The Supreme Court has in a recent decision provided further clarification regarding the issue of mitigation following a repudiation of a charterparty.
The Vessel was chartered by the Charterers for a period from 13 February 2004 until 2 November 2009. The Charterers however re-delivered the Vessel early, in October 2007, in repudiatory breach of Charterparty. The Owners accepted the Charterers’ repudiatory breach in re-delivering early, and claimed damages.
Shortly before the redelivery of the Vessel, the Owners entered into a memorandum of agreement for the sale of the Vessel for the amount of USD 23,765,000.
The Owners commenced arbitration proceedings claiming loss of profits for the remainder of the charter party period., At the time of the arbitration hearing in May 2013, it became apparent that there was a significant difference between the value of the Vessel in October 2007 when the Vessel was sold, and the value of the Vessel had she been sold in November 2009, when the Vessel could have been contractually re-delivered. The arbitrator, relying on expert evidence, found that the Vessel in November 2009 would have been worth USD 7,000,000.
The Charterers argued that the Owners were bound to bring the sale profit into account and give credit for the difference between the purchase price for the Vessel in October 2007 and her estimated value in November 2009 – a difference that amounted to USD 16,765,000.
The Owners argued that the difference in value was irrelevant and should not be considered. It was obvious to the Parties that, if the Charterers’ argument succeeded, the credit would be sufficient to wipe out Owners’ claim altogether.
The salient questions the arbitrator had to decide were whether:
These questions were answered by the arbitrator in the affirmative, with the effect that the amount of USD 16,765,000 had to be deducted from the Owners’ claim. The Owners appealed to the High Court on the question of the relevance of the alleged benefit.
Popplewell J held that the arbitrator had erred at law, finding that the alleged benefit was irrelevant because there was no causative connection between Charterers’ breach and Owners’ benefit. Owners’ commercial decision to sell was occasioned by the fall in the market value for cruise vessels and not Charterers’ breach. Furthermore, the Vessel was the Owners’ investment and it would not be fair or just to appropriate the proceeds from the sale as credit in a claim for damages. The Charterers appealed.
Court of Appeal
The Court of Appeal overturned Popplewell J’s decision; favouring the view of the arbitrator. The Court of Appeal concluded that the sale of the Vessel had been made in response to the repudiation, so there was a sufficient causative connection to bring the benefit into account. Following this train of thought, the Court of Appeal held that if the market for second hand cruise vessels had gone the other way during the period from October 2007 to November 2009, the Owners would had been entitled to treat the difference in value as a recoverable loss, thus increasing Owners’ claim for damages. The Owners appealed.
The Supreme Court overturned the decision of the Court of Appeal, agreeing with the decision from the High Court. In a key passage of the judgment, Lord Clarke stated as follows in relation to the question of whether a benefit should be taken into account or not:
“The benefit to be brought into account must have been caused either by the breach of the charterparty or by a successful act of mitigation.
… 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. If the Owners decide to sell the vessel, whether before or after termination of the charterparty, they are making a commercial decision at their own risk about the disposal of an interest in the value which was no part of the subject matter of the charterparty and had nothing to do with the charterers.”
Commenting on the position also touched upon by the Court of Appeal in event of a rise in the market during the relevant period of time, Lord Clarke stated:
“As I see it, the absence of a relevant causal link is the reason why they could not have claimed the difference in the market of the vessel if the market value would have risen between the time of the sale in 2007 and the time when the charterparty would have terminated in November 2009. For the same reason, the owners cannot be required to bring into account the benefit gained by the fall in value.”
The Supreme Court also commented upon the implication of there being no available market for the vessel, such that Owners had no choice other than to sell the Vessel;
“The analysis is the same even if the owners’ commercial reason for selling is that there is no work for the vessel. At the most, that means that the premature termination is the occasion for selling the vessel. It is not the legal cause of it. There is equally no reason to assume that the relevant comparator is a sale in November 2009. A sale would not have followed from the lawful redelivery at the end of the charterparty term, any more than it followed from the premature termination in 2007. The causal link fails at both ends of the transaction”.
The Supreme Court also commented on the question of whether the sale of the Vessel would be regarded as an act of mitigation, to which the Supreme Court said it did not:
“For the same reasons the sale of the ship was not on the face of it an act of successful mitigation. If there had been an available charter market, the loss would have been the difference between the actual charterparty rate and the assumed substitute contract rate. The sale of the vessel would have been irrelevant. In the absence of an available market, the measure of the loss is the difference between the contract rate and what was or ought reasonably to have been earned from employment of the vessel under shorter charterparties, as for example on the spot market. The relevant mitigation in that context is the acquisition of an income stream alternative to the income stream under the original charterparty. The sale of the vessel was not itself an act of mitigation because it was incapable of mitigation the loss of the income stream.”
Implications of the judgment
The Supreme Court judgment brings clarity to the issue of mitigation of loss. After the Court of Appeal judgment, it was uncertain whether the failure to sell a vessel could be seen as a failure to mitigate. The Supreme Court decision however makes it unlikely that such an argument would succeed and takes a more predictable approach to the calculation of damages and mitigation.
The Supreme Court has also clarified that changes in the sale price of the vessel should not be relevant to any claim for loss of profits under a time charter party, provided that the decision to sell the vessel is not caused by the breach of charterparty.