Mitigation – what happens when the claimant makes money?
The New Flamenco
What constitutes mitigation has never been easy to assess. The primary rule, that a claimant must take all reasonable steps to mitigate the loss he suffers as a result of the defendant’s breach, is well understood. In short, a claimant cannot recover for avoidable loss.
More difficult is the principle governing the circumstances when a defendant can benefit from any profit that may accrue to the claimant, where the latter has taken steps to mitigate his loss. That gives rise to a more difficult analysis of the causative connection between the original breach and any benefit that the claimant gains. Often when faced with a breach and a duty to mitigate a claimant will take what seems to be an independent commercial decision. In doing so it is likely that a profit will arise. Is it right that he should then account for that profit to the defendant charterer who will by definition be in breach in any event.
The Court of Appeal have recently looked at this again in the New Flamenco  EWCA Civ 1299. The facts are easily stated. Ahead of the financial crash in 2007 the charterers repudiated a time charter that had two years left to run. There was no available market and the owners decided to sell the vessel for US$ 23,765,000. When the matter finally went to Arbitration, it was after the original contractual redelivery date, which meant that a comparison could be drawn between the sale price in 2007 and the market value in November 2009. Indeed had the charterparty run its full course and the vessel been sold in November 2009, it was accepted by the parties that the price would have been US$ 7 million. A difference of over US$16m.
The issue for the court was whether the difference in price was to be regarded as a “benefit” which should be brought into account in the owners claim for charterer’s breach for early redelivery. In which case it would wipe out the loss of hire claimed by the owners.
The arbitrator said that it should be brought into account but the High Court had reversed his decision. In part this was because the judge found that owners were not obliged to sell the vessel and so that was an independent commercial decision. Further, the sale could not be said to be aimed at mitigating a loss of income. So whilst the Court acknowledged that the sale was caused by charterer’s breach in reasonable mitigation of the owner’s loss it was not “legally sufficient to establish the necessary causative link between the breach and benefit”.
The Court of Appeal reviewed a line of authorities going back to British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co London Ltd  AC 673. The Court then set out the key principle to follow which is:
“….that, if the claimant adopts by way of mitigation a measure which arises out of the consequences of the breach and it is in the ordinary course of business and such measures benefits the claimant, the benefit is normally to be brought into account in assessing the claimant’s loss unless the measure is wholly independent of the relationship of the claimant and the defendant.”
The Court allowed charterer’s appeal. Key though was the lack of available market. In other words had the vessel been subsequently chartered by owners then the measure of loss would have been the difference in hire rates and any capital depreciation would not of been relevant. Further, there was no requirement that the benefits must be the same kind of loss being claimed or mitigated.
The key question posed for the Court of Appeal to address was: when assessing the owner’s damages for loss of profit on earnings of hire under a time charterparty which had been repudiated by the charterers and the repudiation was accepted by the owners as terminating the contract, are charterers entitled to have taken into account as diminishing the loss of earnings sustained by the owners as a result of the accepted repudiation, a “benefit” said to consist of avoidance of a drop in capital value of the vessel.
The Court of Appeal answered yes; “…. provided the acquisition arose out of the consequences of the breach in the ordinary course of business by way of mitigation of the claimants loss” . In doing so they were able to conclude that the arbitrator had made his own common sense judgement and had not erred in law.
It might be said that there were some unique circumstances and that ordinarily there would be a market for a vessel being redelivered early under a charter and that there would not be the same precipitous loss in values giving rise to such a difference in capital values. Putting aside the difficulties being seen around drill ships in the off shore market where similar circumstances might arise, the decision is of broader commercial importance in dealing with benefits arising from mitigating a loss.