Flame SA v. Glory Wealth Shipping Ltd  EWHC 3153 (Comm)
It is a fundamental principle of English law that, when assessing damages for breach of contract, any damages awarded should compensate the innocent party for the loss of its contractual bargain. In other words, the innocent party should be put in the same position that it would have enjoyed had the contract been performed.
The Commercial Court has now clarified that, when assessing damages for repudiatory breach of contract, it is necessary for the innocent party to prove its damages by showing that, had the other party performed its obligations, the innocent party would have been able and willing to perform its side of the bargain. An innocent party, who at the time of the repudiatory breach would have been unable to perform its side of the bargain – and therefore would have been unable to earn the contract price – is not entitled to be placed in a better position by an award of damages than it would have been in if the contract had not been repudiated.
The background facts
The parties agreed, under a contract of affreightment (“COA”), that the Owners would carry cargoes of coal between 2009 and 2011. The Charterers failed to provide laycans for some of the shipments and the Owners accepted the breach as a repudiatory breach, terminated the COA and sought damages from the Charterers in arbitration proceedings.
The Charterers submitted that the Owners were only entitled to substantial damages if the Owners could prove that, had the Charterers declared any of the laycans in question, the Owners would have been able to perform the corresponding voyages by going out into the market and chartering in a vessel at the relevant time. They argued that, as a result of the market’s collapse in 2008, the financial position of the Owners had so deteriorated that, had the Charterers declared the laycans, the Owners would not have been able to provide the required vessels.
The arbitration panel rejected Charterers’ submission and awarded Owners damages of over USD 5 million (the quantum being so great due to the sudden collapse of the freight market in 2008 which caused an exceptional difference between the COA and market rates).
The Commercial Court decision
The Court held that the arbitration panel had been wrong in law and that, when assessing the level of damages for anticipatory breach (the acceptance of which had terminated the contract), it was necessary for the innocent party to prove damage by demonstrating that, had there been no repudiation, it would have been able to perform its obligations under the contract.
The reasoning behind the decision is that an assessment of loss requires an assessment of what would have happened but for the repudiation. If the Court assumes that an innocent party would have been able to perform, the Court might put the innocent party in a better position than it would have been in had the contract been performed. This would be a breach of the compensatory principle that underlies the assessment of damages.
In so finding, the Court had regard to the importance the majority of the House of Lords attributed to the compensatory principle in the Golden Victory (which was not binding on the facts of this case). The background facts of the Golden Victory meant that, if damages were assessed at the date of breach, the Owners would have lost a charterparty that would be quantified as having slightly less than four years to run. If damages were assessed at the date of the subsequent arbitration hearing, the loss would be quantified as being considerably less because at that stage war, a specified event under the charterparty, had broken out, pursuant to which the Charterers would have been entitled to terminate. The majority of the House of Lords considered that what was known at the date of the hearing of the arbitration had to be taken into account. In other words, where a contract gives the party in breach the right to cancel the contract on the occurrence of a specified event, and such an event occurs even after the innocent party has accepted a repudiatory breach as terminating the contract, then the possibility that the party in breach would have exercised his right to cancel can be taken into account when assessing the damages caused by the repudiatory breach. In that case, Lord Scott referred to the compensatory principle as follows: “The lodestar is that damages should represent the value of the contractual benefits of which the claimant had been deprived by the breach of contract, no less but also no more”.
The Court’s decision in Flame SA v. Glory Wealth is a reflection of the English law compensatory approach to the assessment of damages. In practical terms, it means that in circumstances where a party is assessing whether or not to accept a repudiatory breach and terminate a contract, that party will have to consider whether, but for its acceptance of the repudiatory breach, it would be able to perform its obligations under the contract.