Causation key to whether innocent party should have damages reduced when it benefits from breach of contract, says expert

Out-Law News | 02 Jun 2014 | 3:42 pm | 2 min. read

Damages awarded to the owners of a commercial vessel when a chartering arrangement was cancelled in breach of contract, did not have to be reduced to reflect profits made as a result of a sale the owner would not have otherwise had the opportunity to make, a court has ruled.

The decision by the English Commercial Court contained some "welcome principles" to help courts decide in what circumstances damages should be reduced when the innocent party to a breach of contract benefits in some way, said litigation expert Richard Dickman of Pinsent Masons, the law firm behind Out-Law.com.

An arbitral tribunal had previously held that damages awarded to Panama's Fulton Shipping, the owners of the vessel in question, had to be reduced to reflect a portion of the company's profits from the sale. Because charterer Globalia Business Travel had backed out of the charter in 2007, in breach of contract, Fulton had been able to sell the ship for considerably higher than its value would have been in 2009, when the contract was originally supposed to end and after the financial crisis, the arbitrator found.

However the Commercial Court, with reference to a number of previous cases, disagreed. Setting out a number of general principles derived from previous cases, Mr Justice Popplewell said that it was generally necessary for a benefit to have been "caused by the breach" before it had to be taken into account for the purposes of potentially reducing damages.

"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," he said.

"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 ... 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," he said.

Applying these principles to the facts of the case as found by the arbitrator, the judge found that Fulton did not have to give Globalia any credit for its profits as a result of taking advantage of the difference in the ship's value between 2007 and 2009 because "it was not a benefit which was legally caused by the breach", he said.

Litigation expert Richard Dickman said that it was a "well-established principle" that damages for breach of contract were designed to put the innocent party back into the position that it would have been had the contract been performed.

"The difficulty arises where commercial decisions taken or extraneous events which occur around the time of the breach result in a benefit to the innocent party, typically because of market movements, as in this case," he said. "Here, the court held that the owners did not have to give credit for the profit they had made on the sale, because the decision to sell was a commercial one for them to make and they had been under no obligation to sell in order to mitigate their loss. The benefit was in no sense caused by the breach of contract."

"The court made a welcome attempt to articulate a series of principles for determining the circumstances in which a benefit is caused by the breach, so that credit should be given, and when it is not. As this case shows, it is not enough that the breach simply provides the context in which the benefit is obtained," he said.

The same principles could also be relevant when calculating damages to compensate for a loss which is due to market movements, he said.

"Causation is key," he said. "If some or all of the loss would have occurred anyway, then it was not caused by the breach and such loss is not recoverable."