Definitive judicial guidance on the application of the GAFTA Default Clause and damages

In an article following on from the Court of Appeal judgment in Bunge -v- Nidera (see Trade Advantage January 2014 edition), the author made the comment that until recently there had been a dearth of case-law authority in relation to the application of the GAFTA standard form Prohibition Clause and its inter-relationship with the Default Clause.

Commodity traders in the soft agri market will doubtless have been aware that following on from this article, Bunge had secured permission to appeal the matter to the Supreme Court. By this stage the operation of the Prohibition Clause had fallen away, with the focus very much being on whether the GAFTA Default Clause operated as a complete contractual code for the measure of damages, or whether it was subject to English common law principles.

At the beginning of July the Supreme Court delivered its judgment, which now provides conclusive guidance and clarity on the scope and application of the GAFTA Default Clause.

By way of recap, the case concerned export restrictions that were implemented in Russia during 2010. The Russian Government introduced a complete ban on the export of wheat (as well as various other agri products) on 5 August 2010. The ban was to take effect between 15 August and 31 December 2010. The appellant sellers had a contract for a FOB delivery of Russian wheat, with delivery under the contract between 23 and 30 August 2010. Prior to the beginning of the delivery period, on 9 August 2010 sellers sent buyers a notice of cancellation. Buyers in turn held sellers in anticipatory repudiatory breach of the contract (the ban not having yet entered into force), which they accepted, and proceeded to hold sellers in default. The case proceeded on the acceptance by both parties that, had sellers’ notice been sent on 15 August 2010 or shortly thereafter, sellers would have been entitled to cancel the contract without liability under the terms of the GAFTA Prohibition Clause.

As is usual, the matter went before first tier GAFTA arbitrators and was then  the subject of an appeal to a GAFTA Board of Appeal. From there, the sellers appealed to the Commercial Court. In the Commercial Court, Mr Justice Hamblen, in upholding the GAFTA Board of Appeal Award, held that the sellers were in breach for cancelling the contract too early. He found that, for sellers to be entitled to the benefits of the GAFTA Prohibition Clause, it must be proven that the event relied upon in excusing performance prevented performance when the time came to so perform. Mr Justice Hamblen then held that the GAFTA Default Clause provided a complete contractual method of calculating damages (based on the difference between the contract and market rate at the time of default) that cut across common law principles (a so-called complete code within the GAFTA contract for the measure of damages). This finding was upheld in the Court of Appeal.

In its long-awaited decision, the Supreme Court overturned both the Court of Appeal and Commercial Court judgments in ruling that the GAFTA Default Clause is not a complete code to the measure of damages. In a clear and decisive judgment, the Supreme Court determined that the GAFTA Default Clause is confined to particular breaches of contract as well as issues of mitigation arising from price movements in the market. Overall, the language of the Default Clause is neither wide nor clear enough in language to be deemed a complete contractual code on the measure of damages arising from any breach of contract. In particular, it was noted  that it does not address the effect that subsequent events may have on the contract in question, which may reduce or extinguish a loss.

Having reached this conclusion, consideration was then given to the application of The Golden Victory.  This question had not fallen to be decided at Commercial Court or Court of Appeal level since both courts had ruled that the GAFTA Default Clause was a complete code dealing with the measure of damages arising from a breach.

The Supreme Court rejected any suggestion that the compensatory principle as enshrined in The Golden Victory should be confined to contracts for the supply of goods or services over a period of time. It ruled that applying such principle to the instant case meant that the buyers were only entitled to nominal damages, notwithstanding the accepted anticipatory repudiatory breach of sellers.

This judgment is doubtless one of interest to the trading community at large. The judgment itself contains useful guidance as to the limitations and applicability of the GAFTA Default Clause. It also confirms the general application of The Golden Victory, something which had been the subject of judicial and academic debate following the judgment.

Given the fact that the sellers did not seek to pursue an appeal on the question of liability in the Supreme Court, dicta from the Commercial Court and Court of Appeal judgments on this issue remain good law. In particular, to be entitled to the benefits of the GAFTA Prohibition Clause it must  be proven that the event relied upon in excusing performance prevented performance when the time came  to so perform. Whilst the wording of the GAFTA Prohibition Clause has been amended in the 2014 edition of contracts, becoming part of a general Prevention of Shipment Clause, the wording as concerns prohibition of export still remains largely the same.