The New Flamenco: assessment of damages
Fulton Shipping v Globalia Business Travel (The New Flamenco) [28.06.17]
The Supreme Court, in assessing damages due to owners arising from a premature termination of a charter, has ruled that the charterers are not entitled to a credit for the difference in the value of the vessel when it was sold in 2007 compared with its lower value in 2009 when the charter should have terminated. The sale of the vessel was deemed independent of the breach of contract and, without a causal link between sale and breach, the owners were entitled to claim loss of profit for the “unexpired” period of the charter irrespective of any benefit arising from the early sale.
The decision was an appeal from the Court of Appeal which had overturned a High Court ruling (which had previously reversed a London arbitration award).
The New Flamenco had been chartered from February 2004 until November 2009. Wrongly, the charterers redelivered the vessel in 2007. The early redelivery was a repudiatory breach which owners accepted. The vexed question was whether the benefit of the early sale had to be taken into account in the assessment of damages as an act of mitigation.
Ordinarily, damages for a wrongful early redelivery would be assessed on the basis of the difference between the existing charter rate and the market rate for a substitute charter fixture for the balance of the charter period. However, on the wrongful redelivery in 2007 there was no available charter market for this vessel for the final period of the charter. Therefore, soon after the early redelivery, the owners sold the vessel for US$23,765,000. When commencing their claim against charterers the owners claimed damages for loss of profit for the balance period of the charter in the sum of EUR 7,558,375.
However, during the May 2013 arbitration, evidence emerged that if charter had continued to 2009 and the vessel then sold, the sale proceeds would have been no more than US$7 million. By the fortuity of the sale two years’ earlier, the owners had in fact benefitted by about US$16 million or, put another way, saved themselves from a substantial capital loss. The question is whether that benefit, which would extinguish owners’ claim of EUR 7.5 million entirely, is to be taken into account. The charterers argued that the sale of the vessel in 2007 was an act of mitigation (since there were no available charter fixtures) and so must be taken into account so extinguishing the claim.
The arbitrator held that the sale of the vessel could be considered an act in mitigation and thus the charterers should be given credit for the benefit gained by owners.
On appeal to the High Court, Mr Justice Popplewell held the award to be wrong in law. Poppelwell J considered (i) the circumstances when a benefit obtained by an innocent party is relevant to the assessment of damages and (ii) the principle that there must be a causal link between the breaching party’s act and the benefit subsequently obtained by the innocent party. Popplewell J decided in favour of the owners holding that the decision in The Elena D’Amico  should be applied by analogy, meaning that the decision to sell the vessel was an independent decision and not caused by the charterers’ breach.
The Court of Appeal however took a different view and reversed the decision of the High Court. Longmore LJ concluded that the benefit the owners derived from selling the ship did affect the recoverable loss as the decision to sell was a consequence of the charterers’ breach. If the vessel had not been redelivered, there would not have been a reason for the owners to sell. The lack of an available charter market in 2007 meant that the owners effectively had no choice but to sell. Causation was thus established. Longmore LJ also concluded that the decision in The Elena D’Amico could not be applied, as in that case there was an available market.
Supreme Court decision
The Supreme Court reversed the Court of Appeal and agreed with the decision of Popplewell J. The owners’ damages are not subject to a credit for the difference in the value of the vessel when sold in 2007 compared with its lower value in 2009 as “the sale of the vessel was not itself an act of mitigation because it was incapable of mitigating the loss of the income stream.”
According to the Court, the fall in the market value of the vessel after 2007 is irrelevant because the capital value of the vessel is unrelated to the loss of charter income incurred as a result of the charterers’ breach of contract. The benefit derived from the sale in 2007 was not caused by the breach nor by an act of mitigation but was an independent decision by the owners.
This case helps to clarify the position in relation to the assessment of damages in cases of wrongful early redelivery, particularly when there is no available market for a replacement charter fixture. If there had been an available market “the loss would have been the difference between the actual charterparty rate and the assumed substitute contract rate.”
The decision also clarifies an area of law which was long ago discussed in The Elena D’Amico and which was put in doubt by the Court of Appeal. However, the Supreme Court clearly distinguished the breach of contract from the act of sale i.e. the two are separate and independent events which are not causally linked.
The decision can be said to benefit owners as now, should similar circumstances arise, the owners will be entitled to recover loss of profit for any “unexpired period” of the charter irrespective of any movement in the capital value of the vessel. Any capital gain from selling their vessel at a particular period (or indeed any loss) will therefore be irrelevant.