The "New Flamenco" - Globalia Business Travel S.A.U. of Spain v Fulton Shipping Inc of Panama
By Lara McDonnell
The long awaited Supreme Court decision on the correct measure of damages following a breach of contract, has now been handed down. The decision resolves a vexed question in shipping law as to whether an innocent party (Owners) to a contractual breach, must, in their claim for damages against the contract breaker (Charterers), give credit for a linked capital windfall received by the innocent party, arising on an opportunely timed sale of the vessel.
Summary of the facts:
New Flamenco was time chartered on an NYPE 1993 form dated 13 February 2004 for a year; the charter was extended for two years expiring on 28 October 2007 (recorded in addendum A).
Owners asserted there was a further two-year extension, by oral agreement, to November 2009 (reflected in addendum B).
Charterers disputed the existence of the oral agreement, refused to sign addendum B, and maintained they could redeliver on 28 October 2007.
Owner treated Charterers as in repudiatory breach and accepted the breach on 17 August 2007, terminating the charter.
Charterers redelivered the vessel on 28 October 2007 (per addendum A). Shortly before redelivery Owners entered into an MOA selling the vessel for US$ 23,765,000.
The arbitrator found the New Flamenco would have been worth US$7,000,000 if redelivered in November 2009 (per addendum B).
Owners commenced arbitration, Mr Hamsher was appointed as sole arbitrator.
Owners claimed the net loss of profit they would have earned during the extended two-year charter period: €7,558,375.
Charterers asserted that Owners had to give credit for the difference in the value of the vessel when sold following the repudiatory breach and when it would have been sold following redelivery i.e. for US$16,765,000.
Owners asserted the difference was legally irrelevant.
The arbitrator after finding that there was an oral agreement, as reflected addendum B, proceeded to agree with Charterers, such that Owners’ claim was extinguished by the capital windfall in the value of the vessel when she was sold.
Appeal to the High Court (allowed by Teare J and decided by Popplewell J)
Consequently, there was no causal link for the capital value to be taken into account; whether the vessel was sold when it was in 2007, or when she would have been redelivered in 2009.
The appeal was allowed, this being a question of public importance. Teare J regarded the arbitrator’s decision as open to serious doubt.
In essence Popplewell J’s extensive, comprehensive judgment concluded that no credit was to be given as the windfall was not a benefit legally caused by the breach. (Considering: Bradburn, British Westinghouse, The Elena D’Amico and others.)
Consequently, it boiled down to causation, with the proviso that considerations of justice, fairness and public policy had to play a role.
Court of Appeal (leading judgment of Longmore LJ)
The CA disagreed with the HC, in essence on the basis that where Owners had adopted a measure by way of mitigation arising out of the breach, in the ordinary course of business, and to which they benefited it was normal to take the relevant measure into account, unless it was wholly independent of the relationship between Owners and Charterers.
The learned judge regarded the sale in mitigation as akin to spot chartering the vessel in mitigation, in respect of which there would be no dispute that any benefit obtained would have to be taken into account.
UK Supreme Court (judgment of Lord Clarke, with whom all other Lords sitting agreed: Lord Neuberger; Lord Mance; Lord Sumption and Lord Hodge)
Again, it boiled down to causation – the fall in value was regarded as irrelevant as it related to the Owners’ interest in the vessel and nothing to do with the Owners’ interest injured by the breach.
There had to be a sufficiently close link between the benefit and loss and not that the benefit and loss had to be of the same kind.
The benefit / windfall had to be caused by the breach – which the court found it was not - or have arisen following an act of mitigation – which this was not; the court finding that the premature termination never made it necessary for Owners to sell the vessel, it was an independent commercial decision of theirs to do so.
By virtue of the same principle, if the market value rose and Owners would have received more for the vessel when she would have been redelivered in 2009 Owners would not have to give credit for this against their damages claim.
Owners’ appealed pursuant to section 69 of the Arbitration Act 1996 on the question of law: Whether the enhanced capital value should be credited to Charterers / reduce Owners’ damages.
The appeal was accordingly allowed; the Tribunal had erred in principle and the order of Popplewell J of 21 May 2014 setting aside paragraph 7A of the arbitration award providing Charterers with credit for US$16,765,000 was restored.
The result is to be commended, as being the fairest, most just outcome – why should a guilty party benefit from an innocent party’s decision, following the former’s breach, in respect of which the innocent party happens to receive a substantial windfall? In order to reach this decision, however, the Supreme Court had to conclude that the Owners’ action in selling the vessel was not taken in mitigation, but was independent of the breach. Some may argue it was in mitigation, as was decided by the Court of Appeal, who consequently reached their decision in favour of Charterers.
The final position is that the Owners’ actions could not be characterised as a mitigating action; the Owners did not have to sell the vessel, nor was a sale an action required by the rules on mitigation of loss, in order for the Owners’ losses to be recoverable losses.
Please do not hesitate to contact the writer should any questions arise, or her clerk Michael Wright if she can be of assistance to you in the subject area.
Please click here to download a PDF copy of the New Flamenco Judgment UKSC.