Court rejects "capital" punishment

Appeal considers relevance of ship sale following early redelivery

The Commercial Court recently heard an appeal from an arbitration which found that, in assessing damages for early redelivery, the shipowners were obliged to take account of the drastic fall in value of the vessel "NEW FLAMENCO" between the actual (early) redelivery date in 2007, and the contractual minimum redelivery date in 2009[1].

The Court, overturning the Arbitrator's findings, held that a benefit to an innocent party would only be taken into account to reduce the damages payable where the benefit was caused by the breach.  In this case, the alleged "benefit" was the shipowners' ability to sell the vessel following early redelivery in 2007 at a much higher price than they would have obtained had they sold at the end of the contractual charter period in 2009.  The Court held that such benefit was not caused by the charterers' breach.  Accordingly, the shipowners did not have to give credit for the difference between the capital value of the vessel in 2007 and 2009. 

Background

The dispute arose out of a time charter on the NYPE form dated 13 February 2004 for the vessel "NEW FLAMENCO" (the Vessel), which was novated to Owners on 23 March 2005 (the Charterparty).  The Charterparty provided for London arbitration and English law. 

In June 2007, the Charterparty was extended by agreement until 2 November 2009.  Charterers disputed the agreement to extend the Charterparty, and told Owners they would redeliver on 28 October 2007.  Owners treated Charterers as being in anticipatory repudiatory breach and on 17 August 2007 accepted the repudiation, terminating the Charterparty.  Shortly thereafter, Owners ended into a Memorandum of Agreement for the sale of the Vessel for US$23,765,000. 

Owners brought a claim against Charterers in arbitration for damages calculated in the usual way based on the difference between the Charterparty and market rates of hire for the balance of the charter period. Charterers contended that the Arbitrator was obliged to take into account the decrease in capital value of the Vessel between the actual redelivery date and the earliest contractual redelivery date in 2009.  The Arbitrator found that the value of the Vessel in 2009 was US$7,000,000, and that Owners therefore had to give credit for the "benefit" of US$16,765,000 obtained by selling the Vessel in 2007.  This was more than the Owners' loss of profit claim.

Decision

After an extensive review of the authorities, the Court held that, for an innocent party to be deprived of part of the loss recoverable for breach of contract, the benefit in question must have been caused by the breach.  It was not enough that the breach may have provided the opportunity to gain the benefit.

In this case, the difference in the value of the Vessel was not caused by Charterers' breach of the Charterparty, but rather by the global financial crisis, which would have happened regardless of the breach.

The effect this change in value had (or rather did not have) on Owners was also not caused by Charterers' breach; it was caused by Owners' independent commercial decision to sell the Vessel.

Comment

This case serves as a useful reminder that, while an innocent party should always take steps to mitigate its losses, not every benefit gained following an early redelivery will be taken into account.

The Court also emphasized that, even if a benefit is legally caused by a breach, the Court retains a discretion not to reduce the damages payable if that would be contrary to considerations of justice, fairness or public policy.

[1] Fulton Shipping Inc v. Globalia Business Travel SAU [2014] EWHC 1547 (Comm).