In the event of a breach which leads to the repudiation of a charterparty, it is expected and usually the case that the innocent party would suffer some form of loss. However, on occasion, the breach could also ultimately result in a gain, by providing the innocent party with the opportunity to exercise a right, such as the sale of the vessel, which would otherwise not have arisen.
In the NEW FLAMENCO1, the English Commercial Court overturned an arbitral decision which had determined that a party who has repudiated a charterparty can obtain credit from the innocent party where the latter has benefited from the former’s breach.
The NEW FLAMENCO (the vessel) was a small cruise ship time chartered in 2004 by Globalia Business Travel (the charterers) from Fulton Shipping Inc (the owners). In 2007, the parties agreed to extend the duration of the charterparty to November 2009. The charterers disputed having reached such an agreement and redelivered the vessel in October 2007. The owners treated the redelivery as a repudiation of the contract and mitigated their loss by selling the vessel that same month for approximately US$23.8 million. They subsequently brought arbitral proceedings against the charterers in 2013 for loss of profit.
Due to the financial crisis in 2008, it was found that had the owners sold the vessel when she was due to be redelivered in 2009, the value of the vessel would have been assessed at approximately US$7 million, a significantly lower sale price than that received in 2007. The charterers argued that, consequently, the owners had benefited from the former’s breach of contract and should give credit for the difference between the vessel’s actual sale price and her 2009 value. The arbitrator agreed and made a finding in favour of the charterers.
The Commercial Court overturned the arbitrator’s decision and held that the owners’ benefit (i.e. the sale price of the vessel in 2007) had not been legally caused by the charterers’ breach, but rather by the market fluctuations and by the owners’ independent and commercial decision to sell the vessel.
The charterers’ breach had merely provided the “context or occasion” for the owners to sell and was therefore the “trigger not the cause”. The Court added that the sale was a “transaction which could, in principle, have occurred irrespective of the breach”.
The Court further held that a finding that the sale was in reasonable mitigation of loss and therefore caused by the breach was not legally sufficient to establish the necessary causal link between the breach and the benefit. Moreover, to allow the charterers to benefit from the owners’ investment would be “unfair and unjust”.
The Commercial Court was therefore of the view that it would be unfair to allow a wrongdoer to obtain credit from the innocent party when the latter happened to be lucky enough to benefit from the former’s breach and that it was not sufficient to find that the sale had been completed in mitigation of the breach and was therefore caused by the breach. It is also clear from the Court’s decision that there is no hard and fast rule on this particular question of law and that the assessment of damages will often depend on the circumstances of the case.
Whilst this decision will reassure parties on the receiving end of a repudiation of contract, as this would mean that they are not under an obligation to account for benefits derived subsequent to the breach, it has also caused some controversy. It has been argued that the Court failed to consider other recent case law which, contrary to the Court’s finding, suggest that a causal link between the breach and the benefit is in fact sufficient to justify giving credit for said benefit.
The judgment is currently being appealed and, due to the potential impact on contract law and the assessment of damages where there has been a repudiation of contract, the Court of Appeal’s findings on the above question of law are awaited with interest.