The case of Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain reached the English Supreme Court in 2016/2017. In June 2017, the Supreme Court handed down its eagerly awaited judgment.

The facts

The case involved the charterers of a vessel who redelivered the vessel to the owners two years before the charterparty was due to come to an end. This redelivery was held by the owners to be a repudiatory breach of contract and they accepted the breach as terminating the charterparty.

The owners decided to sell the vessel at that point in time (October 2007), largely because there was no available charterparty market at that time. The vessel sold for US$23.7m.

The owners then claimed damages from the charterers for loss of profits during the remaining two years of the charterparty.

The arbitration

The matter went to arbitration. The questions before the sole arbitrator were:

  • whether the owners of the vessel had been entitled to terminate the charterparty; and
  • if so, whether the owners had to give credit for any benefit that they had received by selling the vessel.

The arbitrator found that the owners had been entitled to terminate the charterparty and that they did have to give credit. On the latter point, the arbitrator decided that the earliest date upon which the vessel could have been sold was November 2009, i.e. the end of the charterparty. If the vessel had been sold at that time, it would have been worth around US$7m, therefore the credit to be given was US$16.7m or €11.25m (i.e. the difference in value between the vessel's sale price in October 2007 and its estimated value in November 2009). This €11.25m figure was in fact more than the owners' claim for loss of profits.

The first appeal

The owners sought permission to appeal the arbitrator's decision to the Queen's Bench Division (Commercial Court) (pursuant to S.69 of the Arbitration Act 1996) on a point of law. That point of law was essentially whether the benefit of the sale could be taken into account when considering the loss of profits under the repudiated time charterparty. Permission to appeal was granted.

The appeal was argued before Popplewell J in 2014. He allowed the appeal and held in paragraph 65 of his judgment that the owners did not have to give credit for any benefit in realising the capital value of the vessel from its sale in October 2007, by reference to its capital value in November 2009, "because it was not a benefit which was legally caused by the breach".

The second appeal

The charterers appealed to the Court of Appeal. Led by Longmore LJ at the end of 2015, the Court of Appeal allowed the appeal, overturned the Commercial Court's decision and agreed with the arbitrator that the owners did have to give credit.

The third appeal

The owners appealed to the Supreme Court in 2016. Led by Lord Clarke of Stone-Cum Ebony JSC, the Supreme Court agreed with Popplewell J and held at the end of June 2017 that credit did not have to be given by the owners.

The Commercial Court's reasoning

As can be seen from the above brief timeline, there was a lot of toing and froing between the Courts and the ultimate decision of whether credit should be given or not. That is indicative of the difficulty surrounding this area of law, i.e. the mitigation of damages.

In the end however, it was the reasoning of Popplewell J that the Supreme Court agreed with. Popplewell J himself said in paragraph 63 of his judgment, that the "search for a single general rule which determines when a wrongdoer obtains credit for a benefit received following his breach of contract or duty is elusive". Nevertheless, he went on to identify in paragraph 64, a number of applicable legal principles including:

  • Generally speaking, it is a necessary condition that the benefit is caused by the breach.
  • 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.
  • 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.
  • Where... 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.
  • Considerations of justice, fairness and public policy have a role to play and may preclude a defendant from reducing his liability....

Ultimately, the owners had a choice whether or not to sell the vessel. They also had this choice during the unexpired period of the charterparty, i.e. including if that charterparty had continued. If and when they chose to sell and realise the capital value of their asset was a business decision and at their risk, and was therefore legally independent of the breach by the charterers. Therefore, the only relevant loss in issue in the arbitration / appeals before the Courts was a loss of income, not a loss of capital.

The Supreme Court's reasoning

The Supreme Court found that the fall in the value of the vessel was irrelevant because the owners' interest in the capital value of the vessel had nothing to do with the interest injured by the charterers' repudiation of the charterparty. In paragraph 32 of the Supreme Court's judgment, it is stated that "the repudiation resulted in a prospective loss of income for a period of about two years. Yet, there was nothing about the premature termination of the charterparty which made it necessary to sell the vessel, either at all or at any particular time". Indeed, the Supreme Court points out that there was equally no obligation to sell the vessel at the end of the charterparty.

Essentially therefore, the Supreme Court stated in paragraph 34 that "the sale of the ship was not on the face of it an act of successful mitigation. If there had been an available charter market, the loss would have been the difference between the actual charterparty rate and the assumed substitute contract rate. The sale of the vessel would have been irrelevant" and "was not itself an act of mitigation because it was incapable of mitigating the loss of the income stream".

Conclusion

As stated above, the Supreme Court therefore clarified that the owners' act of selling the vessel was not itself an act of mitigation such that credit had to be given to the charterers for any benefit that the owners had received by selling the vessel. There had to be a legal connection between the benefit and the breach, which there was not on the facts of this case.

For now, Popplewell J's judgment, as confirmed by the Supreme Court, provides some helpful guidance on mitigation of damages and what principles to apply when evaluating what can and cannot be taken into account.

It is also welcome that such an important legal point was appealed from an arbitration and given the highest judicial consideration.

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.