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The “NEW FLAMENCO” - Causation and credit

Defendants often argue that their breach of contract created no loss, or that injury resulted at least partly from something other than their breach of duty. In these senses legal causation is a routine topic, hosting familiar issues. It is less common to find it at the heart of a dispute on the measure of damages and mitigation, but that was the focus of the 28 June Supreme Court decision in Fulton Shipping v Globalia Business Travel [2017] UKSC 43, the “NEW FLAMENCO”.

Facts

After wrongful termination of a time charterparty, owners claimed unrecovered hire, less operating costs. However, they had sold the vessel soon after charterers’ breach, and got much more than they would have on disposal following performance of the fixture. Charterers said they should have credit for this difference in capital value, which arose only from a drop in the market and would have extinguished owners’ claim.

Decision

In a brief and unanimous judgment, the Supreme Court disallowed that. Charterers could not claim this as a credit, as there was not a close enough link. The sale was not an act done in mitigation, and the price contrast was not caused by charterers’ breach but by owners’ decision to sell when they did, and by a later fall in the market.
The arbitrator and the Court of Appeal had taken a very different view.
The Supreme Court also challenged what seems to have been at least assumption that owners might otherwise have sold on expiry of the charter term - hence they had avoided the loss that would have followed such a sale - and likewise rejected charterers’ logical concession that, if instead the market had risen, they would have been liable for owners’ inability to take advantage of that.

Discussion

The decision is straightforward, but it is hard to distil any rationale as a guide in later cases. From nearly a dozen principles on when a party in breach of contract or duty might get credit for a benefit later obtained by the other, the Supreme Court highlighted causation as the key: “The essential question is whether there is a sufficiently close link between the two and not whether they are similar in nature. The relevant link is causation. The benefit [in dispute] must have been caused either by the breach ….. or by a successful act of mitigation.”
So far, so clear, but (a) causation “is a question of fact and degree which must be answered by considering all the relevant circumstances in order to form a commonsense overall judgment on the sufficiency of the causal nexus between breach and benefit”, and even then (b) considerations of justice, fairness and public policy might deny a defendant credit from “some types of benefits or in some circumstances even where the causation test is satisfied.”
A more general pronouncement, and one more difficult to apply confidently to particular circumstances, would be hard to find.

Commentary

These matters could equally arise under a bareboat charter and many other time-based arrangements, such as a contract of affreightment, a commercial lease and perhaps even a term sale contract. The difficulties that might be involved, and the arguments that might later emerge, are not confined to time charterparties.
Perhaps faced with cash-flow problems, a volatile charter market or some other tough commercial environment, an injured party often has to consider many uncertainties, tackle some and anticipate others. It is often difficult to select the best course, and impossible to cater for all factors and market vagaries.
Such a claimant might later be challenged by the wisdom - or perhaps the opportunism - of hindsight, by a defendant wanting to hitch a gain to his own breach. Valid commercial measures with no intended connection to mitigation might be recast as such, by an opponent looking to take advantage of something that could not have been known about at the time.
Emphasising causation as the key factor, the “NEW FLAMENCO” summarises the main principles on when a wrongdoer might obtain credit for a benefit arising after his breach of contract or duty, and then applies them to its own facts. It is not a route map for other cases.
But it does provide another warning of the difficulties that can come from market changes during the procedural life of a claim, and thus of the need for great care immediately after breach of a time-based contract. Part of that care should be considering all options, taking appropriate advice at an early stage and perhaps in some cases documenting - and maybe even articulating - the reasons for choosing one course over another.
The judgment of the Court can be found here and the Supreme Court’s press summary here.
If you would like to discuss any point or topic in this article please contact a member of the M Taher & Co team.



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