Fulton Shipping v Globalia Business Travel -the New Flamenco - Court of Appeal Decision
Fulton Shipping Inc v Globalia Business Travel SAU (The “New Flamenco”)
English Court of Appeal: Longmore, Christopher Clarke and Sales LLJ:  EWCA Civ 1299: 21 December 2015
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 OF DAMAGES: WHETHER CREDIT TO BE GIVEN FOR CAPITAL VALUE OF VESSEL SOLD ON REPUDIATION FOR A GREATER SUM THAN ITS VALUE ON CONTRACTUAL REDELIVERY DATE: ARBITRATION ACT 1996 SECTION 69 APPEAL
Note: this decision has been overruled by the Supreme Court in a judgment dated 28 June 2017 - see []
In reversing the decision of the High Court - see [] - the Court of Appeal held that, on the charterers’ earlier repudiation of the charter, the owners were 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 the cause of the capital gain, it having arisen out of the consequences of the breach and being done in the ordinary course of business, where there was no available market to charter the vessel.
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
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 they allegedly would have 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, 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 sought and obtained leave to appeal to the Court of Appeal.
Owners argued that (i) fluctuation in the value of capital assets should not be taken into account by way of mitigation, and (ii) before any benefit could be brought into account by way of mitigation, the benefit had to be of the same “kind” or “type” as the loss.
Charterers argued that (i) the High Court had been over-influenced by The “Elena D’Amico” (fn1) where, unlike the present case, there had been an available market, (ii) if there were no available market then there was no reason to treat the sale differently from the actual trading of the vessel, where fluctuations in the chartering market would inevitably be taken into account, (iii) British Westinghouse v Underground Electric Railways (fn2) showed that if loss was mitigated the resulting benefit received should be credited, (iv) the 11 principles adopted by the High Court were over-complex in what was essentially a factual inquiry, and (v) a particular “indicative” circumstance (namely loss of income from charter hire being different in kind to the benefit gained by an increased capital value on the sale of the vessel when a sale could in principle have occurred at any time) could not be sufficiently cogent to conclude that a benefit was not “legally caused” by the breach.
The Court of Appeal recognised the notorious difficulty in laying down principles of law in the realm of mitigation of loss, particularly when a benefit received by a claimant is to be brought into account as avoiding the loss, and while commending the High Court for having tried to do so indicated that the use of the word “indicative” was itself indicative that hard and fast principles are difficult to enunciate.
Having reviewed the leading authorities, the Court of Appeal identified, as a sufficient guide for the fact-finder in any particular case, that the important principle which emerges is that “if a claimant adopts by way of mitigation a measure which arises out of the consequences of the breach and is in the ordinary course of business and such measure benefits the claimant, that benefit is normally to be brought into account in assessing the claimant's loss unless the measure is wholly independent of the relationship of the claimant and the defendant.”
The Court of Appeal stressed the importance in this area of law of the question whether there was an available market. That arises as a statutory question in sale of goods cases as, where a seller fails to deliver, the prima facie measure of damages is the difference between the contract price and the market price at the time when the goods ought to have been delivered. The “Elena D’Amico” held that this was also the prima facie measure of damages in time charter cases. In that case, in concluding that the available market measure applied to repudiation by owners who took early redelivery, the judge held that the normal rules of mitigation did not apply because, if the innocent party chose not to take advantage of the available market, then this was an independent and speculative decision for his account, not for the account of the guilty party, as the loss did not “arise” from the contract but rather from the innocent party’s decision not to avail himself of the available market.
The Court of Appeal pointed out that this reasoning all depended on there being an available market and that this thinking cannot be automatically transposed to cases where there was no available market: “In such cases the prima facie measure of loss in hire contracts is the difference between the contractual hire and the cost of earning that hire (crew wages, cost of fuel etc). But it will not usually be reasonable for the shipowner to claim that prima facie measure if he is able to mitigate that loss by trading his vessel if opportunities to trade that vessel arise. If he does so trade the vessel, he may make additional losses or additional profits but, in either event, they should be taken into account. He is not speculating on the market as he would be if there was an available market of which he chooses not to avail himself; he is just bringing into account the consequences of his decision to mitigate his loss and those consequences will "arise", generally speaking, from the consequences of the breach of contract.”
The Court of Appeal took the view, in light of this, that the arbitrator was correct to rely on the first instance decisions in The “Kildare” (fn3) and The “Wren” (fn4), and the authorities therein discussed, which showed that compensation for actual loss is the underlying principle and that, in this connection, the available market rule is a gloss on that underlying principle. While The “Elena D’Amico” rationalised that gloss by saying that the decision not to take advantage of the market was an “independent decision” which did not “arise from” the breach, it did not follow that a decision to spot charter the vessel where there was no available market was an equally independent decision which did not arise from the breach, where in reality there might have been no alternative form of mitigation available.
As the Court of Appeal identified, the unusual facts of the present case showed that, as well as spot chartering the vessel, an owner may equally decide to mitigate its loss by selling the vessel. In that scenario, “it is not easy to see why the benefit (if any) which an owner secures by selling the vessel should not be brought into account just as much as benefits secured by spot chartering the vessel during the unexpired term of the time charterparty are, according to The Kildare and The Wren, to be brought into account. Nor is there any reason why the value of that benefit should not be calculated by reference to the difference between the value of the vessel at the time of sale and its value at the time when (in a falling market) the charterparty was due to expire.”
On that basis, the Court of Appeal concluded that the arbitrator had appropriately directed himself and made his own common sense overall judgment, such that he had not made an error in law in so doing. So, in answering the question of law set for the appeal (fn5), the Court of Appeal answered: “Yes, provided the acquisition of the benefit arose out of the consequences of the breach in the ordinary course of business and by way of mitigation of the claimant's loss.”
The decision highlights the complex interaction between consideration of the compensatory principle, mitigation and causation, and provides a logical distinction of the decision in The “Elena D’Amico”; as regards the relationship of charter hire income to capital asset value (which concern different kinds of losses/gains), the decision in that case only applies to scenarios where there is an available market - unlike the present case – since a decision to sell a capital asset when there is an available market in which to mitigate the loss of hire income resulting from repudiation of the charter is an independent business decision not caused by the breach of the charter.
Footnote 1:  1 Lloyd’s Rep 75.
Footnote 2:  AC 673.
Footnote 3:  2 Lloyd’s Rep 360.
Footnote 4:  2 Lloyd’s Rep 370.
Footnote 5: “When assessing shipowners’ damages for loss of profits on earnings of hire under a time charter party which has been repudiated by the charterers and the repudiation accepted by the owners as terminating the contract, are the charterers entitled to have taken into account as diminishing the loss of earnings/hire sustained by the owner as a result of the accepted repudiation ‘a benefit’ said to consist of avoidance of a drop in the capital value of the vessel because the vessel has been sold shortly after acceptance of the repudiation whereas if the vessel had been retained until after performance of the charter party, it would have had a lower capital value by reason of decline in the capital value of the vessel through market decline in ship sale values in that period?”