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Contract-breaker cannot take the benefit of asset sale value

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Supreme Court success for Gateley Plc’s Shipping Team.

The long-awaited decision of the UK Supreme Court in the case of the “New Flamenco” was published on 28 June 2017.  In a Judgment delivered by former Admiralty Judge Lord Clarke, and unanimously agreed by the other four Supreme Court Justices, the Court overturned the decision of the Court of Appeal and confirmed that Gateley’s client, Fulton Shipping Inc, is entitled to pursue its €11 million damages claim.

Fulton is the former owner of the cruise ship New Flamenco, which was chartered in 2007 by a Spanish charterer, Globalia Business Travel, for a period of two years.  Globalia then refused to perform the charter, and in an arbitration award issued in 2013 Globalia was found to have wrongfully repudiated the contract.  However, Fulton was not awarded any damages.

The reason for this surprising result was that after Globalia walked away from the charter the ship was sold, and the arbitrator found that if Fulton had kept the ship for two more years (the period for which it should have been chartered to Globalia) its value would have dropped by around US$16 million due to the global financial crash of 2008-9.  He therefore decided that Globalia should receive the benefit of the early sale under the legal principle of ‘mitigation of damages’ and this cancelled out the two years of lost profits claimed by Fulton.

On appeal to the Commercial Court in 2014 this was held to be wrong in law, as the benefit obtained by Fulton was not caused by Globalia’s breach of the contract but by Fulton’s independent decision to realise the capital value of its asset.  The Supreme Court has now emphatically confirmed that the Commercial Court judge was right, and Fulton does not have to give credit for the change in capital value of the vessel.  It is already clear from previous case law that the principle of mitigation of damages does not apply where a loss is covered by the proceeds of insurance or a pension, because these are benefits that the claimant has purchased by the investment of his own money.  This latest decision confirms that in exactly the same way a benefit arising from the claimant’s sale of a capital asset does not reduce his right to claim damages for a loss of income caused by the defendant’s breach of contract.

This is a significant decision in the law of damages, which will have to be taken into account in future in a wide variety of commercial disputes, not just claims under shipping charters.