The Challenge Of Mitigating Your Losses Where There Is No Available Market – ‘The New Flamenco'*

Mitigation of damage where there is no available market is a difficult area of law and can be challenging. As the Court of Appeal recognised recently in its judgment in The New Flamenco, "it is notoriously difficult to lay down principles of law in the realm of mitigation of loss". This judgment provides helpful guidance on the complicated interplay between market conditions at the time of a breach, mitigation and causation. While the facts are squarely based in the shipping world, this key decision has a much wider effect on commercial contracts.

This client alert examines the key principles highlighted in that case and considers how it affects contracts for the sale of goods.

The facts

On 13 February 2004, The New Flamenco was chartered by her claimant owners to the defendant charterers on a time charterparty.2 In August 2005, the charterparty was extended to 28 October 2007 by mutual agreement. On 8 June 2007, the parties reached an oral agreement to extend the charter for another two years, to 2 November 2009.

The charterers alleged no such extension had been agreed and indicated an intention to redeliver the vessel at the end of October 2007, refusing to sign an addendum documenting the further extension. The owners declared the charterers in anticipatory repudiatory breach and accepted this breach as terminating the charterparty on 17 August 2007.

The vessel was redelivered by the charterers on 28 October 2007. However, the owners had been unable to find an alternative employment for the vessel as from October 2007, and shortly before redelivery they entered into a memorandum of agreement for sale of the vessel for the sum of US$23.765m.

The arbitration

Arbitration was commenced by the owners against the charterers for recovery of the net loss of profits the owners alleged they would have earned between October 2007 and November 2009. The charterers contended that the change in value of the vessel had to be taken into account: the vessel's value between the time of actual redelivery in 2007 and the time the owners alleged she should have been redelivered in 2009 had dropped by US$16.765m to just US$7m. As a result, the charterers said that credit should be given to them for the 'benefit' the owners gained in having the vessel redelivered early (i.e. the avoided loss of value of the vessel).

The sole maritime arbitrator found that the sale of the vessel was reasonable mitigation of damage and held that the benefit accrued to the owners...