Key takeaways
Avoided loss
This is not recoverable as damages.
Mitigation
Innocent party must take reasonable steps to reduce its losses.
Collateral benefits
These are not taken into account when assessing damages.
In assessing the damages of the innocent party against a wrongdoer, when must the innocent party give credit for collateral benefits?
As a starting point, damages are intended to be compensatory, putting the innocent party in the same position as it would have been but for the wrongdoer’s breach.
The English Court has developed several further principles for assessing damages, including a requirement for causation and losses that are not too remote. As a further principle, the innocent party is expected to take reasonable steps to mitigate its loss, and the outcome of those efforts are considered when calculating the damages. However, as the Supreme Court decision in the New Flamenco illustrates, there are some limitations on the relevance of apparently mitigatory steps.
Interestingly, the Supreme Court handed down three decisions in 2017 dealing with assessment of damages, mitigation and avoidable loss. This article looks at the New Flamenco in the context of those other decisions and considers its impact generally.
Lowick Rose LLP -v- Swynson Ltd
The decision in Lowick Rose LLP -v- Swynson Ltd [2017] UKSC 32 was handed down two months before the New Flamenco.
In 2006, Swynson Ltd, a company owned and controlled by Mr Hunt, lent Evo Medical Solutions Ltd (EMSL) £15 million to fund a management buyout of another company. Swynson made the loan following negligent due diligence performed by accountants on the target company’s financial status. Two further loans were made by Swynson in 2007 and 2008, but ultimately EMSL defaulted on the loans.
In December 2008, Mr Hunt arranged for the earlier loans to be refinanced and made a personal loan of £18.63 million to EMSL for the specific purpose of enabling EMSL to repay Swynson the earlier loans. Mr Hunt wanted to clean up Swynson’s balance sheet and reduce its tax liabilities. EMSL repaid the loan to Swynson but eventually ceased trading and was unable to meet its liabilities.
Swynson sued the accountants, seeking to recover damages equivalent to the loan amount. The accountants argued that Swynson had suffered no loss, because EMSL had repaid Swynson the whole of the original loan in December 2008.
The general rule is that loss which has been avoided is not recoverable as damages. This is subject to an exception in respect of collateral payments or benefits where these are received independently of the circumstances giving rise to the loss.
The Supreme Court held that the repayment of Swynson’s loan extinguished the accountants’ liability. Ultimately, the fact that Mr Hunt’s loan was for the purpose of discharging Swynson’s loan meant that it could not be regarded as collateral.
The first instance judge and the majority of the Court of Appeal had come to a different conclusion. It is clearly not straightforward to determine when and whether a benefit is truly collateral. However, guidance from the Supreme Court was that it is not the source of the benefit that is important but rather its nature and that the collateral benefit must be received in circumstances that are sufficiently unconnected to the circumstances surrounding the loss complained of.
New Flamenco
In the New Flamenco, charterers were held in repudiatory breach of a time charter with the result that the fixture was terminated two years earlier than contracted for. At about the time of the termination, in October 2007, the claimant shipowners entered into an MOA for the sale of the vessel. The financial crisis of 2008 followed, which in part meant that in November 2009, when the vessel ought to have been redelivered had it not been for charterers’ breach, the vessel was worth only one-third of the 2007 sale value. Charterers argued that shipowners must give credit for that significant difference in value when calculating the damages due.
There was a mix of views leading up to the Supreme Court decision. The LMAA arbitrator considered that the shipowners must give credit for that benefit; the High Court judge determined that no credit was necessary in the circumstances; the Court of Appeal held that shipowners were to give credit. The Supreme Court reached the same view as the High Court judge: no credit for the benefit.
The Supreme Court determined that the MOA sale value in 2007 was irrelevant for these purposes. Their Lordships held that there must be a sufficiently close link between the benefit and the loss caused by the wrongdoer. They determined that in this case charterers’ repudiatory breach of the charterparty had provided the occasion or the trigger for the sale, and that shipowners could have taken the commercial decision to sell their vessel at any time before or after the breach. Charterers’ breach had not legally caused the sale, and therefore the sale value was irrelevant.
In reaching their decision their Lordships also considered that charterers’ breach caused a loss in terms of income revenue across the contracted fixture period, and that the relevant measure of shipowners’ loss was therefore the difference between the fixture hire and the market rate of hire (or if no available market, the difference between the fixture’s hire rate and what was or reasonably ought to have been earner by alternative employment). In that context, the sale of the vessel was not an act of mitigation of shipowners’ loss for earlier termination of the fixture – the vessel’s sale was not in mitigation of the loss in terms of the income stream.
In short, for a benefit to be taken into account when assessing damages, it must either have been legally caused by the wrongdoer’s breach, or it must have arisen from an act of mitigation in respect of that breach.
Application in other cases
The Supreme Court decision in Tiuta International Ltd -v- De Villiers Chartered Surveyors [2017] UKSC 77 was handed down five months after the New Flamenco and reflected the reasoning in Lowick Rose.
In essence, a lender extended two loan facilities to a borrower following two valuation reports from the same valuer. Money advanced under the second facility was used to pay off the loan under the first facility. The second valuation report was alleged to be negligent. The valuer argued that even if this were correct, the lender could only recover the additional sums lent under the second facility, not the money used to pay off the original loan.
The Supreme Court agreed with the valuer. The repayment of the first loan from the advance on the second loan was not a collateral benefit. The terms of the second facility expressly required the indebtedness under the first facility to be discharged.
In the CV Stealth [2021] EWHC 2288 (Comm), the owners of the vessel sought to recover from the charterers losses they had sustained due to the vessel’s detention in Venezuela by order of the Venezuelan court. By the time the vessel had been released, the owners had declared her a CTL. The vessel was eventually sold for scrap.
The charterers argued that estimated drydocking costs that had not been incurred should be deducted from any sums recovered by the owners.
The arbitrator held that the declaration of a CTL was decisive in precluding drydocking. The arbitrator deducted a provisional sum for potentially saved drydocking expenses. On appeal, the Court upheld this finding and distinguished the New Flamenco on the basis that in the CV Stealth, there was a clear causal connection between the vessel’s detention and the owners’ savings by not drydocking her.
Impact
The Supreme Court’s decision in the New Flamenco (and indeed in the other decisions discussed above) makes it clear that causation is key in determining whether there is a sufficient link between the breach and the benefit. Beyond that, there appears to be no single rule to determine which benefits are to be brought into account either as a matter of measuring damages or in factoring in acts of mitigation, or the extent to which benefits must be of the same kind as the loss to be mitigated.
For guidance, the Supreme Court appears to have accepted the principles summarised by the first instance judge in the New Flamenco, which include a requirement to take into account all relevant circumstances such as the nature and effects of the breach and the nature of the benefit accrued and the loss. The issue of causation for the purposes of accounting for a collateral benefit is, therefore, one which remains highly sensitive to its individual circumstances.
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