Supreme Court finds difference in value should not be offset against loss for breach of contract

Fulton Shipping had chartered a cruise ship to Globalia Business Travel until 28 October 2007. Before the charter was due to expire, Fulton and Globalia made an oral agreement to extend it for a further two years to 2 November 2009.

Globalia later disputed having made that agreement and redelivered the ship to Fulton Shipping in October 2007. Fulton Shipping treated this as an 'anticipatory repudiatory' breach which ended the charter, and went on to sell the ship for $23,765,000.

Fulton Shipping began arbitration in London seeking damages for loss of earnings. The arbitrator found that Globalia had made the oral contract and been in repudiatory breach of that contract, and accepted that as a reason for Fulton Shipping to terminate the charter agreement.

However, the arbitrator also said that there was a significant difference in value between the value of the ship when Fulton Shipping sold it and the lower value it would have been able to sell it for in 2009, if the charter agreement had run its course. Globalia was therefore entitled to a $16,765,000 credit for this difference against the damages it was due to pay for breaching the contract. This credit was more than Fulton Shipping's whole loss of profit claim.

The case was appealed to the High Court and proceeded to the Court of Appeal before being passed to the Supreme Court.

The Supreme Court has held that Globalia is not entitled to credit for the difference in value of the ship when sold in 2007 as against its lower value in 2009.

The fall in value was irrelevant, the Supreme Court said, because Fulton Shipping's interest in the capital value of the ship had nothing to do with the loss caused by Globalia breaching the contract.

For credit to be given, the benefit to be taken into account had to have been caused either by the breach of the contract or by a successful act of mitigation, and neither was the case here, it said. 

While the breach of the contract caused a potential loss of income to Fulton Shipping over the two year period, there was nothing about the breach that made it necessary to sell at that time or any other. The decision to sell was a commercial decision made at Fulton Shipping's own risk, the Court said.

The sale of the ship was also not obviously an act of successful mitigation, the Court said. If there had been an available charter market, the loss would have been the difference between the actual rate and the assumed substitute contract rate and the sale of the ship would have been irrelevant. The relevant mitigation in that context was the acquisition of an income stream alternative to that under the contract. The sale was incapable of mitigating the loss of the income stream, the Court said.

The arbitrator therefore erred in principle, the Supreme Court said.

Arbitration expert Michael Fenn of Pinsent Masons, the law firm behind Out-Law.com said: "This decision continues the recent trend of the Supreme Court seeking to maintain the integrity of legal principles rather than manipulating them to achieve a 'fair' result. A similar approach was seen in another recent Supreme Court decision on the treatment of benefits and avoided loss, which was heard alongside Globalia due to the common issues in play."

"While the impact of a strict approach to these issues will depend on the particular circumstances of a dispute, litigants in general should welcome the Court’s focus on clarity and precision of legal analysis, which enables the outcome of litigation to be predicted with greater confidence," Fenn said.