The case of Flame SA v Glory Wealth Shipping PTE Ltd is a warning to parties considering a repudiatory breach claim to first consider whether, at the time of the breach, they were in a position to perform their own contractual obligations. If not, it may not be worth their while to sue, as this case has determined that any damages awarded will be nominal rather than substantial. In the brave new world of costs after the Jackson reforms, there will be substantial costs risk in pursuing such claims.
One possible outcome of this case may be a greater emphasis on early investigation into and gathering evidence of the counterparty’s inability or unwillingness to perform, as a tool for driving early settlement in view of the possibility of an award of nominal damages.
Background
The case concerns the repudiatory breach of a shipping contract, under which shipowners had agreed to carry various shipments of coal on behalf of charterers. The charterers failed to specify laycans for some of the shipments (meaning they did not specify the time range within which the shipments would have to be delivered to the loading ports). The shipowners terminated the contract on the basis of this repudiatory breach.
An arbitral tribunal held that the shipowners were not obliged to prove that they were able to perform the contract by providing the required vessels, despite a downturn in the markets meaning they were in financial difficulties. Teare J, sitting in the Commercial Court, overturned this on appeal, and held that the shipowners would need to demonstrate that, on the balance of probabilities, they would have been able to perform their side of the bargain by supplying the requisite ships in order to receive substantial (as opposed to nominal) damages. This is because contractual damages are intended to put the innocent party in the same position as if the contract had been performed, and should not represent a windfall for such parties.
It is an established principle of English law that in order to obtain the remedy of specific performance, the innocent party must be ready, willing and able to perform its contractual obligations. In the case of Excalibur v Texas Keystone Inc (in which our firm acted for Gulf Keystone), Christopher Clarke LJ, sitting in the Commercial Court, restated this principle and held that the fact that Excalibur was not ready, willing and able to fund its share of the signature bonus and exploration costs was fatal to its claim for specific performance of the contract. However, the question in Flame was whether being ready, willing and able to perform affects the level of damages that an innocent party is entitled to for repudiatory breach under common law. As we note below, it certainly does.
Impact on damages
In Flame, the parties were able to point to case law supporting both sides of the argument. Teare J considered the various authorities and found in favour of the charterers, for the following reasons:
- When assessing loss, the court should consider what would have happened if there had been no repudiation. If the innocent party would not, in any event, have been able to perform the contract, giving them the benefit of the contract which they would have been unable to earn would overcompensate them.
- The previous cases in support of the proposition that an innocent party must prove readiness, willingness and ability to perform were not determinative of the current case, as they concerned an express right to cancel on the occurrence of a particular event. However, Teare J said they strongly supported the application of the compensatory principle.
- The judge also said that the decisions that appeared to support the opposite proposition were, in fact, concerned with the innocent party’s cause of action and not the measure of damages in situations where there has been a repudiatory breach. The cases were authority for the principle that, where there has been an accepted repudiation of a contract, the innocent party is released from future obligations and therefore their inability to perform further obligations cannot provide the guilty party with “an ex post facto justification” for repudiation. In addition, in none of these cases was it obvious that the innocent party would be placed in a more advantageous position through the award of substantive damages than it would have been in had the contract been performed.
- Teare J stated that he was not bound by precedent, as there was no binding decision of an appellate court in which damages had been awarded that had led to an innocent party being put in a better position than it would have been in had the contract not been repudiated.
Lesson learned?
This decision upholds the fundamental principle of contract law that damages are intended to put the innocent party in the same position as if the contract had been performed. Accordingly, the party in breach can rely on Flame to argue that because the innocent party was not ready, willing and able to perform the contract in any event, they would not have earned the benefit of it and should therefore not receive substantial damages. Interestingly, Flame seems to have been little cited since it was decided. Perhaps the lesson has been learned?
