United Kingdom Supreme Court considers whether credit should be given for a benefit arising when assessing damages for breach of contract

We previously commented on a decision of the Commercial Court¹ regarding the question of what benefits need to be given credit when assessing damages for breach of contract (See“Measure of loss and the mitigation of damage. New guidance from the courts on when damages for breach of contract should be reduced to give credit for a benefit arising out of the breach”). This decision has now been upheld by the UK Supreme Court².

The facts

The “NEW FLAMENCO” was a small cruise ship built in Genoa in 1972. She was chartered 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 Supreme Court decision

The Supreme Court stated:

“On the facts here the fall in value of the vessel was …. irrelevant because the owners’ interest in the capital value of the vessel had nothing to do with the interest injured by the charterers’ repudiation of the charterparty.

…..The essential question is whether there is a sufficiently close link between …(the benefit and the loss caused by the wrongdoer)… and not whether they are similar in nature. The relevant link is causation. The benefit to be brought into account must have been caused either by the breach of the charterparty or by a successful act of mitigation. “

The court observed that there was nothing about the premature termination of the charterparty which made it necessary to sell the vessel, either at all or at any particular time. Indeed, it could have been sold during the term of the charterparty. If the owners decided to sell the vessel, whether before or after termination of the charterparty, they were making a commercial decision at their own risk about the disposal of an interest in the vessel which was no part of the subject matter of the charterparty and had nothing to do with the charterers.

The court also concluded that the sale of the ship was not on the face of it an act of successful mitigation. If there had been an available charter market, the loss would have been the difference between the actual charterparty rate and the assumed substitute contract rate. The sale of the vessel would have been irrelevant. In the absence of an available market, the measure of the loss is the difference between the contract rate and what was or ought reasonably to have been earned from employment of the vessel under shorter charterparties, as for example on the spot market. The relevant mitigation in that context was the acquisition of an income stream alternative to the income stream under the original charterparty. The sale of the vessel was not itself an act of mitigation because it was incapable of mitigating the loss of the income stream.

The Supreme Court upheld the decision of the Commercial Court that held 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.

¹Fulton Shipping Inc of Panama v Globalia Business Travel S.A.U. (formerly Travelplan S.A.U) of Spain [2014] EWHC 1547 (Comm)
²Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) of Spain (Respondent) v Fulton Shipping Inc of Panama (Appellant) [2017] UKSC 43