REUTERS | Jean-Paul Pelissier

When the boat comes in: when making a windfall profit does not count as mitigation

The Supreme Court handed down its judgment in Globalia Business Travel SAU (formerly Travelplan SAU) v Fulton Shipping Inc of Panama on 28 June 2017. It brings to an end an extraordinary saga.

The parties had entered a charter party of a vessel owned by Fulton. There was a dispute and the charterer redelivered the vessel to Fulton in October 2007. Fulton treated the charterer as in anticipatory breach of contract and accepted the breach as terminating the charter party. There was no available chartering market on redelivery. Shortly before redelivery, Fulton sold the vessel for US $23.7 million. There was a significant difference between the value of the vessel when it was sold and its value when it would have been redelivered if the charterer had not breached the contract. This was because the market crashed between the time of actual redelivery and the date when the vessel should have been redelivered had the charter party run its course.

The issue was deceptively simple: should credit be given for the additional profit Fulton obtained by selling the vessel?

Deciding the issue

The arbitrator held that credit for the additional profit should be given. Popplewell J at first instance held that it should not. His judgment (at paragraphs 63 and 64) sets out the general principles and that passage was, in turn, set out at paragraph 16 of Lord Clarke’s judgment in the Supreme Court. The passage is too long to cite here but, having apparently been approved by the Supreme Court, it is likely to be a starting point for future cases.

In contrast to the Supreme Court, the Court of Appeal had unanimously held that credit should be given. Longmore LJ had given the leading judgment, with which Christopher Clarke and Sales LJJ agreed.

Longmore LJ took the view that it was critical that there was no available market for chartering the vessel once redelivery took place. The sale was thus a form of mitigation in the light of that fact and credit should be given.

The Supreme Court reversed the Court of Appeal’s decision, in a judgment of Lord Clarke with which all other members of the court agreed. That judgment held that:

  • The essential question is whether there is a sufficiently close link between the loss complained of and the benefit in issue and not whether they are similar in nature. The relevant link is causation. The benefit to be brought into account must have been caused either by the breach of the charter party or by a successful act of mitigation.
  • The repudiation resulted in a prospective loss of income for a period of about two years. Yet, there was nothing about the premature termination of the charter party that made it necessary to sell the vessel. If the owners decide to sell the vessel, whether before or after termination of the charter party, they are making a commercial decision at their own risk about the disposal of an interest in the vessel, which was no part of the subject matter of the charter party and had nothing to do with the charterers.
  • The analysis is the same even if the owners’ commercial reason for selling is that there is no work for the vessel. At the most, that means that the premature termination is the occasion for selling the vessel. It is not the legal cause of it.
  • For the same reasons, the sale of the ship was not on the face of it an act of successful mitigation. The relevant mitigation in that context is the acquisition of an income stream alternative to the income stream under the original charter party. The sale of the vessel was not itself an act of mitigation because it was incapable of mitigating the loss of the income stream.

When mitigation is not mitigation

It is important to note how much this was not a decision that turned on the facts. Often mitigation is seen as a classic area where the outcome depends on the facts. The Supreme Court’s point was that, prior to that stage is the issue where one decides whether the principle of mitigation applies at all. Here it did not. The key point is that the interest by which an owner can sell a vessel is wholly different from the interest by which the owner hires out the vessel for use. The charter party concerns the latter only. The owner’s decision to sell the vessel in this case may indeed have been prompted by the breach of contract, which left the owner with a vessel it could not hire out. However, even those facts do not bring mitigation into play. The right to sell the vessel was independent of the right to hire it out and steps taken to realise the benefit of the first right should not be treated as having been caused by a breach associated with the second right.

The approach taken by the Supreme Court raises the question of how easy such distinctions are to make in other scenarios. Logically, the point applies to all cases where a chattel or other property is hired out or let. In those cases, the decision may be highly illuminating.

Some final thoughts

If ever that was a case that exemplifies what lawyers mean by the term “litigation risk”, it is this one:

  • An arbitrator is reversed by a first instance judge.
  • The first instance judge is reversed by a unanimous Court of Appeal, which states that the arbitrator was correct.
  • Finally, the Court of Appeal is unanimously reversed by five judges in the Supreme Court.

At any stage, what could a lawyer advise its client but that the outcome could be the reverse next time round?

In more than one lecture, the Lord Chief Justice, Lord Thomas, had expressed concern that the resort to arbitration was starving English law of opportunities to develop (see Developing commercial law through the courts: Rebalancing the Relationship between the Courts and Arbitration and Keeping Commercial Law up to Date). This decision, from an arbitration, provided such an opportunity. Perhaps the Court of Appeal will conclude that it should be careful what it wishes for.

39 Essex Chambers John Denis-Smith

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: