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19 October 2016
The Court of Appeal's decision in The New Flamenco(1) acknowledges the difficulties of laying down general principles of law in connection with an innocent party's obligation to mitigate its loss following a repudiatory breach of contract. The case arose in the context of assessing damages for early redelivery where there was no available market at the time of the breach against which to measure the loss.
The charterers had agreed a two-year extension to a time charter. The charterers later denied that they had agreed to extend the time charter and maintained that they were entitled to redeliver the vessel at the end of the previously agreed period. The owners treated the charterers' conduct as being an anticipatory repudiation of the charter, which they accepted as bringing the contract to an end. Soon after redelivery, the owners sold the vessel at what was, at the time, close to the top of the market.
The owners then brought a claim for damages for breach of charter. It was agreed that there was no substitute available market against which to assess losses and damages, so the owners claimed damages on the basis of their actual losses, being the loss of profit that they claimed to have suffered as a result of the early redelivery and consequently the vessel not trading for two additional years. The charterers argued that in order to establish the amount of their actual loss, the owners had to bring into account and give credit for the difference between the sale price of the vessel as at the date of its redelivery and as at the date when the vessel would have been delivered under the two-year extended term. This was an important point, as if the charterers were correct, the owners' claim would be extinguished.
The case originally started in arbitration and the arbitrator held that there was no reason why capital savings brought about by way of reasonable mitigation should not be brought into account in considering the net loss suffered by the owners.
The owners appealed and Justice Popplewell allowed the appeal. He held that although factually the breach caused the mitigation and the mitigation caused the benefit or sale, this was not "legally sufficient to establish the necessary causative link between breach and benefit". He found that the owners' decision to sell the vessel was a decision made independent of the breach. The judge further held that the benefit and the loss were different, the former being a capital gain and the latter an income stream. This, together with the fact that the owners, had they wanted, could have sold the vessel any time irrespective of the charterers' breach, was a further indication that the benefit was not caused by the breach. The judge also held that to allow the charterers to benefit from the owners' business decision to buy and sell the vessel when they did would be contrary to public policy.
The charterers appealed to the Court of Appeal. Popplewell's judgment was set aside and the arbitrator's decision was reinstated. The court held that the important question in this area of law was whether there was an available market. If there was not, then the prima facie measure of damages for an innocent shipowner was the difference between the contractual hire and the cost of earning that hire, less any amounts that the shipowner could earn by reason of trading the vessel. If, rather than trading the vessel, the owners decided to sell it – and it was reasonable for them to do so – there was no sound legal reason not to take into account the benefit of a sale of the vessel at the top of the market, since the sale was both an act of mitigation and the benefit which the owners received.
Thus, for any benefit to be taken into account in assessing damages, the court held that it was sufficient to show that it arose in the ordinary course of business from the consequences of the breach that occurred. The arbitrator's approach was correct in that he formed a "common sense overall judgement" on causation.
The court also rejected the public policy argument on the grounds that public policy arguments do not constitute a general principle of law to be followed in all cases and in any event they should not override the fundamental principle that an injured party should, as far as money is concerned, be placed in the same situation had the contract been performed.
While this judgment does not make new law, it does emphasise the important point that in the absence of an available market against which to assess damages, a close analysis is required of the decisions made by the owners in order to ascertain what losses they have in fact incurred. If the owners do not wish income – including capital windfalls – arising from their post-breach commercial decisions to be taken into account in assessing their damages, clear evidence will be required to persuade a court that those decisions were independent from and collateral to the breach.
It is understood that the owners are seeking permission to appeal to the Supreme Court.
For further information on this topic please contact Chris Grieveson at Wikborg Rein's London office by telephone (+44 20 7367 0300) or email (firstname.lastname@example.org). Alternatively, contact Stewart Ian Munro at Wikborg Rein's Singapore office by telephone (+65 6438 4498) or email (email@example.com). The Wikborg Rein website can be accessed at www.wr.no.
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