Down in Flame(s)
What is the value of money? In a recent Commercial Court decision, it was held that the right to redirect the payment of money (or to give it away) is as valuable as the right to have the money paid into one's own bank account.
Glory Wealth v Flame1 is but the most recent in a series of interesting judgments considering the 'compensatory principle' in contractual damages. It is also the second arbitration appeal arising out of the same Contract of Affreightment (COA) which Flame failed to perform following the market crash of late 2008.
In the first appeal, relating to unperformed shipments in 2009 and 2010, Flame persuaded the Court that an innocent party which accepts a repudiatory breach must still demonstrate that it would have been able to perform when the time came2. However, that was a Pyrrhic victory as the Tribunal had found as a matter of fact that Glory Wealth would have been able to perform.
The latest appeal arose out of the Tribunal's refusal to award substantial damages to Glory Wealth in respect of Flame's failure to perform 6 shipments in 2011, even though the Tribunal found that performance of those shipments would have produced a profit of just over US$3 million.
The reason for the Tribunal's decision was that, if the shipments had been performed, Glory Wealth would have directed freight to be paid to two other companies, who would in turn have paid freight or hire on the chartered-in vessels and held onto the profit themselves. These companies were owned by directors of Glory Wealth, but the Tribunal found as a fact that they were not agents of Glory Wealth, nor would they have accounted to Glory Wealth for the profit made on the shipments3. Accordingly, the Tribunal held that Glory Wealth had suffered no loss.
The Tribunal based its decision on the standard compensatory principle, namely that the purpose of an award of damages is, "so far as money can do so, to place the innocent party in the position he would have occupied if the contract had been performed according to its terms". Since Glory Wealth would never have received the freight, a nil award of damages would (in the Tribunal's view) place Glory Wealth in the position it would have been in had Flame performed its obligations under the COA.
Unsurprisingly, Glory Wealth appealed. The Court thus had to consider whether a company could be said to have lost money which it would never in fact have received. The Court started by noting that it was common ground that Glory Wealth had an entitlement to freight under the COA, and that Flame’s breach deprived them of that right. The Tribunal had valued the right to freight at just over US$3 million (net), but awarded Glory Wealth nothing because it would have directed freight to be paid to the other companies.
The Court disagreed. Where the Tribunal went wrong was to focus on only one aspect of Glory Wealth's ownership of the right to freight, namely the right to receive it directly. However, as the Judge said, "The tribunal did not take into account that whilst one limb of the right to receive freight is the right to receive it into one's bank account another limb of that right is the right to give it away. Flame's breach had deprived Glory Wealth of the benefits of ownership of the right to freight under the COA." The right to dispose of the freight was just as valuable as the right to receive it.
The Court was critical of Glory Wealth's conduct both as regards the use of other companies to receive freight when Glory Wealth itself was insolvent and in relation to the arbitration. However, the Judge also held that there was "no obvious merit" in a result which would enable Flame to escape having to pay damages for their admitted breach of contract which caused a loss of over US$3 million.
It would be wrong to read this case as putting a limit on the compensatory principle (which has been reaffirmed at the highest level). It is rather about the application of that principle to the facts and the need to be clear about exactly what has been lost by the defendant’s breach.
It is also, more broadly, a useful reminder that the right of ownership of something includes the right to give it away.
1 Glory Wealth Shipping Pte Ltd v Flame SA  EWHC 293 (Comm)
2 Flame SA v Glory Wealth Shipping Pte Ltd  2 Lloyd’s Rep. 653
3 It appears this arrangement was put in place to avoid attachments of Glory Wealth's assets, as the company was by 2011 "deeply insolvent"