The assessment of damages on early redelivery and mitigation – “The New Flamenco”

The Supreme Court has now handed down its long-awaited judgement on the “New Flamenco” (Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) of Spain v. Fulton Shipping Inc of Panama [2017] UKSC 43). The New Flamenco has addressed the controversial issue of the calculation of damages for early redelivery in cases where there is no available market and the owners decide to sell the vessel.

The facts are rather simple: The charterers redelivered the vessel (a small cruise ship) early, i.e. on 28 October 2007 instead of 2 November 2009 and the owners treated the early redelivery as anticipatory repudiatory breach. The owners then sold the vessel in October 2007 for US $23,765,000. It later transpired that, due to the global financial crisis, the vessel’s value had dropped significantly at the time she should have been redelivered in November 2009 (being worth only US$7,000,000). The dispute evolved around the calculation of damages arising out of the charterer’s repudiation and focused, in particular, on whether credit was to be given to the difference in the vessel’s capital value when sold or when she should have been redelivered.

The case was referred to arbitration and the arbitrator decided in favour of the charterers, finding that the sale of the vessel was caused by the charterers’ breach and was deemed reasonable mitigation of the owners’ loss caused by the charterers’ repudiation. On appeal ([2015] EWCA Civ 1299), Popplewell J reversed the arbitrator’s decision and allowed the owners to claim their net loss on the basis that there was no direct causative link between the owners’ benefit (the difference in the vessel’s capital value) and the charterers’ anticipatory breach. The Court of Appeal ([2015] EWCA Civ 1299) then reversed Popplewell J’s judgement and reinstated the arbitral award. Finally, the Supreme Court has unanimously allowed the owners’ appeal, reversing the Court of Appeal’s decision ([2015] EWCA Civ 1299). As a result, the Court ruled that charterers were not entitled to deduct from the owners’ loss of profit the credit for the difference in the value of the vessel when sold just after the early redelivery and the date the vessel should have been redelivered.

Lord Clarke (with whom Lord Neuberger, Lord Mance, Lord Sumption and Lord Hodge agreed) delivered the leading judgement. The correct test to be applied is that of causation and in particular, that of a sufficiently close link between the benefit obtained and the kind of loss caused by the wrongdoer (but not that of the similarity between the two in nature). In other words, if a benefit is to be credited, it must have been caused by a breach of charterparty or by a successful act of mitigation, which was not the case in The New Flamenco. In fact, the owners’ decision to sell the vessel, whether before or after termination of the charterparty, is their independent commercial decision which has nothing to do with the charterparty. The charterers’ repudiation provided the owners with the “occasion” to sell the vessel but was not the “legal cause” of the sale.  In a similar vein, the absence of such a causal link would also work against the owners if the market value of the vessel had increased between the time of the sale in 2007 and the time of the agreed redelivery in November 2009.

Furthermore, the Court found that the sale of a vessel per se does not amount to an act of mitigation. In cases where there is no available market, like The New Flamenco, mitigation only entails the acquisition of an alternative income stream to the income expected under the charterparty. The sale of the vessel has nothing to do with mitigation as it is only the exercise of the owners’ property rights and does not aim at reducing the owners’ loss of income.

The Supreme Court’s decision clarifies mitigation and puts an end to the dispute as to what acts may amount to mitigation. Lord Clarke has stressed the importance of causation in defining what mitigation entails, without however making any reference to existing case law or elaborating further on the application of the test. The test is nevertheless the right one and leads to sensible solutions. The sale of the vessel is a transaction owners would have been able to undertake for their own account  irrespective of the early redelivery at any time at any time, including the charter party period, and owners should not therefore be asked to pay any profits they may make by selling their own property.

Repudiated voyage charters and recoverable damages.

The prima facie measure of damages for repudiation of a voyage charter by charterers is the profit which would have been made by the shipowner on performance of that charter, less any benefit arising from mitigation which needs to be taken into account, such as what the ship earned during the period which would have been occupied in performing the voyage (Smith v M’Guire (1858) 3 H & N 554). However, the shipowner may suffer loss other than loss of profit and this may also be recovered, subject to the rules on remoteness. An example of such a different kind of loss arises when a vessel is redelivered to an owner in the wrong location or when a substitute fixture is completed at a discharge port which is not (or which is some distance from) the discharge port under the contract voyage.

This was the case in The MTM Hong Kong [2016] 1 Lloyd’s Rep 197. After the repudiation the vessel had proceeded on her ballast voyage to South America where she had been due to load under the terminated charter. On arrival there was an unexpected delay of nearly three weeks in fixing a substitute charter. The substitute fixture completed in Rotterdam on 12 April 2011. Had the original charter had been performed, the voyage would have completed on 17 March 2011 and the vessel would then have carried a cargo from the Baltic to the US, followed by a further cargo from the US to Europe. The owners were awarded the profit which the vessel would have earned on the contract voyage and the next two voyages less the profit actually earned on the substitute charter. Males J held that the arbitrators had been correct in awarding this additional head of loss.

Good news for judgment creditors (at least in part)

Getting judgment in a commercial case is one thing. Extracting hard cash from a seriously bloody-minded defendant is another. But for judgment creditors there was at least some good news today from Teare J in the Commercial Court.

Mukhtar Ablyazov, the defendant in JSC BTA Bank v Ablyazov & Anor [2016] EWHC 230 (Comm), is a colourful Kazakh politician, dissident and businessman who used to run the biggest bank in Kazakhstan. A little time ago the bank got judgment against him in the English courts in the modest sum of US$4.6 billion, together with the usual paraphernalia of worldwide freezing orders. But for some little time Mr Ablyazov, like Macavity, hasn’t been there. In 2012 he fled England (where he had been granted asylum) with the prospect of imprisonment for contempt hanging over him. Since then he has been elusive, save for a brief time last year being entertained for free courtesy of the French police, and allegedly busy moving assets around where they can’t be found.

Not having extracted much worthwhile from Mr Ablyazov, the bank then turned to a pal of his, Ilyas Khrapunov, who had allegedly helped him hide, move and spirit away assets subject to the worldwide freezing order. They sued him in tort, alleging that the above acts amounted to unlawful means and could thus engender civil liability for the economic tort of causing loss by unlawful means. Mr Khrapunov applied to strike, arguing that if (as is clear) contempt of court cannot give rise to damages, the bank shouldn’t be allowed to get a similar remedy by the back door.

Teare J held that the bank had at least an arguable cause of action. This is significant. Big-time debtors need people to help them evade judgment creditors: this salutary judgment not only gives creditors someone else to sue, but more importantly will give anyone contemplating helping a fugitive tycoons something to worry about.

Why only partly good news? The answer is Euro-law on jurisdiction. The assets were abroad, and neither Mr Ablyazov nor Mr Khrapunov was resident here (Mr Ablyazov seemed to be in Switzerland). Moreover, the damage alleged was held to have occurred abroad, even though it related to the frustration of an English judgment. It followed that the only head of jurisdiction under the Lugano Convention was such loss as might be proved to have been caused by acts, if any, committed by Mr Khrapunov in England before Mr Ablyazov left in haste.

Oh well, you can’t have it all. After all, what’s a billion or so between friends? In any case one suspects we haven’t heard the last of this.

Sale of goods — damages where no market

A straightforward sale of goods case in the CA on damages for breach of the duty to deliver where there’s no available market. Only semi-commercial, but still commercially relevant.

Dealers agree to sell a super-rare new Porsche limited edition to a buyer, then sell their allocation —  one car — to someone else (and subsequently lie about it). Apparently their objection is that the buyer might, horror of horrors, resell the car once he’s bought it: something which they rather pompously say is “against their policy”. Buyer recovers the difference between what he’d have paid under the spec he wanted (£135K) and what he’d have had to pay for a similar car elsewhere (£170K). The court confirms that s.51 SGA enacts Hadley v Baxendale in the specialised context of sale of goods. The fact that the only rough equivalent available elsewhere was just that — a very rough equivalent — is beside the point. The dealers go down for £35K plus costs. See Hughes v Pendragon Sabre Ltd (t/a Porsche Centre Bolton) [2016] EWCA Civ 18 (on BAILII).

AT

No loss, no damages: latest from the CA

Christmas reading from the English CA for charterparty buffs and damages enthusiasts. In The New Flamenco [2015] EWCA Civ 1299 , decided a couple of days ago, a cruise ship under time-charter at a highish rate was wrongfully redelivered a couple of years early. That’s OK, said the owners: we’ll just have those two years’ lost profits, please (there being no relevant market). Not so fast, say the charterers. You sold the ship on redelivery for a very tidy sum: had we given her back at the proper time the market would have collapsed and you’d have got many millions of dollars less for her — a figure that dwarfs any profits lost. In fact you should be d****d grateful to us for breaking our contract, since you’re actually a great deal better off than if we’d kept it.

Arbitrators hold for the charterers; Teare J on appeal for the owners. In a rare reversal of Teare J, the CA restore the arbitrators’ decision. Whatever the case where there is a market rate, in non-market cases where the claimant claims on the basis of profits lost, the general British Westinghouse rule applies and any gains resulting are in account. A salutary reminder from Longmore LJ at [29]: “compensation for actual loss is the underlying principle and … in this connection, it is the available market rule that is a gloss on that underlying principle.” Verb sap.

Happy Christmas to all.

AT

Demurrage is not just for ships – and cannot last for ever.

Demurrage is a provision for liquidated damages for breach of the charterer’s obligation to load or discharge the vessel within the agreed laytime. Demurrage provisions are also to be found in carriage contracts in respect of detention of containers supplied by the carrier. In MSC Mediterranean Shipping Company S.A. v. Cottonex Anstalt [2015] EWHC 283 (Comm), we have the first case considering container demurrage, which is of general interest in its treatment of the carrier’s right to keep a repudiated contract alive and continue claiming demurrage.

In the summer of 2011 the carrier made several contracts with the shipper to carry containers of raw cotton by sea from Middle East ports to Chittagong in Bangladesh. However, the goods were never collected and the containers still remain in a yard in the port at Chittagong and the customs authorities have at all material times refused to allow the containers to be released.

The carrier claimed demurrage from the shipper pursuant to cl.14.8 of the bill of lading which provided for a period of free time for the use of containers and providing that the responsibility of the “Merchant”, defined as including the shipper, was “to return to a place nominated by the Carrier the Container and other equipment before or at the end of the free time allowed at the Port of Discharge or the Place of Delivery”. Demurrage on a daily basis was to be payable by the Merchant thereafter in accordance with the carrier’s tariff. As at 1 January 2015 the total demurrage claimed, from the expiry of free time in 2011, exceeded US$1m.

Leggatt J held that the shipper was liable to pay demurrage under cl. 14 (8) and that there was no scope for reducing the amount payable for this breach on the grounds that the carrier had not taken reasonable steps to mitigate its loss. A liquidated damages clause made proof of the claimant’s actual loss unnecessary and irrelevant.

However, demurrage would not run forever. On 27 September 2011 the shipper had committed a repudiatory breach of the contracts of carriage by sending an email to the carrier in which it indicated that there was no realistic prospect of it being to arrange for any of the containers being collected. The question now arose as to whether the carrier should accept the repudiation and sue for damages or whether it could keep the contract alive.

Following a repudiation, the innocent contracting party may decide to keep the contract alive, unless it has no legitimate interest in doing so which will be the case when: (a) damages are an adequate remedy and; (b) maintaining the contract would be “wholly unreasonable”. Here, the carrier had no legitimate interest in maintaining the contract of carriage. It was restricted to a claim for damages, which would be subject to the mitigation principle. If the containers were in its possession it could mitigate by unpacking them. If, as was the case here, the containers were not in its possession, it could mitigate by buying replacements. Had cl. 14 (8) purported to give the carrier an unfettered right to ignore the shipper’s repudiation and carry on claiming demurrage indefinitely, the clause would have been treated as penal and would be unenforceable.

Free in/ Free out clauses and cargo claims

SDTM-CI v Continental Lines N.V. [2015] EWHC 1747 (Comm)

Cargo claims were brought against the shipowner under two bills of lading incorporating the terms of a charterparty which contained a clause providing “Cargo shall be loaded, spout trimmed and/or stowed at the expenses and risk of Shippers/Charterers … Cargo shall be discharged at the expenses and risk of Receivers/Charterers at the average rate of 1,500 metric tons per weather working day ……Stowage shall be under Master’s direction and responsibility…” Flaux J has held that the incorporated provision has the effect of transferring responsibility for loading and discharging away from the shipowner. To the extent that it was established that the cargo was damaged by bad loading and/or discharge, as opposed to bad stowage, the cargo interests could not recover such damages from the shipowner.

Simon Baughen