If, following a breach of contract, the innocent party benefits from its mitigation, then, ordinarily, that benefit will reduce the loss that can be claimed for breach.  In Fulton Shipping Inc of Panama v Globalia Business Travel S.A.U. (formerly Travelplan S.A.U.) of Spain ("The New Flamenco") [2015] EWCA Civ 1299 shipowners who were forced to sell a vessel early, due to the charterer's breach, received more for the sale than if they had sold when the charter party had ended in the normal course. This unexpected windfall should reduce the loss claimed, the Court of Appeal held. The owners had made a considerable profit from the action they took by way of mitigating what would otherwise have been an undoubted loss. That profit arose from the consequences of the breach and should therefore be brought into account when assessing loss.

Globalia Business Travel S.A.U. (Globalia) had chartered a vessel from Fulton Shipping Inc of Panama (Fulton), the owners. The term of the original charter was extended by oral agreement. Globalia, disputing that there was an oral agreement, claimed that it was entitled to redeliver the vessel on the original (pre-extension) date. Fulton treated Globalia as being in anticipatory repudiatory breach, accepted the breach as terminating the charter party and sold the vessel since there was no available market to re-charter it. The time of sale corresponded with a market peak which occurred immediately prior to the global financial crisis. The difference between the price that the vessel actually realised and the price which it would have achieved if sold at the end of the contract term (the benefit) was greater than the loss of profits claimed by the owners.

Globalia argued that the benefit the owners, Fulton, gained by selling the vessel two years earlier should be taken into account, with the result that it, Globalia, should pay no damages. An arbitral tribunal agreed, and the owners appealed to the High Court. Popplewell J, after undertaking an extensive review of the case law, overturned the tribunal's decision. This was a further appeal to the Court of Appeal.

Mitigation (per McGregor on Damages)

The key principles of mitigation are:

• The claimant must take all reasonable steps to mitigate its loss, or, put another way, the claimant cannot recover for avoidable loss.
• Consequently, the claimant can recover for loss incurred in its reasonable attempts to avoid loss.
• However, the claimant cannot recover for avoided loss.

It was the third principle that was the focus of the debate before the Court of Appeal.

Avoided loss will normally be taken into account

The Court of Appeal held that "if a claimant adopts by way of mitigation a measure which arises out of the consequences of the breach and is in the ordinary course of business and such measure benefits the claimant, that benefit is normally to be brought into account in assessing the claimant's loss unless the measure is wholly independent of the relationship of the claimant and the defendant."

The court believed that, on a fair reading of the arbitral award, the arbitrator considered that the breach by Globalia was the (or at least an) effective cause of the benefit. As Leggatt J put it in Thai Airways International Public Co Ltd v KI Holdings Co Ltd [2015] EWHC 1250 (Comm), "When the defendant's breach of contract combines with another effective cause to result in loss to the claimant, the loss is recoverable … the same principle must apply to gains."

At first instance, Popplewell J had felt that the benefit should not be taken into account since to do so would be contrary to fairness and justice, as the benefit was the fruit of something the owners, as the innocent party, had done or acquired for their own benefit (and at their own risk). The Court of Appeal turned this on its head by noting that the owners had made a considerable profit from the action they took by way of mitigating what would otherwise have been an undoubted loss. That profit arose from the consequences of the breach and should therefore, it held, be brought into account.

Comment: The decision how to mitigate a loss is very important for an individual or business. This decision makes it clear that extra benefits obtained during mitigation will favour the defaulting party, because they serve to reduce the innocent party's loss. In this case, those benefits were in excess of the loss, so wiped out the innocent party's claim. Of course, to the extent that the benefit exceeds the loss, the "extra" is retained by the innocent party.

This decision should not impact an innocent party's decision about how best to mitigate. When faced with a breach it is always going to be advisable to mitigate loss in the best, and most profitable way, even if it means letting the defaulting party off the hook. Why? Because doing so reduces the risk of an unsuccessful claim for damages (against a possibly insolvent counterparty) and the innocent party may still realise a gain over and above its loss.

This decision will encourage a defaulting party to carefully examine the mitigating steps that have been taken in order to assess whether they were reasonable, and more importantly, what benefits have been obtained.

The test set out by the Court of Appeal is easier to apply than Popplewell J's multifactorial analysis. It also represents a more broad brush approach to the tricky question of whether a benefit that arises in the context of mitigation should be taken into account.

Separately, the Court of Appeal stressed the importance, in appeals from an arbitrator's award, of being particularly respectful of the boundaries between fact and law which the parties, by their choice of tribunal, have created. The Court noted that Fulton, when seeking leave to appeal from the award on a point of law pursuant to s69 of the Arbitration Act 1996 was correctly astute to formulate the question of law that fell to be decided.