Can someone who breaches a contract receive credit for a benefit received by the other party?

Nov 2017

Rating system:
Reading time (1-10 minutes): 2
Sophistication level (1 (idiot) – 10 (expert)): 6
Entertainment value (1 (turgid) – 10 (side-splitting)): 5

A cruise ship, the New Flamenco, was chartered under a contract until November 2009. The charterer wrongly thought they could return the ship in October 2007. The owner sought damages for this breach. At about the same time the owner also sold the ship for over US $23.5m. Two years later in November 2009, when the ship had been due to be returned under the contract, it was only worth US$7m – largely because of the financial crash. So the owner was $16.5 million better off as a result of selling in 2007 rather than in 2009 – considerably more than the $7.5m of lost profits it was claiming in damages. Should the court have taken this into account and given credit for this $16.5m benefit in calculating the damages, so that the damages would have been nil?

What did the court say?

The initial arbitrator said the sale price difference should be taken into account. A judge on appeal said it shouldn’t. It then went to the Court of Appeal which said it should. And finally it went to the Supreme Court which said it shouldn’t. Why? Well, the law says that a ‘benefit’ for a claimant should only be taken into account in reducing its damages claim if either (i) it was caused by the defendant’s breach or (ii) it resulted from an act of mitigation by the claimant – ie the claimant did something because of the breach with a view to reducing the loss it was going to suffer as a result of the breach. In this case, neither of these actually applied. The claimant did not sell the ship in 2007 because of the breach or with a view to reducing its loss caused by the breach. The sale and the breach were simply not sufficiently connected. It is not sufficient if the breach has merely provided the occasion or context for the innocent party to obtain the benefit, or merely triggered its doing so. The owner could have chosen either to sell or not to sell the ship at any time whether or not the charter contract was still going on (any buyer would have bought it subject to the charter contract, in the same way a freeholder of land can sell its property subject to any lease). The sale of the ship was only relevant to the damages claim in that as the claim related to lost future profits you could take into account the future cost savings that the owner had made in selling the ship.

Case: Globalia v Fulton Shipping (2017)