Dancing around mitigation of damages: Supreme Court decision in The New Flamenco

27th July 2017

Commercial Dispute Resolution Partner Malcolm Simpson explains the important and high profile case, The New Flamenco, which provides Supreme Court clarity on the treatment of collateral benefits and mitigation in the calculation of damages.

It is rare for a dispute to go all the way from an arbitration through to the Supreme Court. That is what happened in The New Flamenco [1], so that we now have some clarity on the treatment of collateral benefits and mitigation when it comes to the calculation of damages. Commercial Dispute Resolution Partner Malcolm Simpson explains.

The New Flamenco

This high profile dispute concerned a charterer’s redelivery of a cruise ship to its owners early (in October 2007, instead of in November 2009), in repudiatory breach of charterparty. The owners accepted the charterer’s early delivery breach as terminating the contract, and claimed loss of earnings for what would otherwise have been the remainder of the term.  The owners then sold the vessel towards the end of October 2007, obtaining a better price for it than they would have achieved had they sold it in November 2009 (the date that would otherwise have been the end of the charterparty term), post the global financial crisis.

The question in the case was whether damages payable by the charterers, the breaching party, should be reduced by (and therefore whether the owners should have to give credit for) the value of the benefit that the owners had received by selling in October 2007.

Dancing around mitigation of damages

At an initial arbitration, the case was decided in favour of the charterers.

That decision was appealed to the High Court, which found, instead, for the owners. Popplewell J attempted to distill, from relevant authorities, some general principles, which can be summarised as follows:

• In order for the receipt of a benefit by an innocent party to result in the reduction of damages payable by a breaching party, the benefit must be caused by the breach.
• Determining causation is a question of fact and degree, which must be answered taking all relevant circumstances into account, including the nature and effects of the breach and the nature of the benefit obtained and the loss claimed, and forming a common sense overall judgment.
• The causation test will not be satisfied if the breach merely causes the occasion, trigger or context for the innocent party to obtain the benefit; nor is it sufficient that the benefit would not have been obtained ‘but for’ the breach.
• A mitigating step may be a reasonable and sensible step taken to reduce the impact of a breach, but that does not mean that the breach is legally causative.
• Benefits flowing from a step taken in reasonable mitigation are only to be taken into account to reduce recoverable damages if and to the extent that they are caused by the breach.
• The causation test is unlikely to be met where and to the extent that the benefit arises from a transaction which the innocent party could have undertaken irrespective of the breach.
• It is not necessary that the benefit is of the same kind as the loss claimed or mitigated.
• Even where the causation test is met, considerations of fairness and public policy may nonetheless preclude the benefit from being taken into account to reduce recoverable damages. In particular, benefits which are the fruits of something that the innocent party has done or acquired should not be taken into account, and therefore be effectively appropriated for the benefit of the wrongdoer, where that would be unfair.

The High Court’s decision was then overturned at the Court of Appeal; and the Court of Appeal’s decision was, in turn, appealed to the Supreme Court…

Supreme Court clarity – Causation is key

In a rather brief conclusion which brings the long-running to-ing and fro-ing of this case to an end, the Supreme Court unanimously overturned the Court of Appeal’s decision and found for the owners. The Supreme Court’s judgment centres on the causation test – that is, for an innocent party’s benefit to be brought into account to reduce damages payable by a breaching party, the benefit must have been legally caused either by the breach or by a successful act of mitigation.

In the current case there was an insufficient link between the early re-delivery and the sale at a pre-financial crisis price for the causation test to be met. The vessel could have been sold at any time (regardless of whether the charterparty had been terminated or was continuing).  At best the breach had prompted a sale – it had certainly not legally caused it; and the sum for which it was sold was dictated by the prevailing market and irrespective of the breach.

WM Comment

Although the earlier order of the High Court was ultimately effectively restored by the Supreme Court, this judgment does not go so far as to make clear whether (and if so the extent to which) the principles enunciated by the High Court judge are endorsed and authoritative. The Supreme Court decision does absolutely clarify, however, that causation is key when it comes to the consideration of collateral benefits and mitigation of loss.  In light of the overall outcome of the case, it seems likely that practitioners and commercial contracting parties will not go too far wrong if they bear in mind Popplewell’s principles when calculating damages in future contract and tort post-breach/collateral benefit cases.

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[1] Globalia Business Travel SAU of Spain v Fulton Shipping Inc of Panama [2017] UKSC 43