The New Flamenco – the Supreme Court dances in a different direction
In the Court of Appeal ( 1 LLR 383), time-charterers of the New Flamenco successfully overturned the High Court judgment against them, reinstating the arbitration award in their favour. The question was whether charterers liability for loss of profit should be extinguished by the profit that owners were able to make in selling the vessel earlier than would have been the case because of charterers’ repudiation.
What drove this dispute was the market crash in 2008, which created a very large liability for loss of operational profit due to the collapse of the chartering market, but at the same time gave owners an even larger benefit from selling before the crash, rather than during it. The Court of Appeal decided that in a crash situation, where there was no long term market for chartering the vessel, the profit made from a decision to sell could be taken into account in assessing the net loss caused by charterers’ repudiation, which meant owners had no claim for loss of operational profits. Not surprisingly, given there was up to US$ 14 million at stake, owners appealed to the Supreme Court ( 2 LLR 177), whose decision has given a further twist to the case.
First and foremost, the Supreme Court has steered away from connecting capital gains to operation losses in times of market upheaval. For capital gains to be taken into account against the loss of operational profits, there needs to be a legal causal link between the two. This has to be more than the sale taking place after the charter had been repudiated. To paraphrase the unanimous judgment of the Court was that while the repudiation might have been the occasion for selling the vessel, it was not the legal cause of it. That cause was the commercial decision by owners to sell, one that they could have taken at any time, even if the charter had not been repudiated. Nor was the sale an act of mitigation, because the loss suffered by owners by reason of the repudiation was a loss of operational profits, for which mitigation would be re-chartering the vessel, not selling it.
Owners might have got to this point in the judgment and thought that they had succeeded. However, the Supreme Court also addressed the concern about owners benefiting twice from both the repudiation and the sale by pointing out that the sale of the vessel is still relevant to the extent that it shortened the period of operational loss. While it was referred back to the arbitrator to do the final accounting, this should effectively neutralise owners claim, because they sold the vessel after the repudiation, but before redelivery. So they were receiving full operational income up until the time they sold the vessel, and thus would have no claim for any operational loss thereafter.
This approach ties in with the decision in The Golden Victory ( 2 LLR 164), a case where charters repudiated their time charter with 4 years left to run, but after a further 15 months, the Iraq war broke out which would have given charterers the option to cancel the charter, and this was held to be the end-point for owners loss of profit claim.
It would therefore appear that the Supreme Court in the New Flamenco has added another reason for delaying a final assessment of loss of profit on a repudiated long term charter, that of waiting to see if owners sell the vessel.