In Bunge SA v Nidera BV (1 July 2015), the UK Supreme Court has given a key judgment on the GAFTA default clause and the application of the principle in the GOLDEN VICTORY1 to sale of goods contracts.

The Supreme Court determined how the GAFTA default clause works, finding it was not a complete code entitling a claimant to damages whether it suffered a loss or not. It upheld the principle established in theGOLDEN VICTORY and confirmed that when assessing damages, it is possible to consider subsequent events which show that a loss would not in fact have been incurred. It also held that this principle applies to sale of goods contracts just as to other contracts.

Background

The case concerned the effect of the default clause in the widely used GAFTA 49 form. Bunge (the sellers) contracted to sell to Nidera (the buyers) a cargo of Russian milling wheat FOB Novorossiysk. The contract incorporated the GAFTA 49 form, which included at clause 13 the then standard GAFTA prohibition clause and at clause 20, the standard GAFTA default clause which provides a contractual scheme for establishing damages payable in the event of default by either party.

The contractual delivery period was 23 to 30 August 2010. On 5 August 2010, the Russian government issued a resolution prohibiting the export of wheat between 15 August and 31 August 2010 (therefore covering all of the contractual delivery period). On 9 August 2010, sellers purported to declare the contract as cancelled under the prohibition clause. Buyers rejected this and brought a damages claim against sellers for wrongful repudiation. In the event, the prohibition was not lifted before the end of the delivery period and so shipment would not have been possible and buyers effectively suffered no loss as a result of sellers’ wrongful early termination2.

Issues

There were two issues for the Supreme Court to decide:

  1. On the assumption that the GOLDEN VICTORY applied and buyers would be entitled only to recover nominal damages for sellers’ default absent the GAFTA default clause, did that clause entitle buyers to recover damages in full?
  2. If not, is the assumption valid?

Sellers argued that at common law, it was necessary to take account of events occurring after the breach which showed that the same loss would have been suffered even without the repudiation. Based on theGOLDEN VICTORY, buyers had suffered no loss as a result of sellers’ termination of the contract and were entitled to no more than nominal damages – and clause 20 did not exclude the operation of those common law principles.

Buyers argued that because clause 20 applied, they were entitled to damages whether or not they would actually have suffered the loss for which they claimed based on the formula in clause 20.

Decision

The Supreme Court rejected criticism of the decision in GOLDEN VICTORY and confirmed its application in this case, so that sellers succeeded in their appeal.

It held that the fundamental principle of the common law of damages is the compensatory principle, which requires that the injured party is “so far as money can do it to be placed in the same situation with respect to damages as if the contract had been performed”3. In a contract of sale where there is an available market, this is usually achieved by comparing the contract price with the market price.

In the GOLDEN VICTORY, this compensatory principle was held to be overriding. Irrespective of the date as at which the market price was ascertained, it was necessary to take account of contingencies known at the date of assessment of damages, if their effect was to reduce the amount of the loss to be compensated.

Until now, there had been some doubt as to whether the GOLDEN VICTORY principle should apply both to one off and instalment contracts. The Supreme Court held it applied to both.

The Supreme Court also held that default clauses like GAFTA clause 20 are not necessarily to be regarded as complete codes on the assessment of damages or on mitigation and set out how the GAFTA clause operates:

  • Clause 20 is concerned with non-performance. It does not matter whether the contract has not been performed because it was repudiated in advance of the time for performance, or because it was simply not performed when that time arrived.
  • Clause 20(a) gives the injured party the option, at its discretion, of selling or buying (as the case may be) against the defaulter, in which case the sale or purchase price will be the “default price”. Either party is at liberty to reject the default price, if there is one, as the basis for assessing damages. If either (i) there is no default price, because the injured party did not go into the market to buy or sell against the defaulter, or (ii) there is a default price but one of the parties is dissatisfied with it, then damages must go to arbitration under sub-clause (c).
  • Clause 20(c) provides for two alternative bases of assessment. The first, which applies if a default price has been established but not accepted, is the difference between the default price and the contract price. The second is the difference between the contract price and the “actual or estimated value” of the contract goods at the date of default.

This decision should bring finality in the long-running debate over how the GAFTA default clause works and restore certainty for parties trading on GAFTA and other similar forms. The confirmation of the principle in the GOLDEN VICTORY and the scope of its application is significant too. It is likely to give rise to disputes as to whether subsequent events have impacted the level of damages to be awarded in sale of goods and other contracts.