Blessings in disguise: when does the law require you to give credit to a contract-breaker?

Richard Farnhill

If a breach of contract allows the non-breaching party to save money or avoid a loss, must it give credit for that saving to the contract breaker? That was the issue considered by the Supreme Court in Globalia v Fulton Shipping.

The facts were straightforward enough, although as we shall see they split judicial opinion quite starkly. The case involved the charter of a cruise ship, New Flamenco. The charterparty was due to expire on 2 November 2009. The charterer, in summer 2007, wrongly asserted that they were entitled to redeliver the vessel on 28 October 2007. On 17 August 2007 the owner accepted the charterer’s anticipatory repudiatory breach and terminated; in September 2007 it commenced arbitration seeking damages for the repudiatory breach totalling €7,558,375. The charterer redelivered the vessel on 28 October 2007, and at around the same time the owner sold the vessel for US$23,765,000. It was found in the arbitration that by November 2009, when the vessel was due to be redelivered, its value had fallen to US$7,000,000: financial crises and cruise liners do not make happy bedfellows.

By selling in October 2007 rather than November 2009, the owner had enjoyed a benefit of roughly US$16.5m, more than the total of its claim. No credit was given for that benefit in its damages calculation, however. The question for the arbitrator, and subsequently the courts, was whether it should have been. The arbitrator and the Court of Appeal found that it should, such that the owners claim would fail. The judge and, critically, the Supreme Court disagreed: the sale was irrelevant in calculating the owner’s loss and should be disregarded.

In his judgment Popplewell J gave 11 factors supporting his conclusion that the avoided loss in value of New Flamenco was irrelevant. The Supreme Court did not disagree with these but focussed in particular on one: the benefit to be brought into account must have been caused either by the breach of the charterparty or by a successful act of mitigation. Here it was not. The early termination of the charterparty did not make it necessary to sell the vessel; equally, the vessel could have been sold even had the charterparty remained in place. The sale and the breach were simply not sufficiently connected. At most, the breach may have been the motive prompting sale, but that was not enough.

Similarly, there was no reason to assume that the vessel would have been sold in November 2009; it could simply have been rechartered or the owner could have waited for a better financial climate in which to sell. Consequently, as Lord Clarke put it, the causal link failed at both ends of the transaction.

That is not to say that the sale would be entirely irrelevant. If the sale price was reduced because the vessel was not under charter then that would be a recoverable loss because that is sufficiently causally connected: the charter’s wrongful actions would, in addition to cutting off an income stream, have reduced the capital value of the vessel. Presumably the same rule would apply in reverse: if the vessel were more valuable without the encumbrance of a charter (if, for example, the charter had been unduly favourable to the charterer) then credit would have to be given for any increase in value.

Those principles are reasonably straightforward to follow, albeit they may be less easy to apply in practice to the facts of individual cases. What is less clear is one of Lord Clarke’s final comments. He notes that the sale of the vessel would shorten the period during which the owners could claim to have lost the income stream under the old charterparty. But that is precisely what the owner in this case was claiming: the profits from the point of redelivery in October 2007 to the expiry of the charterparty in 2009. Since the vessel was sold almost at the same time as the wrongful redelivery that ought, independently, to extinguish the claim. The Supreme Court’s analysis is brief, two pages in total, and this part of it runs to a single sentence. Moreover, the arbitrator had reserved some issues for future determination, and others were remitted for him to determine in light of the judgment. This may be one of them. In short, it would be wrong to read too much into that apparent anomaly, although for the charterer the ship may not yet have sailed on its defence.

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

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