Appeal court: profits from sale of ship should be treated as mitigation of loss from breach of contract

Instead, the Court of Appeal based its decision on "the fundamental compensatory principle, that damages should place the innocent party, as far as possible, in the position it would have been in had the contract been performed", according to complex commercial disputes expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com.

"This principle also requires the innocent party to take reasonable steps to mitigate the loss and he cannot recover for loss which could have been avoided if he had taken such steps," Dickman said.

"Benefits which are wholly independent of the relationship between the parties, such as insurance, are not to be taken into account in assessing the loss. However, to quote the appeal court judge, if the party '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 a measure benefits [that party], that benefit is normally to be brought into account in assessing [the party's] loss unless the measure is wholly independent of the relationship" between the parties," he said.

The Court of Appeal overturned the judge's decision in a dispute between cruise ship owners Fulton Shipping and Globalia Business Travel, which had chartered the vessel. In doing so, it restored an arbitral award which reduced the damages due to Fulton, as it had been able to sell on the ship for considerably higher than the sum it would have received had Globalia not backed out of the charter before the financial crisis hit, in breach of contract.

It was also relevant that there was no 'available market' for another long-term charter in this case, meaning that Fulton had to look into other methods of mitigating its loss such as the sale of the vessel, the appeal court said. The High Court judge had found that there was insufficient connection between Globalia's breach of contract and Fulton's decision to sell the ship, which led to his incorrect conclusion that the profits from the sale should not be taken into account when assessing the measure of damage, according to the Court of Appeal.

"[Where there is no available market] the prima facie measure of loss in hire contracts is the difference between the contractual hire and the cost of earning that hire (crew wages, cost of fuel etc.)," said Lord Justice Longmore in his leading judgment. "But it will not usually be reasonable for the shipowner to claim that prima facie measure if he is able to mitigate that loss by trading his vessel if opportunities to trade that vessel arise."

"If he does so trade the vessel, he may make additional losses or additional profits but, in either event, they should be taken into account. He is not speculating on the market as he would be if there was an available market of which he chooses not to avail himself; he is just bringing into account the consequences of his decision to mitigate his loss and those consequences will 'arise', generally speaking, from the consequences of the breach of contract," he said.

"The reason why the judge came to the contrary conclusion appears to stem chiefly from his seventh principle that, where the benefit arises from a transaction of a kind which the innocent party would have been able to undertake for his own account irrespective of the breach, that is suggestive that the breach is not sufficiently causative of the benefit ... I do not consider it necessary for an arbitrator to spell out this somewhat elaborate principle of causation," he said.

"The Court of Appeal thought the judge had been over-analytical in his criticism of the arbitrator's decision," said Richard Dickman.

"It should have been enough, as the arbitrator essentially found, that the sale of the vessel arose out of the consequences of the breach and in the ordinary course of business.. The arbitrator had also been entitled to find that, when applying considerations of fairness and justice to the case as a whole, the owners should give credit for the substantial profit they made in mitigating what would otherwise have been a substantial loss," he said.

It was also clear from the judgment that the Court of Appeal was "reluctant to disturb the arbitrator's 'common sense overall judgment', perhaps mindful of the perception in some quarters that the English courts are too interventionist in relation to arbitrations and with a view to preserving London's pre-eminent position as an international arbitration centre", Dickman said.

However, he added that the judgment "may not be the last word on the subject", as a further appeal to the Supreme Court could not be ruled out.