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M/S ‘New Flamenco’ – Have your cake and eat it?

Picture this scenario – you charter a cruise ship. It’s all going well, so you decide to extend the charter period by a further 2 years, but you have a change of heart and tell the owners that you won’t be taking the ship for the extended period after all. The owners, unsurprisingly, take issue with this. They call you up on it holding you in breach and they then accept that breach as terminating the charter party. You then re-deliver the ship to the owners, and in the meantime they enter into a memorandum of agreement to sell the ship to a third party for approx. US$23.75m in the absence of an available chartering market at the time.

Inevitably, the owners sue you for losses – broadly, the lost profits during the remaining 2 years of the charter – caused by your breach by commencing arbitration in London (the charter agreement is governed by English law). And then Lehman Brothers collapse in 2008 and the world changes quite a bit...

You subsequently discover that the owners’ election to sell the ship a year earlier (in 2007, when the charter was brought to an abrupt end) means that they have done really rather well for themselves as the value of the ship in 2009 (when the charter was supposed to end) would have been US$7m. So you think to yourself, there is no case to answer as the owners have actually benefitted from the circumstances and you should, in contesting their claim for loss of profits, be entitled to a credit of the US$16.75m windfall, right? That must be right, mustn’t it, otherwise the owners will have had their proverbial cake and eaten it? Well, wrong, actually.

On 28 June 2017 the UK’s Supreme Court gave judgment in the case of Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) -v- Fulton Shipping Inc [2016] UKSC 43, a case involving the cruise ship “NEW FLAMENCO”. It played out as I have described above. The charter was originally dated 2004. The original owners actually sold “NEW FLAMENCO” to the claimants in 2005, and the charter was novated at that time, the claimants stepping into the (former) owners’ shoes. The charter was extended in 2005 to 2007 and then, again, in 2007 to 2009 – the charterers disputed that the 2009 extension was ever formally agreed. That’s when the owners brought the charter to an end.

The sole arbitrator was appointed in 2008, but the actual hearing didn’t take place until 2013, by which time it became apparent that there was a significant difference in the value of the “NEW FLAMENCO” in October 2007, when she was sold, and in November 2009, when she was supposed to be redelivered at the end of the charter. The arbitrator’s award concentrated on 2 key issues (1) whether the owners were entitled to terminate the charter for breach (yes – and there was no further challenge to that finding), and (2) if so, whether they had to give credit for any benefit that they received when they sold the ship (again, yes – but it’s this part of the arbitrator’s award which was challenged all the way to the Supreme Court).

The owners appealed the arbitration award in the High Court, and in his judgment delivered on 21 May 2014 Popplewell J allowed that appeal, holding that the owners didn’t actually have to give credit for the capital value windfall “because it was not a benefit which was legally caused by the breach”.

This then set the hares running on the charterers’ side who appealed to the Court of Appeal, who sided back with the charterers and allowed their appeal back in late December 2017. Longmore LJ, who gave the leading judgment, took a different view from Popplewell J and held that "if a claimant adopts by way of mitigation a measure which arises out of the consequences of the breach and is in the ordinary course of business and such measure benefits the claimant, that benefit is normally to be brought into account in assessing the claimant’s loss unless the measure is wholly independent of the relationship of the claimant and the defendant”. The key, really, was in connecting the measure adopted in mitigation (i.e. the sale) and the consequences of the breach (i.e. the sale being a consequence of the breach). The Court of Appeal held that there was such a connection.

It was then the owners’ turn to challenge the Court of Appeal judgment, and they appealed to the Supreme Court. Lord Clarke (who delivered the Supreme Court’s judgment) reversed the Court of Appeal’s findings, and concluded that Popplewell J was correct. He made the following observations: “Viewed as a question of principle, most damages issues arise from the default rules which the law devises to give effect to the principle of compensation, while recognising that there may be special facts which show that the default rules will not have that effect in particular cases. On the facts here the fall in value of the vessel was in my opinion irrelevant because the owners’ interest in the capital value of the vessel had nothing to do with the interest injured by the charterers’ repudiation of the charterparty.

Lord Clarke’s view was that the most relevant link was causation – “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.” He found that in the case of “NEW FLAMENCO” the charterers’ breach caused a prospective loss of income (for the remainder of the charter). “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 vessel which was no part of the subject matter of the charterparty and had nothing to do with the charterers.

Harsh for the charterers? Probably. The right result? Very much so. Perhaps the fact that the ship was actually sold to the current owners at the beginning of this very charter played a part in Lord Clarke’s reasoning but it also illustrates, rather nicely, the point he was making. What’s the upshot? Charterers beware!

By the way, it’s not the end of the road for the charterers here as the matter will now be remitted back to the original arbitrator for determination in light of the Supreme Court’s findings. 10 years on, the clock ticks on for “NEW FLAMENCO”.

Pawel Wysocki

Wysocki Quinn Woollam

The content of this article is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content herein.

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