An analysis of the recent English Supreme Court decision, The New Flamenco – what happens when charterers repudiate a long-term time charter and owners sell the vessel? Is the sale a step in mitigation? Here in Part 1 we look at the English law position and in Part 2 we assess the US law position. (See transcription below for full text with case citations.)

 

  • Video transcript

    Welcome to Floyd Zadkovich’s video series!

    This is exciting… our first video…

    We recently launched our new law firm and thought to do something a little different, something out of the box. So in keeping with this, we plan to give you updates, case summaries and news on relevant developments in the US and England in these short videos.

    This first video looks at the English law position on a specific area of damages. It is followed by a separate second video with a comparative analysis of the US position on this issue.

    We are going to focus on a recent English Supreme Court decision of “The New Flamenco”- Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) of Spain v Fulton Shipping Inc of Panama [2017] UKSC 43.

    It was handed down in June 2017 and made its way through all of the courts in England. First started as a London arbitration, appealed to Commercial Court, and then Court of Appeal and ultimately the English Supreme Court. As it went through, the views taken [by the arbitrators and courts] went back and forth as we will see. That of itself is interesting but I think there are some particular aspects of the judgment that are worth unpacking.

    It’s also timely to discuss this decision because it was handed down in the first week or so of our new business…!

    To very briefly summarise the facts, there was a long-term charter in place between Owners and Charterers for a cruise ship. Charterers wrongfully repudiated the charter early. Owners sold the vessel shortly thereafter. Had the charter been fully performed, the vessel would have been worth less than the vessel was sold for shortly after the repudiation – because, as it transpired, the market value of such vessels fell dramatically in the following period.

    Charterers’ argument was that Owners should have had to account in their damages calculations for the capital loss they avoided in selling the vessel early (ie. the difference between the sale price achieved and the value of the vessel at the end of the charter). Charterers contended the sale was a step taken in mitigation of Owners’ losses or the sale was caused by Charterers’ breach.

    On the first appeal of the original London arbitrator’s decision, the Commercial Court, Mr Justice Popplewell, explained the key principles as these (and I only take two of a list of principles – see paragraph 16 of the judgment):

    “…In order for a benefit to be taken into account in reducing the loss recoverable by the innocent party for a breach of contract, it is generally speaking a necessary condition that the benefit is caused by the breach. Bradburn, British Westinghouse, The Elena D’Amico”

    - “… There is no requirement that the benefit must be of the same kind as the loss being claimed or mitigated: Bellingham v Dhillon, Nadreph v Willmett, Hussey v Eels, The Elbrus, cf The Yasin; but such a difference in kind may be indicative that the benefit is not legally caused by the breach: Palatine.”

    Factually speaking in the New Flamenco case, we are talking about a difference in kind. The kind of loss are hire payments or income / earnings. That is how we can characterise them. Whereas, the kind of alleged mitigation is an asset sale or capital gains. Those are obviously different in kind. That does not necessarily mean that the benefit will not be caused by the breach, but it does make it much harder to establish the causal connection.

    The Supreme Court endorsed these principles laid out by the Commercial Court, and overturning the Court of Appeal, it held in this particular case that the sale of this cruise ship was not caused by the repudiatory breach of Charterers and was not done in mitigation. It was an entirely independent decision taken by Owners and not causally connected to the breach.

    There were a few important reasons for this finding in this case:

    (i) Owners could have sold the vessel at any time, before the repudiation on a ‘subject to charter’ basis or after the repudiation as they did. There was nothing preventing them from doing so in the charterparty;

    (ii) Owners were not forced to sell the vessel because of the repudiatory breach – they chose to do so for their own commercial reasons; and

    (iii) The sale was undertaken at Owners’ commercial risk. It was completely up to them as to when they sold. The value of the vessel could have gone up or down during the two remaining years of the charter. As the court noted, Owners looked good selling when they did, but they may have looked imprudent if the market value had increased. This was their risk to take. As it happened, the market value of these vessels (along with just about everything else in the world at that time) crashed because of the Global Financial Crisis in 2008. That was wholly unrelated to the Charterers’ breach.

    In view of the lack of a causal connection between the breach and the sale, Charterers failed in their argument and Owners ultimately prevailed in their position, although it did take them all the way to the Supreme Court to have that decided.

    This is part 1 of two part series on this issue. In the next video we explore the US position and how a US arbitrator or US court may deal with the factual scenario thrown up by the New Flamenco case.

    I hope that you have enjoyed this presentation and please feel free to share it in your networks. Finally, we would very much welcome any feedback on content and format, or topics you would like to hear about. Please drop us a line and get in touch with us.

    You will find the second related video on our website. Thank you for listening.

    This video is not intended as legal advice and is only a general summary not to be relied upon. If you would like to discuss any specific issues arising, please do not hesitate to give us a call or send an email.

    Luke Zadkovich | tel: +1 917 868 1245 | email: luke.zadkovich@floydzad.com
    Ed Floyd | tel: +1 917 999 6914 | email: ed.floyd@floydzad.com
    www.floydzad.com

    Copyright © 2017, Floyd Zadkovich LLP. All rights reserved.

Subscribe for our updates

If you need guidance on any legal or commercial issues, then please contact us.