The New Flamenco – The Supreme Court dances to the tune of the first instance judge

The Supreme Court recently handed down its judgement in Globalia Business Travel S.A.U. of Spain v Fulton Shipping Line of Panama (the New Flamenco) [2017] UKSC 43. The judgement, which can be lauded for its brevity, helpfully sets out some principles to be applied to determine whether a windfall for a claimant seemingly connected to a defendant’s breach of contract should benefit a defendant by reducing the damages they have to pay.

The facts can be summarised as follows. An arbitration award had determined that the charterers were in repudiatory breach of the charterparty. The issue before the Supreme Court was whether the charterers were entitled to credit against the damages payable in light of the fact that the owners of the vessel had sold her for US $23 million shortly after the repudiation when, at the time when the charter should have come to an end (had the vessel been redelivered by charterers as per the charterparty) the vessel was worth only US $7 million (the market for vessels having fallen in the interim).

Charterers’ argument was that owners had sold the vessel to mitigate their loss and accordingly Charterers should receive credit (with a value of around EUR 11 million) for the benefit owners received by that mitigation.

In the judgement from the first court to consider the issue Popplewell J agreed with owners that there was insufficient causal connection between the breach by charterers and the benefit owners received for any credit to be given in respect of the same. It was important to the decision at first instance that owners could have sold the vessel at any time during the currency of the charterparty and their decision to sell was accordingly not caused by the breach, and the benefit received arose out of commercial speculation on owners’ part, legally independent of the breach.

The Court of Appeal disagreed and overturned the first instance decision. Drawing parallels between the decision to sell the vessel and a decision to fix a vessel on the spot hire market in an unfavourable charter market, the Court of Appeal considered that the benefit obtained by owners arose from the consequences of the breach of contract.  

The Supreme Court overturned the Court of Appeal decision preferring the approach taken by the first instance decision.

While apparently rejecting the suggestion that the loss must be of the same kind (i.e. income vs. capital) as the mitigation to be taken into account, the Supreme Court held that “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 Court indicated the key question was whether there is a sufficiently close link between the two, rather than whether they are similar in nature.

In practice the application of the “close link” test will likely lead practitioners along the same lines as the “similar nature” test and cynically one might consider that the distinction drawn was one of nomenclature alone. This is particularly so given the obiter comments in the judgement, seemingly leaving open the potential for an argument that an inflated sale value “benefit” might be said to represent a capitalisation of the value of a year’s hire payments. It is difficult to see how a sale value would ever not include some element of such capitalisation.

The law in this area is clearly not complete but given the wide variety of cases where similar questions could arise it is difficult to see how it ever can be. Numerous questions arise from the judgement and will inevitably be explored in future cases as the law in this area continues to develop and judges seemingly seek to strike a balance between the need for apparent fairness in each case and the need for certainty.