“The New Flamenco” Supreme Court 28th June 2017

This judgment concerns the assessment of damages, and in particular whether benefits obtained by the innocent party following a breach should be taken into account when assessing damages so as to reduce the recoverable loss. The judgment is therefore of considerable significance in respect of questions of causation and mitigation of loss in general, which are often two sides of the same coin.

The facts

The vessel, a cruise ship, was subject to a charter expiring on 2 November 2009. In breach of charter, the vessel was redelivered on 28 October 2007. Shortly before the redelivery, the Owners concluded an agreement to sell the vessel for about USD 24 million. Due to the intervening financial crisis, if the charterparty had been performed and the Owners had sold the vessel after redelivery in November 2009, it would have fetched only USD 7m. It is notable that the charter permitted the Owners to sell the vessel during its term.

The Owners claimed loss of profits in respect of the unexpired period of the charter. The Charterers argued that the Owners had to give credit for the difference between the sum for which the vessel had been sold in October 2007, and what its value would have been in November 2009, at the end of the charter term. The Charterers contended that this sum (about USD 17 million) more than extinguished any claim for loss of profit. The question for the court was whether this difference in the value of the vessel should be brought into account in the assessment of damages.

The decision of the Court of Appeal

The Court of Appeal held that the difference in value should be brought into account because at the time of the repudiation there was no available market for an equivalent charter and the Owners had reasonably decided to mitigate their loss by selling the vessel, thereby achieving a financial benefit. 

The decision of the Supreme Court

The Supreme Court reversed the decision of the Court of Appeal and reinstated the decision of the first instance judge. The Supreme Court held that the correct test is whether the benefit was legally caused by the breach and/or by an act of mitigation. 

In the present case the breach did not cause the benefit because the vessel could have been sold by the Owners at any time, whether or not the charter had been repudiated. 

The repudiation did not make it obligatory to sell the vessel. Even if the reason for the sale was that the vessel had no employment, and it was commercially reasonable to sell, that was no more than a “trigger” for selling the vessel, not the legal cause. The decision to sell the vessel was an independent decision or speculation of the Owners as regards their interest in the capital value of the vessel. For similar reasons the sale did not constitute mitigation of the loss of the charter. The outcome does not depend on whether or not there was an available market for an equivalent charter at the time of the repudiation. 

However the Supreme Court made clear that a sale of a vessel is not irrelevant for all purposes, as it might reduce the recoverable loss by shortening the period during which the owners could claim to have lost the income stream under the charterparty.

Practical implications of the decision

Although succinct and clear as regards the relevant test, the Supreme Court decision is perhaps slightly light on guidance as to how the test is to be applied in practice. The concept of causation often serves to express a conclusion, but without detailed guidance it is not always very informative as regards working out what the result should actually be. Although the judge provided detailed guidance as to how the test should be applied (including, most notably, a suggestion that considerations of justice, fairness and public policy can trump the causation test), it is not entirely clear how much of that guidance the Supreme Court endorsed. So this decision probably leaves some uncertainty for future cases. 

However, so far as the shipping industry is concerned, it seems that the following conclusions can be drawn:

1. Where a charter permits the sale of the vessel, the sum realised in a sale is very unlikely to affect the measure of damages recoverable for a breach of charter. However, a sale will probably affect the measure of damages by reducing the period during which the Owners can claim to have lost an income stream under the charterparty.

2. Where a charter does prohibit sale, an enhanced price realised from a sale that was only made possible by a repudiation may well need to be brought into account in the assessment of damages, although this is less certain and will depend on the detailed facts.