Flame SA v Glory Wealth Shipping

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DMC/SandT/14/06

England

Flame SA v Glory Wealth Shipping Pte Ltd

English Commercial Court: Teare J: [2013] EWHC 3153 (Comm): 22 October 2013

Christopher Hancock QC (instructed by Thomas Cooper) for Flame

Lawrence Akka QC (instructed by Holman Fenwick & Willan LLP) for Glory Wealth

CONTRACT OF AFFREIGHTMENT: REPUDIATION: QUANTUM OF DAMAGES: COMPENSATORY PRINCIPLE: WHETHER INNOCENT PARTY MUST PROVE ABILITY TO PERFORM OBLIGATIONS, HAD CONTRACT CONTINUED, TO RECOVER SUBSTANTIAL DAMAGES FROM CONTRACT BREAKER

Summary

In order to recover substantial damages when a contract has been repudiated, the innocent party must prove on the balance of probabilities that it would have been able to perform its contractual obligations had the contract continued, to satisfy the compensatory principle that damages are to be awarded to compensate the innocent party for its true loss.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, and International Contributor to DMC’s Case Notes

Background

Flame and Glory were party to a contract of affreightment ("COA") which provided for Glory (as disponent owner) to carry six cargoes of coal in bulk in each of the years 2009, 2010 and 2011. The arbitration award in respect of which the appeal was brought related to the failure of Flame (as charterer) to declare laycans for various shipments in 2009 and 2010. The arbitration panel awarded damages to Glory in the sum of about USD5.5 million plus interest.

The arbitration panel found that Flame was in actual repudiatory breach of the COA by failing to declare laycans for the voyages and that each such repudiatory breach had been accepted by Glory as terminating Glory’s obligation to carry cargoes on those voyages. The panel further found that the lost revenue, the difference between the COA rate and market rate, was about US$5.5 million. The reason for such a great difference between the COA and the market rates was that, following the collapse of Lehman Brothers, the freight market suffered a sudden and dramatic decline.

Flame said that, as a result of the market's collapse, the financial position of Glory had so deteriorated that, had Flame declared the laycans, Glory would have been incapable of providing the required vessels. Flame submitted that Glory were only entitled to substantial damages if Glory could prove that, if Flame had declared any of the laycans, Glory would have been able to perform the corresponding voyages by going out into the market and chartering in a vessel at the relevant time.

The arbitration panel rejected the submission made by Flame. The rejection of that submission gave rise to the question of law on appeal.

Judgment

The judge came to the following conclusions having heard leading counsel for the parties and undertaken a thorough review of the leading case law:

- An award of damages for breach of contract is to compensate the victim of the breach for the loss of his contractual bargain. The object of an award of damages is to put the innocent party in the same position as, and in no better position than, it would have been in had the contract been performed. This is referred to as the compensatory principle. The House of Lords in The “Golden Victory” (fn.1) ascribed the compensatory principle to be the fundamental principle governing the quantum of damages for breach of contract.

- The court must have regard to the compensatory principle which underlies the assessment of damages when assessing the quantum of a claim. None of the cases cited to the Court was binding in relation to the question in issue, so did not require the court to depart from the compensatory principle. The importance ascribed to that principle in The “Golden Victory” (fn.1) was a powerful argument for applying that principle in the present case.

- The assessment of loss necessarily requires a hypothetical exercise to be undertaken. The assessment is of what would have happened had there been no repudiation. That enables the true value of the rights which have been lost to be assessed. The innocent party is claiming damages and therefore the burden lies on that party to prove its loss. That requires the innocent party to show that, had there been no repudiation, it would have been able to perform its obligations under the contract.

- If the court were to assume that the innocent party would have been able to perform, rather than consider what was likely to have happened had there been no repudiation, the court might well put the innocent party in a better position than it would have been in had the contract been performed. The assessment of damages does require an assumption to be made but that assumption is limited to one that the party in breach has performed its obligations.

But despite the conclusions set out above, the appeal still failed, because the arbitrators had found as a fact that Glory would have been able to perform the COA if Flame had called upon them to do so. Thus, had the arbitrators concluded [as they should have done] that Glory were obliged to prove that they had sustained substantial damages by showing that, had Flame performed their obligations, they would have provided the necessary vessels, the result of the arbitration would have been no different.

Comment

As the writer commented in relation to the House of Lords’ decision in The “Golden Victory” (fn.1) [1] for the Judge to have held otherwise than he did would have flown in the face of reality; it would have created the potential for an innocent party to be improperly over-compensated based on an assumption, contrary to the fundamental principle underlying the payment of damages, namely to award damages that represent the innocent party’s true loss. The present judgment is to be welcomed for upholding the spirit of that principle.


Footnote 1: Golden Strait Corporation v Nippon Yusen Kubishka Kaisha [2007] UKHL 7