After the charterers repudiated an agreed extension of a time charter of the cruise ship New Flamenco, the owners sold her in October 2007 for US$23,765,000. By the date on which she would have been redelivered in November 2009, her value had fallen to US$7,000,000. The Supreme Court held that this difference in capital value did not have to be credited against the owners’ claim for lost hire, because it was not caused by the repudiation and the sale was not mitigation of that loss.
The charter, repudiation and sale
The cruise ship New Flamenco was time-chartered on the NYPE 1993 form. The claimants, who managed and later bought the vessel, became the owners under a novation in March 2005. The charter was extended to 28 October 2007. At a meeting on 8 June 2007 the parties orally agreed a further two-year extension to 2 November 2009. The charterers disputed that agreement, refused to sign the written addendum and maintained that they could redeliver on 28 October 2007. The owners accepted that stance as an anticipatory repudiation on 17 August 2007. The vessel was redelivered on 28 October 2007. Shortly beforehand the owners had agreed to sell her for US$23,765,000.
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Had the extension been performed, the vessel would have been redelivered in November 2009. The arbitrator found that her value then, as between a willing seller and a willing buyer, was US$7,000,000. The fall followed the financial crisis. The owners claimed €7,558,375 for the net loss of charter profits over the two years, after giving credit for operating costs saved by the sale. They had also been prepared to allow US$5,145,000 for what they described as depreciation. The charterers argued that the owners must instead give credit for the whole difference between the October 2007 sale price and the November 2009 value: US$16,765,000, or €11,251,677. That sum exceeded the profit claim and would have left the owners with nothing.
Arbitration and the courts below
The sole arbitrator found that the oral extension had been agreed and that the owners had validly terminated for the charterers’ repudiatory breach. There was no challenge to that finding. He made no findings on the other accounting figures, which the parties had not agreed, but declared that the charterers were entitled to the €11,251,677 credit when damages were assessed. The owners appealed under section 69 of the Arbitration Act 1996 on a question of law: whether, in assessing damages for lost hire after an accepted repudiation, the charterers could require credit for the alleged benefit of avoiding a fall in the vessel’s capital value by selling soon after termination rather than at the end of the charter.
Popplewell J allowed the owners’ appeal. Applying principles drawn from the authorities on benefits and mitigation, he held that the difference in capital value was not a benefit legally caused by the breach. The Court of Appeal allowed the charterers’ appeal. Longmore LJ said that where a claimant, in the ordinary course of business, takes a mitigating measure arising out of the consequences of the breach, a resulting benefit is normally brought into account unless the measure is wholly independent of the relationship between the parties. He saw no reason why a benefit from selling the vessel should be treated differently from profits made by spot chartering during the unexpired term.
Why the capital difference was not brought into account
Lord Clarke, with whom Lord Neuberger, Lord Mance, Lord Sumption and Lord Hodge agreed, preferred the judge’s reasoning. The owners’ interest in the capital value of the vessel had nothing to do with the interest injured by the repudiation. It was not necessary that the benefit be of the same kind as the loss. The essential link was causation: a benefit is brought into account only if it was caused by the breach or by a successful act of mitigation.
The avoided fall in value was not, on the arbitrator’s findings, caused by the repudiation. The breach caused a prospective loss of income for about two years. Nothing about the premature termination made it necessary to sell the vessel, either at all or at any particular time. She could have been sold during the charter. The decision to sell was a commercial decision taken by the owners at their own risk about an interest which was no part of the subject matter of the charterparty and had nothing to do with the charterers. At most, termination was the occasion for the sale, not its legal cause. The same lack of a causal link meant that the owners could not have claimed against the charterers if the market value had risen; they therefore could not be required to account for the fall. A sale in November 2009 was not the proper comparator, because lawful redelivery would no more have required a sale than the termination in 2007 did.
The sale was also not, on its face, an act of successful mitigation. If there had been an available charter market, the loss would have been the difference between the contract rate and the substitute rate, and the sale would have been irrelevant. In the absence of such a market, the measure is the difference between the contract rate and what was, or ought reasonably to have been, earned from shorter employment. The relevant mitigation is the acquisition of an alternative income stream. Selling the vessel could not itself mitigate the loss of the charter income. It was the exercise of proprietary rights which the owners enjoyed independently of the charterparty and of its termination. A sale during the lost period might shorten the period for which lost income could be claimed, and a sale at an undervalue of a capitalised hire entitlement might raise a separate claim, but neither point made the sale itself mitigation.
The arbitrator had therefore erred in principle, whether by failing to identify or by failing to apply the correct principles. The Court answered the question of law in the negative.
Verdict: The Court unanimously allowed the shipowners’ appeal and restored Popplewell J’s order. The charterers could not deduct the avoided fall in the ship’s capital value from damages for loss of charter income. The remaining issues were to go back to the arbitrator.
