The “NEW FLAMENCO” was a small cruise ship built in Genoa in 1972. She was chartered to Globabia for a term due to end on 28 October 2007.

The Owners and Charterers reached an oral agreement to extend the charter party term for a further two years so as to expire on 2 November 2009. However the Charterers later disputed having made this agreement. They maintained an entitlement to redeliver the Vessel on 28 October 2007.

The Owners treated the Charterers as being in anticipatory breach and on 17 August 2007 accepted this breach as terminating the charter party. The Vessel was redelivered on 28 October 2007. Shortly before that date, the Owners entered into a Memorandum of Agreement for sale of the Vessel for US$23,765,000.

The Owners advanced a claim for damages calculated by reference to the net loss of profits which they alleged that they would have earned during the additional two year extension. The amount claimed was €7,558,375.

The issue

The question was whether the Owners were bound to bring into account and give credit for the difference between the amount for which the Vessel had been sold when redelivered in October 2007 (US$23,765,000) and her value when she should have been redelivered in November 2009 (US$7,000,000). If so this amount would extinguish the Owner’s claim.

The legal background

It is well established that that damages for breach of contract are intended to put the innocent party in the same financial position as if the contract had been performed. This principle may also be expressed as the claimant being entitled to the value in money of the contractual rights he has lost.

It is also well established that an innocent party has an obligation to take all reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong. Where the innocent party does take steps to mitigate the loss to him and these steps are successful, the defendant is entitled to the benefit accruing from the innocent party ‘s action and is liable only for the loss as lessened

The question is what benefits received by the innocent party need to be brought into account when assessing the damages due. Not all benefits to the innocent party resulting from a breach of contract fall to be taken into account. For example insurance proceeds are considered as arising under the relevant contract of insurance and not as a result of the breach[2].

Hitherto the position has been unclear. The judgment in Fulton v Globalia has now offered some guidance on the principles to be applied.

Conclusions on legal principle stated in Fulton v Globalia

The judge stated that, ” The search for a single general rule which determines when a wrongdoer obtains credit for a benefit received following his breach of contract or duty is elusive.” However he went on to summarise the following principles:

(1) In order for a benefit to be taken into account in reducing the loss recoverable by the innocent party for a breach of contract, it is generally speaking a necessary condition that the benefit is caused by the breach.

(2) The causation test involves taking into account all the circumstances, including the nature and effects of the breach and the nature of the benefit and loss, the manner in which they occurred and any pre-existing, intervening or collateral factors which played a part in their occurrence.

(3) The test is whether the breach has caused the benefit; it is not sufficient if the breach has merely provided the occasion or context for the innocent party to obtain the benefit, or merely triggered his doing so.. Nor is it sufficient merely that the benefit would not have been obtained but for the breach (e.g. a claim on an insurance policy).

(4) In this respect it should make no difference whether the question is approached as one of mitigation of loss, or measure of damage; although they are logically distinct approaches, the factual and legal inquiry and conclusion should be the same.

(5) The fact that a mitigating step, by way of action or inaction, may be a reasonable and sensible business decision with a view to reducing the impact of the breach, does not of itself render it one which is sufficiently caused by the breach. A step taken by the innocent party which is a reasonable response to the breach and designed to reduce losses caused thereby may be triggered by a breach but not legally caused by the breach.

(6) Whilst a mitigation analysis requires a sufficient causal connection between the breach and the mitigating step, it is not sufficient merely to show in two stages that there is (a) a causative nexus between breach and mitigating step and (b) a causative nexus between mitigating step and benefit. The inquiry is also for a direct causative connection between breach and benefit, in cases approached by a mitigation analysis no less than in cases adopting a measure of loss approach. Accordingly, benefits flowing from a step taken in reasonable mitigation of loss are to be taken into account only if and to the extent that they are caused by the breach.

(7) Where, and to the extent that, the benefit arises from a transaction of a kind which the innocent party would have been able to undertake for his own account irrespective of the breach, that is suggestive that the breach is not sufficiently causative of the benefit.

(8) There is no requirement that the benefit must be of the same kind as the loss being claimed or mitigated: but such a difference in kind may be indicative that the benefit is not legally caused by the breach.

(9) Subject to these principles, whether a benefit is caused by a breach is a question of fact and degree which must be answered by considering all the relevant circumstances in order to form a commonsense overall judgment on the sufficiency of the causal nexus between breach and benefit.

(10) Although causation between breach and benefit is generally a necessary requirement, it is not always sufficient. Considerations of justice, fairness and public policy have a role to play and may preclude a defendant from reducing his liability by reference to some types of benefits or in some circumstances even where the causation test is satisfied.

(11) In particular, benefits do not fall to be taken into account, even where caused by the breach, where it would be contrary to fairness and justice for the defendant wrongdoer to be allowed to appropriate them for his benefit because they are the fruits of something the innocent party has done or acquired for his own benefit.

Application of these principles to the facts in Fulton v Globalia

The judge concluded that the Owners were not required to give credit for any benefit in realising the capital value of the Vessel in October 2007, by reference to its capital value in November 2009, because it was not a benefit which was legally caused by the breach.

The decision to sell was legally independent of the breach. The breach merely provided the context or occasion for the Owners to realise the capital value of the Vessel. It was the trigger not the cause.

The court went on to state that the capital value of the Vessel was a benefit which the Owners had obtained for their own account prior to the breach when they bought the Vessel in 2005. They invested their money (or that which they borrowed) in an asset, taking upon themselves the risk of fluctuations in its capital value which would inevitably be affected by the sale and purchase market. They took the risk of having invested in the Vessel, and of the financial consequences of a decision as to whether or when to sell her. To allow the Charterers to take the benefit of their decision to sell at what turned out to be an opportune moment in market conditions would be to allow the Charterers to appropriate the fruits of the Owners’ investment in the Vessel in a way which would be unfair and unjust.

[1] Fulton Shipping Inc of Panama v Globalia Business Travel S.A.U. (formerly Travelplan S.A.U) of Spain [2014] EWHC 1547 (Comm)

[2] Bradburn v The Great Western Railway Company (1874) LR 10 Ex 1

Categories: Contract

Anthony de Winton

Anthony is a consultant for Pitman. He gained a wide breadth of international legal experience in house with Kraft Foods. This experience included responsibility for the Middle East & Africa region and latterly providing legal support to the international supply chain and procurement organisation.