The New Flamenco case raises more questions than answers about damages

Chartering, Legal, Markets, Sales and Purchases — By on November 10, 2017 at 8:00 PM

A full house attending one of the most important events of its kind

The financial effects, adverse and beneficial, arising from the discontinuation of charter arrangements concerning the New Flamenco have produced significant differences of opinion among arbitrators, the Commercial Court, the Court of Appeal and the Supreme Court. The owner’s claim for damages raised questions about the relative significance of loss of hire income and the subsequent sale of the vessel.

Speakers at a London Shipping Law Centre seminar in October all took the broad view that the various perspectives taken by the arbitrator and courts had left points of principle unresolved. Not surprisingly, the speakers’ observations on the New Flamenco findings and judgements were delivered under the cautious banner of ‘Update on Damages.’

The seminar was hosted by DLA Piper at their London offices and chaired by Mr. Justice Males.

Simon Croall QC of Quadrant Chambers summarised the circumstances giving rise to the dispute. In 2005, owners and charterers concluded a two-year time charter for the New Flamenco. In 2007, the owners felt they had an oral agreement with the charterers to extend the charter for a further two years but the latter denied the agreement and refused to perform it.

The owners regarded this as a repudiatory breach which terminated the charterparty. They contended that they could not (in the short term) find another party willing to conclude a two-year fixture; and, consequently, entered into a memorandum of agreement to sell the vessel for $23,765,000.

Owners claimed damages by reference to the net loss of profits—anticipated revenue from the charter less costs and expenses—arising from the withdrawal. However, they offered a credit of over $5 million for the ‘reduction of the resale value of the vessel between October 2007 when they had to take redelivery and November 2009. The charterers argued that the whole of the difference between the sale price and the credit offered had to come into the reckoning in determining loss.

The arbitrator concluded that owners were entitled to terminate the charterparty as it would not have been possible at the time to conclude a separate substantial two-year charter. The resultant dearth of income had created the need to sell the vessel. The decision to do so clearly stemmed from the breach. He felt the owners had acted in “reasonable mitigation of damages” in selling the vessel and that capital savings should not be brought into account in considering the owners’ net loss.

The Commercial Court allowed an appeal, holding that it was not sufficient for the breach to have merely provided the occasion or context for the innocent party to obtain the benefit. It should make no difference whether the question was one of mitigation of loss or measure of damage.

The Court of Appeal reversed the Commercial Court, contending that if a claimant, by way of mitigation, adopted a measure arising out of the consequences of the breach in the ordinary course of business—and such measure benefited the claimant—that benefit should normally be brought into account in assessing the claimant’s loss.

The Supreme Court reversed the Court of Appeal, taking the view that while premature termination of the charter party agreement was the occasion for selling the vessel, it was not the legal cause thereof.

However, Mr Croall felt the Supreme Court had not explained why the benefit from the sale could not in law mitigate a loss of hire, there being a strong indication that the benefits were of a different kind.

The conflicting findings and judgements raised a number of unresolved questions for parties contemplating arbitration. The distinction between a transaction being caused by the breach and the breach merely providing the opportunity for the transaction was surely a question of fact—and therefore for the arbitrator to resolve?

When is a benefit of a sufficiently different kind to the loss to preclude mitigation? Who decides whether something is sufficiently different and by what criteria? Was this not also a question for the arbitrator? Why should there be a distinction between monies generated from a charter and monies earned by selling the ship, such that the latter cannot mitigate the former? Would the ship owner make that distinction?

Tom Whitehead of St Philips Stone highlighted the compensatory principle. An innocent party deserved to be restored to the same position financially as if the original contract had been performed. Further, if the yield from a substitute charter party proved greater than the original, the innocent party should keep the additional earnings.

However, it was essential to establish at the outset what exactly had been lost. Net earnings under the charter party should at least equal gross revenue less expenses saved through non-performance.

The proceeds from the ship’s sale complicated matters, as assessing future earnings exactly was virtually impossible. However, if the owner could not obtain another charter party in the immediate future, given “no available market,” he would be saddled with the costs of a vessel’s upkeep. It followed that he would seek ways of reducing costs, including outright disposal.

This highlighted the concept of mitigation and its application. What legal principles had to be applied to determine whether a gain should be brought into account? Paradoxically, the act of selling the vessel had been held to be both mitigating (avoiding lay up costs) and non-mitigating (irrelevant to a claim for loss of profit).

Simon Croall was leading counsel for the charterers throughout the dispute while Tom Whitehead was junior counsel for the owners.

Dr Andrew Summers of the London School of Economics considered market conditions as a major focus for assessing appropriate damages arising from the New Flamenco case.

Speculation seemed inevitable, especially when the facts surrounding the incident itself were insufficiently clear. The Court of Appeal and the Supreme Court had taken ‘speculation’ into account in arriving at different interpretations of the circumstances relating to the claim.

Dr Summers also addressed the compensatory principle which aimed to place the innocent party in the same position—-as nearly as possible—-as if the breach had not occurred. However, he recognised that it was almost impossible to restore an exact position: even if another charter was secured, its timing, rates and terms would not replicate the previous charter exactly.

Loss, therefore, involved comparison between two positions: where the innocent party would have been if the breach had not occurred (non-breach) and his actual situation (breach). The difference between the two equalled the loss.

Dr Summers felt an innocent party would be taking a speculative course if he chose not to restore the non-breach position as nearly as possible.

He considered that while it might have been impossible for the owners to conclude an alternative and satisfactory substitute two-year time charter party immediately following repudiation, it was unclear whether shorter charters or some other commercial use might have been available. The Supreme Court felt that insufficient attention had been paid to these factors.

Contributions from the audience showed a widespread sense of there being more questions posed than answers provided.

More questions and networking at the reception with dips and drinks that followed!

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