Following any breach of contract, an innocent party will usually seek to mitigate any loss that has arisen as a result. In some cases, the breach will allow the innocent party the chance to take advantage of an opportunity which it had not otherwise considered, perhaps leaving it in a considerably more advantageous position financially.
Such a situation arose in The NEW FLAMENCO1. In this case, the English Commercial Court considered the principles which dictate whether an innocent party’s apparent “windfall” as a result of commercial decisions made following a breach must be credited against any damages awarded as a result of the breach.
The NEW FLAMENCO (the vessel) was time chartered in 2004 to Globalia Business Travel (Charterers). In June 2007, the parties orally agreed an extension to the charterparty up to 2 November 2009. However, Charterers disputed having agreed that extension, and asserted that they were entitled to redeliver the vessel in October 2007. Accepting Charterers’ position as an anticipatory repudiatory breach, Fulton Shipping Inc (Owners) terminated the charterparty and the vessel was redelivered in October 2007.
Having accepted the breach, Owners entered into a sale contract shortly before redelivery, selling the vessel for a little under US$23.8 million. They commenced arbitration against Charterers in early 2008, claiming damages by reference to the net loss of profit that Owners said they would have earned between October 2007 and the extended contractual redelivery date of 2009.
By the time of the arbitration hearing in 2013, it was clear that, due to the 2008 financial crisis, the value of the vessel in 2009 (i.e. on contractual redelivery) would have been approximately US$7 million – significantly lower than her actual 2007 sale price. Charterers argued that, therefore, Owners had benefited from Charterers’ breach and should give credit for the difference between the Vessel’s sale price and her 2009 value. Owners argued that the difference in value was legally irrelevant. The arbitrator agreed with Charterers, with the effect that Owners recovered no damages because the credit for the sale exceeded Owners’ loss of profit claim.
On appeal, the Commercial Court overturned the arbitrator’s decision, holding that the benefit Owners achieved through the higher 2007 sale price had not been legally caused by the breach, but rather by market fluctuations and by Owners’ independent commercial decision to sell the vessel when they did. Charterers’ breach had merely provided the “context or occasion” for the sale, but did not cause Owners to sell the vessel. The sale“could, in principle, have occurred irrespective of the breach”.
In considering the relevant principles as to when a benefit should be credited against damages for breach, the Court held that the test is that the breach has caused the benefit, not just that it provided an opportunity for the innocent party to obtain the benefit. The fact that an action is a reasonable step taken in mitigation does not necessarily mean it is caused by the breach, particularly if that step could have been taken in any event.
The Court also held that all the circumstances must be considered, and it is a question of fact and degree as to whether there is a causal link. Furthermore, benefits should not be taken into account where it would be contrary to justice, fairness and public policy, particularly if it allowed the wrongdoer simply to take advantage of something the innocent party did for its own benefit. Finally, the Court noted that the logical consequence of applying Charterers’ argument to a situation in which the market had fallen, would allow an owner to claim additional losses, which the Court considered to be particularly novel.
Although the Court reviewed extensive case law, it has been suggested that it failed to consider other, recent, authorities which suggest that a credit would be given if there was a simple causal link between the breach and the benefit. The judgment is being appealed, and as there is clearly a wide potential impact on contract law and assessment of damages this is awaited with interest. However, the decision may, in the meantime, provide some reassurance to owners in a similar situation.