In the recent case of Fulton Shipping v Globalia Business Travel, which concerns mitigation of loss, the Court of Appeal once again reiterated that claimants will only be compensated for losses actually suffered (the compensatory principle).
We have previously considered the compensatory principle in relation to damages, in our post on Bunge SA v Nidera BV. In that case, the Supreme Court unanimously held that when calculating damages for wrongful repudiation of a contract, the fact that the contract could be lawfully terminated at a later stage should be taken into account and used to reduce the level of damages awarded. The Supreme Court was at pains to stress that this was to give effect to the compensatory principle.
Available market rule
If a claimant mitigates by taking some step in the ordinary course of business (for example, selling an asset rendered less valuable due to a breach of contract), this should normally be taken into account in assessing the degree of loss, unless this is wholly independent of the relationship between the claimant and the defendant.
In Fulton Shipping, the court examined the “available market rule” in some detail, calling it a “gloss” on the underlying principle that damages are awarded for losses actually suffered. The rule stipulates that if an available market exists, the measure of damages is the difference between the contract price and the market price at the time that the goods were due to be delivered. However, if the innocent party decides to speculate on the market, any further loss arising from this speculation arise from such choice, and are not for the account of the breaching party.
If there is no available market, the prima facie measure of loss is the contractual rate of hire less the costs of earning it. Where a ship owner reasonably mitigates by selling the vessel, the losses or gains made as a result should be taken into account either way, because those gains or losses are part of the cost of earning the charter hire. The losses or gains arise from the decision to mitigate the loss arising from the breach, and are not a consequence of speculation.
The Court of Appeal’s decision
Fulton Shipping concerned the measure of damages for early re-delivery of a chartered ship. The charter still had two years left to run. The claimant could not find a substitute charter party and therefore decided to sell the ship. It obtained the sum of $23,765,000 in 2007, whereas had it waited until 2009 when the charter party was due to end, it would have obtained only $7,000,000.
The defendant argued that the claimant, in selling the ship, had mitigated its loss, and therefore the difference of $16,765,000 should be applied to reduce the level of damages awarded. The Court of Appeal held that the loss of $16,765,000 should be taken into account, overturning Popplewell J’s decision and reinstating the decision of the arbitrator who had originally heard the claim.
The Court of Appeal acknowledged that mitigation is an area where it is difficult to set out “hard and fast principles”, and appeals from arbitrator’s decisions should be treated with caution.
Carefully assess value of loss
This judgment shows that the court is willing to take quite a wide view in determining whether benefits accruing to the claimant result from a breach of contract. Potential claimants should look carefully at the consequences of any breach of contract, including any gains made by way of fulfilling the claimant’s duty to mitigate, before issuing proceedings. It is important to determine the true value of the claimant’s loss from the outset, as the clear trend of the authorities is to give effect to the compensatory principle so that a claimant is not over-compensated.
