Globalia Business Travel SAU of Spain v Fulton Shipping Inc of Panama [2017] UKSC 43

Charterers repudiated a two-year charterparty extension of the New Flamenco. The owners sold the vessel shortly after, avoiding a significant market drop by 2009. The Supreme Court held owners need not credit the charterers with this capital benefit, as it was not caused by the breach.

Facts

The vessel New Flamenco was time-chartered to Globalia Business Travel under a 2004 NYPE form charter, later extended by agreements recorded in addenda A and B. The charterers disputed the further extension recorded in addendum B (extending the charter to 2 November 2009) and redelivered the vessel on 28 October 2007. The owners, Fulton Shipping, accepted the conduct as anticipatory repudiatory breach and, shortly before redelivery, sold the vessel for US$23,765,000.

Following the financial crisis triggered by the collapse of Lehman Brothers in 2008, the arbitrator found the vessel would have been worth only US$7,000,000 in November 2009 when she would otherwise have been redelivered. The owners claimed loss of profits of approximately €7.5 million for the two-year extension period. The charterers contended that the owners had to give credit for the approximately US$16.765 million capital benefit obtained by selling early in a falling market – a credit that would extinguish the owners’ damages claim.

Issues

The question of law on appeal under section 69 of the Arbitration Act 1996 was whether, in assessing owners’ damages for loss of hire following an accepted repudiation of a time charterparty, charterers were entitled to have credited against the owners’ loss a benefit said to consist of the avoidance of a fall in the capital value of the vessel because the owners sold the vessel shortly after acceptance of the repudiation rather than after the contractual term.

Procedural History

The sole arbitrator declared the charterers entitled to a credit of €11,251,677, effectively extinguishing the owners’ claim. Popplewell J allowed the owners’ appeal, holding that the capital benefit was not legally caused by the breach. The Court of Appeal (Longmore, Christopher Clarke and Sales LJJ) reversed, considering that, absent an available market, the benefit obtained by sale in mitigation should be brought into account. The owners appealed to the Supreme Court.

Arguments

The charterers argued that, in the absence of an available charter market, the sale of the vessel was an act of mitigation, and the avoidance of the subsequent capital loss was a benefit caused by and arising out of the breach which had to be credited against the owners’ loss of profit claim. They accepted that, had the market risen, owners could have claimed the lost capital uplift.

The owners argued that the difference in capital value of the vessel was legally irrelevant. The sale was an exercise of their proprietary rights, independent of the charterparty, and any capital benefit was caused by their independent commercial decision to sell and by movements in the sale and purchase market, not by the breach.

Judgment

The Supreme Court (Lord Clarke giving the judgment with which Lord Neuberger, Lord Mance, Lord Sumption and Lord Hodge agreed) unanimously allowed the owners’ appeal and restored the order of Popplewell J.

Causation as the central question

Lord Clarke endorsed the eleven propositions of legal principle distilled by Popplewell J, in particular that for a benefit to reduce recoverable loss it must generally be caused by the breach, and that it is not enough for the breach to provide the occasion or trigger for the benefit. The essential question is whether there is a sufficiently close causal link between the breach (or a successful act of mitigation) and the alleged benefit. Difference in kind between loss and benefit is not the test, but may be indicative of an absence of causal connection.

Application to the facts

The owners’ interest in the capital value of the vessel had nothing to do with the interest injured by the charterers’ repudiation, which caused only a prospective loss of income over approximately two years. Nothing about the premature termination required the owners to sell the vessel, either at all or at any particular time; the vessel could have been sold at any time, including during the charter (subject to the new owner performing the charter). The sale was a commercial decision taken at the owners’ own risk concerning an asset whose capital value was not the subject matter of the charterparty.

The fall in market value between October 2007 and November 2009 was caused by the financial crisis and by the owners’ decision to sell, not by the breach. Symmetrically, had the market risen, the owners could not have claimed the lost capital uplift from the charterers, because the same causal link would be absent. The causal link, Lord Clarke observed, fails at both ends of the transaction.

Sale not an act of mitigation of the lost income stream

The sale of the vessel was not itself an act of mitigation of the relevant loss. The relevant loss was the loss of an income stream; mitigation, in the absence of an available charter market, consisted in acquiring an alternative income stream (e.g. through spot chartering). Selling the vessel was incapable of mitigating the loss of an income stream, although it could shorten the period over which loss of hire could be claimed and could, in some circumstances, capitalise the value of remaining hire if the vessel were sold with the benefit of the charter.

Implications

The decision clarifies the proper approach to the credit of benefits in assessing damages for repudiation of a time charterparty, and more generally in contract damages. The key principles confirmed are:

• Causation is the central inquiry: a benefit is to be credited only if caused by the breach or by a successful act of mitigation, not merely triggered or occasioned by it.
• An owner’s decision to dispose of a capital asset following repudiation is generally an exercise of independent proprietary rights, not an act of mitigation of lost hire.
• The compensatory principle does not require accounting for fluctuations in capital value of an asset where those fluctuations are independent of the contractual interest infringed.
• The symmetry argument is important: if owners could not have recovered an additional loss from a falling capital value, they should equally not be required to credit a capital gain from a rising one (or, here, an avoided loss).

The decision is significant for shipowners, charterers, and contract lawyers more broadly. It limits the scope for defendants to reduce damages by pointing to collateral commercial advantages obtained by claimants which are not legally caused by the breach. It also reaffirms the distinction between the loss of an income stream (the proper subject of mitigation by alternative employment) and the value of the underlying capital asset. The judgment leaves intact the well-established rules concerning available markets and substitute employment, and it remits remaining quantum issues for further determination by the arbitrator.

Verdict: Appeal allowed. The Supreme Court restored Popplewell J’s order setting aside the arbitrator’s declaration that the charterers were entitled to a credit of €11,251,677 against the owners’ damages. The owners were not required to give credit for the benefit said to have arisen from selling the vessel in October 2007 at a higher value than it would have had in November 2009, as that benefit was not legally caused by the charterers’ repudiatory breach. Remaining issues were remitted to the arbitrator.

Source: Globalia Business Travel SAU of Spain v Fulton Shipping Inc of Panama [2017] UKSC 43