The Supreme Court has today handed down the long awaited judgment in Globalia Business Travel SAU (formerly TravelPlan SAU) of Spain v Fulton Shipping Inc “The New Flamenco”. An appeal under section 69 of the Arbitration Act, the appeal addressed the nature and scope of mitigation of damage and whether certain benefits obtained by an innocent party have to be brought into account when assessing damages for the repudiation of as time charterparty. 

Simon Croall QC and Ben Gardner (with Door Tenant Peter Ferrer) acted for the Charterers

The New Flamenco was a cruise ship that had been chartered for a two-year extension to a time charter.  Shortly before the two-year extension was due to start, the Charterers repudiated the extension and redelivered the vessel.  The Owners responded by selling the vessel in October 2007 for US$23.8m. On the findings of the Arbitrator the sale was made in mitigation of the losses caused by the repudiation and gave rise to a gain. The latter finding arose from his conclusion that the Vessel would only have been worth US$7m at the time when she should have been redelivered under the extended time charter in November 2009 (i.e. the first point when she could have sailed).  The difference in value was at least in part due to the collapse of the cruise market in late 2008 in the light of the financial crisis. 

The arbitrator decided that the benefit of selling the New Flamenco two years early was an act of mitigation caused by Charterers’ repudiation of the charterparty and credit should be given for it.  On an appeal on a point of law under section 69 of the Arbitration Act, Popplewell J held that as a matter of law the sale was not caused by the repudiation and could not be regarded as mitigation of the Owners’ loss of revenue under the repudiated time charterparty.  The Court of Appeal disagreed, reinstating the arbitrators’ decision.  Their analysis involved applying the principles in British Westinghouse Electric & Manufacturing Co. Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673. They concluded that in the light of the finding of mitigation made by the Arbitrator the benefit was to be taken account of as a successful act of mitigation. The Owners appealed to the Supreme Court.

In a short judgment, Lord Clarke (with whom the other Justices agreed) indicated a preference for Popplewell J’s conclusion and approach and allowed the appeal.  He considered that the sale of the Vessel was not caused by the repudiation of the charterparty and “was not itself an act of mitigation because it was incapable of mitigating the loss of the income stream”. In so doing it has placed a limitation upon the types of actions which can, as a matter of law, be regarded as mitigation such that under established principles the results of such acts are brought into account. That limitation must arise as a matter of law because being an appeal from an Arbitrator the court’s jurisdiction only extended to issues of law.

What is less clear is the applicable principle in determining whether the results of actions taken in response to a breach are to be regarded as successful mitigation. The Court rejected the Owners’ argument that a benefit could only be taken into account if it is of the same kind as the loss. It emphasised that “the relevant link is causation”.  However the rationale for rejecting the sale as a successful act of mitigation does not appear to relate to causation but instead suggest that some kinds of benefit cannot be treated as mitigating some kinds of loss. This comes quite close to adopting something like the difference in kind test and suggests that such differences are potentially significant in the context of the relevant enquiry.

The judgment leaves a number of questions unanswered, including the extent to which a benefit of a different kind can ever mitigate a loss.  It is also unclear to what extent the Court endorsed some of the elements of Popplewell J’s judgment which troubled the Court of Appeal, such as his two-step causation test and his emphasis on the policy reasons for Owners bearing the benefits and burdens of investing in the vessel.  Finally it is unclear whether the principles set out in British Westinghouse (which have long been thought to govern this area of law but were not directly addressed in the judgment) have by implication been revised. These questions will doubtless be explored in future cases.