Web Alert: The two limbs of The Glory Wealth

In the Glory Wealth [1] the English court considered the proper assessment of damages for breach of contract and found that, in the event of repudiatory breach of a charterparty, the innocent party not only has to point to the difference between the contract charter rate and the (lower) market rate if they are to be awarded damages, but also have to show that it would have been able to perform its obligations under the contract; otherwise the innocent party could receive a substantial ‘windfall’ in damages, breaching the compensatory principle.

Now, a second arbitration appeal [2] arising out of the same facts looks at a further aspect of the compensatory principle for contractual damages, namely whether or not an innocent party claiming damages has actually suffered any loss as a result of a repudiatory breach of contract.

Background facts

The owner, Glory Wealth Shipping PTE LTD, and charterer, Flame S.A., were parties to a contract of affreightment (COA) which provided for the owner to carry 6 cargoes of coal, in bulk, in each of the years 2009, 2010 and 2011. Disputes arose when the charterer failed to declare the 5th and 6th shipments of 2009 and all 6 shipments in 2010. The owner commenced London arbitration proceedings on the basis of repudiatory breach of contract by the charterer. The owner sought damages and claimed that the correct measure of loss was the difference between the COA rate and the (lower) market rate.

By virtue of an earlier arbitration appeal, it was found that whilst the charterer was in actual repudiatory breach of the COA, the burden was still on the owner to demonstrate that they would have been able to perform its obligations under the COA and, therefore, in effect prove their loss before the measure of damages could be calculated.

Tribunal’s decision

In this case the tribunal refused to award damages to the owner on the basis of the fact that the freight payable under the COA would not have been paid to the owner anyway, but instead would have been directed to two other companies in an arrangement prescribed by the owner. As the owner would not have received those funds, the tribunal held that the owner had not suffered any true loss.
In coming to its decision, the tribunal applied the principle that an award of damages must place the innocent party in the same position it would have been had the contract been performed. As the owner, in this situation, would not have received the freight in any event, the correct award of damages should be nil. The owner appealed.

High Court decision

The High Court disagreed with the conclusion of the tribunal, stating that in failing to hold that the owner had suffered a loss and been deprived of their right to earn freight as a result of the charterer’s breach of contract, the tribunal had erred in law.

The court held that the owner had a contractual right to receive freight due under the COA. The fact that the owner had decided that the freight would be paid to other companies was only one limb to consider. The court instead held that there were two limbs to consider: (1) the right of a party to receive freight into one's bank account, and (2) the right to thereafter give it away.

The court also considered that it could not be correct that the charterer could escape having to pay damages where they openly breached a contract which caused a loss. The owner was therefore entitled to damages of over $3m.

Comment

This decision highlights that complications can often arise in determining the correct contractual level of damages, as well as the importance of the compensatory principle.

In holding that the owner had not suffered any loss, the tribunal had not taken into account the owner’s right to dispose of funds due to it. There was no question that the funds were due to the owner under the COA, therefore, how they chose to dispose of the funds was a matter for them and did not, and should not, affect the conclusion that the owner had actually suffered a loss.

Had the court agreed with the tribunal, this would have allowed the charterer to obtain a windfall for its own repudiatory breach of contract. In addition, the two companies to whom the freight was to be (re)directed were not parties to the COA and may not have been able to step into the shoes of the claimant in this arbitration.

This article intends to provide general guidance on the issues arising. It is not intended to provide legal advice in relation to any specific query. The law is also not static. If in doubt, The Standard Club is always on hand to assist.
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[1] Flame SA v Glory Wealth Shipping Pte Ltd [2013] 2 Lloyd’s Rep. 653
[2] Glory Wealth Shipping Pte Ltd v Flame SA [2015] EWHC 293 (Comm)