In fact, in the run up to August 2007 the charterer, wrongly, disputed that it had reached any such agreement in June that year. On 17 August 2007, the owner treated the charterer’s position as an anticipatory breach and accepted the breach as terminating the contract. The charterer handed the vessel back on 28 October 2007. The owner sold it immediately for USD$23,765,000. The financial crisis caused the ship’s value to plummet to just US$7,000,000 in November 2009: a difference of US$16,765,000. At a subsequent arbitration, the arbitrator decided that the owner had to give credit to the charterer for the difference in value because it arose from the breach. The effect was that this extinguished any claim the owner had for loss of profit.

The issue for the High Court was: was the arbitrator right in his approach?

The principles

Popplewell J carried out a thorough review of the authorities on compensatory principles for breach of contract.

He reminded himself that damages are intended to put a party into a position he would have been in had the contract been performed.

However, he noted there were exceptions to this: causation and remoteness may mean losses are not recoverable. Similarly, public policy might justify that no credit need be given; for example, a party need not give credit for the proceeds of insurance that he has arranged himself.

At [64], his lordship said the following principles emerged from the authorities:
1.For a benefit to be taken into account in reducing the loss recoverable by the innocent party for a breach of contract, it is generally speaking a necessary condition that the benefit is caused by the breach.
2.The causation test involves taking into account all the circumstances, including the nature and effects of the breach and the nature of the benefit and loss, the manner in which they occurred and any pre-existing, intervening or collateral factors which played a part in their occurrence.
3.The test is whether the breach has caused the benefit; 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 his doing so. Nor is it sufficient merely that the benefit would not have been obtained but for the breach.
4.In this respect it should make no difference whether the question is approached as one of mitigation of loss, or measure of damage; although they are logically distinct approaches, the factual and legal inquiry and conclusion should be the same.
5.The fact that a mitigating step, by way of action or inaction, may be a reasonable and sensible business decision, with a view to reducing the impact of the breach, does not of itself render it one which is sufficiently caused by the breach. A step taken by the innocent party which is a reasonable response to the breach and designed to reduce losses caused thereby may be triggered by a breach, but not legally caused by the breach.
6.While a mitigation analysis requires a sufficient causal connection between the breach and the mitigating step, it is not sufficient merely to show in two stages that there is: (a) a causative nexus between breach and mitigating step; and (b) a causative nexus between mitigating step and benefit. The inquiry is also for a direct causative connection between breach and benefit, in cases approached by a mitigation analysis, no less than in cases adopting a measure of loss approach. Accordingly, benefits flowing from a step taken in reasonable mitigation of loss are to be taken into account only if and to the extent that they are caused by the breach.
7.Where, and to the extent that, the benefit arises from a transaction of a kind which the innocent party would have been able to undertake for his own account irrespective of the breach, that is suggestive that the breach is not sufficiently causative of the benefit.
8.There is no requirement that the benefit must be of the same kind as the loss being claimed or mitigated, but such a difference in kind may be indicative that the benefit is not legally caused by the breach.
9.Subject to these principles, whether a benefit is caused by a breach is a question of fact and degree which must be answered by considering all the relevant circumstances to form a common sense overall judgment on the sufficiency of the causal nexus between breach and benefit.
10.Although causation between breach and benefit is generally a necessary requirement, it is not always sufficient. Considerations of justice, fairness and public policy have a role to play and may preclude a defendant from reducing his liability by reference to some types of benefits or in some circumstances even where the causation test is satisfied.
11.In particular, benefits do not fall to be taken into account, even where caused by the breach, where it would be contrary to fairness and justice for the defendant wrongdoer to be allowed to appropriate them for his benefit because they are the fruits of something the innocent party has done or acquired for his own benefit.

How it applied to the facts of the case

Applying the principles above to the facts of the case, Popplewell J found that the charterer was not entitled to take advantage of the greater value of the ship at the time of the breach in 2007, compared to when the charter would naturally have ended in 2009.

He first considered it as a question of mitigation. The most relevant points were:
1.that there was no finding by the arbitrator that a failure to sell the ship would be a failure to mitigate;
2.it could in any event be sold at any time including during the charter;
3.it was pertinent (if not conclusive) that the US$16,675,000 was capital and not income, which suggested the loss did not flow from the breach; and
4.it was pertinent that the difference in value was because of a change in the market: the realisation of the greater value was triggered by the charterer’s breach, but it was not the cause.

Popplewell J reached the same conclusion when analysing it as a measure of damages. The contract was for an income stream and that is what the owner had lost. Assuming that the charterer was correct and everything crystallised in 2007, the measure would be the difference in value of a ship sold in 2007 immediately and sold in 2007 for delivery in 2009. It followed that the subsequent collapse in market value had nothing to do with the contract.

Public policy pointed to the same conclusion. Like the proceeds of insurance, he observed the owners had put their capital into the ship for their own benefit, taking personally the responsibility for the losses and gains as the market ebbed and flowed. The income derived from the ship was a separate matter. “To allow the charterers to take the benefit of their decision to sell at what turned out to be an opportune moment in market conditions would be to allow the charterers to appropriate the fruits of the owners’ investment in the Vessel in a way which would be unfair and unjust.”

The result was that the capital gain realised on sale of the ship was irrelevant to the losses the owner could recover from the charterer.

Practice points

Where a wrongdoer seeks to reduce the innocent party’s damages by relying on a benefit resulting from a breach of contract, the first key question to ask appears to be “Did the breach cause the benefit or did it merely trigger it?”

In answering that it should ask itself:
1.What is the nature of and effect of the breach? Does the benefit flow from the breach or merely coincide?
2.What is the nature of the loss claimed and of the benefit the wrongdoer seeks to rely on?
3.Are the losses and benefit of different kinds? Or could the innocent party have undertaken the transaction anyway? A “yes” to any of these may suggest no legally causative link.

Finally one should ask “Are there any considerations of fairness, justice or public policy that say the benefit should not be taken into account?”

Richard Adkinson, barrister at No5 Barristers’ Chambers (ra@no5.com; www.no5.com).