Fulton Shipping Inc of Panama v Globalia Business Travel S.A.U. (formerly Travelplan S.A.U) of Spain

This is an appeal brought with leave of Teare J pursuant to s.69 of the Arbitration Act 1996 from a reasoned award dated 3 June 2013 (“the Award”) by an experienced maritime arbitrator. It raises a short point as to whether a shipowner claiming damages for charterers’ repudiation of a time charter must give credit for the capital value of having sold the vessel upon repudiation for a greater sum than the value of the vessel at the contractual date for redelivery under the charter.

The “NEW FLAMENCO” (“the Vessel”) was a small cruise ship built in Genoa in 1972. By a time charterparty on the NYPE form dated 13 February 2004 she was chartered by her then owners to the Defendants, a division of Spain’s leading tourist group (“the Charterers”). At that time the Vessel was managed by the Claimants (“the Owners”). The Owners bought the Vessel on 4 March 2005 and entered into a novation agreement dated 23 March 2005 under which they assumed the rights and liabilities of the owners under the charterparty.

In August 2005 the Owners and the Charterers concluded an agreement extending the charter for two years to 28 October 2007, with an option for a third year. The option was never exercised. The extension was recorded in Addendum A.

At a meeting on 8 June 2007, the Owners and Charterers reached an oral agreement (as the arbitrator found) in terms subsequently recorded in Addendum B. The agreed terms extended the charterparty for a further two years so as to expire on 2 November 2009.

The Charterers disputed having made the agreement recorded by Addendum B and refused to sign it. They maintained an entitlement to redeliver the Vessel on 28 October 2007 in accordance with Addendum A. The Owners treated the Charterers as in anticipatory repudiatory breach and on 17 August 2007 accepted the breach as terminating the charterparty.

The Vessel was redelivered on 28 October 2007. Shortly before that date, the Owners entered into a Memorandum of Agreement for sale of the Vessel for US$23,765,000.

The charterparty was governed by English law and provided for London arbitration. The Owners commenced arbitration and a sole arbitrator was appointed on 4 March 2008. Claim submissions were served only on 23 November 2011 and the hearing took place in May 2013. By the time of the hearing it was apparent that there was a significant difference in the value of the Vessel between October 2007, when the Owners sold it, and November 2009, when the Vessel would have been redelivered to Owners had the Charterers not been in breach of the charterparty. The collapse of Lehman Brothers in September 2008 and the financial crisis had occurred in the meantime. The value of the Vessel when she would have been redelivered in accordance with Addendum B in November 2009 was, as the arbitrator subsequently found, US$7,000,000.

The Owners advanced their claim for damages calculated by reference to the net loss of profits which they alleged that they would have earned during the additional two year extension. Such profits were set out in a detailed schedule identifying the revenue which would have been earned under the charterparty, and giving credit for the costs and expenses which would have been incurred in operating the Vessel in providing the charterparty service for those two years, but which had been saved as a result of the sale of the Vessel. The amount claimed was €7,558,375.

The Charterers argued that the Owners were bound to bring into account and give credit for the difference between the amount for which the Vessel had been sold in October 2007 (US$23,765,000) and her value in November 2009 (US$7,000,000). The Owners argued that the difference in value was legally irrelevant and did not fall to be taken into account. The arbitrator decided this issue in favour of the Charterers. Because there was disagreement between the parties on the accounting figures in relation to the net profits which would have been earned for the two year period under the charter, the arbitrator made no findings on the quantum of the Owner’s claim and left the figures to be agreed by the parties or referred back to him in the absence of agreement. But he declared that in respect of those sums the Charterers were entitled to a credit of €11,251,677 (being the equivalent of US$16,765,000) in respect of the benefit that accrued to the Owners by selling the Vessel when worth more in October 2007 than it was at the end of the charter period in November 2009. This was more than the Owners’ loss of profit claim and would result in the Owners recovering no damages for the Charterers’ repudiation.

The way in which the point arose before the arbitrator involved a procedural wrangle which he described as being extremely contentious at the hearing. In the original claim submissions, the Owners particularised their loss and damage as being “€7,558,375 (giving credit for expenditure saved and reduction in the re-sale value that the vessel would have had on completion of the period) as set out in the schedule attached hereto”. The schedule gave details of different elements of expenditure saved and concluded with “reduction in re-sale value between November 2007 and November 2009: US$ 5,145,000 @ 1.49 €3,453,020”. The amended defence submissions admitted and averred “as asserted by owners” that it was appropriate to take into account the benefit accruing to owners as a result of the sale of the vessel in 2007 and that such benefit was to be calculated by reference to the difference between the amount payable under the MOA and the value on the open market of the vessel as at November 2009, being the first day when she could be sold if Addendum B had been performed. There was a plea in the original reply submissions that a drop in the shipping market between August 2007 and November 2009 was res inter alios acta and irrelevant to the assessment of damages which were to be made by reference to the date when the contract was terminated and not by reference to subsequent market movements. As the arbitrator observed, this left a tension between the claim submissions and the reply submissions on the point in issue in this appeal.

Following disputes during the course of the hearing, on the morning of the final day of the hearing the Owners applied for leave to amend their claim submissions, one of the proposed amendments being to delete the conceded credit. The arbitrator resolved the disputed application by refusing to allow permission to amend the claim submissions. He ruled that it was open to the Owners to run the argument identified in their reply submissions to the effect that a drop in the market value of the vessel was res inter alios acta and irrelevant to the assessment of damages, but they were not entitled to withdraw the quantified concession made in the claim submissions that a benefit of US$5,145,000 had to be brought into account. He therefore held that if the Owners were successful in their argument on the issue of principle, a credit of US$5,145,000 would in any event have to be brought into account in calculating their net loss.

The arbitrator made findings that the sale of the Vessel by the Owners in October 2007 was caused by the Charterers’ breach and was in reasonable mitigation of damage. The relevant findings were expressed in the following terms:

On behalf of the Owners, Mr Gee QC argued that taking into account the fluctuation in the capital value of the vessel involved an error of law. There were six strands to the argument, which developed in the course of submissions:

On behalf of the Charterers, Mr Croall QC argued that:

These arguments raise a number of issues concerning measure of loss and mitigation of damage, on which I was referred to a number of authorities. I shall first consider those which I have found of assistance, before seeking to draw conclusions as to the principles to be derived from them and to apply those principles to the issue in the appeal.

The starting point is the uncontroversial principle that damages for breach of contract are intended to put the innocent party in the same financial position as if the contract had been performed. This is the compensatory principle which “has been enunciated and applied times without number and is not in doubt” per Lord Bingham in Golden Strait Corpn v Nippon Kubisha Kaisha (The Golden Victory) [2007] 2 AC 353 at [9] (see also per Lord Scott at [29]). It may also be expressed as the claimant being entitled to the value in money of the contractual rights he has lost (per Lord Scott at [30]).

The principle does not, however, mean that a claimant always recovers for the amount of the losses which arise from the breach. Principles of causation mean that his losses may be factually too remote from the breach to be recoverable despite the fact that they would not have been suffered but for the breach. His losses may be too remote in law. Conversely, he may end up better off as a result of the breach than he would otherwise have been, without having to give credit for such benefit against his recoverable loss. Some benefits fall to be taken into account and others do not. The classic examples of those which do not are proceeds of insurance for which he has paid, and monies received due to the benevolence of third parties, but these are not the only instances. The answer to the question whether a claimant is bound to bring a benefit into account in calculating his damages is not to be found in a simple application of the compensatory principle. Mr Gee’s submission that the arbitrator’s conclusion offends the compensatory principle, and Mr Croall’s submission that a contrary conclusion would do so, do not therefore offer a solution to the problem in this case.

The three aspects of the principles relating to mitigation are summarised in McGregor on Damages 18^th Edn as follows:

“7-003 The principal meaning itself comprises three different, although closely interrelated, rules. This analysis into three rules, although clearly implicit in the cases, is one which had not, at the first time of writing in the late l950s, been given explicit statement in English law. It is submitted that such a division lends clarity to a difficult topic. The three rules are these.

7-004 (1) The first and most important rule is that the claimant must take all reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong and cannot recover damages for any such loss which he could thus have avoided but has failed, through unreasonable action or inaction, to avoid. Put shortly, the claimant cannot recover for avoidable loss.

7-005 (2) The second rule is the corollary of the first and is that, where the claimant does take reasonable steps to mitigate the loss to him consequent upon the defendant’s wrong, he can recover for loss incurred in so doing; this is so even though the resulting damage is in the event greater than it would have been had the mitigating steps not been taken. Put shortly, the claimant can recover for loss incurred in reasonable attempts to avoid loss.

7-006 (3) The third rule is that, where the claimant does take steps to mitigate the loss to him consequent upon the defendant’s wrong and these steps are successful, the defendant is entitled to the benefit accruing from the claimant’s action and is liable only for the loss as lessened; this is so even though the claimant would not have been debarred under the first rule from recovering the whole loss, which would have accrued in the absence of his successful mitigating steps, by reason of these steps not being ones which were required of him under the first rule. In addition, where the loss has been mitigated other than by steps taken by the claimant subsequent to the wrong, the claimant can again recover only for the loss as lessened, provided that the benefit gained is not to be regarded as collateral. Put shortly, the claimant cannot recover for avoided loss.”

In Bradburn v The Great Western Railway Company (1874) LR 10 Ex 1, the Court of Exchequer held unanimously that a passenger injured by an accident on the defendant’s railway did not have to give credit for the proceeds of his policy of insurance which became payable by reason of the accident. There is a brief report of two judgments. Baron Bramwell said:

“Clearly there must be no rule. The jury have found that the plaintiff has sustained damages through the defendants’ negligence to the amount of 217l., but it is said that because the plaintiff has received 31l. from the office in which he insured himself against accidents, therefore the damages do not amount to 217l. One is dismayed at this proposition. In Dalby v. India and London Life Assurance Company (4 Bing N.C. 272) it was decided that one who pays premiums for the purpose of insuring himself, pays on the footing that his right to be compensated when the event insured against happens is an equivalent for the premiums be has paid; it is a quid pro quo, larger if he gets it, on the chance that he will never get it at all. That decision is an authority bearing on the present case, for the principle laid down in it applies, and shews that the plaintiff is entitled to retain the benefit which he has paid for in addition to the damages which he recovers on account of the defendants’ negligence.”

Baron Pigott said

“I am of the same opinion. The plaintiff is entitled to recover the damages caused to him by the negligence of the defendants, and there is no reason or justice in setting off what the plaintiff has entitled himself to under a contract with third persons, by which he has bargained for the payment of a sum of money in the event of an accident happening to him. He does not receive that sum of money because of the accident, but because he has made a contract providing for the contingency; an accident must occur to entitle him to it, but it is not the accident, but his contract, which is the cause of his receiving it.”

The judgments identify two bases for the decision. One is an application of principles of causation, expressed clearly in the last part of Baron Pigott’s judgment: the insurance proceeds are not a benefit caused by the accident because they flow from the contract of insurance which provides for them to be paid on that contingency; they are caused by the contract, not the accident. The other basis is one of policy: it would be contrary to fairness and justice that the wrongdoer should get the benefit of an insurance for which the innocent party has paid.

In British Westinghouse Electric and Manufacturing Company Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673, the defendants agreed to supply eight steam turbines to the plaintiffs for use in the London Underground. The turbines were below contractual specification in their economy and efficiency. The plaintiffs used them for several years, and then replaced them with Parsons machines, which were of an efficiency which exceeded the contractual specification required of the defendants. The plaintiffs claimed £42,000 in respect of the losses caused by the inefficiencies of the machines prior to replacement; and £78,186 for the cost of the Parsons machines. The issue which came before the House of Lords, from a special case stated by an arbitrator, was whether the plaintiffs were bound to give credit against the claim for the cost of the Parsons machines for the savings due to their superior efficiency over what the defendants had contracted to supply. The Judicial Committee held that they did. No question arose in relation to the £42,000 claim for losses suffered whilst the defendants’ machines were in use prior to replacement. Viscount Haldane LC gave the leading speech. At page 689 he articulated what McGregor has formulated as the third rule of mitigation in these terms:

“…….when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.”

Having referred to Staniforth v Lyall (1830) 7 Bing 169, he continued at p690-1:

“I think that this decision illustrates a principle which has been recognized in other cases, that, provided the course taken to protect himself by the plaintiff in such an action was one which a reasonable and prudent person might in the ordinary conduct of business properly have taken, and in fact did take whether bound to or not, a jury or an arbitrator may properly look at the whole of the facts and ascertain the result in estimating the quantum of damage.

Recent illustrations of the way in which this principle has been applied, and the facts have been allowed to speak for themselves, are to be found in the decisions of the Judicial Committee of the Privy Council in Erie County Natural Gas and Fuel Co. v. Carroll [1911] AC 105and Wertheim v. Chicoutimi Pulp Co. [1911] AC 301. The subsequent transaction, if to be taken into account, must be one arising out of the consequences of the breach and in the ordinary course of business. This distinguishes such cases from a quite different class illustrated by Bradburn v Great Western Ry. Co. (1874) LR 10 Ex 1, where it was held that, in an action for injuries caused by the defendants’ negligence, a sum received by the plaintiff on a policy for insurance against accident could not be taken into account in reduction of damages. The reason of the decision was that it was not the accident, but a contract wholly independent of the relation between the plaintiff and the defendant, which gave the plaintiff his advantage. Again, it has been held that, in an action for delay in discharging a ship of the plaintiffs’ whereby they lost their passengers whom they had contracted to carry, the damages ought not to be reduced by reason of the same persons taking passage on another vessel belonging to the plaintiffs: Jebsen v East and West India Dock Co. (1874) LR 10 CP 300, a case in which what was relied on as mitigation did not arise out of the transactions the subject-matter of the contract.

…….

I think the principle which applies here is that which makes it right for the jury or arbitrator to look at what actually happened, and to balance loss and gain. The transaction was not res inter alios acta but one in which the person whose contract was broken took a reasonable and prudent course quite naturally arising out of the circumstances in which he was placed by the breach.”

Three aspects of the speech are of relevance to the current dispute. First, the third rule of mitigation is formulated as applicable where the benefit to a defendant “has diminished his loss” and the benefit which is to be taken into account is “the effect in actual diminution of the loss” (p689). Mr Gee submitted that it was implicit in this formulation that the loss and the benefit must be of the same kind because it is the loss which must be diminished. I find no such implication in the language used. I see no difficulty in principle in treating a benefit of one kind as being capable of diminishing a loss of another kind if each may be measured in financial terms. The implication in other parts of the speech is contrary to Mr Gee’s submission, especially the statements that “an arbitrator may properly look at the whole of the facts and ascertain the result in estimating the quantum of damage” and that it is “for the jury or arbitrator to look at what actually happened, and to balance loss and gain.”

Secondly there must be a sufficient causative connection between breach and benefit (“The subsequent transaction, if to be taken into account, must be one arising out of the consequences of the breach”; and “a reasonable and prudent course quite naturally arising out of the circumstances in which he was placed by the breach”). The causation requirement was expressed to be one which created a sufficient link between the breach and the mitigating step. But the facts of the case did not require any further consideration of a causal link between the mitigating step and the benefit, or of a direct link between breach and benefit. The case is not authority for the proposition that once the causal link has been established between the breach and the mitigating step, no further questions of causation arise in respect of the benefits flowing from the mitigating step.

Thirdly, Bradburn, which was described as a “quite different class of case”, perhaps because it did not involve mitigation, was treated as a decision to be explained on causation grounds (“The reason of the decision was that it was not the accident, but a contract wholly independent of the relation between the plaintiff and the defendant, which gave the plaintiff his advantage.”)

In Laverack v Woods of Colchester [1967] 1 QB 278 the Court of Appeal was concerned with a claim for damages for wrongful dismissal. The issue of relevance to the current dispute was whether the employee’s claim for loss of income fell to be reduced by a capital increase in the value of shares in two companies, Martindale and Ventilation, which he had bought after his dismissal. On this point the Court was unanimous in holding that the benefit from the Martindale shares fell to be deducted from damages but that from the Ventilation shares did not.

Martindale was the company to which the employee had gone to work upon being dismissed by the defendant. In relation to the Martindale shares, Lord Denning MR, with whom Diplock LJ agreed, said at 291A-C:

“Martindale stands on a little different footing. His salary of £1,500 was very low for a man of his ability: and it looks as if he was getting, in addition, a concealed remuneration by a profit on his shares in the company. In the course of the argument Russell LJ worked out the estimated improvement in his equity over the period from August, 1964, to March, 1967, in so far as it was due to his work. It comes to £2,066. I think that the plaintiff should give credit for that figure in addition to the actual earnings of £3,717 9s. 2d.”

Russell LJ said at p300G-301C:

“Finally, there is the question whether any and what deduction should be made from the damage suffered on account not only of his salary earned and expected in the period from Martindale, but also on account of the undoubted fact that the expenditure of the time released to him by the wrongful dismissal has enabled him by his work and management during that time to enhance the value of the half interest in Martindale that he bought for £1,500 shortly after his dismissal. I agree that account should be taken of this, though of necessity a fairly high degree of estimation is involved. The master held that in all the circumstances it was reasonable that the plaintiff should go into Martindale on the terms on which he did, rather than hawk his services around. One of the reasons for saying that it was reasonable is that avowedly the plaintiff was hoping to gain in part by improving by his own efforts the value of his holding as well as, in other part, by a relatively low salary. To the extent that this hope has been fulfilled in the relevant 2⅔ years, it seems right to set it against his loss of salary from the defendants. As to the method of assessment of the extent to which his released time has contributed to the increase in value of his interest, the following calculation leads to the figure of £7,768 mentioned by the Master of the Rolls...”

Mr Gee submitted that the decision, so far as concerned the Martindale shares, was not inconsistent with his submission that benefits which are different in kind from the loss do not fall to be taken into account. Although an increase in the capital value of shares is in form different in kind from wages, the basis of the decision is that the benefit was “concealed remuneration” and so of the same kind as the loss. There is force in this submission, although it is not the rationale expressed by Russell LJ.

I find the decision of more assistance in relation to the Ventilation shares. The purchase of these shares was connected with the breach because Ventilation was a competitor of the defendant in France where the plaintiff was employed to work, and a covenant in the plaintiff’s terms of employment would have prevented him from purchasing them whilst employed by the defendant; it was only upon breach that he was able to make the purchase. Lord Denning MR, with whom again Diplock LJ agreed on this point, said at p290F-G:

“In my opinion the master was wrong in requiring the plaintiff to give credit for his investment in Ventilation. He might have invested his money in any other company and made similar profits. It is sheer speculation whether he would do better in Ventilation than in others. I realise that the plaintiff was only at liberty to invest in Ventilation because his employment was terminated. But nevertheless the benefit from that investment was not a direct result of his dismissal. It was an entirely collateral benefit, for which he need not account to his employers.”

The conclusion is expressed in terms of causation. The increase in value is a “collateral benefit” which does not fall to be taken into account because it was not “a direct result” of the termination of his employment. The test of causation draws a distinction between the breach causing the benefit, and the breach merely being the occasion which enables the innocent party to obtain the benefit. The latter is insufficiently causative to bring the benefit into account.

Further guidance is to be found in Russell LJ’s judgment on the point at p305D-G where he said:

“I turn to the question of Ventilation and the plaintiff’s investment therein. I can see no justification for considering this investment as of any relevance to the damage occasioned by the wrongful dismissal. It was an investment of money and nothing more. Its profitability or otherwise cannot be attributed to his release from his obligation to devote his time to the service of the defendants; because such minimal time as he devoted to the affairs of Ventilation cannot seriously be regarded as having been made available to him by his dismissal. It is of course true that during his employment he was barred from such investment in a company carrying on this particular type of business, which is in France in competition with the defendants. But that does not suffice to entitle the defendants to set off any improvement in the value of the plaintiff’s shareholding against his loss of salary and bonus. It is simply a question of turning his private money or credit to account and not his time and work. It is no different from an investment which he could have made during his continued service.”

What Russell LJ treated as indicative of the breach not being causative of the benefit was that the purchase of the Ventilation shares was the kind of transaction which the employee might have made irrespective of the defendant’s termination of his employment, namely a private investment of capital for his own account. This is suggestive, in my judgment, not of a rule that benefits may only be taken into account if of the same kind as the loss, but of a principle that if the benefit arises from the kind of transaction which the innocent party would have been able to undertake for his own account irrespective of the breach, that is a pointer towards the breach not being legally causative of the benefit.

InParry v Cleaver [1970] AC 1, the House of Lords held by a majority (Lords Reid, Pearce and Wilberforce) that the principle established in Bradburn’s case of disregarding insurance proceeds applied equally to disability pension payable upon discharge from the police service. In two passages heavily relied on by Mr Gee, Lord Reid said at p15B-E:

“It is said to make all the difference that both the future wages of which he has been deprived by the fault of the defendant, and the benefit which has accrued by reason of his disablement come from the same source or arise out of the same contract. This seems to be founded on an idea of remoteness which is, I think, misconceived. Remoteness from the defendant’s point of view is a familiar conception in connection with damages. He pays damages for loss of a kind which he might have foreseen but not for loss of a kind which was not foreseeable by him. But here we are not dealing with that kind of remoteness. No one has ever suggested that the defendant gets the benefit of receipts by the plaintiff after his accident if they are of a kind which he could have foreseen, but not if they are of a kind which he could not have foreseen, or vice versa That the plaintiff may, in consequence of the defendant’s fault, receive benefit from benevolence, or insurance is no more or no less foreseeable or remote than that he may get a benefit from a pension to be paid by his employer. If remoteness has any relevance here it is quite a different kind of remoteness—the connection or absence of connection between the source of the benefit and the source of the wages. But what has that got to do with the defendant? It is rational to make the extent of the defendant’s liability depend on remoteness from his point of view—on what he knew or could or should have foreseen. But it is, to my mind, an irrational technicality to make that depend on the remoteness or closeness of relationship between the plaintiff’s source of loss and source of gain. Surely the distinction between receipts which must be brought into account and those which must not must depend not on their source but on their intrinsic nature.”

and at 16H:

“A pension is intrinsically of a different kind from wages. If one confines one’s attention to the period immediately after the disablement it is easy to say that but for the accident be would have got £X, now he gets £Y, so his loss is £X-Y. But the true situation is that wages are a reward for contemporaneous work, but that a pension is the fruit, through insurance of all the money which was set aside in the past in respect of his past work. They are different in kind.”

Mr Gee argued that these were statements of principle of the highest authority that no credit has to be given for benefits which are different in kind from the loss suffered, whether they arise from the breach itself or from mitigation. This is in my view to place greater weight on the passages than they will bear. The ratio of Lord Reid’s speech is that the pension payments cannot be distinguished from insurance proceeds and so are not to be taken account of under the principle in Bradburn’s case: see pp13F-G, 14E-H and 16E-F, (and also Lord Pearce at pp37D, 38B but cf Lord Wilberforce at p42B). Lord Reid did not treat Bradburn as a case resting on principles of causation: at p14E-H he treated it as founded on what was just and reasonable, it being unfair that the wrongdoer should, in the words of Asquith LJ in Shearman v Folland [1950] 2 KB 43, 46 “in effect be depriving the plaintiff of all benefit from the premiums paid by the latter, and appropriating that benefit to himself.” Lord Reid was therefore concerned with whether the nature of the pension rights under consideration in that case could be brought within the policy considerations which dictated that insurance proceeds should be ignored. This necessarily required a focus on the intrinsic nature of the benefits, not their source. Lord Reid’s dictum at p16H is part of his answer to the question posed at p16A, which is whether the pension is “in reality a form of insurance or something quite different”. The “something quite different” which is under consideration in the passage relied on is wages. It is for this reason that Lord Reid emphasises the difference in kind between pension and wages. It is not a statement of principle of general application that benefits which are different in kind from the loss can never be taken into account. Still less is any such principle discernable from the speeches of Lord Pearce or Lord Wilberforce.

The decision also demonstrates that, contrary to Mr Croall’s submission, causation does not provide a single test whose fulfilment is sufficient in all cases, at least outside the sphere of mitigation. Mr Croall submitted that Lord Reid’s analysis was one of causation: the pension contributions were the quid pro quo for past work, which had already earned them prior to the accident, against the future contingency of the accident occurring, so that the accident provided the occasion but not the operative cause of their payment. If Bradburn is to be explained as a case turning on causation, Lord Reid’s speech might be interpreted in this way. But as I have pointed out, Lord Reid did not treat Bradburn as a case resting on principles of causation, but rather on policy considerations of what was just and reasonable. Lord Pearce also explained Bradburn as decided on considerations of fairness, justice and public policy (p37D-E). Lord Pearcerejected causation as a sole or sufficient test at pp33H-34B:

“Nor does causation, I think, really provide an answer. The pension could not have arisen had not the man by the terms of his employment earned it or by his own thrift provided for it outside his employment. That is the real source of the pension. On the other hand, the potential pension thus provided would not have come into play had not the accident occurred. Each is certainly a causa sine qua non and probably each is entitled to be called a causa causans. Strict causation seems to provide no satisfactory line of demarcation.”

Lord Wilberforce too rejected a causation test as providing the answer in every case in endorsing the dictum of Windeyer J in Espagne’s case in the High Court of Australia at p41E. He founded his conclusion at p42G-H on two grounds, only the first of which was expressed in terms of causation.

As I have pointed out, Lord Reid referred to Asquith LJ’s dictum in Shearman v Folland with approval. At p19G he said that “public policy must enter largely into our decision”. Lord Pearce too endorsed Asquith LJ’s dictum at p35G-36A and treated equitable considerations as running through the whole subject (p37C-D). The second of Lord Wilberforce’s two grounds for deciding the case at p42G-H was that quite apart from the absence of causation, the pension did not come into account because it was to be regarded as the reward or earning of pre-injury service. In my judgment Parry v Cleaver stands for a principle, rooted in policy, that 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.

InBellingham v Dhillon [1973] 1 QB 304 the plaintiff was a driving instructor who suffered personal injury as a result of which he lost the opportunity to lease a driving simulator which would have enabled his company to earn a continuing profit. In due course he was able to buy a simulator at such a knock down price that the saving on the price exceeded the profit he would have made had he leased a machine in the meantime. Forbes J held that the claim for loss of profits from using a simulator must give credit for the capital benefit obtained by purchase of the machine. He observed at p308B that if the case were one of contract there would be no difficulty in applying the principles set out by Viscount Haldane in British Westinghouse, and rejected the argument that Parry v Cleaver mandated a different result in tort. The decision supports Mr Croall’s argument that benefits may be taken into account whether or not they are of the same kind as the loss which is mitigated or claimed. The decision to purchase the simulator was in reasonable mitigation of a loss of profit. It was a capital benefit for which credit had to be given in a claim for loss of income.

The argument is also supported by Nadreph Ltd v Willmett & Co [1978] 1 WLR 1537. A landlord of commercial premises brought a claim against its solicitors for negligence in relation to a notice to terminate the tenancy, which caused the tenant (Citroen) to vacate the premises and become entitled to statutory compensation from the landlord. The court was concerned on a preliminary issue with whether the landlord was bound to give credit, against the claim to be recouped for the liability for statutory compensation, for benefits arising from the vacation of the premises by Citroen. The landlord advanced the argument which Mr Gee makes in this case, that a benefit of one kind can not be set off against damage of a different kind (see p1540E). Whitford J rejected it as a point unsupported by any direct authority and concluded that benefits should be taken into account if they “relate sufficiently closely to a head of damage as to be appropriate to be set off against that head of damage” (p1543H). The nature of the benefit being considered is not easy to discern because the preliminary issue (p1540B) was drawn in imprecise terms, and the benefit was hypothetical; but it seems likely that what was contemplated was loss of rental income, which was different in kind from the loss claimed, which was not loss of income but a liability to pay statutory compensation.

The Yasin [1979] 2 Lloyds Rep 45 points in the opposite direction. In a claim brought by receivers against shipowners under a bill of lading for loss of a cargo, shipowners argued on a preliminary issue that the insurance proceeds paid to receivers fell to be taken into account so as to wipe out the damages claimed. They sought to distinguish Bradburn on the particular facts by reason of the insurance having been one which the shipowners were bound to effect in favour of receivers under the terms of the charterparty with the receivers’ cif sellers, terms which were incorporated into the bill of lading. Lloyd J held that the insurance proceeds did not fall to be deducted from damages. At p50 col 1 he said:

“The alternative way in which the first point is put by Mr. Phillips is that Bradburn’s case is simply an illustration of a more general rule that, in assessing damages, one disregards what is collateral. Here it is said the benefit of the insurance is not collateral, for it is specifically provided for by the parties in the contract itself; since the source of the loss and the source of the gain are the same—namely, the contract between the parties—the plaintiffs cannot prove that they have suffered any loss resulting from the way in which the contract has been performed.

In my judgment, the answer to that argument is also to be found in Parry v. Cleaver, and in particular in the speech of Lord Reid. There are always two questions, namely, (1) what is the loss which the plaintiff has suffered as a result of the accident (in this case by the total loss of the vessel), and (2) what are the sums which he has received which he would not have received but for the accident. Then comes the question whether sums under (2) can be set off against losses under (1). That depends not on the source of those sums but on their nature.”

Having cited the passages in Lord Reid’s speech in Parry v Cleaver at p15 and p16 to which I have referred above, and a further passage at pp20-21, he went on at p51 col 1:

“Applying that reasoning to the present case, the question is whether the insurance proceeds are to be regarded as different in kind from the loss which the plaintiffs have suffered by reason of the defendants’ breach of contract. It seems to me that the answer to that question must be “Yes”. The insurance is payable on an event and does not depend in any way on proof of breach. The receipt is different in kind from the loss; and, if that is right, then, applying Lord Reid’s test, the benefit of the insurance is to be left out of account in assessing damages and it makes no difference that the benefit comes from the same source as the loss, in the sense that they both arise out of or are provided for in the same contract.

The only indication which I can find in Parry v. Cleaver which tends the other way is the observation of Lord Pearce at pp. 202 and 37, where, after referring to equitable considerations, he said this:

…It seems to me possible that on those grounds there might be some difference of approach where it is the employer himself who is the defendant tortfeasor, and the pension rights in question come from an insurance arrangement which he himself has made with the plaintiff as his employee.

I come back to equitable considerations when I consider Mr. Phillips’ third argument at the end of this judgment.

I think the answer which I have just given should also be given to various hypothetical instances which Mr. Phillips put most persuasively in his reply. What would happen if the defendants, after the claim had arisen, paid a sum in lieu of damages without prejudice to liability? Could the plaintiffs both keep the sum and claim for damages? What would happen if the defendants, instead of taking out a policy of insurance, themselves undertook to indemnify the plaintiffs in the event of a total loss? Could the plaintiffs retain the indemnity and claim for damages? The answer to these questions will be found in every case by asking the same two questions posed by Lord Reid and then asking whether the loss and the gain are of the same or a different kind.”

There Lloyd J, as he then was, appears to treat the passages in Lord Reid’s speech in Parry v Cleaver as supporting a general rule that in every case the answer is to be found by determining whether the loss and gain are of the same or different kind. With the greatest respect I cannot agree that this is the effect of Lord Reid’s speech, for the reasons I have endeavoured to state. Nor does it seem to me consistent with principle. Where policy considerations are at work, it is natural to consider the nature of the benefits in question, and to compare them with the type of loss suffered (or mitigated). But where the question is simply whether there is a sufficient causative connection between benefit and breach, there is no reason for the nature of the benefit and the loss to be determinative. Provided that each may be measured in financial terms, one should properly be set off against the other if they are both sufficiently causatively linked with the breach, because in doing so effect is given to the compensatory principle. That is not to say that if the benefit is of a different kind to the loss, the difference is wholly irrelevant; it may cast light on whether the causation test is fulfilled. But in my judgment it is not the test.

This is consistent with the second rule of mitigation: where losses are incurred in reasonable mitigation of loss, they are recoverable. Their recoverability does not depend upon their being of the same kind as the loss being mitigated. So losses incurred from hedging undertaken in mitigation of breach of a sale contract are recoverable (Choil Trading SA v Sahara Energy Resources Ltd [2010] EWHC 374 (Comm)), as are legal costs incurred in the mitigating steps (Herrmann v Withers LLP [2012] EWHC 1492 Ch). Principles of remoteness, based on foreseeability of kinds of loss, have no part to play here, any more than they do in relation to benefits (per Lord Reid in Parry v Cleaver). There is no reason to import a requirement that benefits must be of the same kind if they are to be brought into account under the third rule of mitigation when there is no such limitation in relation to losses under the second rule.

The Elena D’Amico [1980] 1 Lloyd’s Rep 75, is a decision of Robert Goff J which is often treated as authority for the principle that where there is an available market, a defaulting owner’s liability for damages is to be calculated by reference to the difference between the charter rate and the market rate, whether or not the charterer chooses to go into the market to fix a substitute vessel. The same principle applies to a defaulting charterer’s liability for damages, which is calculated by reference to the market rate whether or not the owner refixes the vessel. In that case the charterers argued that their failure to charter in a substitute vessel was a step taken in reasonable mitigation of loss, such that they should be entitled to recover the lost profits from being unable to fulfil profitable trading with the vessel. Robert Goff J rejected the argument on the grounds that a decision not to take advantage of an available market could not constitute mitigation within the causation test laid down by Viscount Haldane in the British Westinghouse case. Any lost profits were the result of the charterers’ independent decision not to enter the market to fix a substitute vessel. At page 88 col 2 he observed that the three aspects of mitigation articulated in McGregor are all aspects of a wider principle of causation, namely that a plaintiff can only recover damage suffered by him which has been caused by the defendant’s legal wrong. Having cited the two passages from the speech of Viscount Haldane in British Westinghouse at pp689,691 to which I have referred above, emphasising the words “arising out of the transaction” at p 689 and “quite naturally arising out of the circumstances in which he was placed by the breach” at p 691, he continued at p89:

“In my judgment, those two passages, particularly the words I have emphasised, indicate plainly that there must be a causative link between the breach of contract and the action or inaction in question to bring into play the principle of mitigation of damage.

Now where, as for example in a case of a breach by a seller in failing to deliver the goods on the due date, there is an available market and advantage is not taken of the available market then, generally speaking, the decision by the buyer not to take advantage of the available market is an independent decision, independent of the breach, made by the buyer on his assessment of the market. It is perfectly true that his decision is made in the context of a pre-existing breach of contract by the seller, in the sense that the breach of contract provided the occasion upon which the buyer makes his market judgment; but even if there had been no breach at all it would have still been possible for the buyer to have made the same decision. For example, if the goods had been delivered on the due date he could, if he had so wished, have sold the goods on the date of delivery and then have bought in comparable goods at a later date. The position was made clear by Lord Wrenbury when he delivered the advice of the Privy Council in the case of Jamal v. Moolla Dawood Sons & Co., [1916] 1 A.C. 175. That was a case concerned with a contract for the sale of shares and not with a contract for sale of goods, and the breach was a breach by the buyer and not by the seller. But in that context Lord Wrenbury said (at p. 179):

…If the seller retains the shares after the breach, the speculation as to the way the market will subsequently go is the speculation of the seller, not of the buyer; the seller cannot recover from the buyer loss below the market price at the date of the breach if the market falls, nor is he liable to the purchaser for the profit if the market rises.

So in that situation, generally speaking, the decision not to take advantage of the available market is the independent decision of the innocent party, independent of the wrongdoing which has taken place. It takes place in the context of a pre-existing wrong but it does not, to use Viscount Haldane s expression “arise out of the transaction”.

………

“It does not matter (and this is important in regard to the findings of the arbitrator in the present case) that his decision was a reasonable one, or was a sensible business decision, taken with a view of reducing the impact upon him of the legal wrong committed by the shipowners. The point is that his decision so to act is independent of the wrong. He could have done it anyway. He could have decided, for example, to have assigned away his existing charter-party at that time, and not to charter in a substitute vessel at all or alternatively to have chartered in a substitute vessel at a later date, depending upon his judgment of the market. His decision to do so in the context of the breach is merely a decision which is “triggered off’ by the fact that there has been a breach; but it is not caused by the breach.”

Three aspects of the reasoning are of importance in the current context. First the decision applies a causation test to the action or inaction which is said to bring the doctrine of mitigation into play, elucidating the causation principle expressed by Viscount Haldane in British Westinghouse in the context of benefits. A distinction is to be drawn between the breach being the cause of the mitigating step and the breach being merely the occasion, context or trigger for the decision to take such step. Secondly, the fact that such 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. Thirdly, what was treated as indicative of the causative independence of the mitigating step from the breach in that case was that the charterer’s decision whether or not to have a vessel under charter to fulfil the profitable trading opportunity was one which was open to the charterer irrespective of the breach. If the owners had not repudiated the charterparty, the charterer could have chosen to pursue the trading opportunity with that vessel, or with another vessel or not at all. This suggests that one touchstone of whether a mitigating step is legally independent of the breach is whether it was one which was open to the innocent party in any event. In this respect the decision echoes the reasoning of Russell LJ in Laverack v Woods, that if the benefit arises from the kind of transaction which the innocent party would have been able to undertake for his own account irrespective of the breach, that is indicative that the breach is not legally causative of the benefit.

In Palatine Graphic Arts Co Ltd v Liverpool City Council [1986] 1 QB 335, the defendant local authority agreed to pay for the plaintiff’s premises in Liverpool at the price which would have been payable if the acquisition had been by way of compulsory purchase. The major part of the price constituted compensation for disturbance, which it was common ground fell to be assessed in the same way as if the disturbance were damage suffered at common law for trespass. The issue was whether the plaintiff was required to give credit for a regional development grant which it obtained from the national government as 22% of its costs of relocating in another part of Liverpool. The Court of Appeal held not. There were two ratios for the decision. The first was that it would be contrary to public policy to make the deduction because it would discourage those such as Palatine from locating to the development areas which it was the purpose of regional development grants to encourage. The second relied on a difference between disturbance on compulsory purchase and the payment of a regional development grant. Having considered Parry v Cleaver, Glidewell LJ expressed this second ground at p345B:

“Secondly, the loss caused by disturbance on compulsory purchase and the payment of regional development grant are different in kind. The loss on disturbance flowed from the fact that the landowner had been forced to give up occupation of his land and premises as a result of the acquisition of his interest. The regional development grant was paid in respect of part of the expenditure incurred when moving into new premises”

Sir John Donaldson MR expressed this ground for the decision in these terms at p346F-347D:

“On the facts of this case, there is no dispute but that Palatine incurred disturbance expenditure in the amount, I think, of £147,478, although the precise figures do not matter, and that this expenditure would not have been incurred but for the compulsory purchase. There is also no dispute that some of this expenditure attracted regional development grant. The sole question in dispute is whether the disturbance loss is properly to be regarded as being the disturbance expenditure as abated pro tanto by the regional development grant. If it is, then the amount of the compulsory purchase price can only take account of the disturbance expenditure so abated, as otherwise it would amount to over-compensation and offend against the principles enunciated in Horn’s case. If it is not, the compulsory purchase price can take account of the full disturbance expenditure since that, and not the abated sum, represents the disturbance loss.

It is at this point that it is necessary to take a closer look at the nature of a regional development grant, just as the House of Lords took a closer look at the nature of a police pension in Parry v. Cleaver [1970] A.C. 1. A regional development grant is not paid in compensation for dispossession or disturbance. It is payable whether or not there is a change of ownership or location, so long as it relates to expenditure of a relevant kind incurred in a relevant geographical area. It is therefore different in kind from compensation for disturbance. Indeed it is not compensation at all. Regional development grants are, as one of the Department of Industry booklets rightly describes them, “Incentives for Industry in the Areas for Expansion.”

This analysis leads me to conclude that in the instant, and similar, cases, (i) the person whose land is compulsorily acquired incurs disturbance expenditure in re-establishing his business, (ii) other things being equal, this expenditure is the same wherever he incurs it, (iii) this expenditure is prima facie the measure of his disturbance loss, (iv) his disturbance loss is not reduced, if he chooses to incur the disturbance expenditure in a particular area and is rewarded—not compensated—for so doing by the receipt of an incentive payment in the form of a regional development grant. In principle this is no different from the mail order customer who buys goods for £100 and has his name entered in a draw for a prize of £100. The goods will cost him £100, whether he wins or loses. If he wins, he will have paid £100 for the goods and received a prize of £100. He will not have received the goods for nothing. ”

May LJ agreed with both judgments.

Mr Gee argued that this was an example of the application of the general principle articulated by Lord Reid in Parry v Cleaver that benefits do not have to be brought into account unless they are of the same kind as the loss caused by the breach or by steps taken in mitigation of breach. I am unable to accept that submission. The difference in the nature of the loss and benefit was relevant because it showed that the benefit had not been caused by the (deemed) breach. Damages for disturbance were for the disruption caused by moving out of the premises and relocating somewhere. The regional development grant was not a benefit for having to move just somewhere; it was a benefit for moving to a particular location which was not causally connected to leaving the old premises. Sir John Donaldson’s distinction between the cost of relocation being compensation for moving from the old premises and the grant being a reward for relocating to a particular place emphasises that the causal link must be between the benefit and the breach. It was not sufficient in that case to say simply that the move from the old premises was caused by the deemed breach, which in turn caused the move into the new premises, which in turn gave rise to the regional development grant which defrayed the costs of moving. The case is an illustration of the principle that there must be a sufficient causative link directly between breach and benefit, not merely in the intermediate stages between the two; and that a difference in kind between the loss and the benefit may be an indication that there is an insufficient causative nexus.

In Hussey v Eels [1990] 2 QB 227 a couple bought a bungalow in reliance upon the defendant’s misrepresentation that the building had not been the subject of subsidence. The cost of remedy was £17,000 which was treated as the difference between the price paid and the sound market value. The plaintiffs could not afford the repairs, and having eventually obtained planning permission to demolish and rebuild, they sold the bungalow to developers with the benefit of planning permission at a profit which exceeded £17,000. The Court of Appeal reversed the first instance decision that the profit fell to be deducted from the damages.

I derive assistance from the decision in relation to the instant case in three respects. First, Mustill LJ, giving the leading judgment, recognised that although there was a logical distinction between treating benefits as the product of mitigation and treating them as part of the measure of loss, each approach raises the same issues of fact and leads to the same conclusion. At p 234E he observed that the epitome of the argument accepted by the House of Lords in British Westinghouse was expressed in terms of measure of loss rather than mitigation. At p 232D-E he said:

“In the course of his argument in support of the notion thus briefly conveyed by the judge Mr. Burton advanced two distinct propositions. 1. The plaintiffs owed a duty towards the defendants to mitigate the loss resulting from their purchase of the house in reliance on the misrepresentation; the sale to the developers was a performance of this duty; the result of this mitigation was to be taken into account in computing the loss. 2. Whether the re-sale was mitigation or not, the fact is that when the plaintiffs’ dealings are regarded as a whole it can be seen that they have suffered no loss. Very often it happens that no distinction need be drawn between these two ways of approaching the problem: they raise the same issues of fact and lead to the same conclusion, and are often treated together under the same heading of “mitigation.” Nevertheless, I believe that Mr. Burton was right to recognise the distinction when advancing his clients’ case.”

Secondly, the case supports Mr Croall’s argument that no distinction is to be drawn between kinds of loss or benefit in the present context. Mustill LJ said at p236D-237B:

“I must next deal with three cases cited in argument, all of which are in the same line of authority. The first was The World Beauty [1970] P 144. A vessel damaged in a collision was performing a charter at a high rate of freight, and was due in a few months time to embark on a long term charter already fixed. As a result of the collision the vessel was detained for repairs. So as to avoid losing the first charter, the owners chartered-in a substitute, but made a lower profit. They also arranged with the charterers under the second charter to take the repaired ship before the contractual first date for delivery, 100 days earlier than she would have done if there had been no collision. In the Court of Appeal it was held first that the owners of the colliding vessel were not entitled to deduct from the damages the profits made during the 100 days, since these arose from the fact that the second charter was already in existence and not from the collision, and second that a deduction should be made for a sum representing the value of the acceleration of the profitable second charter by 100 days.

This case illustrates the principle that where steps are properly taken to mitigate a continuing loss any gains brought about by the taking of such steps are to be brought into account. Beyond this, I doubt whether The World Beauty sheds any light on the question now before us

Again, in Bellingham v. Dhillon [1973] Q.B. 304, the plaintiff suffered a continuing loss through personal injury, because he lost the opportunity to lease a machine which would have enabled his company to earn a continuing profit. More than three years later he was able to buy the machine at a low price—so low that the saving on the price exceeded the profit which would have been made from operating the machine at the high rental which the plaintiff’s company would have had to pay during the intervening years. The claim for loss of profit failed.

In my judgment this case establishes no new principle. The facts are striking, since the purchase was made so long after the initial opportunity was lost. But once it was accepted that the purchase was made in mitigation (see p. 309, as it seems to me the mitigation related to the future continuing loss of profit, not to the loss already accrued), it was inevitable in the light of Westinghouse that all the financial aspects of the purchase should be taken into account”.

The World Beauty is said to illustrate a principle that where steps are taken to mitigate a continuing loss any gains brought about by the taking of such steps are to be taken into account. The correctness of the decision in Bellingham v Dhillon, which involved setting off a capital benefit in reduction of a loss of income, is endorsed. The conclusion in that case was said to be correct because it was inevitable that in the light of British Westinghouse all the financial aspects of the purchase should be brought into account.

Thirdly the Court treated the causation test as not being fulfilled because the benefit arose out of the decision by the owners of the bungalow to unlock the development value of the property for their own benefit. The case is therefore a striking example of the proceeds of sale of an asset not having to be brought into account notwithstanding that in that case, unlike the present, the asset was acquired as part of the transaction in respect of which the owner was suing. At p241B-D Mustill LJ said:

“I have dealt with the authorities at some length, because it was said that in one direction or another they provided a direct solution to the present problem. For the reasons already stated, I do not see them in this light. Ultimately, as with so many disputes about damages, the issue is primarily one of fact. Did the negligence which caused the damage also cause the profit—if profit there was? I do not think so. It is true that in one sense there was a causal link between the inducement of the purchase by misrepresentation and the sale 2½ years later, for the sale represented a choice of one of the options with which the plaintiffs had been presented by the defendants’ wrongful act. But only in that sense. To my mind the reality of the situation is that the plaintiffs bought the house to live in, and did live in it for a substantial period. It was only after two years that the possibility of selling the land and moving elsewhere was explored, and six months later still that this possibility came to fruition. It seems to me that when the plaintiffs unlocked the development value of their land they did so for their own benefit, and not as part of a continuous transaction of which the purchase of land and bungalow was the inception.”

In Smoker v London Fire Authority, Wood v London Fire Authority [1991] AC 502 the House of Lords held that the principle in Bradburn’s case extended to pension payments which had been contributed to in part by the employer who was also the defendant tortfeasor. Lord Templeman giving the leading speech said at p543H-554A:

“In the present case counsel for the defendants sought to distinguish the decision of this House in Parry v. Cleaver [1970] A.C. 1 on the ground that the defendants are in the triple position of employers, tortfeasors and insurers. In my opinion this makes no difference to the principle that the plaintiff has bought his pension which is, in the words of Lord Reid, at p. 16, “the fruit, through insurance, of all the money which was set aside in the past in respect of his past work.” The fruit cannot be appropriated by the tortfeasor.”

This is the House of Lords unanimously treating Parry v Cleaver as correctly decided on the policy grounds that 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.

In Famosa Shipping Co Ltd v Armada Bulk Carriers Ltd (The Fanis) [1994] 1 Lloyd’s Rep 633, owners were in breach of a time charter of a vessel for two laden legs. Charterers entered into a time charter trip for a substitute vessel (Chusuvoy) and claimed damages by reference to the additional hire under the replacement charter. The Chusuvoy charterparty provided for higher prices to be payable by owners for bunkers remaining on board on redelivery, which allowed the charterers to make a profit when she was redelivered. The issue on appeal from the arbitration tribunal (of which the sole arbitrator in this case was a member) was whether the benefit comprising the profit made on bunkers on board on redelivery fell to be deducted from the charterers’ damages. Mance J upheld the tribunal’s decision that no deduction fell to be made because the profit arose out of the charterers of the Chusuvoy redelivering her with more bunkers on board than they were bound to, and was not caused by the defendant charterers’ breach of the original charterparty. It was argued by the owners, by reference to Viscount Haldane’s speech in British Westinghouse, that the tribunal had conflated the relevant causation inquiry as being between breach and benefit, whereas it should have been a two stage inquiry, first between breach and mitigating step, and secondly between mitigating step and benefit. Mance J rejected the argument in the following terms at p636 col 2 to 637 col 1:

“The general issue is in my view appropriately stated as being whether any profit or loss arose out of or was sufficiently closely connected with the breach to require to be brought into account in assessing damages. Resolution of that issue involves taking into account all the circumstances, including the nature and effects of the breach and the nature of the profit or loss, the manner in which it occurred and any intervening or collateral factors which played a part in its occurrence, in order to form a commonsense overall judgment on the sufficiency of the causal nexus between breach and profit or loss.

Here, if the profit was an element or consequence of the substitute charter (which itself arose naturally out of the situation in which the charterers were placed by the breach), it was appropriate to speak of the profit itself as arising out of, or as a consequence of, the breach. If on the other hand the profit was not an element or consequence of the substitute charter, then the profit did not arise out of or as a consequence of the breach. It was for the arbitrators to form a judgment one way or the other. The arbitrators said that the profit did not arise out of or as a consequence of the breach. The next sentence in their award shows also that they did in the course of their reasoning consider whether the profit was part and parcel of or a consequence of the substitute charter. I see no error of law in their approach or conclusion, and dismiss this appeal accordingly.

I would add that it is clear in my view that it would have made no difference to the arbitrators’ conclusion if they had in par. 18 of their award asked themselves expressly in two stages (i) whether the Chusovoy charter arose out of the breach, as they had already held that it did, and only then (ii) whether the profit arose out of the Chusovoy charter, which they clearly concluded that it did not. Any judgment as to what was part and parcel of or arose out of the Chusovoy charter was for the arbitrators to make. Accordingly even if there had been any error or over-compression in the arbitrators’ formulation of the legal test, it was not one which could have had any effect on the outcome. If I had considered there to be any error in law in par. 18, I would have dismissed the appeal on this alternative ground.”

In Needler Financial Services Ltd v Taber [2002] 3 All ER 501, Sir Andrew Morritt V-C had to consider whether in a claim against an investment adviser for negligently advising the plaintiff to transfer to a new pension provider, the plaintiff was obliged to give credit for the benefit received from the subsequent demutualisation of the new pension provider. He held that the benefit did not fall to be taken into account. Having referred to a number of authorities, including British Westinghouse and Hussey v Eels, he said at [24] (in a passage cited with approval by Rix LJ in Rubenstein v HSBC Bank Plc [2012] CLC 747 [135]) :

“In my view the authorities to which I have referred establish two relevant propositions. First, the relevant question is whether the negligence which caused the loss also caused the profit in the sense that the latter was part of a continuous transaction of which the former was the inception. Second, that question is primarily one of fact.”

Having decided this issue in favour of the plaintiff he did not need to address the alternative argument advanced that only benefits of the same kind as the loss are capable of being brought into account: see [17].

In Dalwood Marine Co v Nordana Line A/S (The Elbrus) [2010] 2 Lloyds Rep 315, Teare J was concerned with the working out of the principle established in The Elena D’Amico in circumstances of a charterer’s default where there is no available market for a comparable substitute charter. He held that where an owner refixes the vessel, account is to be taken of the benefit conferred on the owner by the subsequent charter in assessing his damages, which may include benefits received after the date on which the vessel would have been redelivered under the original charterparty. In rejecting a submission that benefits were limited to those obtained prior to the charterparty redelivery date, Teare J said at [41]:

“Mr Baker submitted that it was wrong in law to take into account the earnings of the vessel after the date on which the vessel would have been notionally redelivered under the original charterparty. As I have already observed the owners are to be compensated for the contractual right they have lost and therefore what has to be valued is the value in monetary terms of the right to earn hire up to and not beyond the notional date of redelivery, less such benefits as have been obtained by action taken to mitigate that loss. There is no reason in principle to limit the type of benefit which may be taken into account. The approach of Bingham J. in TheConcordia C shows that when assessing the monetary value of the benefits obtained as a result of action taken to mitigate the owners’ loss it may be appropriate to reduce the recoverable damages by benefits other than the hire earned on a substitute voyage during the period ending with the notional date of redelivery. That is also shown by the statement of principles by Staughton LJ in The Noel Bay. Where such other benefits have been obtained (eg where the vessel is redelivered after the substitute voyage in a location where she is better placed for future employment) it will be a matter for the fact-finding tribunal to assess the monetary value of such benefits. Depending on the nature of the benefit and the approach taken to valuation it may be necessary to take into account earnings after the notional date of redelivery. Thus the mere fact that such earnings have been taken into account does not necessarily mean that the tribunal has erred in law.”

This is again inconsistent with Mr Gee’s submission that the test turns on a distinction between kinds of benefit/loss.

I come finally to the decision of the Court of Appeal in Coles v Hetherton [2013] EWCA Civ 1704, decided since the Award in this case. It concerned preliminary issues in 13 cases involving disputes between respective insurers arising out of road traffic accidents. Royal and Sun Alliance Insurance Plc had insured the plaintiffs on terms which enabled them to take advantage of a scheme for the repair of their cars with the provision of a courtesy car in the meantime. The repairs would be carried out at garages operated by the RSAI group, who would charge at one rate to one group company, who then charged a higher rate to the group company insuring the plaintiff. The lower rate charged by the garages was 75% of the higher rate paid by the insurers. The higher rate was claimed against the tortfeasor (or in practice his insurers). RSAI claimed (and it was assumed for the purposes of the preliminary issues) that the 100% charged by insurers was no more than the market rate, so that the 75% charged by the garages to the intermediate group company was below market rate. The first preliminary issue was whether the measure of loss for tortious damage to a car is the reasonable cost of repair. Aikens LJ, giving the judgment of the Court, held that the damage to the vehicle is direct loss suffered as soon as it is damaged by the defendant’s negligence and that the measure of loss is the diminution in value of the vehicle. The cost of repair is not the measure of damage, but the practical way in which the courts have measured the diminution in value is to take the reasonable cost of repair as representing the diminution. The actual cost of repair is evidence of the reasonable cost, which the courts will, as a matter of convenient practice, treat as sufficient evidence unless the amount appears to be clearly excessive: see [27].

Mr Gee relied in particular on the way Aikens LJ dealt with an alternative argument advanced by the defendants that the innocent driver has a duty to mitigate his loss and that the effect is that where the vehicle is repaired, only the actual cost of repair is recoverable (see [21]). The Court rejected the argument in these terms:

“[29]. The argument that the claimants cannot recover the full cost of repair to RSAI because they must mitigate their loss by having the repairs done at a lower cost is wrong because mitigation is not relevant in respect of this “direct” loss. As we have already pointed out, the loss to a claimant whose chattel has been damaged by the negligence of another is immediate. That loss cannot be “mitigated” by having the chattel repaired free or for a lower cost, because it is not the cost of repairs that constitutes the loss; the loss is the diminution in value of the chattel.”

Mr Gee submitted that this supported the argument that a benefit which was different in kind from a loss mitigated could not be taken into account. In my judgment it provides no such support. The cost of repairs cannot be claimed as mitigation damage because it cannot mitigate physical damage (as opposed to loss of use), which is the loss under consideration. Such damage occurs once and for all at the moment of the accident, so that there is no room for the application of the doctrine of mitigation in respect of damage which has already been incurred and is capable of quantification. Put another way, the cost of repairs is not avoided loss because the loss, being the diminution of value of the vehicle at the time of the accident, has already occurred.

The case is also of interest in its treatment of the provision of courtesy cars, which formed the subject matter of the third preliminary issue. Aikens LJ said

“46.

Courtesy car costs: The position of the cost of a courtesy car is different, because that cost cannot be a part of the repair costs, as the respondents acknowledge. The appellants accept that if a claimant is deprived of his chattel for a time, he can recover a sum by way of general damages for that deprivation. The cases on what sums can be recovered when a claimant has hired a replacement vehicle on a credit hire basis all establish that a claimant can claim that cost of replacement as damages, provided he has reasonably mitigated his loss and that the cost contains no element that is not legally recoverable, such as the cost of hiring on credit. If, under the terms of the claimant’s insurance, he is entitled to be indemnified by having a replacement car provided without further charge to him, then the claimant can still claim general damages for the deprivation of his own vehicle. In practice, the amount of those general damages will be the sum it would have cost the claimant to hire (on non-credit terms) a comparable vehicle. Where the replacement car has been provided as part of the indemnity under the motor insurance of the claimant, the general damages he recovers in respect of the deprivation of his own vehicle will be held for the benefit of his insurer.

47.

The issue between the parties on the recoverability of the courtesy car costs centres on whether the RSAI policies provide that RSAI will indemnify the insured for his loss of use of his vehicle by supplying a replacement, at no charge to the insured. As we understand Mr Curtis’ argument, he submitted that the claimant could not recover any sum because the car was provided as a benefit under the policy rather than as an indemnity in respect of the claimant’s loss of use of his damaged vehicle. Two consequences are said to follow: first, this benefit does not constitute the “fruits of the insurance” and so the benefit has to be taken into account when assessing the measure of damages, ie it falls outside the Bradburn v Great Western Railway and Parry v Cleaver rule. Therefore, secondly, by taking this benefit, the claimants have, as they were obliged to do, mitigated their loss, so that the “loss of use” damages are thereby reduced to nil.

48.

We cannot accept either of these arguments. The right to a replacement car if the insured vehicle cannot be used after an accident because it has to be repaired is set out in the policy; the right is only dependant upon the insured opting to use the RSAI scheme. It is, as Mr Curtis accepted before the judge, a contractual benefit under the policy which RSAI is bound to supply if the insured exercises the RSAI scheme option. That makes this benefit a “fruit of the policy” and within the Parry v Cleaver rule. We agree with Cooke J’s summary, at [36] of judgment (2): “the insurers provide a benefit to the policyholder who has obtained the use of a substitute car and provided it is at a reasonable rate and was reasonably incurred to cover the cost of the use of the damaged car, it is recoverable.

49.

Because the policy provided that the policyholder could have a replacement vehicle at no charge if he elected to use the RSAI scheme, there is no question of “mitigation” by the exercise of that option. Mitigation concerns actions taken to reduce loss after the tort (or breach of contract) has occurred. Here the claimant is exercising rights for which he had contracted (and paid for) before the tort occurred. Exercising that contractual right is not “mitigating” the loss of use of the damaged vehicle.”

Mr Gee relied on this last paragraph as articulating a separate principle that benefits obtained from exercising rights which arise prior to breach cannot be taken into account because the doctrine of mitigation is not brought into play. I do not so read it. It is a conventional application of the causation principle articulated in British Westinghouse and which forms at least one of the explanations for Bradburn’s case. The fact that the step taken after breach is the exercise of a contractual or other right obtained prior to the breach may be a good reason for not treating the breach as legally causative of the step. This is all that I take Aikens LJ to mean by stating that the exercise of the contractual right obtained and paid for prior to the loss is not mitigation of the loss of use of the damaged vehicle. A broader rule that the exercise after breach of rights obtained prior to breach can never be treated as mitigation is not supported by the decision or its reasoning.

The search for a single general rule which determines when a wrongdoer obtains credit for a benefit received following his breach of contract or duty is elusive. In Parry v Cleaver Lord Wilberforce said at 41H-42B:

“As the learned justices in the High Court are careful to state, it is impossible to devise a principle so general as to be capable of covering the great variety of benefits from one source or another which may come to an injured man after, or because, he has met with an accident. Nor, as was said by Dixon C.J. in Espagne’s case (1961) 105 C.L.R. 569, is much assistance to be drawn from intuitive feelings as to what it is just that the wrongdoer should pay. Moreover, I regret that I cannot agree that it is easy to reason from one type of benefit to another.”

Nevertheless a number of principles emerge from the authorities considered above which I would endeavour to summarise as follows:

On the facts found by the arbitrator, the application of these principles does not require the Owners to give credit for any benefit in realising the capital value of the Vessel in October 2007, by reference to its capital value in November 2009, because it was not a benefit which was legally caused by the breach.

The Vessel was an asset purchased by the Owners in 2005. It had a capital value, which could be measured by reference to the amount for which the Owners could sell it at any particular time. Its value could be expected to fluctuate according to market conditions. When the Owners sold it in October 2007, it was, on the tribunal’s findings, worth $23,765,000. The fact that it would have been worth only $7 million two years later was a result of the fall in the market flowing from the financial crisis. The difference in the value of the Vessel was not caused by the Charterers’ breach of the charter; it was caused by the fall in the market which occurred irrespective of such breach. The effect of the fall in the market on the Owners was also not caused by the Charterers’ breach. It was caused by the Owners’ decision to sell the Vessel. At the moment of breach, the Owners had a choice whether or not to sell the Vessel, as they had at any stage over the unexpired period of the charterparty. If and when they chose to sell, market fluctuations in the Vessel’s value thereafter would no longer affect them, for good or ill. If the market subsequently rose, the decision to sell might with hindsight seem a poor one; if the market fell it would prove to be a wise one. That was a matter for the Owners’ commercial judgment and involved a commercial risk taken for their own account. That is none the less so because it was reasonable for them to sell when faced with the Charterers’ breach. The decision to sell was legally independent of the breach, so far as concerns movements in the capital value of the Vessel, just as was the decision of charterers not to charter in substitute tonnage in The Elena D’Amico. The breach merely provided the context or occasion for the Owners to realise the capital value of the Vessel. It was the trigger not the cause.

The arbitrator held that the Owners sold the Vessel in response to the breach so that the movement in the capital value “crystallised” (paragraph 73). Mr Croall accepted that the difference in capital value would not fall to be taken into account if the Owners had not sold the Vessel. He argued that this would be because no mitigation step would have been taken. But to my mind this reinforces the conclusion that it was the Owners’ decision to unlock the capital value of the Vessel, not the breach, which gave rise to the relevant benefit. The Owners were not obliged to sell the Vessel, as a matter of fact or law. The tribunal did not find that a failure to do so would have been a failure reasonably to mitigate loss. There can be no question of the Owners being obliged to realise the capital value of the Vessel by selling it on breach, however reasonable such a course was from a business point of view.

The causation question is not concluded by the tribunal’s finding that the sale was in reasonable mitigation of loss. The loss in question which was mitigated was the Owners’ net loss of income from the charterparty. The sale of the Vessel mitigated this loss because it reduced the continuing costs of operating or laying up the Vessel. To the extent that the benefits flowing from the sale comprised such cost savings, there is no difficulty in treating the causal nexus between breach and benefit as established through the mitigating step of selling the Vessel. But insofar as the sale gave rise to a capital benefit, it was not caused by the breach, but by the independent decision of the Owners to realise the capital value of their asset. Although that was a benefit which flowed from the mitigating step of selling the Vessel, it does not satisfy the principle that benefits are only to be taken into account to the extent that they are caused by the breach.

This is the context in which it is relevant that a capital benefit is a different kind of loss from that being claimed by the Owners, and from that which was being mitigated, which is a loss of income. The difference in kind is not itself the reason it does not fall to be taken into account. But it is indicative that it was not a benefit which was legally caused by the breach, notwithstanding that it flowed from a step which was in reasonable mitigation of loss caused by the breach.

A further indication that the capital benefit to the Owners derived from selling the Vessel in 2007 rather than 2009 was not legally caused by the breach is to be found in the fact that a sale of the Vessel was the kind of transaction which it was open to the Owners to enter into irrespective of the Charterers’ breach of charterparty. Whilst the charter was on foot, the Owners might have sold the Vessel subject to charter, provided that they did so on terms which required the new owner to perform the charterparty so that they were not putting it out of their power to perform. They might, for example have entered into a back to back charter with the new owner so as to become disponent owners vis a vis the Charterers, or have arranged a novation to which the Charterers and the new owner were party. Alternatively they might have sold the Vessel on terms that she be delivered to the new owner following expiry of the charter period. Sale of the Vessel was a transaction which could, in principle, have occurred irrespective of the breach. I say in principle, because the question whether such a sale would have been achievable during the currency of the charter was not apparently explored in the reference and the tribunal did not make any findings about it. It is at least arguable that it is implicit in the arbitrator’s conclusion on the point in issue that he thought that the Vessel could not have been sold prior to November 2009 had the charter remained on foot. But even if it be assumed that the existence of the charter would in practice have formed an impediment to sale before its expiry, a sale was nevertheless a transaction of a kind which the Owners could have undertaken for their own account irrespective of the breach, just as Mr Laverack’s purchase of shares in Ventilation was a transaction of a kind which he could have entered into for his own benefit whilst employed by Woods but was in fact unable to enter into because of the restrictive covenant in his contract of employment.

If Charterers’ arguments were correct, one may ask why any profits made by the Owners with the proceeds of sale would not fall to be taken into account for the Charterers’ benefit in reduction of damages. Mr Croall’s answer is that the chain of causation would be broken by the independent decision of the Owners as to how to apply the proceeds. But if the decision of the Owners as to how to apply the proceeds prevents the necessary causal nexus with breach, in my judgment an antecedent decision of the Owners whether or not to unlock the value of the Vessel by selling it must also do so. Indeed I doubt whether in most cases they could really be regarded as two distinct and unrelated decisions. The decision to sell a vessel will not normally be taken in isolation from consideration of how to employ the proceeds of sale. The decision whether or not to sell will involve an owner making a commercial assessment of the economic consequences of a sale, including the anticipated commercial and financial benefits of having available the proceeds of sale and applying them or investing them in some particular way. In some cases the two decisions may be taken at the same time and be so inextricably bound together as to be a single decision. Even where the decisions are temporally separate, at the very least the decision to sell will normally be informed by considerations as to what is to be done with the proceeds.

If the issue is approached as one of the measure of damage, rather than mitigation, the application of the causation test leads to the same conclusion. This may be illustrated by applying the compensatory principle as an exercise in valuing the contractual rights of the Owners which were lost by the Charterers’ breach. The Owners’ contractual rights under the charterparty were rights to an income stream, to which were attached the obligation to provide the Charterers with the use of the Vessel. So far as concerns the capital value of the Vessel, the only potentially beneficial change in the Owners’ position caused by loss of those contractual rights and concomitant obligations might be a difference in value between a vessel which is charter free and one which is subject to the unexpired period of the charter. If it be assumed that it is the sale of the Vessel which crystallises the relevant loss and benefit from the change in contractual rights, the relevant benefit flowing from the lost contractual rights, in terms of the capital value of the Vessel, would be the difference in value between the Vessel being sold in October 2007 for immediate delivery, and the Vessel being sold in October 2007 for delivery at the expiry of the charter in November 2009. The change in capital value of the Vessel consequent upon the drop in the market over the following two years has nothing to do with the contractual rights which the Owners have lost as a result of the Charterers’ repudiation.

The same result is in my judgment dictated by the policy grounds which inform Bradburn’s case and its extension in Parry v Cleaver and Smoker’s case. The capital value of the Vessel was a benefit which the Owners had obtained for their own account prior to the breach when they bought the Vessel in 2005. They invested their money (or that which they borrowed) in an asset, taking upon themselves the risk of fluctuations in its capital value which would inevitably be affected by the sale and purchase market. They took the risk of having invested in the Vessel, and of the financial consequences of a decision as to whether or when to sell her. 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. In this respect the position is properly analogous to the position of a person who receives the proceeds of insurance or a pension following breach, and the policy rationale for ignoring such benefits articulated in Shearman v Folland, Parry v Cleaver and Smoker’s case applies.

I have not overlooked Mr Croall’s argument that questions of causation are for the fact finding tribunal and that conclusions of fact cannot be challenged on an appeal under s.69 which lies only on a point of law. I cannot, however, accept that the arbitrator applied the correct principles of law, notwithstanding that at paragraph 69 he quoted the passage in the judgment of Mance J in The Fanis concerning the approach to causation which I have set out above. I naturally afford deference and respect to the views of this experienced maritime arbitrator, and give proper weight to the importance of the Courts not usurping the fact finding function of the parties’ chosen tribunal. I have nevertheless reached the conclusion that had the arbitrator applied the correct principles he could not have reached the conclusion to which he came, which is indicative of an error of law either in failing to identify the correct principles of law or in failing to apply them. The arbitrator appears to have treated the issue as determined by (a) the compensatory principle (Award paragraphs 63, 67) (b) his rejection of Owners’ argument that the benefit had to be of the same kind as the loss mitigated (paragraphs 67, 68) and (c) his finding that the sale of the Vessel was caused by the Charterers’ breach and in reasonable mitigation of loss (paragraph 73). The finding that the sale of the Vessel was caused by the Charterers’ breach and in reasonable mitigation of loss was not legally sufficient to establish the necessary causative link between breach and benefit.

Moreover the arbitrator did not consider or apply the policy considerations I have identified. This may be because this way of putting the argument was not advanced before him. He dismissed Palatine and Parry v Cleaver as irrelevant (paragraph 72), but this appears to have been in the context of the Owners’ reliance on those authorities for the argument that the benefit must be of the same kind as the loss mitigated, a proposition which he rejected, in my view correctly. Nevertheless the point is open to the Owners on the appeal. Permission to appeal was granted in relation to the point of law defined in the Claim Form, which is in wide enough terms to encompass this argument.

Mr Gee also argued that if the Charterers were right, one might have expected the point to have been raised and decided before, relying on the observations in Jebsen v East and West India Dock Co (1875) LR 10 CP 304, endorsed by Asquith LJ in Shearman v Folland at p48:

“The absence of authority for a claim by defendants like this, which yet if well founded must have arisen in many cases, affords a strong presumption against its having any legal foundation. It is true that there must be a first instance in every claim, and that ingenuity often for the first time suggests a point which has escaped observation, and which yet, when brought to the test of argument, is found to be a sound one. But this is a point which must have arisen so frequently that it is to us incredible that, if sound, it never should have been taken.”

Mr Croall responded by relying on the arbitrator’s findings that it was unusual for there to be a sharp fall in the market and for the breach of a time charter to cause owners to sell the Vessel (Award paragraphs 62, 70). Such a large fall in the market might be unusual, but fluctuations in the sale and purchase market of vessels of an extent to make the point worth taking are common. With due respect for the experience of the tribunal, I doubt whether the situation in which the reasonable commercial response for an owner faced with repudiation of a long term charter is to sell the vessel is sufficiently unusual that the point could potentially arise only rarely. The novelty of the Charterers’ argument reinforced when one considers the position if the market had risen, not fallen. If in the case of a sale it is legitimate to look at the value of the vessel so as to require an owner to give credit if the market falls, it must be legitimate for an owner to claim any additional loss caused by the sale if the market rises. If the Vessel would have doubled in value by November 2009, would the tribunal’s finding that the sale was in reasonable mitigation of the loss have entitled the Owners to claim the lost capital value? Mr Croall, bowing to the logic of his argument, submits that such a claim would be valid upon those findings. If the point were a good one, in either direction, one might expect it to have arisen before, yet the researches of counsel identified no case in which the argument has been advanced, let alone succeeded.

Accordingly the appeal will be allowed.