The 'NEW FLAMENCO' – Supreme Court Decision

The Supreme Court delivered this week its long awaited decision in the "NEW FLAMENCO", holding that the benefit that arose from the sale of the vessel by the owners following the charterers' repudiation of charter could not be taken into account when assessing damages because it was not caused by the breach or by a successful act of mitigation.

The "NEW FLAMENCO" (the "Vessel") was a small cruise ship chartered in 2004 by Globalia Business Travel ("Charterers") from Fulton Shipping Inc ("Owners"). Owners alleged that, in 2007, the parties met and agreed a two-year extension of the charter (up to November 2009). The Charterers, who disputed having reached such agreement, redelivered the Vessel in October 2007, when the Owners sold her for USD 23,765,000.

The arbitrator found that the Charterers had breached the agreement to extend the charter, but that the sale of the Vessel in October 2007 was caused by the breach and was in reasonable mitigation of Owners' losses. If the Vessel had been sold when the charter was due to come to an end in November 2009, her value would have been USD 7,000,000, a fall in value of USD 16,765,000. It followed that the Charterers were entitled to a credit of USD 16,765,000 in respect of the benefit that accrued to the Owners by selling the Vessel when worth more in October 2007 than it was at the end of the charter period in November 2009. This was more than the Owners' loss of profit and would result in the Owners recovering no damages for the Charterers' repudiation.

The question in the appeals was whether that difference constituted a benefit which, on principles of mitigation and avoidance of loss, should be brought into account.

In the Commercial Court, Popplewell J disagreed with the arbitrator and held that it should not, because, inter alia: a) the Owners' decision to sell an asset acquired before the breach was not caused by the Charterers' breach and the arbitrator's conclusion that the sale was, in fact, in reasonable mitigation of the loss could not be conclusive when the sale was caused by the independent decision of the Owners to realise the capital value of the vessel; b) the facts that the benefit gained was of a different kind (capital as opposed to income) and that the sale was a transaction that Owners could enter in to at any time were indicative that the benefit was not 'legally caused' by the breach; c) if the benefits accruing from the sale were to be taken into account, so should the use...

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