The assessment of damages on early redelivery and mitigation – “The New Flamenco”

The Supreme Court has now handed down its long-awaited judgement on the “New Flamenco” (Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) of Spain v. Fulton Shipping Inc of Panama [2017] UKSC 43). The New Flamenco has addressed the controversial issue of the calculation of damages for early redelivery in cases where there is no available market and the owners decide to sell the vessel.

The facts are rather simple: The charterers redelivered the vessel (a small cruise ship) early, i.e. on 28 October 2007 instead of 2 November 2009 and the owners treated the early redelivery as anticipatory repudiatory breach. The owners then sold the vessel in October 2007 for US $23,765,000. It later transpired that, due to the global financial crisis, the vessel’s value had dropped significantly at the time she should have been redelivered in November 2009 (being worth only US$7,000,000). The dispute evolved around the calculation of damages arising out of the charterer’s repudiation and focused, in particular, on whether credit was to be given to the difference in the vessel’s capital value when sold or when she should have been redelivered.

The case was referred to arbitration and the arbitrator decided in favour of the charterers, finding that the sale of the vessel was caused by the charterers’ breach and was deemed reasonable mitigation of the owners’ loss caused by the charterers’ repudiation. On appeal ([2015] EWCA Civ 1299), Popplewell J reversed the arbitrator’s decision and allowed the owners to claim their net loss on the basis that there was no direct causative link between the owners’ benefit (the difference in the vessel’s capital value) and the charterers’ anticipatory breach. The Court of Appeal ([2015] EWCA Civ 1299) then reversed Popplewell J’s judgement and reinstated the arbitral award. Finally, the Supreme Court has unanimously allowed the owners’ appeal, reversing the Court of Appeal’s decision ([2015] EWCA Civ 1299). As a result, the Court ruled that charterers were not entitled to deduct from the owners’ loss of profit the credit for the difference in the value of the vessel when sold just after the early redelivery and the date the vessel should have been redelivered.

Lord Clarke (with whom Lord Neuberger, Lord Mance, Lord Sumption and Lord Hodge agreed) delivered the leading judgement. The correct test to be applied is that of causation and in particular, that of a sufficiently close link between the benefit obtained and the kind of loss caused by the wrongdoer (but not that of the similarity between the two in nature). In other words, if a benefit is to be credited, it must have been caused by a breach of charterparty or by a successful act of mitigation, which was not the case in The New Flamenco. In fact, the owners’ decision to sell the vessel, whether before or after termination of the charterparty, is their independent commercial decision which has nothing to do with the charterparty. The charterers’ repudiation provided the owners with the “occasion” to sell the vessel but was not the “legal cause” of the sale.  In a similar vein, the absence of such a causal link would also work against the owners if the market value of the vessel had increased between the time of the sale in 2007 and the time of the agreed redelivery in November 2009.

Furthermore, the Court found that the sale of a vessel per se does not amount to an act of mitigation. In cases where there is no available market, like The New Flamenco, mitigation only entails the acquisition of an alternative income stream to the income expected under the charterparty. The sale of the vessel has nothing to do with mitigation as it is only the exercise of the owners’ property rights and does not aim at reducing the owners’ loss of income.

The Supreme Court’s decision clarifies mitigation and puts an end to the dispute as to what acts may amount to mitigation. Lord Clarke has stressed the importance of causation in defining what mitigation entails, without however making any reference to existing case law or elaborating further on the application of the test. The test is nevertheless the right one and leads to sensible solutions. The sale of the vessel is a transaction owners would have been able to undertake for their own account  irrespective of the early redelivery at any time at any time, including the charter party period, and owners should not therefore be asked to pay any profits they may make by selling their own property.