The New Flamenco – Supreme Court allows owners’ appeal

The Supreme Court, on 28 June 2017, found in favour of the owners in the long-awaited “New Flamenco” judgment - Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) of Spain v Fulton Shipping Inc of Panama. The full judgment can be found here.

Much has already been written about this case, including by CMS UK here.

The decision of the Supreme Court gives important guidance as to the relationship between an innocent party’s actions post-breach and its right to full damages.

Facts

In, brief the facts are:

• the New Flamenco was a cruise ship owned by Fulton Shipping Inc and time chartered to Globalia Business Travel S.A.U.;
• the time charter commenced in 2004, was extended more than once, and in 2007 the charterer redelivered the vessel in repudiation of a two-year extension which was about to start; and
• the owner sold the vessel in October 2007 for US$23,765,000m.

The owners advanced their claim for damages calculated by reference to the net loss of profits which they alleged that they would have earned during the additional two-year extension. The amount claimed was €7,558,375.

The charterers argued that the owners were bound to bring into account and give credit for the whole difference between the amount for which the vessel had been sold in October 2007 (US$23,765,000) and her value in November 2009 (subsequently found by the arbitrator to be US$7,000,000). The owners argued that the difference in value was legally irrelevant and did not fall to be taken into account.

The arbitrator found for the charterer, holding that the sale was made in mitigation of the losses caused by the repudiation. That decision was appealed on a point of law under Section 69 of the Arbitration Act 1996 and Popplewell J allowed the appeal, holding that there must be a direct connection between breach and benefit. Here, the benefit received by the owner was caused by the fall in the shipping market and not by the charterers’ breach.

The Court of Appeal reinstated the arbitrator’s decision, finding that the benefit did in fact arise as a consequence of the breach. That benefit should therefore be taken into account when determining the claimant’s loss.

Decision

The Supreme Court has now indicated a preference for Popplewell J’s approach and allowed the appeal. Lord Clarke stated that the fall in the vessel’s value was irrelevant because the owners’ interest in the capital value of the vessel was unrelated to the injury suffered as a result of the charterer’s repudiation. The difference in the value of the vessel was in Lord Clarke’s opinion not caused by the repudiation of the charterparty - the owners’ decision to sell the vessel in 2007 was purely commercial, had nothing to do with the charterer (and indeed could have happened while the vessel was still on charter), and was made at the owners’ own risk. As Popplewell J said, the breach merely provided the context or the occasion for the sale – “it was the trigger not the cause”.

Further, the sale of the vessel was not of itself an act of mitigation. In an available market, the loss would have been the difference between the charterparty rate and the assumed substitute contract rate; in the absence of an available market, the alternative rate would be what ought reasonably to have been earned from shorter charters eg on the spot market. The relevant mitigation for the loss of the charterparty income stream is the acquisition of an alternative income stream and the sale of the vessel cannot mitigate that loss.

Popplewell J was therefore correct to hold that the arbitrator erred in principle. The charterers are not entitled to a credit of €11.2m and a number of outstanding issues have been remitted back to the arbitrator for determination.

Comment

Charterers should be mindful of the potential for damages claims when considering whether to retain vessels on charter or terminate early through a repudiatory breach.

The decision of the Supreme Court suggests that the owner’s treatment of the vessel, post acceptance of repudiatory breach, might be of limited relevance in calculating damages. In particular, it appears that the sale of the vessel by the owner is unlikely to be a mitigating factor that might be taken into account to reduce damages. The decision is of critical relevance, as mitigation is also a duty on an innocent party. As such, if the decision was different it might have suggested that an owner was under an obligation to sell a vessel to mitigate a loss under a charter (if the sale price would have reduced the loss). This would obviously have created issues of serious concern to owners.

The decision appears to ensure that owners will continue to have a ‘free hand’ in dealing with the ownership (or sale) of a vessel post acceptance of a repudiatory breach of charter, without impacting the owners’ right to the usual measure of damages for such cases. This continues to be the difference between the charter rate for the remaining period of hire less the assumed market rate for such vessel for the remaining period of hire (assuming that an available market exists – and, where it does not, the second figure would be what ought reasonably to have been earned in the short-term market). The calculation of damages, when it comes to the repudiation of charter contracts, remains relatively straightforward and without reference to the rest of an owner’s business.