When does a claim for early redelivery must take into account benefits resulting from action to mitigate and avoid loss?
This was an appeal against a Commercial Court decision, that reversed an arbitration award holding that an innocent owner claiming compensation for an anticipatory breach of a Charter Party must give credit to the charterer in respect of his gains in capital value, by selling the vessel for a substantially superior amount at the moment of the breach than what she would be worth at the moment of redelivery, had the charter not been breached.
The facts of the case and the arbitration decision:
The Cruise ship “New Flamenco” had been chartered under a NYPE time charter party, dated 13 February 2004. The parties were negotiating an extension until 2 November 2009 and according to the ship owner, reached an oral agreement in relation to this. The charterers did not agree and redelivered the vessel on October 2007, date of the previous agreement, which was accepted by the owners as a breach in August 2007, terminating the charter party.
In face of the anticipatory breach, the Owner sought to mitigate his losses from the non-payment of hire for the remaining charter period and entered a MOA to sell the vessel, for a total value of US$23,765,000.
After arbitration proceedings, the decision supported the owners’ claim that there was a valid agreement until November 2009 and they were entitled to damages for the loss of hire period, deducting any expenses that would no longer be incurred in managing and operating the vessel.
However, the arbitrator found that the sale of the vessel in 2007 resulted in a substantial benefit to the owner, since she was worth in 2009 at the end of the charter period, only US$7,000,000, in the post financial crisis scenario. This credit was considered in calculating damages caused by the charterers breach, resulting in no damages to be paid at all, given the large value of the vessel’s depreciation after sale.
The decision of the Commercial Court:
In deciding the matter, Popplewell J started his considerations of the matter at the light of the compensatory principle, that the innocent party should be put on the same financial position had the contract been performed.
He considers however, that the principle does not mean any loss arising from the breach is recoverable as it may be too remote in Law. The same should apply where the innocent party’s condition in fact improves and he does not have to give credit for his recoverable losses, such as receiving proceeds of insurance for which he has paid for or money received due to the benevolence of third parties; so the judge concluded that his decision could not be based solely on this principle.
In considering the duty of the innocent party to mitigate loss, the learned judge highlighted the three rules that may serve for guidance on mitigation disputes: (i) The claimant cannot recover for avoidable loss; (ii) the claimant can recover for losses incurred in reasonable attempts to avoid loss; and, the most relevant for this case, (iii) the claimant cannot recover for avoided loss. Continuing, the third rule is said to be applicable where the benefit “has diminished his loss” and the benefit to be taken into account is “the effect in actual diminution in loss”, as quoted from Bradburn v Great Western Ry. Co. (1874) LR 10 Ex 1.
Despite this rule, the benefits must also have a sufficient causative connection between the breach and benefit, such as arising out of the consequences of the breach and from a reasonable and prudent course in response to it. The rule from Laverack v Woods of Colchester  1 QB 278, where it is concluded that when a benefit is said to be “collateral” it shall not be taken into account in calculating damages because it was not a direct result from the breach event, is applied. This test of causation draws a clear distinction between the breach causing the benefit, and the breach merely being the occasion that enables the innocent party to obtain the benefit, the latter being insufficient to give credit to the party in breach.
Following the reasons above, the final decision was in favour of the Owners, where they were not required to give credit for the difference in capital value after the Sale of the vessel in October 2007 instead of November 2009, because the benefit was not legally caused by the breach. The true cause of the gains from the sale was the market’s devaluation of the vessel from the moment it was sold to the end of the charter period, not the charterer’s breach. Also the effects of the fall in the market were not caused by the breach but for the Owners prudent commercial decision to sell the vessel, a legally independent decision, applying the same logic from The Elena D’Amico  1 Lloyd’s Rep 75.
The sufficient causality between the breach and the benefit is deemed to be the most relevant deciding factor but it may not be sufficient alone. Thus, the decision gives important consideration to fairness, justice and public policy, where, in the judge’s view, it would be unjust to benefit the party in breach when the merits are solely with the ship owner on this case.
The Court of Appeal decision
Acknowledging the difficulty in laying down principles of law in respect to benefits received by a claimant as avoiding the loss, Longmore LJ has disagreed from the view adopted by the Commercial Court in deciding the matter, where the rule of sufficient causation should be applied in a less elaborate manner.
The starting point of his decision, and the most relevant one, was the principle established on the leading case British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd  A.C. 673. The principle to be inferred from the decision is that any measure adopted by the claimant, that causes him some benefit or improves his overall position, should be brought into account in assessing the claimant’s losses if such measure was taken as a result of the consequences of the breach and in the ordinary course of business. In the view of the court, this is the correct approach towards causation between the breach, benefit and the measure taken in response to the breach, when assessing any benefits claimed by the charterer.
The rule of causation required on the Commercial Court’s decision, that the benefit must be directly caused by the breach, was found to be to be too difficult and unlikely to be applicable in practice. The usual effect of a breach is to cause loss and only action in response to this loss is likely to cause a benefit. Therefore, the rule formulated on British Westinghouse remains more appropriate to the case, as reasoned by Christopher Clarke LJ.
The Lord Justices of Appeal also did not view the decision of selling the vessel as a purely speculative decision by the owner, wholly independent from the breach of the time charter party, as it was the case in The Elena D’Amico, which greatly influenced the appealed decision. The decisive factor that differed both cases was the existence of an available market at the moment the breach occurred, which would determine how damages for breach should be assessed.
On The Elena D’Amico case, there was an available market at the moment the breach occurred on part of a ship owner, but the charterer chose not to enter in any substitute charter in order to speculate on the way the market rates were going. Therefore, it was held that the amount of damages to be awarded should be confined to the difference between the contract rate of hire and the market’s rate at the moment of the breach. Any other losses claimed were caused by his independent decision to speculate.
On the present case, however, there was no available market at the moment of the breach, and damages should therefore be assessed on the basis of the hire payments, which the owner would be entitled if the charter had continued, deducting any losses avoided, such as the costs of crewing and operating the vessel for the remaining charter period.
On this scenario, a sale transaction of the vessel could be seen as a measure to avoid loss, if it can be said that the sale arose from the breach of contract and it happened in the ordinary course of business, as per the rule from British Westinghouse. It so happened that the arbitrator before, and now the Court of Appeal, found the sale of the vessel did arise in this context of the breach and there was no reason why this benefit should not be regarded when assessing damages caused by the breach.
Other arguments, of Fairness and justice, were also reasoned against. The sale of the vessel brought substantial profit to the innocent party and it cannot be said that taking these profits in account for awarding damages would be unfair or unjust, since the purpose of damages is to place the party in the same position had the breach not occurred.
The court rejected a last point regarding the argument of endless transaction. Once the vessel was sold, the use of its proceeds became irrelevant, since it was only the vessel the subject matter of the contract.
The decision provides important guidance when assessing damages and avoided losses upon a breach of contract. The most relevant aspect is whether at the moment of breach, there is an available market, where the innocent party can find a substitute for the remaining charter balance. This will influence how damages and benefits will be awarded to the parties and if any action taken by the innocent party is to mitigate its losses or wholly independent actions, of a speculative nature.
If the owner on this case had the option to re-charter his vessel and chose not to do so, it would become more arguable that it was his independent decision that caused his benefits and would not entitle the charterer to claim any credits for them.
The rule of causation also became very clear after this judgment, where the judges should ask only if the mitigation measure arose from the consequences of the breach and such action occurred in the normal course of business. Any over elaborated causation standards, also demanding that the benefit is of the same kind of the loss, shall not be applicable to similar cases.
For a copy of the full judgement see here