#Contract #Causation #UKSC clarifies meaning of ‘collateral’ after #BreachOfContract

SUPREME COURT CLARIFIES PRINCIPLES FOR DETERMINING WHEN BENEFITS ENJOYED BY A CLAIMANT FOLLOWING A BREACH OF CONTRACT WILL BE TREATED AS COLLATERAL ~ Donny Surtani, Charlotte Benton, Herbert Smith Freehills – Litigation notes, 11 JULY, 2017.

The Supreme Court has ruled that the owners of a ship that was redelivered early in breach of a charterparty did not have to give credit for the benefit they obtained by selling the vessel for a higher price upon its early redelivery, rather than at the end of the contractual term of the charterparty when the vessel was worth significantly less: Globalia Business Travel SAU (formerly TravelPlan S.A.U) of Spain v Fulton Shipping Inc of Panama [2017] UKSC 43. In doing so, the Supreme Court overturned the unanimous decision of the Court of Appeal and re-instated the order of the High Court, which had itself disagreed with the tribunal’s ruling on this issue in the underlying arbitration.

The Supreme Court’s decision lays down an important precedent and establishes that there is no straightforward litmus test to determine whether a benefit enjoyed by an innocent party will be taken into account to reduce the damages payable following a breach of contract, or alternatively treated as a collateral benefit which is ignored for these purposes. The key question will be whether the benefit was caused either by the breach or by the innocent party’s act of mitigation, taking into account all the circumstances.

If no such causation is found, recoverable loss will not be reduced by the benefit. Importantly, it will not satisfy the causation test if the breach merely provided the occasion or context for the innocent party to obtain the benefit, nor is it sufficient that the benefit would not have been obtained but for the breach. Determining causation in this sense is not a straightforward question, and reasonable views may differ – as illustrated by the opposite conclusions reached in unanimous decisions of the Court of Appeal and Supreme Court in this case.

Donny Surtani and Charlotte Benton, a partner and associate in our dispute resolution team, consider the decision further below.

Background

The claimant shipowners chartered a cruise ship to the defendant charterers. The owners alleged that, pursuant to an oral amendment to extend the charterparty, the charter was due to expire on 2 November 2009. The charterers disputed that they had entered into the oral amendment and asserted that they were entitled to redeliver the vessel on 28 October 2007. The owners treated the charterers as being in anticipatory repudiatory breach, which they accepted as terminating the charterparty. They went on to sell the vessel for US$23,765,000 just prior to its redelivery on the original expiry date in October 2007.

The owners claimed for loss of earnings for the period of the extension to the charterparty. It was found in arbitration that the parties had indeed extended the period of the charterparty by oral agreement, so the charterers were in breach by not continuing the charter until November 2009. The arbitrator also found that the value of the vessel had reduced to US$7,000,000 by November 2009, when the vessel would have been redelivered had the charterparty run its course (due to the global financial crisis having occurred in the intervening period).

The charterers submitted that by selling the vessel in October 2007, rather than November 2009, the owners had enjoyed a benefit of US$16,765,000. The arbitrator found that the owners had to give credit for this benefit in calculating damages, as the sale of the vessel was caused by the charterers’ breach and was a step taken in reasonable mitigation of damage. The credit was worth more than the owners’ loss of profit claim, so they were not entitled to any damages.

The owners were granted permission to appeal to the High Court and the case was subsequently appealed to the Court of Appeal and then the Supreme Court.

High Court

In his judgment, Popplewell J considered what the authorities said regarding the question of whether a benefit received by the innocent party should be taken into account to reduce recoverable damages. He noted that the search for a general rule which determines whether a wrongdoer should obtain credit for a benefit accruing to the innocent party is “elusive”, but nevertheless distilled the following principles from the authorities:

  1. Generally speaking, it is a necessary condition that the benefit is caused by the breach.
  2. In determining causation, all the circumstances should be taken into account, including the nature and effects of the breach and the nature of the benefit and loss, the manner in which they occurred and any pre-existing, intervening or collateral factors which played a part in their occurrence.
  3. It will not satisfy the causation test if the breach merely provided the occasion, trigger or context for the innocent party to obtain the benefit.  Nor is it sufficient that the benefit would not have been obtained but for the breach.
  4. It should make no difference whether the question is treated as one of mitigation of loss, or measure of damage. They are logically distinct approaches, but the factual and legal inquiry and conclusion should be the same.
  5. A mitigating step may be a reasonable and sensible business decision, taken to reduce the impact of the breach, but that does not of itself mean it is sufficiently caused by the breach. A reasonable response, designed to reduce loss, may be triggered but not legally caused by the breach.
  6. A mitigation analysis requires a sufficient causal connection between the breach and the mitigating step. It is not sufficient merely to show in two stages that there is a causative nexus between: (a) breach and mitigating step, and (b) mitigating step and benefit. Benefits flowing from a step taken in reasonable mitigation of a loss are to be taken into account only if and to the extent that they are caused by the breach.
  7. It is suggestive that the breach is not sufficiently causative of the benefit where and to the extent that the benefit arises from a transaction which the innocent party would have been able to undertake irrespective of the breach.
  8. It is not necessary that the benefit is of the same kind as the loss claimed or mitigated. However, such a difference may indicate that the benefit is not legally caused by the breach.
  9. Subject to these principles, whether a benefit is caused by a breach is a question of fact and degree which must be answered by considering all the relevant circumstances, forming a common sense overall judgment.
  10. Even where the causation test is satisfied, considerations of justice, fairness and public policy may nonetheless preclude the benefit from being taken into account.

In particular, benefits which are the fruits of something the innocent party has done or acquired for his own benefit should not be taken into account where it would be contrary to fairness and justice for the wrongdoer to be allowed to appropriate them for his benefit.

On these principles, Popplewell J decided that the owners did not have to give credit for the benefit gained by selling the vessel. The benefit was not legally caused by the breach, as the vessel was an asset which the owners could have sold at any time at the prevailing market rate and irrespective of the breach. The fact that it would have been worth less in November 2009 was a result of the financial crisis, which occurred irrespective of the charterer’s breach.

In addition, as the owners had taken the commercial risk of acquiring the vessel and selling it when they did, it would have been contrary to public policy to allow the contract breaking charterers to appropriate the result of the owners’ business acumen.

Court of Appeal

The Court of Appeal unanimously overturned Popplewell J’s decision, finding that the benefit gained by the owners had arisen from the consequences of the breach and should have been taken into account in calculating their loss.

The court said that if a claimant takes a mitigating measure which arises out of the consequences of the breach and which is in the ordinary course of business, any benefit to the claimant should normally be brought into account in assessing loss – though it recognised an exception where the measure is wholly independent of the relationship of the claimant and the defendant.

Longmore LJ noted that in cases where there is an available market for a replacement transaction, questions of collateral benefit should not arise as the innocent party would be confined to claiming the difference between the contract and market rate of hire. If he were to wait before taking a replacement charter, the resulting loss or gain would not be caused by the wrongdoer’s breach, but by his decision not to take advantage of the available market.

In contrast, where there is no available market, the prima facie measure of loss is the difference between the (lost) contractual hire and the (avoided) cost of earning that hire (crew wages, cost of fuel, etc). However, it would not usually be reasonable, Longmore LJ said, for the owner to claim that measure if he is able to mitigate the loss by trading the vessel if opportunities to do so arose. Any profits made would have to be taken into account in calculating damages.

Equally, Longmore LJ said, the owner may decide to mitigate the loss not by spot chartering the vessel but by selling it. If he did so, the benefit obtained from that act of mitigation would need to be taken into account just as much as any benefits secured by spot chartering the vessel.

Supreme Court

Lord Clarke gave the judgment in a unanimous decision, overturning the Court of Appeal’s decision and finding in favour of the owners.

Lord Clarke said that the question is not whether the benefit is of the same kind as the loss caused by the wrongdoer; he agreed in particular with the eighth principle identified by Popplewell J (see above). His reasoning instead focused on the causation test, saying that for the benefit to be brought into account, it must be caused either by the breach or by a successful act of mitigation. Lord Clarke said that the “essential question is whether there is a sufficiently close link” between benefit and breach. The relevant link is causation, which is a broad and flexible test as illustrated in particular by Popplewell J’s second and ninth principles (see above).

On the facts of this case, the court held that there was an insufficient link between the benefit and the breach in order for the causation test to be met.

In particular, Lord Clarke noted that there was nothing about the termination of the charterparty which necessitated the vessel’s sale. It could have been sold during the term of the charterparty. The termination was merely the occasion for selling the vessel – and indeed there was no reason to assume it would have been sold when the vessel was redelivered in November 2009, if the charterers had honoured the full term of the charterparty. The owners’ commercial decision, taken at their own risk, to dispose of their interest in the vessel was no part of the subject matter of the charterparty and had nothing to do with the charterers.

That was also the reason why the owners could not have claimed the difference in the market value of the vessel if it had risen between October 2007 and November 2009. The owners equally could not be required to bring into account the benefit gained by the fall in value.

Lord Clarke also said that the sale of the vessel was not, on the face of it, a successful act of mitigation. If there had been an available charter market, the correct calculation of loss would have been the difference between the actual charterparty rate and the assumed substitute contract rate. The sale of the vessel would have been irrelevant. Where there is no available charter market, the measure of loss is the difference between the contract rate and what was or ought reasonably to have been earned from employment of the vessel under shorter charterparties. The relevant mitigation in those circumstances, he said, would have been securing an alternative income stream. He concluded that the sale of the vessel was not an act of mitigation because it was incapable of mitigating the loss of the income stream.

Lord Clarke noted that if the vessel were sold part way into the period when it would have been employed under the repudiated charterparty, the sale would or might be relevant for some purposes, including to shorten the period during which the owners could claim to have lost the income stream under the old charterparty. If it could be shown that the owners received less for the vessel than they could have done by selling it with the benefit of the charterparty, the difference might also be recoverable. But none of those considerations would make the sale of the vessel itself an act of mitigation.

Donny Surtani

Donny Surtani

Partner
Email | Profile
+44 20 7466 2216

Charlotte Benton

Charlotte Benton

Associate
Email
+44 20 7466 2503

Filed under ContractRemedies

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