Contract Breach & Mitigation: Does the Breaching Party Benefit by its Early Return of For-Hire Equipment?

On June 28, 2017, the U.K. Supreme Court issued its decision in Globalia Business Travel S.A.U. v Fulton Shipping Inc which gives useful guidance in the principles to be applied in determining what benefits are to be deducted from the quantum of a loss of damages claim in the case of a repudiatory breach. In this case, the courts considered whether credit should be given to the charterers in respect of the difference between (a) the sale value achieved when the owners sold the vessel following the repudiatory breach; and (b) the sale value that would have been achieved at the time the vessel was due to be redelivered under the original charterparty.

In overturning the Court of Appeal decision, the Supreme Court determined that there needed to be a clear causal link between the breach of contract by the charterers and any benefit received by the owners as a result of the sale of their vessel.

While this particular case involved the charterparty of a vessel, the principles would apply equally to an operating lease of an aircraft or other leased asset which is returned early in repudiatory breach of the lease agreement.

Background

Fulton Shipping Inc. (Fulton) acquired a small cruise ship, the New Flamenco, in 2005 and entered into a novation agreement with the existing charterers, Globalia Business Travel SAU (Globalia) effective on or about the date of the title transfer. Fulton and Globalia initially agreed in writing to extend the charter to October 2007 and later agreed verbally to further extend the charter to November 2009 although the second extension was not agree to in writing by Globalia.

Globalia returned the vessel to Fulton in October 2007 shortly after Fulton terminated the charterparty as a result of the anticipatory repudiatory breach by Globalia. Before redelivery, Fulton had arranged for a sale of the vessel to a third party for an amount of $23.765 million.

Initial arbitration proceedings held in London, found that Fulton had terminated the charterparty in response to Globalia’s repudiatory breach and this was not disputed by the parties. However, the arbitrator went on to determine that the difference in the purchase price between what Fulton received in 2007 and what Fulton would have received in November 2009 at the scheduled end of the charterparty, was to be taken into account in calculating the damages payable by Globalia to Fulton for its loss of profits under the charterparty. Owing to economic circumstances, expert evidence concluded that if the vessel had been sold in November 2009 at the scheduled end of the charterparty it would only have been worth $7 million, a difference of $16.765 million from 2007. As this amount was greater than the loss of profit claim by Fulton, the arbitrator determined that Fulton was not entitled to any damages.

High Court Principles

Fulton appealed the arbitrators decision to the English High Court and the decision in 2014 found that crediting the benefit of the change in capital value to the charterers was not the correct analysis “because it was not a benefit which was legally caused by the breach”¹. In coming to this conclusion the judge noted that (1) Fulton was entitled to sell the vessel at any time during the charterparty based on their own commercial assessment of the vessel’s ongoing value and (2) their “decision to sell was legally independent of the breach” ². The change in the sale price of the vessel from 2007 to 2009 was due primarily to economic factors rather than any cause related to the charterer’s repudiatory breach. Therefore any benefit to Fulton for selling at such time was in reward for Fulton having taken the commercial risk in respect of the capital value of the asset.

Court of Appeal Decision

The Court of Appeal reversed this decision in 2015 on the basis that Fulton was required to mitigate its losses resulting from the repudiatory breach by Globalia and as the sale of the vessel was one way in which to mitigate its losses any gain in the profit as a result of such sale should therefore be taken into consideration in the losses claim.

Supreme Court Judgment

The UK Supreme Court concluded on 28 June 2017 with a unanimous decision that the arbitrator had “erred in principle” ³ and that the Court of Appeal decision was to be overturned. 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” the essential question being whether the change in the sale price was caused by the breach of the charterparty⁴. Additionally the sale of the vessel was not to be considered as mitigation as it did not impact on the rental stream. If there had been a secondary market in which to lease the vessel, mitigation would have been to re-lease the vessel and make a claim between the rental under the Globalia charterparty and any new charterparty.

Conclusion

The Supreme Court’s decision in Globalia should not be limited to vessel charters, but also to other for-hire contracts such as operating leases for aircraft and other assets. Parties to such contracts should be aware of the Globalia decision in the case of an early redelivery in breach of contract.

¹ Fulton Shipping Inc of Panama v Globalia Business Travel SAU [2014] EWHC 1547 at para 65, Popplewell J

²Fulton Shipping Inc of Panama v Globalia Business Travel SAU [2014] EWHC 1547 at para 66, Popplewell J

³ Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) of Spain (respondent) v Fulton Shipping Inc of Panama (appellant) [2017] UKSC 43 at para 36, Lord Clarke

⁴ Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) of Spain (respondent) v Fulton Shipping Inc of Panama (appellant) [2017] UKSC 43 at para 30, Lord Clarke