New Flamenco: Dancing With New Rules On Mitigation

The Supreme Court confirms there needs to be a direct and casual link between the loss caused by the wrongdoer and any benefit obtained by the injured party.

Introduction

The Supreme Court1 refused to grant a charterer credit for profits realised by the shipowner as a result of selling the vessel earlier than anticipated in order to mitigate losses. The court upheld a strict stance on causation to determine which losses and profits could be claimed by the charterer. Whilst the facts of this case are related to shipping, the principles have wider application in relation to mitigation of losses.

The facts

Fulton Shipping Inc (Fulton/Shipowner) acquired a cruise ship from its previous owners in March 2005. A charterparty agreement was set up between Fulton and Globalia Business Travel S.A.U. (Globalia/Charterer) in August 2005 for two years with an option to extend the agreement for a further year. Instead of exercising this option, the parties orally agreed in a meeting in June 2007 that the charterparty would be extended for a further two years.

The Charterer denied that any agreement was ever made. The Charterer indicated in late 2007 that it wanted to redeliver the vessel, and the Shipowner considered this to be anticipatory repudiatory breach of the charterparty agreement. The vessel was redelivered in October 2007. Shortly before redelivery, the Shipowner entered into an agreement with another party to sell the vessel for US$23.7 million.

Following the financial crisis, the shipping market fell dramatically. If the vessel had been redelivered after the two year extension period (in November 2009), the Shipowner would only have been able to sell the vessel for US$7 million. The Shipowner commenced arbitration proceedings to claim the loss of income from the Charterer's breach of the agreement by early termination. The Charterer sought to obtain credit for the profit retained by the Shipowner for selling the vessel in 2007.

Arbitration and appeals

The dispute was referred to arbitration. The arbitral tribunal concluded that the Charterer was entitled to credit for the realised profit, and left it up the parties to amicably agree on the exact quantum of the credit.

The Shipowner appealed to the High Court under section 69 Arbitration Act2, to challenge a question of law. The High Court held there was no requirement for the Shipowner to give credit for any benefit when realising the capital value of the asset, because the sale of the vessel...