Does a Shipowner Have to Sell Its Ship in Order to Mitigate Its Loss? Supreme Court Says No!

In our client alert “Does a shipowner have to sell its ship in order to mitigate its loss?” in November 2016, we discussed the controversial Court of Appeal decision in The New Flamenco.

On 28 June 2017 the eagerly anticipated UK Supreme Court judgment in The New Flamenco was handed down, reversing the decision of the Court of Appeal. The Supreme Court held that the shipowner did not have to sell its ship to mitigate the loss of the charterers’ repudiatory breach. The Supreme Court agreed with the High Court decision of Popplewell J that the benefit brought into account must be caused by the breach of the charterparty. There must be a sufficiently close link between the two.

A brief recap of the facts

By a charterparty on an NYPE form and subsequent addenda, the cruise ship, The New Flamenco was time chartered for a period of over five years from 2004. The Charterers redelivered the vessel in October 2007 but the Owners’ position was that the earliest redelivery date under the charterparty was in November 2009. The Owners treated the Charterers as being in anticipatory repudiatory breach and accepted such repudiation as terminating the charterparty. In late October 2007, the Owners entered into an MOA for the sale of the vessel for US$23,765,000.

The arbitrator found that the minimum redelivery date under the charterparty was in November 2009 and that the value of the vessel in November 2009 was US$7,000,000. The arbitrator further found that the Owners’ sale of the vessel in October 2007 was caused by the Charterers’ early redelivery and was in reasonable mitigation of loss. It was not in dispute that there was no available market for a substitute charter at the time of the Charterers’ breach.

The arbitrator declared that the Charterers were entitled to a credit of US$16,765,000: the difference between the value of the vessel in October 2007 and November 2009. This would be set off against the Owners’ claim for damages. That is, the Charterers were entitled to a credit in the assessment of the Owners’ damages claim for the ‘benefit’ that accrued to the Owners by selling the vessel for more in October 2007 than what it would have been worth at the end of the charter period in November 2009.

The Owners appealed. A fundamental part of their appeal was that the benefit they had obtained was not sufficiently causally linked to the Charterers’ early redelivery such that it should be taken into account when assessing damages. The Owners argued that the capital value of a vessel is different in kind from the type of loss for which they were claiming (i.e., loss of an income stream).

On the Owners’ appeal to the High Court, Mr Justice Popplewell held that the Owners’ decision to sell the vessel was independent of the Charterers’ breach in redelivering the vessel two years early and, therefore, the difference in value could not be taken into account to reduce the loss recoverable. The Charterers successfully appealed to the Court of Appeal.

Court of Appeal decision

Overturning the High Court decision at first instance, the Court of Appeal held that the owners of a vessel claiming damages for the repudiation of a time charterparty must give credit to the charterers for the ‘benefit’ accrued following the sale of the vessel. That is, the owners must give credit for the difference in value between when the vessel was sold and when it would have been sold had the charterers performed the contract.

Supreme Court decision

The Supreme Court overturned the Court of Appeal decision to reinstate the position of Popplewell J in the High Court. The Supreme Court held that the fall in value of the vessel was irrelevant as 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 rationale was not that the benefit must be of the same kind as the loss caused. Rather, the rationale was that there must be causation between the benefit brought into account and the breach of the charterparty. There must be a sufficiently close link between the two.

Lord Clarke, who delivered the unanimous judgment, inter alia held:

“The repudiation resulted in a prospective loss of income for a period of about two years. Yet, 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.”

The Supreme Court held that it was a commercial decision to sell the vessel and one which could have been made at any point during the term of the charterparty. The loss suffered was that of the income stream for the remaining two years of the charterparty term and not one relating the proprietary right of the Owners to the vessel. Therefore, the sale of the vessel was not an act of mitigation because it was incapable of mitigating the loss of the income stream.

Conclusion

Our previous client alert raised the important question that arose following the decision of the Court of Appeal: would a shipowner be expected to sell its vessel, following a repudiatory breach of a charterparty, in order to mitigate its loss? The Supreme Court decision has removed this uncertainty and clarified the position. It is logical not to take into account the value of the capital asset when considering the loss of income stream following the repudiatory breach of a charterparty. Disposing of the capital asset is ultimately a commercial decision which can be made within the lifetime of the charterparty and independently of any breach. Accordingly this should not been seen as mitigation, as any benefit following a sale will not ordinarily have been caused by the breach.
Source: Reed Smith