Fulton Shipping v Globalia Business Travel - The New Flamenco - Supreme Court Decision

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DMC/SandT/17/08

England

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

United Kingdom Supreme Court: Neuberger, Mance, Clarke, Sumption and Hodge SCJJ: [2017] UKSC 43: 28 June 2017

Steven Gee QC, Tom Whitehead, Daniel McCarty and William Hooper (instructed by Gateley LLP) for Fulton

Simon Croall QC, Peter Ferrer and Ben Gardner (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

In reversing the decision of the Court of Appeal [[1]] and reinstating the decision of the High Court [[2]], the United Kingdom Supreme Court held that, on Charterers’ earlier repudiation of the Charter, Owners were not obliged to give credit to Charterers for the capital value of selling the Vessel for a greater sum than the value of the Vessel had there been a notional sale at the contractual date for redelivery under the Charter, as the repudiation was not the legal cause of the capital gain and the sale of the Vessel was not a successful act of mitigation for the lost income stream of hire under the Charter caused by the repudiation.

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

Background

Fulton (“Owners”) bought the 1973-built small cruise ship “NEW FLAMENCO” (“Vessel”), 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 (“Charter”) to Globalia (“Charterers”). Owners thereby assumed the rights and liabilities of the owner under the 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 Brothers in 2008 had occurred. As a result, the value of the vessel if she would theoretically 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, which allowed Owners’ appeal, concluding 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. In turn, Charterers appealed to the Court of Appeal, who reversed the decision of the High Court. Owners then appealed to the United Kingdom Supreme Court.

Judgment

The sole judgment of the United Kingdom Supreme Court was given by Lord Clarke, with whom Neuberger, Mance, Sumption and Hodge SCJJ agreed.

In reversing the decision of the Court of Appeal and reinstating the decision of the High Court, Lord Clarke gleaned the following points with reference to the High Court judgment:

The fall in the value of the Vessel was caused by neither the breach of the Charter nor by a successful act of mitigation. In the view of Lord Clarke: “The essential question is whether there is a sufficiently close link between the two and not whether they are similar in nature. The relevant link is causation.”

There was nothing about the premature termination of the Charter that made the sale of the Vessel necessary. While Charterers’ breach gave Owners the occasion to sell the Vessel, that was not the legal cause of the sale. Also, there was no reason why a sale of the Vessel would have necessarily followed redelivery had the Charter instead continued to the lawful redelivery date on or about 2 November 2009. Alternatively, Owners could have sold the Vessel at any time irrespective of Charterers’ breach, provided they did so on terms requiring the new owner to perform the Charter. Consequently, the sale of the Vessel was a commercial decision for Owners and had nothing to do with Charterers.

The sale of the Vessel was not a successful act of mitigation as the sale was incapable of mitigating the loss of the income stream, namely the two years' remaining hire under the Charter. Had Owners failed to sell the Vessel the arbitrator had not found that such failure to sell would have been a failure reasonably to mitigate their losses. If there had been an available charter market then the loss would have been the difference between the actual charter rate and the assumed substitute contract rate. In the absence of an available market, the measure of loss is the difference between the contract rate and what was or ought reasonably to have been earned from the employment of the Vessel under shorter charterparties.

That was not to say the sale of the Vessel could never be relevant for some purposes. So, if the vessel were sold, say, a year into the two year period, that would shorten the period during which the owners could claim to have lost the income stream under the old charter and therefore the period during which there was a lost income stream to mitigate. Further, if the owners could shown that they received less for the vessel than they could have done by selling her with the benefit of what remained of the old charter, the difference might also be recoverable on the basis that the effect of the sale would be to capitalise the value of a year’s hire payments. But none of those considerations would make the sale of the vessel itself an act of mitigation. That would simply be the exercise of the owners’ proprietary right which they enjoy independent of the charter and independent of its termination.

Comment

The judgment of Lord Clarke provides a clear and concise answer to the question asked on the appeal. In general terms, it approved the decision of the High Court but used a leaner basis to rationalise whether a benefit arising to a wronged party on the premature termination of a contract after repudiation by the other party is to be brought into account when assessing the quantum of damages due to the wronged party.