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Background

Lucy_Hayes_ph

Bunge SA (the “Seller”) contracted to sell 25,000 tonnes of Russian milling wheat to Nidera BV (the “Buyer”).  The parties entered into a standard Grain and Feed Trade Association (“GAFTA”) Form 49 contract.

In clause 13 both parties agreed that in the case of any legal prohibition restricting export, the prohibition would apply to the contract and, to the extent performance was prevented, the contract would be cancelled.

Clause 20 stated:

“DEFAULT – In default of fulfilment of contract by either party, the following provisions shall apply:

(a)        The party other than the defaulter shall, at their discretion have the right, after serving notice on the defaulter, to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price.

(b)        If either party be dissatisfied with such default price or if the right at (a) above is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be settled by arbitration.

(c)        The damages payable shall be based on, but not limited to the difference between the contract price and either the default price established under (a) above or upon the actual or estimated value of the goods on the date of default established under (b) above.”

The delivery date was meant to be between 23 and 30 August 2010.  On 5 August 2010, Russia introduced an embargo on the export of wheat, to commence on 15 August.  The Seller informed the Buyer of this on 9 August, stating that Clause 13 operated to cancel the contract.  The Buyer responded two days later, arguing Clause 13 did not apply as the delivery had not yet been prevented, but stating it would treat the contract as repudiated.  On 12 August the Seller offered to reinstate the contract on the same terms, but the Buyer instead began arbitration, claiming a sum of US$3,062,500 (being the difference between the contract and market price of the wheat on 11 August 2010, the date repudiation was accepted).

The first-tier GAFTA Tribunal held that the Seller’s cancellation had been premature, as the embargo might have been lifted before the delivery date, and therefore counted as a repudiation.  However, as the embargo was not in fact lifted, the contract would have been terminated anyway by Clause 13 without the Seller incurring any liability.  Therefore the Tribunal considered that the Buyer had suffered no loss, and declined to award it substantial compensation.

The GAFTA Appeal Board reversed this decision, doubting that post-repudiation events could be relevant to the assessment of damages at common law.  It accepted that the contract would have been cancelled on the delivery date if the Seller had not repudiated it earlier.  However, it considered that Clause 20 applied to the calculation of damages, and awarded the Buyer the damages claimed.  The High Court and then the Court of Appeal both held that the calculation in clause 20 displaced the normal common law rules of damage, and awarded the Buyer the full damages.

By the time the case reached the Supreme Court, it was not in dispute that the Seller’s attempted cancellation had operated as a repudiatory beach.  The appeal centred around the measure of damages.

The Seller relied on The Golden Victory (Golden Strait Corporation v. Nippon Yusen Kubishka Kaisha [2007] UKHL 12); in this case, a charterer unlawfully terminated an instalment contract in anticipation of the outbreak of the second Gulf War.  The war began 14 months after the contract was terminated.  At the date of termination, the contract still had 4 years to run.  A majority in the House of Lords held that the overriding principle was that compensation should place the injured party in the position they would have been had the contract been performed.  It was necessary to take account of events known at the date of the assessment by the court, if their effect was that the contract would have been lawfully terminated before its contractual term.  Therefore the damages were awarded for only 14 months rather than the full 4 years.

There has been some criticism of The Golden Victory for subordinating contractual certainty to the compensatory principle.  The injured party had no power over the subsequent events which reduced its entitlement to damages (if the hearing had been within the 14 months before war broke out, its right to damages could have been worth substantially more).

Here, the Seller argued the fact that Clause 13 would have come into effect to cancel the contract on the delivery date should be taken into account.  It also argued that Clause 20 did not exclude the common law principle that damages should reflect actual loss.  The Buyer claimed that Clause 20 meant that loss should be assessed on the date of default, and because the clause operated as a liquidated damages clause then post-termination events were irrelevant.

Key questions

The Supreme Court considered:

  • Whether Clause 20 of the GAFTA contract excluded the common law principles for the assessment of damages;
  • If not, whether it is relevant to take post-breach events into account when assessing damages; and
  • Whether the common law compensatory principle established in The Golden Victory could apply to a one-off sale (as opposed to an instalment contract).

Supreme Court judgment

Does the GAFTA Clause 20 exclude common law considerations?

Lord Sumption acknowledged that parties to a contract could opt for certainty, accepting “the rough with the smooth” by agreeing a damages clause which could operate to give a better or worse outcome than common law damages.  However, this must be clearly the intention of the parties. He stated that there is a presumption that “in the absence of clear words” a damages clause is not “intended to operate arbitrarily, for example by producing a result unrelated to anything approximate to the true loss”.

Analysing Clause 20, the Court noted that it provides a method for determining the market value of the goods that either were actually purchased by way of mitigation, or might have been purchased under a notional substitute contract.  Two alternative bases of assessment by the arbitral tribunal are provided at sub-clause (c): either the difference between the contract price and the “default price” (if established but not accepted by the defaulting party), or the difference between the contract price and the “actual or estimated value” of the goods at the date of breach.

The clause does not require the injured party to mitigate, merely gives discretion to do so. If a replacement contract is not concluded, the damages are ascertained by the estimated price of the goods at the time of breach.  However, the clause leaves open the possibility that damages may be affected by mitigation by the innocent party or by an offer from the defaulter which would have been reasonable for the innocent party to accept. Additionally the clause states damages are payable “based on, but not limited to” the given calculation, indicating that other considerations are not excluded.

The Supreme Court decided that the clause does not deal with what should be done in circumstances where the goods could not have been delivered, resulting in the buyer suffering the same loss in any event.  Lord Sumption was critical of the lower courts’ emphasis on certainty over fairness; “commercial certainty is undoubtedly important…   But it can rarely be thought to justify an award of substantial damages to one who has not suffered any.”

Should post-breach events be taken into account?

All five judges accepted that, as a general rule, damages for breach of contract or tort are assessed as at the date of breach, but that the court could depart from this rule where necessary to compensate the injured party properly. Lord Sumption stated that the “so-called ‘breach-date’ rule” did not exist as a concrete rule, as it could lead to massive over- or under-compensation of an innocent party.

Normally, an injured party would be required to mitigate their loss, if possible, by entering a substitute contract as soon as is reasonable after the original contract was terminated.  Therefore the relevant damages will generally be determined not just by the price at a given time but by the principles of mitigation.

The comparison of the contract price with the market price at the date of breach, as anticipated by Clause 20, is not straightforward where there has been an anticipatory breach.  The Buyer could not know at the time of repudiation what the later market price could be.  Lord Toulson saw no virtue in attempting a retrospective assessment of the theoretical price had the ban not been lifted, when it was known that no profit could have been made.

Endorsing The Golden Victory, the Court considered that the compensatory principle would be offended if subsequent intervening events which would have lawfully terminated the contract were not taken into account.

Does the Golden Victory apply to one-off sale contracts?

Some of Lord Scott’s dicta in The Golden Victory has been considered to imply a distinction between a one-off sale and a longer-term contract, but neither Lord Sumption nor Lord Toulson considered that this had been his intention.  The principle that damages should be compensatory does not differ depending on whether the contract was for a single transaction or a series of transactions, and so there is no reason why the assessment of damages should differ.

Ultimately, the Supreme Court found in favour of the decision by the first-tier GAFTA Tribunal and awarded nominal damages of $5 to the Buyer.

Comment

The Supreme Court firmly upheld the common law principle that damages must be assessed with the benefit of knowledge of post-breach events.  The judgment serves as a word of warning that contractual damages provisions should not be treated as providing a complete answer to the calculation of damages where they would not otherwise satisfy common law principles.  If the parties intend to exclude the compensatory principle, the duty to mitigate, or the consideration of future events, this will have to be expressly and unambiguously stated.  The parties must also be careful that the clause is not void as a penalty.

It also emphasises the importance of mitigating after a repudiatory breach, even if that means accepting an offer to reinstate a contract.  The nominal damages awarded to the Buyer are something of a cautionary tale against being too quick to initiate proceedings.