Reed Smith Client Alerts

The UK Supreme Court recently handed down its anticipated decision in The New Flamenco case, reversing the much debated Court of Appeal decision from last year (see also our client alert on the previous decision as well as our earlier blog focusing on the shipping aspects of this case). The Supreme Court decision provides important guidance on the notoriously difficult issue of accounting for market conditions at the time of a breach, mitigation and causation in the computation of damages. While the facts of The New Flamenco are squarely based in the shipping world, this judgment has a much wider effect on all commercial contracts.

This client alert examines the key principles that can be derived from the Supreme Court’s decision, read alongside the earlier High Court judgment, and how they affect commercial contracts in general, including in particular contracts for the sale of goods.

A recap of the underlying facts

On 13 February 2004, The New Flamenco was chartered by the claimant owners to the defendant charterers on a time charterparty. In August 2005, the charterparty was extended to 28 October 2007 by mutual agreement. On 8 June 2007, the parties reached an oral agreement to extend the charter for another two years, to 2 November 2009. The charterers alleged no such extension had been agreed and indicated an intention to redeliver the vessel at the end of October 2007. The owners declared the charterers in anticipatory repudiatory breach and accepted this breach as terminating the charterparty on 17 August 2007.

The vessel was redelivered on 28 October 2007. However, the owners had been unable to find an alternative employment for the vessel as from October 2007, and shortly before its redelivery they entered into a memorandum of agreement for the sale of the vessel for the sum of US$23.765 million. Shortly after the sale, the market plummeted, and it is estimated that by November 2009 the vessel’s market value had dropped to just US$7 million.