Paul Bugden, Bugden + Co., London

Ref: Fulton Shipping v Globalia Business Travel (The New Flamenco) [2017] UKSC 43; [2017] 1 W.L.R. 2581.

Once again fundamental principles of damages for breach of contract have reached the Supreme Court for consideration in the context of  a shipping case.

In March 2005, the appellants (“the owners”) bought a cruise ship called the New Flamenco (“the vessel”). The vessel had been chartered to the respondents (“the charterers”) by its previous owners by way of a time charterparty (“the charterparty”). By a novation agreement the appellant assumed the rights and liabilities of the previous owner under the charterparty effective as from March 2005. In August 2005, the owners and the charterers concluded an agreement extending the charterparty for two years so that it was due to expire in October 2007. At a meeting in June 2007, the owners and charterers reached an oral agreement extending the charterparty for a further two years, expiring in November 2009. The charterers disputed having made the agreement and maintained they were entitled to redeliver the vessel in October 2007 as originally agreed. The owners treated the charterers as in anticipatory repudiatory beach and accepted the breach as terminating the charterparty. The vessel was redelivered in 28 October 2007. Shortly before the delivery the owners agreed to sell the vessel to a third party for US$23,765,000.

The owners commenced arbitration in London, as provided for by the charterparty, seeking damages for the charterers’ repudiatory breach. The arbitrator found that an oral contract to extend the charterparty had been made, the charterers were in repudiatory breach of that contract and therefore the owners were entitled to terminate the charterparty. This finding went unchallenged.

The evidence showed that there was a very significant fall in the value of the vessel over the time of her actual sale in 2007 and the time when the vessel would have been redelivered to the owners (November 2009) had the charterers not been in breach. The arbitrator found that the charterers were entitled to a credit for this difference in value, amounting to some US$16,000,000 which he discounted in his award from the damages payable by the charterer to the owners from the loss of profit claim.  As the credit was more than the owners’ loss of profit claim the owners were awarded no damages.

The owners appealed to the High Court pursuant to section 69 of the Arbitration Act 1996 on a question of law; namely whether when assessing the owners’ damages for loss of profits the charterers were entitled to have brought into account the drop in the capital value of the vessel. Popplewell J held that they were not because the benefit accruing to the owners from the sale of the vessel in October 2007, instead of in November 2009, was not legally caused by the breach.

The charterers appealed to the Court of Appeal. The appeal was allowed on the basis that the owners took a decision to mitigate their loss by selling the vessel in October 2007 and there was no reason why the benefit secured by doing this should not be brought into account, in the same way that benefits secured by spot chartering a vessel during an unexpired term of charterparty would be.

The owners appealed that judgment to the Supreme Court which allowed the owners’ appeal and restored the decision of Popplewell J. The sale of the ship after the repudiation (when prices were higher and at a time earlier than it might otherwise have been sold but for the termination of the charter) was not a relevant benefit to be taken into account so as to reduce the claim to lost hire. As such the charterers were not entitled to a credit for the difference in the value of the vessel when sold in 2007, in comparison to its diminished value in 2009.

The owners’ interest in the capital value of the vessel was held to be nothing to do with the interest injured by the charterers’ repudiation of the charterparty. The owners would not have been able to claim the difference in the market value of the vessel if the market value had risen between the sale in 2007 and the time the charterparty should have been terminated in 2009.

There was equally no reason to assume that a sale would necessarily have followed the lawful redelivery at the end of the charterparty term.  The repudiation resulted in a prospective loss of income for a period of about two years. However, there was nothing about the premature termination of the charterparty which made it necessary to sell the vessel, at all or at any particular time. It could also have been sold during the term of the charterparty. When to sell the vessel was a commercial decision made at the owners’ own risk. The premature termination of the charterparty was at most the occasion for selling the vessel, but it was not the legal cause of it.

For the same reasons, 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. 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. The relevant mitigation in that context is the acquisition of an alternative income stream 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.