In a case that has implications for the law of mitigation and damages in the context of contract law generally, the Commercial Court found that a benefit which Owners of a Vessel were found to have obtained as a result of the sale of their Vessel immediately after the repudiation of a time charterparty and for the purpose of minimising losses caused by the repudiation, was not in law to be taken into account when assessing the damages awarded for the repudiation because the benefit was not legally caused by the breach.

The facts

 The "NEW FLAMENCO" (the "Vessel") was a small cruise ship built in 1972. The Vessel was chartered in 2004 by Globalia Business Travel ("Charterers") from Fulton Shipping Inc ("Owners"). In 2007, the parties met to negotiate an extension. Owners alleged that in that meeting a two-year extension of the charter was agreed (up to November 2009). The Charterers, who disputed having reached the agreement, redelivered the Vessel in October 2007. The Owners sold the Vessel for USD 23,765,000 in October 2007.

The arbitration findings

Having found that an agreement to extend the charter had been reached, the arbitrator had to decide how damages would be calculated, taking into account that the Owners had pleaded that they had sold the Vessel to minimise their loss. It was also common ground that there was no alternative employment for the Vessel as at the date of early redelivery in 2007.

The Owners (in their pleaded case) claimed damages by reference to the net loss of profits which they alleged they would have earned during the additional two years extension, giving credit for expenditure saved, plus a reduction in the re-sale value that the Vessel would have had on completion of the period. Owners calculated the reduction to be USD 5,145,000, which left them with a claim for EUR 7,558,375. The Charterers argued that, as the sale had been a mitigating act, they were entitled to the full benefit of that act, alleging that a greater reduction should be taken into account because the value of the Vessel in October 2009 (the first time at which Owners could have sold the Vessel in 2009 if the charter had been performed) was  much less than the price achieved on the 2007 sale. Both parties adduced expert evidence regarding the re-sale value of the Vessel in 2009.

In their Reply Submissions, the Owners alleged that a drop in the shipping market between 2007 and 2009 was res inter alios acta and irrelevant to the assessment of damages. This left a tension between the Claim submissions and the Reply, and the Owners tried to amend their Claim Submissions on the last day of the arbitration hearing to the effect that the credit originally given for the re-sale value of the Vessel would be withdrawn. The arbitrator refused to allow permission to amend and ruled that it was open to the Owners to run the argument identified in their Reply Submissions, but that they were not entitled to withdraw the quantified concession made in their Claim Submissions. He then went on to find that the sale of the Vessel was caused by the Charterers' breach and was in reasonable mitigation of the loss caused by the repudiation.
The arbitrator found that the value of the Vessel in November 2009 was USD 7,000,000 and declared that the Charterers were entitled to a credit of EUR 11,251,677 (being the equivalent of USD 16,765,000, the difference between the value of the sale in October 2007 and November 2009) in respect of the benefit that accrued to the Owners by selling the Vessel when worth more in October 2007 than it was at the end of the charter period in November 2009.

The appeal to the Commercial Court

The Owners appealed to the Commercial Court under s.69 of the Arbitration Act 1996. The question of law put to the Court was whether a shipowner claiming damages for charterers' repudiation of a time charter must give credit for the capital value of having sold the vessel upon repudiation for a greater sum than the value of the vessel at the contractual date for redelivery under the charter.

The Owners argued that there was an error of law in the arbitrator's decision for the following reasons: 1) the compensatory principle of damages for breach of contract requires that owners be placed in the same position as if they had received hire under the charterparty; 2) a benefit arising out of a breach of contract can only be taken into account if it is the same kind of loss as that for which the innocent party is claiming – in this case,  capital value is different in kind from the loss of an income stream; 3) a benefit arising out of reasonable mitigation can only be taken into account if it is of the same kind as the loss being claimed, as above; 4) alternatively, mitigation cannot apply to the exercise of rights obtained by the innocent party for his own benefit prior to the breach (here, the sale being the exercise of the Owners' proprietary rights); 5) alternatively, the benefit was not sufficiently causally linked to the breach, because it is not sufficient that the breach causes a mitigating step that leads to the benefit, rather the benefit must have been caused directly by the breach, and the changes in the capital value of the Vessel were not caused by the breach; and 6) the capital value of a ship belongs to an owner, and cannot be appropriated by a defaulting charterer for the latter's benefit.

The Charterers argued that the appeal was concerned with principles of mitigation of damage; 2) the award was a legitimate application of the third rule of the doctrine of mitigation, namely that where an innocent party takes steps in reasonable mitigation of damage, he must give credit for benefits obtained by such mitigation, provided there is a sufficient causal nexus; 3) there is no additional requirement that the benefit must be of the same kind as the loss; 4) there is no requirement of a direct link between benefit and breach; 5) the existence of a sufficient causal nexus is a question of fact for the fact finding tribunal; and 6) the Owners' argument offends the compensatory principle because it would leave the Owners better off as a result of the breach.

The Commercial Court's findings

Popplewell J reviewed some of the main authorities adduced by the parties and said that it was difficult to find a single general rule which determines when a wrongdoer obtains credit for a benefit received following his breach, but that a number of principles emerged from the authorities:

  1. In order for a benefit to be taken into account in reducing, it is a necessary condition that the benefit is caused by the breach (Bradburn (1874) L.R. 10 Ex.1, British Westinghouse [1912] A.C. 673, The Elena D'Amico [1980] 1 Lloyd's Rep 75);
  2. The causation test involves taking into account all the circumstances, including the nature and effects of the breach and the nature of the benefit and loss, the manner in which they occurred and any pre-existing, intervening or collateral factors which played a part in their occurrence (The Fanis[1994] 1 Lloyd's Rep 633);
  3. The test is whether the breach has caused the benefit; it is not sufficient if the breach has merely provided the occasion or context for the innocent party to obtain the benefit, or merely triggered his doing so (The Elena D'Amico, supra);
  4. It should make no difference whether the question is approached as one of mitigation of loss, or measure of damage (Hussey v Eels [1990] 2 Q.B. 227);
  5. The fact that a mitigating step may be a reasonable and sensible business decision with a view to reducing the impact of the breach does not of itself render it one which is sufficiently caused by the breach (The Elena D'Amico, supra);
  6. When establishing whether there is sufficient causal connection between the breach and the benefit, the search is for a direct causative connection (Palatine [1986] Q.B. 335) and, accordingly, benefits following from a step taken in reasonable mitigation of loss are to be taken into account only if and to the extent that they are caused by the breach;
  7. Where the benefit arises from a transaction of a kind which the innocent party would have been able to undertake for his own account irrespective of the breach, that is suggestive that the breach is not sufficiently causative of the benefit (Laverack v Woods [1967] 1 Q.B. 278, The Elena D'Amico supra);
  8. Contrary to what Owners had argued, there is no requirement that the benefit must be of the same kind as the loss being claimed or mitigated (Bellingham v Dhillon [1973 Q.B. 304, Nadrepeh v Willmett [1978] 1 WLR 1537, Hussey v Eels supra, The Elbrus [2010] 2 Lloyd's Rep 315, cf The Yasin [1979] 2 Lloyd's Rep 45) , but such a difference in kind may be indicative that the benefit is not legally caused by the breach (Palatine, supra);
  9. Subject to the above principles, whether a benefit is caused by a breach is a question of fact and degree (Hussey v Eels supra, Needler v Taber [2001] Pens. L.R. 253, The Fanis supra);
  10. Although causation between breach and benefit is generally a necessary requirement, it is not always sufficient. Considerations of justice, fairness and public policy will play a role (Palatine supra, Parry v Cleaver [1970] AC 1);
  11. In particular, benefits do not fall to be taken into account where it would be contrary to fairness and justice for the defendant to be allowed to appropriate them for his benefit because they are the fruits of something the innocent party has done or acquired for his own benefit (Shearman v Folland[1950] 2 KB 43, Parry v Cleaver supra);

Popplewell J then went on to find that the application of the above principles to the present case led to the conclusion that the benefit obtained by the Owners by selling the Vessel earlier than her contractual re-delivery date should not be taken into account because it was not a benefit which was legally caused by the breach. He gave the following reasons:

  1. The difference in value of the Vessel (between 2007 and 2009) was not caused by the Charterers' breach and the effect of the fall on the Owners was also not caused by the breach. The Owners had a choice whether or not to sell the Vessel – it was a matter for their commercial judgement and involved a commercial risk taken for their own account. The breach merely provided the context or the occasion for the Owners to realise the capital value of the Vessel;
  2. The capital benefit was caused by the independent decision of the Owners to realise the capital value of their asset, and it did not matter that it flowed from  the mitigating step of selling the Vessel;
  3. The difference in kind was indicative that the benefit was not legally caused by the breach, although was not of itself the reason for the capital benefit not to be taken into account;
  4. Further indications that the capital benefit was not legally caused by the breach is to be found in the fact that a sale of the Vessel was the kind of transaction which it was open to the Owners to enter into irrespective of the Charterers' breach of charterparty and so he concluded that profits made by the Owners with the proceeds of sale would not fall to be taken into account;
  5. If the issue is approached as one of the measure of damage, rather than mitigation, the application of the causation test leads to the same conclusion. The contractual rights of the Owners which were lost by the breach were rights to an income stream. The change in capital value of the Vessel caused by the drop in the market over the following two years has nothing to do with the Owners' contractual rights lost as a result of the breach;
  6. The same result is dictated by policy grounds. To allow the Charterers to take the benefit of Owners' decision to sell would be to allow the Charterers to appropriate the fruits of the Owners' investment in the Vessel in a way which would be unfair and unjust. This was analogous to the position of a person who received the proceeds of insurance or a pension following breach – the case law showed that these would not be taken into account to reduce their loss;
  7. Although questions of causation are for the fact finding tribunal and that conclusions of fact cannot be challenged on an appeal under s.69, he said he could not accept that the arbitrator had applied the correct principles of law. The finding that the sale of the Vessel was caused by the Charterers' breach and in reasonable mitigation of loss was not legally sufficient to establish the necessary causative link between breach and benefit. The arbitrator also did not seem to apply the policy considerations found in the authorities;

Comments

The claim arises from unusual circumstances, namely the Owners' decision to sell the vessel in mitigation of losses caused by the repudiation following the premature termination of a charterparty, followed by a dramatic fall in capital values after the sale.

Although Popplewell J's decision provides a useful review of some of the relevant authorities, it is striking that he did not consider other relevant cases in the field of time charters that seem at odds with his decision. For example, The Kildare [2011] 2 Lloyd's Rep 360, and The Wren [2011] 2 Lloyd's Rep 370, which are time charter repudiation cases where there is no available market (as in this case) are not addressed by the judgment despite the fact that they were cited to him and expressly relied upon by the Arbitrator. On one view, these cases suggest that where benefits are derived from subsequent transactions concluded by the Owners of the Vessel which is the subject of the repudiated charter, they are to be taken into account to reduce the damages award. This is so despite the fact the transactions involve exploiting the Vessel (i.e. a capital asset obtained prior to the breach) and the benefits will or may reflect post breach rises and falls in the market. Those cases, amongst others, appear to suggest that a link between the breach and the transactions is sufficient to justify the benefit being brought into account and do not fit easily with the Judge’s analysis.

In granting the Charterers permission to appeal to the Court of Appeal, Popplewell J said that the question of law was one of public importance for the law on repudiation of charters and for contract law in general and, considering the lack of specific authority, accepted that the issues under consideration in this case could benefit from being tested afresh "with a sharper and clearer focus".between the breach and the transactions is sufficient to justify the benefit being brought into account and do not fit easily with the Judge’s analysis.

The Court of Appeal’s analysis of the questions which arise on this appeal are awaited with interest.