When, under English law, can damages be reduced for benefits obtained following a breach of contract?

On 28 June 2017, the UK Supreme Court handed down judgment in Globalia Business Travel SAU (formerly TravelPlan SAU) of Spain v Fulton Shipping Inc “The New Flamenco” [2017] UKSC 43 in which it unanimously allowed an appeal on a point of English law under s.69 Arbitration Act 1996 (the "Act"). The case concerned the extent to which benefits obtained by an innocent party following a breach of contract should be taken into account in assessing its damages for that breach.

Background facts

The ‘New Flamenco’ was a cruise ship that had been time-chartered by the claimant owners to the defendant charterers from February 2004 to November 2009. The original charterparty was due to expire in 2007 but a two-year extension was agreed. Prior to the commencement of the two-year extension, the charterers disputed the extension agreement and redelivered the vessel. The owners treated this as a repudiatory breach and terminated the charterparty. Shortly before redelivery, the owners sold the vessel. In the proceedings that followed it was found that the amount the owners received for that sale (in 2007) was far higher than that which they could have received had the charterparty run its course (in 2009).

The owners’ claims before the tribunal

The charterparty was governed by English law and contained an arbitration clause with London seat. The owners commenced an arbitration claiming damages for the lost profits arising from the charterers’ early repudiation. The arbitrator found that the charter had been wrongfully repudiated but also found that the net difference between the 2007 and 2009 sale prices was a benefit which, under English contract law, fell to be deducted from any damages due to the owners.

The s.69 appeal to the English courts

The owners appealed under s.69 of the Act. This allows, in an English seated arbitration (and subject to certain limited conditions) a party to appeal to the English court on a question of English law arising out of the arbitral award (s.69 may be excluded by the agreement of the parties, and parties frequently do so in an arbitration clause either expressly, or by use of a set of institutional rules containing provisions with such an effect).

In that appeal the English courts were asked to decide whether the difference in sale price was a benefit which should have been taken into account in assessing the owners’ damages.

The first instance judge disagreed with the arbitrator, finding that, as a matter of English law, the owners’ decision to sell was not caused by the repudiation. Specifically, the judge thought that for the wrongdoer (charterers) to obtain credit for the benefit received by the innocent party (owners) due to a breach of contract, there must have been a direct and causative connection between breach and benefit.

The Court of Appeal, however, disagreed with the judge and accepted the arbitrator’s original position. In summary, it ruled that where a claimant adopts a measure which arises out of the consequences of the breach, is in the ordinary course of business and benefits the claimant, that benefit is normally brought into account in assessing the claimant’s loss unless the measure is wholly independent of the relationship between the claimant and the defendant.

Supreme Court’s decision

The owners were granted permission to appeal to the Supreme Court. That court preferred the approach of the first instance judge, allowed the appeal, and held that the benefit obtained by the owners should not be deducted from their damages.

It held that the fall in value of the vessel was irrelevant because the owners’ interest in the capital value of the vessel had nothing to do with the interest injured by the charterers’ repudiation of the charterparty. The key question to be answered was whether there was a sufficiently close link between the loss and the benefit (and not, for example, an assessment of whether they were similar in nature). The relevant link was causation.

In this case, absence of this relevant causal link precluded the charterers from setting off the difference in market value against the owners’ claim. Specifically, there was nothing about the premature termination of the charterparty which made it necessary to sell the vessel, either at all or at any particular time (indeed it could have been sold during the term of the charterparty itself). Therefore, the owners’ decision to sell the vessel, whether before or after termination of the charterparty, was a commercial one made at their own risk about the disposal of an interest in the vessel which was no part of the subject matter of the charterparty and had nothing to do with the charterers. As the first instance judge had put it: “the breach merely provided the context or occasion for the owners to realise the capital value of the vessel. It was the trigger not the cause”.

For the same reasons the Supreme Court also did not see the sale of the ship as an act of mitigation which lessened the loss caused by the charterers breach. Whether or not there had been an available market the sale of the ship was an independent act not relevant to mitigating the lost income stream under the charterparty

Conclusions

The Supreme Court’s judgment, from the perspective of English contract law is important in helping to clarify the circumstances in which benefits obtained by an innocent party following a breach of contract should be taken into account in assessing its damages.

As to s.69 of the Act, it should be noted that it will not always be available. This may be because its own terms are not met, or because, as noted above, the parties have agreed, in the interests of finality of the award, to its exclusion. Nonetheless, the case provides an interesting illustration of how, in cases where it is available, matters subject to arbitration can still end up shaping substantive English common law; a point which readers may recall was, last year, the subject of a somewhat public debate between the current Lord Chief Justice, Lord Thomas, and Lord Saville, the architect of the Act.