The "NEW FLAMENCO" – back in step
Court of Appeal overturns High Court and holds that a 'capital' benefit obtained following the sale of a vessel on her early redelivery can reduce a damages claim for repudiatory breach of charterparty.
The Court of Appeal has held that capital gains on the sale of a vessel are no exception to the general principle that a claimant must account to a defendant for benefits obtained as a result of reasonable mitigation of damage caused by the defendant's breach of charterparty, at least where there is no available market on which to trade the vessel.
The facts are set out in our previous article on the first instance decision in this matter. Permission to appeal was given on the following point:
"When assessing shipowners' damages for loss of profits on earnings of hire under a time charter party which has been repudiated by the charterers and the repudiation accepted by the owners as terminating the contract, are the charterers entitled to have taken into account as diminishing the loss of earnings/hire sustained by the owner as a result of the accepted repudiation "a benefit" said to consist of avoidance of a drop in the capital value of the vessel because the vessel has been sold shortly after acceptance of the repudiation whereas if the vessel had been retained until after performance of the charter party, it would have had a lower capital value by reason of decline in the capital value of the vessel through market decline in ship sale values in that period?"
The Court of Appeal answered this question in the affirmative, reversing the Judgment at first instance, and agreeing with the arbitration award.
The arbitrator had found (as a matter of fact, rather than law) that the sale of the vessel arose from the consequences of the breach. In these circumstances, the capital gains were a benefit to be taken into account when assessing damages, in the usual way.
The compensatory principle is that a claimant who sustains loss is, so far as money can do it, to be placed in the same position as if the contract had been performed. This is relatively straightforward where there is an available market.
However, the matter is more complicated where there is no available market, as is clear from the leading authorities of The "WREN" and The "KILDARE". In those cases, the loss had to be determined by reference to the actual trading of the vessel on the spot market.
The Judge at first instance reasoned that owners' decision to sell the vessel was not caused by charterers' breach in redelivering the vessel early. Instead, it was an independent speculation on the part of the owners, as was the charterers' decision not to fix a replacement vessel in The "ELENA D'AMICO".
However, the Court of Appeal disagreed. The sale of the vessel was not an independent speculation, but was in the ordinary course of business where there was no available market. As such, the capital benefit of selling the vessel in 2007 rather than when the vessel should have been redelivered in 2009 (after the market had collapsed) had to be taken into account when assessing the losses caused by the defendant's breach of charterparty.
If there had been an available market, the measure of damages would have been the difference between the market rate and the charter rate over the balance of the charter period. In that case, the sale of the vessel would have been an independent business decision, and would not be taken into account.
However, where (as in this case) there was no available market, the additional profit on the sale of the vessel would be taken into account, as this was effectively a mitigation of owners' losses and not an independent business decision. This distinguished the case from The "ELENA D'AMICO".
Where the owners had mitigated their losses by selling the vessel, the benefit of doing so was to be calculated by reference to the difference between the value of the vessel at the time of sale and its value at the time when (in a falling market) the charterparty was due to expire.
The Court of Appeal's Judgment is a helpful application of the principle that, in the absence of an available market:
If a claimant mitigates their loss, and obtains a benefit by doing so,
- That benefitis normally to be brought into account in assessing the claimant's loss; unless
- The measure is wholly independent of the relationship between the clamant and the defendant.
 Fulton Shipping v Globalia Business Travel  EWCA Civ 1299
  2 Lloyd's Rep 370
  2 Lloyd's Rep 360
  1 Lloyd’s Rep 75
 See Paragraph 34 of the Judgment - "where the market rate is displaced because there is no market…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"."