The New Flamenco decision resonates for tanker owners too

One way of summarising the Court of Appeal’s decision in Fulton Shipping Inc v Globalia Business Travel SAU (‘the New Flamenco’) [2015] is: ‘you can’t sell your cake and eat it too’.

Put in legal parlance: Owners that sell their vessel following an early redelivery may have to account for the benefit obtained from the sale in any claim for damages against the charterers. This will be the case if there is no available market to charter the vessel at the time and the sale is a step taken to minimise the loss caused by the charterers’ breach.

In Fulton Shipping Inc v Globalia Business Travel SAU (‘the New Flamenco’) [2015], the Court reversed the Commercial Court decision and held that the owners of a cruise vessel (Fulton) should be required to give credit to the charterers (Globalia) for having sold the vessel for a higher value than would have been achieved two years later, had the charterers not breached the contract.

Under English law, an innocent party is entitled to be put in the same position he would have been in had the contract been performed. He will not, however, be allowed to recover losses which he has avoided by taking steps to minimise the impact of the breach.

The New Flamenco was chartered to Globalia in February 2004. In 2007, the parties met to negotiate an extension. Fulton alleged that an agreement had been reached to charter the vessel for a further two years until November 2009. Globalia denied there had been an agreement and redelivered the vessel in October 2007. Fulton sold the vessel in October 2007 for US$23,765,000.

In a London arbitration, Fulton claimed €7,558,375 for the net loss of profits which it alleged it would have earned during the two-year extension. The arbitrator found that an extension had been agreed and Globalia was in breach by redelivering the vessel early. The arbitrator also found, however, that Fulton had sold the vessel to reduce its losses and the sale price of the vessel in November 2009 (after the 2008 global financial crisis) would have been US$7 million, US$16 million less than the price obtained in 2007. The arbitrator concluded that this difference, which was a benefit to Fulton, had to be taken into account when calculating damages against Globalia. The result was that the benefit wiped out the claim.

Fulton appealed to the Commercial Court, where it succeeded. Popplewell J found that the benefit arising from having sold the vessel earlier should not be taken into account, because the benefit (the difference in the sale price between 2007 and 2009) was not legally caused by the breach. For Popplewell, Globalia’s breach merely provided the context or occasion for Fulton to realise the capital value of the vessel. The judge also placed importance on the fact that Fulton was free to exercise its right as owners to sell the vessel at any time and held that it would be unfair and unjust to allow the charterers to appropriate the fruits of the owners’ investment in the vessel.

The Court of Appeal, however, disagreed with Popplewell J and reinstated the arbitrator’s decision. The decision also clarifies that different rules apply when there is not an available market following the repudiation, i.e. the possibility to fix the vessel in an equivalent charter to the one being lost. If there is an available market, damages will be calculated by the difference between the contract rate and the market rate of hire on the date of the breach. It is assumed that a shipowner will go to the market to charter the vessel. If it chooses to delay re-fixing its vessel, any benefit it obtains as a result will not affect what it can recover from the charterer because its decision is considered a speculation on the market.

This is not the case, however, if there is no available market for an equivalent fixture. The actual steps taken and the benefit (or loss) a shipowner obtains as a result will affect the damages that it can recover.  

Fulton is seeking permission to appeal from the Supreme Court.