UK: The Challenge Of Mitigating Your Losses Where There Is No Available Market – ‘The New Flamenco'*

Mitigation of damage where there is no available market is a difficult area of law and can be challenging. As the Court of Appeal recognised recently in its judgment in The New Flamenco, "it is notoriously difficult to lay down principles of law in the realm of mitigation of loss". This judgment provides helpful guidance on the complicated interplay between market conditions at the time of a breach, mitigation and causation. While the facts are squarely based in the shipping world, this key decision has a much wider effect on commercial contracts.

This client alert examines the key principles highlighted in that case and considers how it affects contracts for the sale of goods.

The facts

On 13 February 2004, The New Flamenco was chartered by her claimant owners to the defendant charterers on a time charterparty.2 In August 2005, the charterparty was extended to 28 October 2007 by mutual agreement. On 8 June 2007, the parties reached an oral agreement to extend the charter for another two years, to 2 November 2009.

The charterers alleged no such extension had been agreed and indicated an intention to redeliver the vessel at the end of October 2007, refusing to sign an addendum documenting the further extension. The owners declared the charterers in anticipatory repudiatory breach and accepted this breach as terminating the charterparty on 17 August 2007.

The vessel was redelivered by the charterers on 28 October 2007. However, the owners had been unable to find an alternative employment for the vessel as from October 2007, and shortly before redelivery they entered into a memorandum of agreement for sale of the vessel for the sum of US$23.765m.

The arbitration

Arbitration was commenced by the owners against the charterers for recovery of the net loss of profits the owners alleged they would have earned between October 2007 and November 2009. The charterers contended that the change in value of the vessel had to be taken into account: the vessel's value between the time of actual redelivery in 2007 and the time the owners alleged she should have been redelivered in 2009 had dropped by US$16.765m to just US$7m. As a result, the charterers said that credit should be given to them for the 'benefit' the owners gained in having the vessel redelivered early (i.e. the avoided loss of value of the vessel).

The sole maritime arbitrator found that the sale of the vessel was reasonable mitigation of damage and held that the benefit accrued to the owners by such sale should be brought into account. On appeal to the High Court, Popplewell J reversed the arbitrator's decision. The Court of Appeal then overturned Popplewell J's decision and restored the arbitrator's decision: i.e. the sale of the vessel had to be taken into account.

Guiding principles

There is no single case which sets out guiding principles relating to mitigation. In practice, where there is a renunciation of a contract and there is an available market, the relevant market price for the purposes of assessing damages will generally be determined by the principle of mitigation: the innocent party is normally required to mitigate its loss by going into the market for a substitute contract as soon as is reasonable after the original contract was terminated (usually subject to any express default/termination clause in the contract). The position is less straightforward when there is no available market. Helpfully, Popplewell J at first instance summarised the guiding principles in such cases.

In summary, in order for a benefit to be taken into account and reduce the damages payable by a breaching party, the benefit must be caused by the breach. There must be a clear, direct, causal link between the breach and the benefit obtained. All of the relevant circumstances must be taken into account, 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". Other important factors with a role to play are "considerations of justice, fairness and public policy".

Application of these principles by the Court of Appeal

The Court of Appeal found that the principles laid down by Popplewell J at first instance were sound. However, it was the application of such principles which was wrong and led the Court of Appeal to overturn the decision. This was based on a number of considerations.

First, the Court of Appeal discussed that the compensatory principle was key. In this respect, the Court of Appeal made specific reference to the Supreme Court judgment in Bunge SA v Nidera BV, which had also emphasised the importance of the compensatory principle. It is clear that "he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed". Compensation for financial loss naturally arising from the breach is the fundamental purpose of awarding damages.

Second, where a breach has occurred, a claimant is required to take all reasonable steps to mitigate the loss consequent on the breach. Any loss which could have been avoided but failed to be, due to a lack of action, cannot be recovered.

Third is the natural corollary of the obligation to mitigate, which is that where action has been taken which diminishes the loss, such diminution is to be taken into account when awarding compensation. This is so even where such action did not have to be taken as a 'reasonable step' in mitigation, but was taken in any event.

Application of the principles of mitigation

(i) Available market The principles of mitigation are relatively straightforward to apply where there is an available market. In sale of goods cases, the statutory obligation contained in the Sale of Goods Act 1979 is that, where there is an available market, damages are prima facie assessed by comparing the contract price of the goods with the market price at the time of default. If the innocent party opts to go into the market and buys or sells against the breaching party, it has mitigated its loss by taking this reasonable step. If the innocent party opts not to go into the market, its damages are still limited to the difference between the contract and the market price of the goods. The duty to mitigate is therefore built into this statutory formula and, where there is an available market, the actual decisions and actions of the innocent party should not – save for in exceptional circumstances – affect this calculation. Interestingly, the UK Supreme Court recently considered the principle of mitigation in the context of the GAFTA default clause in its judgment in the Bunge SA v Nidera BV case, where the court rejected the argument that the GAFTA default clause precludes the operation of the principle of mitigation of loss. As the Supreme Court held in that case, although the GAFTA default clause deals with the innocent party's duty to mitigate by going into the market to buy or sell against the defaulter, it does not deal with any other aspect of mitigation3.

(ii) No available market More complex are cases where there is no available market at the time of the breach. In this situation, the innocent party is required to consider much more carefully what "reasonable steps" in mitigation would be. In The New Flamenco, there was no available market for the re-charter of the vessel. The owners therefore opted to sell the vessel, a decision which was accepted as a reasonable step in mitigation.

The Court of Appeal stated that, where there is no available market, an innocent party will need to consider what steps it may take to mitigate its loss. If steps are taken, "he may make additional losses or additional profits but, in either event, they should be taken into account," as "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 also stated that "one just has to decide whether the sale of the vessel arose 'out of the consequences of the breach and in the ordinary course of business'." It does not matter that the benefit obtained was of a different type to the loss – "there is no requirement that a benefit which is to be brought into account must be of the same kind as the loss being claimed or mitigated".

In this particular case, the Court of Appeal held that the arbitrator had "made his own 'common sense overall judgment'" and had not, therefore, made an error of law in doing so. The arbitrator had been persuaded that the benefit arose from the consequences of the breach and so should be taken into account. Furthermore, considerations of fairness and justice were important, as these "persuaded the arbitrator that, when he looked at the case as a whole, the owners had made a considerable profit from the action they took by way of mitigating what would otherwise have been an undoubted loss".

What next for mitigation?

This case serves to bring to the fore the importance of mitigation. When faced with a breach of contract, the innocent party's focus is often solely on determining whether a breach has indeed been committed and how to extricate itself from the contract. However, it is clear that the actions of the innocent party immediately after the breach can and will have significant effects on the damages it is then able to recover from the breaching party.

In a sale of goods contract where there is an available market, there is generally no need to consider beyond whether the innocent party wishes to buy or sell against the breaching party at that point. The prima facie measure of damages means that speculation on the market is done entirely at the risk of the innocent party.

However, where there is no available market, the innocent party must consider and document much more carefully what appropriate mitigating steps may be available to it to take and what impact these may have on the overall claim. Options might include cleaning, blending to upgrade, storage, sale to a different geographic market or type of market (e.g. food to fuel). In such case, if the innocent party obtains a benefit by taking a specific step in mitigation, such as the owners of The New Flamenco, that benefit will most likely have to be brought into account in assessing any loss claimed against the defaulting party.

Footnotes

* Fulton Shipping Inc of Panama v Globalia Travel SAU [2015] EWCA Civ 1299 (judgment handed down on 21 December 2015).

2. The vessel was initially owned by a different company, but the claimant owners purchased the vessel on 4 March 2005, and the charterparty was novated on 23 March 2005.

3. http://www.reedsmith.com/Landmark-Supreme-Court-ruling-on-default-clauses-and-damages-Bunge-SA-v-Nidera-BV-07-01-2015/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.