The Supreme Court has today handed down Judgment allowing Owners’ appeal in the “New Flamenco” (see our previous blog of 2 March 2016 and our Client Alerts of 25 February 2016 and 8 November 2016).

For those of you who are not familiar with the case, Charterers were in repudiatory breach of the Charterparty, which Owners accepted as terminating the Charterparty, and the vessel was redelivered in October 2007. At that time the Owners sold her for USD 23,765,000, whereas if the vessel had been redelivered at the end of the Charterparty term, in 2009, her sale value would have been only USD 7,000,000. The question was whether that benefit, i.e. the increase in sale price in 2007 over and above that which could have been obtained in 2009, should be set-off against Owners’ claim for damages calculated by reference to the net loss of profits which they alleged they would have earned during the additional two year Charterparty period. If the increase in sale value were allowed to be set-off, this would have caused Owners to have no recovery from Charterers.

We are preparing a Client Alert which will set out the background to the Supreme Court’s decision, but for now we can say that it held that:

  1. On the facts of this case the value of the vessel was irrelevant because the Owners’ interest in the capital value of the vessel had nothing to do with the interest injured by the Charterers’ repudiatory breach of the Charterparty.
  2. The essential question in such cases is whether there is a sufficiently close link between the benefit and the loss caused by the wrongdoer. The benefit to be brought into account must have been caused either by the breach of Charterparty or by a successful act of mitigation.
  3. Notably in this case the benefit was not caused by Charterers’ repudiatory breach but by Owners’ commercial decision to sell the vessel.
  4. Given the relevant measure of damages, the pertinent mitigation would be the acquisition of an income stream alternative to the income stream under the original Charterparty.
  5. It was therefore held that the Judge was correct to hold that the Arbitrator erred in principle and that the answer to the question put to the High Court, namely “When assessing shipowners’ damages for loss of profits on earnings of hire under a time charterparty which has been repudiated by the charterers and the repudiation accepted by the owners as terminating the contract, are the charterers entitled to have taken into account as diminishing the loss of earnings/hire sustained by the owner as a result of the accepted repudiation “a benefit” said to consist of avoidance of a drop in the capital value of the vessel because the vessel has been sold shortly after acceptance of the repudiation whereas, if the vessel had been retained until after performance of the charterparty, it would have had a lower capital value by reason of decline in the capital value of the vessel through market decline and ship sale values in that period?” is “no”.