A recent Court of Appeal decision overturned the High Court judgment against the time charterers of the ship the New Flamenco, reinstating the arbitration award in their favour.(1) The issue at question was whether the charterers' liability for loss of profit should be extinguished by the profit that the owners were able to make in selling the vessel earlier than would have been the case due to the charterers' repudiation.
The dispute was driven by the financial crash in 2008, which created a large liability for loss of operational profit due to the collapse of the chartering market, while at the same time encouraging owners to sell their vessels before the crash, rather than during or after it, to obtain the best price. The Court of Appeal decided that in a crash situation, where there is no long-term market for vessel chartering, profits made from a decision to sell a vessel could be taken into account when assessing the net loss caused by a charterers' repudiation, which meant that the owners had no claim for the loss of operational profits. Unsurprisingly, given that there was up to $14 million at stake, the owners appealed the decision to the Supreme Court and the court's decision has provided a further twist to this case.(2)
First, the Supreme Court has avoided connecting capital gains to operational losses in times of market upheaval. For capital gains to be taken into account against the loss of operational profits, there must be a legal causal link between the two. This must be more than the sale taking place after the charter has been repudiated. To paraphrase the court's unanimous judgment, while the repudiation might have created the occasion for selling the vessel, it was not the legal cause of it. The primary cause was the commercial decision by the owners to sell, which could have been taken at any time, even if the charter had not been repudiated. Nor was the sale an act of mitigation, as the loss suffered by the owners by reason of the repudiation was a loss of operational profits, for which mitigation would be re-chartering the vessel, not selling it.
The owners might have got to this point in the judgment and thought that they had succeeded. However, the Supreme Court also addressed the concern about owners benefiting twice from both the repudiation and the sale of a vessel by pointing out that the sale was still relevant to the extent that it shortened the period of operational loss. While it was referred back to the arbitrator for final accounting, the decision effectively serves to neutralise the claim made by the owners, as they sold the vessel after the repudiation, but before redelivery. The owners were therefore receiving full operational income until they sold the vessel and thus had no claim for any operational loss thereafter.
This approach ties in with the decision in The Golden Victory, a case where the ship's charterers repudiated their time charter with four years left in the agreement.(3) The Iraq war broke out 15 months after the cancellation, which would have given the charterers the option to cancel the charter, and this was held to be the end point for the owners' loss of profit claim.
In New Flamenco the Supreme Court has added another reason for delaying a final assessment of the loss of profit on a repudiated long-term charter by waiting to see whether the owners will sell the vessel.
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For further information on this topic please contact Robert Joiner or Ian Teare at Wikborg Rein by telephone (+65 6438 4498) or email (firstname.lastname@example.org or email@example.com). The Wikborg Rein website can be accessed at www.wr.no.