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The New Flamenco in the Supreme Court: the effect of commercial risk-taking by a claimant on causation and damages

Introduction

This Supreme Court decision raises the question of what post-breach actions of a claimant are taken into account in calculating loss, and which actions are disregarded under legal causation and mitigation principles. In particular, when can a claimant that managed to profit from breach nevertheless recover loss?

The argument in Globalia Business Travel SAU v Fulton Shipping Inc of Panama (The New Flamenco) was heard alongside that in Swynson Ltd v Lowick Rose LLP, which raised similar issues and led to judgment a couple of months earlier.

The facts of The New Flamenco are set out elsewhere, and come down to the charterers repudiating a time charter two years early. Rather than the shipowner chartering the vessel to replacement charterers, it sold the vessel at what with hindsight was a very good price.

Factual causation

Naturally enough, the defendant charterer argued that its repudiation did the shipowner a favour: the shipowner got US $23.7 million from the sale, whereas but for their breach it would only have received around EUR €$7.5 million profit from two years chartering to the defendant after which it would still have had a vessel worth only US $7 million. As a matter of the “but for test” of factual causation (but for the breach would the loss have occurred?), this is right and the shipowner suffered no loss. The owner would not have sold the vessel in autumn 2007 had the charterers not repudiated.

Legal causation

But this decision is all about the principle of legal causation, and the first noteworthy point from the decision is its very modern willingness to treat both mitigation, and the collateral benefits rule (when can a post-breach benefit received by a claimant from a third party be disregarded), as parts of the broader principle of legal causation.

Thus, to put legal causation very shortly indeed, where the claimant acts unreasonably, receives an insurance payout or charity, or is affected by unusual third party wrongdoing (for example), these events “break the chain of causation”— really the chain of responsibility— and exonerate the defendant from their consequences.

Commercial risk and speculation

This decision falls into a category of claimant actions best described as “speculation” or commercial risk-taking. Such actions of the claimant following the breach may not be unreasonable from a commercial point of view, indeed they may be perfectly sensible, but they involve an unusual action taking a risk, the consequences of which should not be visited on the defendant.

The classic example of such speculation is a claimant not taking advantage of an available market by which it could completely or substantially avoid, and in any event crystallise, its loss — purchasing replacement goods or chartering a replacement vessel (when a seller or shipowner has repudiated), or selling or chartering to a replacement buyer or charterer (when a buyer or charterer has repudiated). This is the basis of the prima facie market value at the date of breach measure of damages when there is an available market, as set down in the Sale of Goods Act 1979 and applicable at common law in charterparty and other cases.

As Lord Toulson explained in the sale of goods case of Bunge SA v Nidera BV at paragraphs 79-80 (repeating almost word for word what he had said as a first instance judge in Dampskibsselskabet “Norden” A/S v Andre & Compagnie SA at paragraph 42):

“The availability of a substitute market enables a market valuation to be made of what the innocent party has lost, and a line thereby to be drawn under the transaction.

Whether the innocent party thereafter in fact enters into a substitute contract is a separate matter. He has, in effect, a second choice whether to enter the market—similar to the choice which first existed at the time of the original contract, but at the new rate prevailing (the difference being the basis of the normal measure of damages). The option to re-enter or stay out of the market arises from the breach, but it does not follow that there is a causal connection between the breach and his decision whether to re-enter or to stay out of the market, so as to make the guilty party responsible for that decision and its consequences. The guilty party is not liable to the innocent party for the adverse effect of market changes after the innocent party has had a free choice whether to re-enter the market, nor is the innocent party required to give credit to the guilty party for any subsequent market movement in favour of the innocent party. The speculation which way the market will go is the speculation of the claimant.”

In The New Flamenco the shipowner’s speculative action was not a matter of choosing not to resort to an available market for a substitute, as there was no available time charter at the date of breach, but rather was a matter of choosing to sell rather than re-charter (even by spot charters) the charter vessel, which Lord Clarke emphasised was a “commercial decision” at the owner’s “own risk” (paragraph 32).

There is a lot of sense in this. The vessel could have been sold at any time (including when under charter) and the gain or loss from such a sale could be (and was in this case) out of all proportion to the lost profits from the charter itself, including because the life of the vessel is often much greater than the remaining length of the repudiated charter. These points indicate that, as the court found, the sale of the vessel was the taking of a wider commercial risk that went beyond merely mitigation, the loss due to the charterer’s repudiation.

The most important take-away from the case is therefore the need for both parties’ lawyers to scrutinise post-breach actions of the claimant (even if “reasonable” — see on this point Popplewell’s fifth principle, quoted at paragraph 16 of the Supreme Court’s decision) for signs of a broader commercial decision likely to be treated as independent of the breach. A good test is to consider the position if the actions had turned out the opposite way. For example, where the loss was in fact eliminated, the claimant’s solicitors should ask whether, if the claimant’s actions had gone badly and increased the loss (equivalent to the market for The New Flamenco going up not down), they would have felt comfortable seeking to claim the increased losses from the defendant. If not, that may point to the gain from those actions also being properly something to disregard.

Further, the decision is a useful illustration of deeming in this context: the break in the chain of causation (here selling the vessel) does not act as a guillotine, meaning that all losses beyond that point are irrecoverable and the claimant recovers nothing. Instead, the claimant is deemed to have done the more reasonable/normal/expected thing, in this case to have kept the vessel and spot chartered it out where possible (see paragraph 34). Damages are calculated as if that had happened.

Note also that, although the Supreme Court’s decision is regrettably short on discussion of general principles (but see further the general note on contract damages), it quotes in full at paragraph 16 the 11 principles set out by Popplewell J at first instance, which therefore get implicit (and some explicit: see paragraph 30) endorsement.

Postscript: are sales of leased/chartered property always to be disregarded?

Some caution is needed, however, as to the comments in paragraphs 33-34 of the judgment, which seem to suggest that selling the vessel could never be an act of reasonable mitigation of the loss of repudiation of a charterparty and could never be legally caused by such a repudiation. But just such a position obtained in Bulkhaul Ltd v Rhodia Organique Fine Ltd, a decision relied on by the Court of Appeal but unfortunately not mentioned in the Supreme Court’s judgment. In Bulkhaul the vessel being hired out was bespoke and the owner had no remaining use for it after the repudiation, and thus sale was the only option. In that case, the Court of Appeal held that such a sale should have taken place and calculated damages accordingly. It is certainly possible in other cases for there to be no replacement hire market extant or anticipated for the life of the vessel, in which case sale of the vessel plainly can be a or the only reasonable course, rather than a commercial gamble to be disregarded.

3 Verulam Buildings Adam Kramer

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