The Supreme Court confirms there needs to be a direct and casual link between the loss caused by the wrongdoer and any benefit obtained by the injured party.
The Supreme Court1 refused to grant a charterer credit for profits realised by the shipowner as a result of selling the vessel earlier than anticipated in order to mitigate losses. The court upheld a strict stance on causation to determine which losses and profits could be claimed by the charterer. Whilst the facts of this case are related to shipping, the principles have wider application in relation to mitigation of losses.
Fulton Shipping Inc (Fulton/Shipowner) acquired a cruise ship from its previous owners in March 2005. A charterparty agreement was set up between Fulton and Globalia Business Travel S.A.U. (Globalia/Charterer) in August 2005 for two years with an option to extend the agreement for a further year. Instead of exercising this option, the parties orally agreed in a meeting in June 2007 that the charterparty would be extended for a further two years.
The Charterer denied that any agreement was ever made. The Charterer indicated in late 2007 that it wanted to redeliver the vessel, and the Shipowner considered this to be anticipatory repudiatory breach of the charterparty agreement. The vessel was redelivered in October 2007. Shortly before redelivery, the Shipowner entered into an agreement with another party to sell the vessel for US$23.7 million.
Following the financial crisis, the shipping market fell dramatically. If the vessel had been redelivered after the two year extension period (in November 2009), the Shipowner would only have been able to sell the vessel for US$7 million. The Shipowner commenced arbitration proceedings to claim the loss of income from the Charterer’s breach of the agreement by early termination. The Charterer sought to obtain credit for the profit retained by the Shipowner for selling the vessel in 2007.
Arbitration and appeals
The dispute was referred to arbitration. The arbitral tribunal concluded that the Charterer was entitled to credit for the realised profit, and left it up the parties to amicably agree on the exact quantum of the credit.
The Shipowner appealed to the High Court under section 69 Arbitration Act2, to challenge a question of law. The High Court held there was no requirement for the Shipowner to give credit for any benefit when realising the capital value of the asset, because the sale of the vessel was not “legally caused” by the breach of contract. The commercial decision for the Shipowner to sell the vessel could have been taken at any time, and the Shipowner would have to assume risks of the market increasing or decreasing.
Justice Popplewell3 set out 11 principles for determining when mitigation of loss can be offset against a benefit:
- For a benefit to be taken into account, the benefit must have been caused by the breach
- The causation test takes all circumstantial factors into account
- It is not sufficient that the benefit would not have been obtained but for the breach
- It makes no difference whether the issue is approached as mitigation of loss or measure of damage
- In order to be mitigation, any action or inaction must be a reasonable response to the breach and be designed to reduce losses
- There must be a sufficiently direct causal connection between the mitigating step and the breach
- If the benefit arises from a step which the innocent party could have taken regardless of the breach, there is no causal link
- The benefit does not necessarily have to be of the same kind as the loss
- The causal link will be judged on an overall common sense analysis of the factual nexus of the case
- Considerations of justice, fairness and public policy must be taken into account
- The benefit cannot be credited to the wrongdoer if it is contrary to fairness and justice to allow appropriation of another party’s benefit
The Charterers appealed to the Court of Appeal who agreed with the arbitrator’s decision, stating that the opportunity to sell the vessel would not have arisen had the Charterer not breached the contract. The Shipowner decided to release equity from the vessel, and therefore is “bringing into account the consequences of their decision to mitigate their losses.”4
Supreme Court Judgment
- The Supreme Court determined that the fall in the value of the vessel was irrelevant, as the Shipowner had a separate interest in the value of the charterparty agreement, which was injured as a result of the Charterer’s early termination.
- The Court did not agree with submissions that in order for credit to be given, the benefit must be of the same kind as the loss (i.e. in this case it would be gain of monies paid under new charterparty agreement at a higher rate offset against the losses suffered by the Shipowner).
- The difference in the market price of the vessel was not caused by the repudiation of the charterparty agreement, and therefore there is no reason for the Shipowner to have to bring the sum (of around US$17 million) ‘into account’.
- The sale of the vessel could have happened at any time, not necessarily at the end of the extended charterparty period, and therefore the sale event was not an event of mitigation.
Therefore, the Supreme Court upheld the judgment of the High Court in finding that the arbitral tribunal had made an error on a point of law.
In order for the wrongdoer to receive credit for the innocent party mitigating its losses, it is important to follow the chain of causation to prove the acts of the innocent party directly acted to mitigate the losses caused by the default of the wrongdoer. The most common example of this would be where a charterparty is severed and the shipowner negotiates a new charterparty agreement at a higher rate that the previously existing agreement. This profit would not have occurred ‘but for’ the breach of the charterer.
Parties in default should be aware that the act of mitigation can come in multiple forms. Common examples of mitigating losses would be entering into a new charterparty agreement to reduce the time the vessel is unemployed, selling a commodity at market value or preventing excessive use of fuel/bunkers to reduce costs.
From the perspective of the innocent party, it should be aware that mitigation is wider than just obtaining a benefit of the ‘same kind’ as the loss. The courts are likely to take into account all of the acts, and omissions, of the innocent party to see if it has sufficiently attempted to mitigate risk