Fulton Shipping v Globalia Business Travel - The New Flamenco

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DMC/SandT/14/15

England

Fulton Shipping Inc v Globalia Business Travel SAU (The “New Flamenco”)

English Commercial Court: Popplewell J: [2014] EWHC 1457 (Comm): 21 May 2014

Steven Gee QC and Tom Whitehead (instructed by Gateley LLP) for Fulton

Simon Croall QC and Peter Ferrer (instructed by Clyde & Co LLP) for Globalia

TIME CHARTER: REPUDIATION: QUANTUM: WHETHER CREDIT TO BE GIVEN FOR CAPITAL VALUE OF VESSEL SOLD ON REPUDIATION FOR A GREATER SUM THAN VALUE ON CONTRACTUAL REDELIVERY DATE: ARBITRATION ACT 1996 SECTION 69 APPEAL

Summary

On the charterers’ earlier repudiation of the charterparty, the owners were not obliged to give credit to the charterers for the capital value of selling the vessel for a greater sum than the value of the vessel at the contractual date for redelivery under the charter, as the repudiation was not the legal cause of the capital gain.

Note: this decision was overruled by the Court of Appeal - [2015] EWCA Civ 1299 - see [[1]] - but was restored by the Supreme Court - [2017] UKSC 43 - see [[2]]

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

Fulton (“Owners”) bought the 1973-built small cruise ship “NEW FLAMENCO”, which they had previously managed. The purchase was pursuant to a novation agreement dated 23 March 2005 and subject to a time charter on a NYPE form dated 13 February 2004 to Globalia (“Charterers”). Owners thereby assumed the rights and liabilities of the owner under the charter (“Charter”).

Owners and Charterers later agreed by way of addenda two extensions of the Charter for two consecutive periods of two years. The second extension was by way of oral agreement, which Charterers later disputed, refusing to sign the second addendum, and maintaining their entitlement to redeliver the vessel on 28 October 2007.

Owners treated Charterers as in anticipatory repudiatory breach of the Charter and on 17 August 2007 accepted the breach as terminating the Charter. The vessel was redelivered on 28 October 2007. Owners entered a memorandum of agreement for the sale of the vessel shortly before that date for USD23.7 million.

Owners then started arbitration proceedings in London, claiming the net loss of profits that allegedly would have been earned during the additional two-year extension. The profits were set out in a detailed schedule identifying Charter revenue, and giving credit for the costs and expenses that would have been incurred in operating the vessel to provide the charter service for the two years but which were saved as a result of the sale. The sum claimed was about EUR7.5 million.

By the time the arbitration hearing took place in 2013, the financial crisis following the collapse of Lehman Brother in 2008 had occurred. As a result, the value of the vessel when she would have been sold - but for Charterers’ repudiatory breach - after expiry of the period agreed in the second addendum in November 2009, was subsequently found by the arbitrator to be USD7 million.

Charterers argued that Owners were bound to bring into account and give credit for the difference between the sum for which the vessel had been sold in October 2007 (USD23.7 million) and her value in November 2009 (USD7 million). Owners took the position that the difference in value was legally irrelevant. The sole arbitrator, applying the ‘compensatory principle’, declared that Charterers were entitled to a credit of EUR11.2 million (USD16.7 million), which exceeded Owners’ loss of profit claim and resulted in Owners recovering no damages for Charterers’ repudiation.

Owners sought and obtained leave to appeal to the High Court.

Judgment

Owners argued that taking into account the fluctuation in the capital value of the vessel involved an error of law as this offended the compensatory principle. Benefits of a different kind resulting from reasonable steps taken in mitigation and lacking a sufficient causal connection with the breach - as was the case here - were not to be brought into account.

Charterers argued that there was no error of law, that a sufficient causal nexus is the sole test, and that the arbitrator applied the correct test by finding that the sale was caused by the breach and that the capital benefit arose therefrom. This was a factual finding not open to review on an appeal under section 69. Not taking into account the difference in sale values would offend the compensatory principle by leaving Owners better off.

Having heard submissions for Owners and Charterers on the issue of the compensatory principle, mitigation and causation, the judge concluded that a single general rule to determine when a wrongdoer obtains credit for a benefit received following his breach of contract or duty does not exist.

The judge was, however, able to identify a number of principles that emerged from the authorities considered, which he summarised as follows:

(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.

(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.

In applying the principles identified to the facts of this case, the judge concluded that Owners did not need to give credit to Charterers for any benefit in realising the capital value of the vessel in October 2007, with reference to her capital value in November 2009, because that was not a benefit which was legally caused by the breach.

The underlying rationale was that the loss in the capital value of the vessel was caused by the fall in the market, irrespective of Charterers’ breach of the Charter. It arose (or could be assessed) only because Owners had decided to sell the vessel in October 2007, where they had a choice whether or not to sell her at any stage over the unexpired period of the Charter. Whether or not to sell was Owners’ commercial judgment and involved a commercial risk taken for their own account, even if it was reasonable for them to sell when faced with Charterers’ breach.

This accorded with the decision in The “Elena D’Amico” (fn1) where the breach merely provided the context or occasion for the owner to realise the capital value of the vessel, the breach being the trigger but not the cause of the sale.

Comment

The decision highlights the complex interaction between consideration of the compensatory principle, mitigation and causation, and provides a logical extension to the decision in The “Elena D’Amico” on the relationship of hire to capital value.

Footnote 1: [1980] 1 Lloyd’s Rep 75.