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Introduction

This case concerns the measure of damages for breach of contract and whether a benefit received by the claimant in consequence of that breach should be accounted for.

Background Facts

In this case the Defendants, a Spanish tourist group (the “Charterers”) chartered the ‘New Flamenco’ (the “Vessel”) from her then owners. The constanty_okolie_phClaimants (the “Owners”) thereafter bought the Vessel and later assumed the rights and liabilities of the Vessel’s former owners pursuant to a novation agreement.

The Owners and Charterers agreed to extend the charter by two years to October 2007; this was recorded in ‘Addendum A’. By oral agreement, the charter was further extended to November 2009 (as found by the Arbitrator), this agreement was reduced to writing in ‘Addendum B’. The Charterers however, denied having made the agreement and refused to sign. The Owners treated this as an anticipatory repudiatory breach and consequently accepted the breach as terminating the charter party agreement.

The Vessel was redelivered to the Owners in October 2007, at that time there was no available market in which to charter the Vessel, so the Owners sold it for $23,765,000. Thereafter, the Owners commenced arbitration proceedings; however by the time of the hearing in 2013, it had become clear that there was a substantial difference in the value of the Vessel in October 2007 (when it was redelivered) and in November 2009 (when it fell to be delivered under the disputed Addendum B). The Arbitrator determined that the value of the Vessel in November 2009 was $7,000,000.

The Owners claimed £7,558,375 in damages, this being the amount they would have earned, less costs and expenses during the additional two year extension. The Charterers submitted that account should be given to the difference in the value of the Vessel in October 2007 and its value in November 2009, which would have had the effect of wiping out the Owner’s losses.

The Arbitrator, being minded that a person suffering loss by reason of breach of contract is to be placed, as far as possible, in the same position as if the contract had been performed (Robinson v Harman [1848] 1 Exch. 850), decided in favour of the Charterers finding that:

  • The sale of the Vessel had been caused by the breach;
  • The sale was in reasonable mitigation of damages; and that
  • The Owners were obliged to account for the capital benefit.

High Court

The issue before the High Court was whether a ship-owner was bound to give credit for the capital value of a ship sold on repudiation of a time charter for an amount greater than the value of the ship as at the contractual date for redelivery.

The High Court considered several authorities including British Westinghouse Co Ltd v Underground Electric Railways Co Ltd [1912] A.C.673, and reiterated that the transaction “…if to be taken into account must be one arising out of the consequences of the breach and in the ordinary course of business“.

In allowing the appeal, the High Court:

  • Relying on The Elena D’Amico [1980] 1 Lloyds Rep 75 held that the Owners were not required to give credit for the capital benefit obtained in October 2007 because this was not a benefit legally caused by the breach;
  • Determined that the sale of the Vessel was a transaction open to the Owners independently of the breach and in applying Laverack v Woods of Colchester Ltd. [1966] EWCA Civ 4, determined that this indicated that “the breach was not sufficiently causative of the benefit… the breach merely provided the context or occasion for the Owners to realise the capital value of the Vessel“; and
  • Relied on Parry v Cleaver [1970] A.C. 1 in finding that “benefits do not fall to be taken into account even if caused by the breach where it would be contrary to fairness and justice to allow the wrong do-er to benefit from something the innocent party had done for their own benefit”. The Court considered that the purchase of the Vessel was an investment whereby the Owners had undertaken the risk of fluctuations in its capital value and to allow the Charterers to benefit from this would be unjust.

The Charterers appealed, submitting that the difference in the value of the Vessel constituted a benefit to the Owners which should have been accounted for based on principles of mitigation and avoidance of loss.

Court of Appeal

The Court of Appeal allowed the appeal, observing that the approach to be applied was dependent on whether or not there had been an available market to charter the Vessel, i.e. the normal rules of mitigation did not apply to available market cases. The Court held that where a claimant decides (however reasonably) not to avail himself of the available market, this is an independent decision which does not arise from the breach. If there is no available market it cannot be said to be an independent decision and accordingly, the mitigatory measure would flow from the breach.

The Court considered that where there had been no available market to charter the Vessel, British Westinghouse principles applied, meaning that where a claimant “adopts by way of mitigation a measure which arises out of the consequences of the breach” and such measures were in the “ordinary course of business” and benefitted the claimant, that benefit is usually to be brought into account. The Court of Appeal did not approve of the High Court’s view that there must be “a direct causative connection between breach and benefit“, reiterating that British Westinghouse simply called for the benefit to “arise from the consequences of the breach.” The Court also considered that while in some cases the courts had found it contrary to fairness and justice for a defendant to benefit from something done by the claimant or acquired for their own benefit, this was “hardly a principle of law which must be followed in all cases” and further, that fairness and justice required the Owners to account for their profit.

In summary, the Court found that the Owners could only recover the amount of hire giving credit for the sale price they in fact obtained for the Vessel after the breach.

Legal issues before the Supreme Court

The Supreme Court will consider the correct measure of ship owners’ damages following acceptance of a charterers’ repudiatory breach of charter. Particularly, can a “benefit”, said to consist in the avoidance of a fall in the capital value of the ship over the unexpired balance of the charter period because of the vessel’s sale shortly after the repudiation, be set off against owners’ claim to recover loss of earnings for that period?

The Hearing is expected to begin on 21 November 2016 and conclude on 24 November 2016, and will be heard alongside Lowick Rose LLP (in liquidation) v Swynson Limited & Anor, which deals with similar issues. (case preview here).

Implication

Both the High Court and the Court of Appeal conceded the difficulty in formulating principles of law in respect of mitigation of loss, more particularly where there is a benefit obtained by the claimant as a consequence of the breach which falls to be accounted for. What is apparent from the extensive consideration of case law in this area by the Arbitration Tribunal, High Court and the Court of Appeal, and the differing rationales and conclusions drawn by each, is that the differing interpretations of principles expounded in applicable case law could lead to uncertainty. The Supreme Court’s clarification in this area is therefore keenly awaited.