Let's call it quits: Cruise ships, capital losses and mitigation
In its recent judgment in Fulton Shipping Inc of Panama –v- Globalia Business Travel SAU the Court of Appeal considered a short, but important, point of law in relation to the calculation of damages in English law.
The context in which it arose was an appeal from the decision of an arbitrator in a shipping charterparty dispute, but it is of significance much more widely in relation to English law contractual damages claims. In some ways, the question of principle which was being considered is remarkably simple, but that belies the complexity of the considerations needed to resolve it.
The starting point is the English law principle which requires a wrongfully damaged party to seek to mitigate its loss, i.e. to take reasonable steps to try to reduce the extent of its losses which flow from the breach. It is well established that a party who seeks to mitigate its loss by taking reasonable steps that backfire and instead increase the loss can recover those additional losses if the steps taken were indeed reasonable. In this case, an owner of an asset sold the asset in response to the early wrongful termination of a hire contract, but the result of the sale was that the owner avoided a hypothetical capital loss which it would later have suffered had it retained the asset. The issue was whether the benefit of the capital loss which the owner avoided by the sale should be counted as offsetting the loss of income it suffered as a result of the breach of the hire contract. This was a question on which there is, surprisingly, seemingly no direct prior authority.
Fulton were the owners of a cruise ship, which they chartered to Globalia under a charterparty which was due to expire in October 2007. In June 2007, a two year extension to the charterparty to November 2009 was orally agreed, as subsequently recorded in writing as an addendum to the charterparty. However, Globalia then disputed that any extension had actually been agreed, refused to sign the addendum, and maintained an entitlement to redeliver the ship back to Fulton in October 2007. Fulton treated this as anticipatory repudiation. Shortly before the ship was redelivered in October 2007, Fulton sold the vessel for around US$24m.
The dispute was referred to arbitration in London. The arbitrator found that Globalia had breached the extension agreement. The parties were agreed that Fulton could not have found alternative charterparty employment for the vessel in October 2007, and the arbitrator held that the sale of the vessel was a reasonable act of mitigation by Fulton as owner. He went on to find that the value of the vessel in November 2009 at the end of the agreed extension period would only have been US€7m (a reduction due in large part to the effects of the intervening financial crisis). In light of that finding, the arbitrator found that Fulton was obliged to credit by way of mitigation of its losses the sum of US$16m which it had "saved" by selling the ship in October 2007 rather than at the end of the extended charter period. This was in excess of any loss of profit which Fulton could show it had lost from the loss of income under the charterparty extension.
Appeal at first instance
Fulton lodged an appeal on this point of law in the Commercial Court in London. The first instance court found that the arbitrator had made an error in law. In essence, the judge found that the sale of the vessel was not a step taken to mitigate the loss, but was by contrast an independent business decision. As a matter of legal consequences, the repudiation merely provided an opportunity for that independent business decision to sell the vessel to be taken, rather than directly caused the decision to be taken. Indeed, the court noted, the vessel could have been sold by Fulton at any time even if the charterparty extension had been fulfilled by Globalia.
The Court of Appeal's decision
The Court of Appeal reversed the judgment at first instance, finding that Fulton was indeed obliged to give credit for the capital loss it had avoided by selling in 2007. In a key section of the leading judgment, it was held that "The search for legal principle in this area is undoubtedly elusive" but that the longstanding fundamental principle is "that a claimant who sustains loss is, so far as money can do it, to be placed in the same situation as if the contract had been performed. It was, in the end, considerations of fairness and justice that 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. That profit arose from the consequences of the breach and should therefore be brought into account.
In assessing this judgment, it is important to bear in mind that the remit of the English courts was limited to whether an error had been made in law by the arbitrator. The courts had no authority to review or set aside findings of fact. The arbitrator's decision, as quoted by the Court of Appeal, including a finding of fact that the "necessity for the sale had been brought about by the refusal to perform the two year extension". Also critical to the Court of Appeal's analysis were acknowledgments that as a matter of fact, the arbitrator had determined that the sale was an act taken in mitigation of loss, arose as a consequence of Globalia's breach of contract, and was made in the ordinary course of Fulton's business.
Although it is not discussed in the judgments, there must also have been implicit in the arbitrator's decision a finding that Fulton would in fact have sold the vessel at the end of the extended charter party in November 2009. It is otherwise not clear what the relevance of the sale value of the vessel would have been on that particular date. There was no apparent obligation on Fulton to sell it then. The market value of the vessel would inevitably fluctuate through time, both before and after the expiry of the extended charterparty. There is no obvious reason for taking the capital value of the vessel at the end of the time charter, unless it was found as a matter of fact that Fulton would have sold then. Absent such a finding of fact, there is no obvious reason to value the vessel on that date, when Fulton would have continued to own the asset subject to its inherent fluctuating capital value. So, for instance, on a hypothetical redelivery after fulfilment of the charterparty extension in 2009 (and in light of then depressed capital values in the shipping markets) it could be said that Fulton might well have taken a decision to wait for the market to pick up before selling. This choice of date at which the capital values are compared is critical. If the sale value had been compared to the capital value of the vessel as at, say, the date of the arbitral award, the answer to the question "what capital loss was avoided" would have been significantly different.
Equally, it seems there must have been an (implicit) finding of fact by the arbitrator that the vessel would not in fact have been sold prior to the end of the extended charterparty if the charterparty had been fulfilled. Otherwise, the benefit (if any) which Fulton accrued by the sale of the vessel in response to the breach would arguably better have been measured by comparing (i) its capital value when sold free of charterparty in October 2007 to (ii) the capital value the vessel would in any case have had on the hypothetical date of sale when sold subject to the charterparty.
The Court of Appeal noted that Globalia's counsel had conceded that if the capital value of the vessel had increased rather than decreased over the two year period of the breached contract extension, Globalia would have been liable for the additional capital loss suffered by Fulton as a consequence of its reasonable attempt to mitigate by selling the vessel. That was of course an easy concession for Globalia to make in the circumstances, being the opposite of the factual position. Any defendant actually faced with those contrasting facts would of course have been raising arguments that Fulton's decision to sell the vessel had broken the chain of causation, that it had crystallised its losses as at that date, that the capital value lost should not be measured at the end of the charterparty in 2009 but at some other date when the value was lower, and so on.
As a point of law, the Court of Appeal's judgment appears beguilingly simple. It will certainly be a factor for any defendant to an English law claim of breach of contract to consider as part of its potential armoury. However, any attempt to apply this principle to different facts will expose a host of consequential issues of legal principle which remain to be determined, and a raft of issues will arise as to the proper interpretation of the different fact patterns in question and consequently their legal implications. As the Court of Appeal itself noted "It is notoriously difficult to lay down principles of law in the realm of mitigation of loss particularly when it is said that a benefit received by a claimant is to be brought into account as avoiding the loss… hard and fast principles are difficult to enunciate."
What the judgment most certainly does underline is the importance of framing decisions taken in response to (or merely around the time of) breaches of English law contracts very carefully, and on the basis of English law advice taken at the earliest possible stage.