same month Fulton sold the Vessel to a third party for US$23,765,000.  As a result of the subsequent global financial crisis, there was a significant depreciation in the value of the Vessel over the next two years, and by November 2009 (when the Vessel would have been re-delivered in accordance with the alleged charter extension) the Vessel's value had fallen to an estimated US$7,000,000.

Fulton commenced arbitration proceedings in London and claimed damages for the net loss of profits which they alleged they would have earned during the two-year extension of the charter, amounting to EUR 7,558,375.  Globalia argued that the sale of the Vessel in October 2007 had been a mitigating act, and the calculation of the net loss of profits should, therefore, give credit for the capital savings made by Fulton by selling the Vessel in October 2007 instead of November 2009.   

At an arbitration hearing in May 2013, the sole Arbitrator found that the sale of the Vessel was caused by Globalia's breach of contract and was a step taken in reasonable mitigation of damage caused by this breach. As a result, when Fulton calculated the net loss of profits, Globalia was entitled to a credit of over EUR 11 million, to reflect the benefit derived by Fulton from the sale of the Vessel in October 2007 rather than in November 2009.  The credit given was more than Fulton's claim for loss of profits, meaning that Fulton should recover no damages.

Fulton appealed the Arbitrator's decision to the High Court pursuant to Section 69 of the Arbitration Act 1996. The question of law to be decided by the Court was whether a shipowner claiming damages for a charterers' repudiation of a time charter must give credit for the capital value of having sold the vessel upon repudiation for a greater sum than the value of the vessel at the contractual date for redelivery under the charter. Put simply, if a wrongdoer's breach of contract inadvertently results in a benefit for the innocent party, should the wrongdoer obtain credit for this benefit in the calculation of damages.

Decision

In the Commercial Court, Popplewell J allowed Fulton's appeal, holding that the Arbitrator had not applied the correct principles of law.

In his judgment, Popplewell J referred, as a starting point, to the fundamental contractual damages principle (known as the compensatory principle), that damages for breach of contract are intended to put the innocent party in the same financial position as they would have been, but for the breach. Popplewell J concluded that the simple application of the compensatory principle would not be sufficient in this case because the principle was used by both parties in support of their arguments. Fulton argued that the Arbitrator's decision offended the compensatory principle because it did not leave it in the same position as if the charter contract had been fulfilled. Conversely, Globalia argued that any reversal of the Arbitrator's decision would offend the compensatory principle by leaving Fulton in a better financial position as a result of the breach.

Popplewell J acknowledged that 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," and undertook a detailed analysis of the relevant caselaw. Some of the key principles which emerged from his analysis were:

  1. For a benefit to be taken into account in reducing the damages recovered by a claimant for breach of contract, it is generally a necessary condition that the benefit is caused by the breach. It is not sufficient that the breach merely provided the occasion or context for the innocent party to obtain the benefit, nor that the benefit would have been obtained but for the breach.
  2. The test for whether the benefit is caused by the breach is a question of fact and degree and must take into account all the relevant circumstances.
  3. Where the benefit arises from a transaction of a kind which the innocent party would have been able to undertake for his own account irrespective of the breach, it is suggestive that the breach is not sufficiently causative of the benefit.
  4. There is no requirement that the benefit must be of the same kind as the loss being claimed or mitigated, but such a difference in kind may be indicative that the benefit is not legally caused by the breach.
  5. Although causation between breach and benefit is generally a necessary requirement, considerations of justice, fairness and public policy are also important and may preclude the reduction of damages by reference to some benefits or in some circumstances, even when the causation test is satisfied.

In applying these principles to the facts of the present case, Popplewell J held that Fulton was not required to give credit for the benefit of the sale of the Vessel in October 2007 because there was no causal link between Globalia's breach of contract and the benefit obtained, nor was the sale in mitigation of damages. The difference in the value of the Vessel between 2007 and 2009 was caused by the downturn of the financial markets, which occurred irrespective of Globalia's breach of contract. Fulton's decision to sell was also made irrespective of the breach; "the breach merely provided the context or occasion for the Owners to realize the capital value of the Vessel. It was the trigger not the cause."  A further indication of a lack of causation was the fact that Fulton was free to exercise its right as owner to sell the Vessel and obtain the benefit at any time. The fact that Fulton's benefit was a capital benefit, while the loss suffered by Fulton was an income stream also indicated (albeit not definitively) that the benefit was not legally caused by the breach. Popplewell J also applied considerations of justice and fairness, holding that "allowing the Charterers to appropriate the fruits of the Owners' investment in the Vessel… would be unfair and unjust."

Comment

Popplewell J's judgment provides useful guidance on the considerations to be weighed up by the Court when determining whether benefits derived by an innocent party following a repudiatory breach of contract serve to reduce the damages owed by the party in breach. His judgment suggests that if the innocent party is exercising a pre-existing right of ownership to derive a benefit, it may well not have to account for this benefit.  Popplewell J acknowledged that the question of law raised in this case was of public importance for the law on repudiation of charters and for contract law in general, therefore, he granted Globalia permission to appeal to the Court of Appeal.