A recent Supreme Court decision clarifies that post-breach events can be taken into account when calculating damages and provides some further guidance on the construction and interpretation of damages clauses in commercial contracts. Walker Morris' Head of Commercial Dispute Resolution, Gwendoline Davies, explains.

The Compensatory Principle

The fundamental ‘compensatory principle’ underpins the assessment of damages in contract and tort law in England and Wales. The principle provides that the purpose of an award of damages is to compensate the injured party for loss, rather than to punish the wrongdoer. The general rule is that damages should (so far as a monetary award can) place the claimant in the same position as if the contract had been performed or the tort had not been committed.

In the contractual context, an earlier House of Lords case, The Golden Victory [1] (a case involving an ongoing charter contract), established that, when assessing damages, the court should take account of the effect of subsequent events on the claimant’s loss. The general rule is that damages are assessed at the date of breach, save where justice requires a departure from that date, and the Golden Victory finding has sometimes been said to offend that rule. However, in Bunge SA v Nidera BV [2], a case involving an anticipatory breach of contract, the Supreme Court has confirmed that it is just and necessary to consider post-breach events known at the date of assessing damages, to the extent that they are relevant to and affect the claimant’s loss.

The Case

The parties had entered into a contract for a one-off sale of Russian milling wheat. The contract provided for shipment between the 23 and 30 of August 2010, but Russia then introduced an embargo on agricultural exports which was to run from the 15 of August to the 31 of December 2010. On 9 August, Bunge (the Seller) purported to cancel the contract without liability in accordance with the relevant ‘prohibition of export’ clause (theProhibition Clause). Nidera (the Buyer) argued that the contract was cancelled prematurely as the ban had not yet come into effect, and therefore treated the Seller's action as a repudiatory breach.

On the following day, the Seller offered to re-instate the contract. The Buyer did not agree, and instead brought a damages claim for some $3 million. That sum was the difference between the contract and market price as at the date of acceptance of repudiatory breach, as calculated under the contractual clause which attempted to deal with assessment of damages in the event of default (the Default Clause). The Seller argued that, although it had been in anticipatory breach, the contract would have been cancelled as a result of the embargo in any event, such that the Buyer had not suffered a loss as a result of the breach and, under the compensatory principle, was not entitled to any damages.

The case was argued before the relevant first-tier tribunal, an appeal board, the High Court, the Court of Appeal and it eventually reached the Supreme Court – such is the importance of the proper application of the assessment of damages principles.

The Decision

The Supreme Court confirmed that:

  • The particular Default Clause in the contract did not cover the entire range of possible damages and neither addressed nor excluded the consideration of subsequent events.
  • Due to the embargo, the contract would never have been performed.
  • The Buyer did not suffer a loss as the Seller was entitled to cancel the contract without liability.
  • It is necessary for the court to consider post-breach events known at the assessment of damages if they are relevant to and affect the claimant’s loss.
  • The compensatory principle is fundamental to the assessment of damages such that damages must reflect the loss, if any, that the innocent party has suffered.
  • Default/damages clauses which attempt to provide a prospective formula for calculating damages in the event of breach may produce a different result from the common law. However, in the absence of very clear words, such clauses may be assumed not to operate arbitrarily, for example by producing a result unrelated to anything which the parties could reasonably have expected to approximate the true loss.
  • Default/damages clauses should not, in any event, necessarily be regarded as complete codes for the assessment of damages. It will rarely be possible or appropriate for a contract draftsman to achieve a clause which could be correctly interpreted and applied in such an all-embracing way.
  • The compensatory principle, as determined in Golden Victory in relation to a series of transactions, is applicable to one-off transactions.

WM Comment

In Bunge, the claimant ultimately obtained nominal damages of just $5 - very significantly less than the $3million it had claimed! To avoid any similar catastrophe or confusion when reviewing your contractual arrangements or any potential claims, keep in mind these top tips:

  • When a breach occurs or a contract is terminated before the contractual date, consider carefully the circumstances in which this has occurred.  Assess whether the breach or early termination has actually caused any loss, bearing in mind the surrounding contractual terms and any post-breach events, before taking any action or initiating proceedings.
  • As well as contingent circumstances such as those in the Bunge case, the following are further examples of situations in which the date for assessment of damages may be later than the date of breach:
    • Where there is no market by which the claimant can act to avoid further losses (for example, by replacing goods or finding another customer), the date of assessment may be deferred until such a market exists.
    • In the case of latent breaches – that is, where the breach is not known to the claimant when it is committed.
    • Where a claimant requires the defendant to perform a contractual obligation, it may be reasonable for the claimant to press the defendant for performance or a cure for some time, only giving up the contract, and therefore assessing damages, at a later date when it became clear that the defendant will not perform.
  • If the parties wish to pre-emptively designate in the contractual terms a formula for assessing damages in the event of a breach, specialist advice will be needed. Great care must be taken to ensure that any such damages clauses do not amount to unlawful penalties [3] and, if the intention is to exclude the compensatory principle or the claimant’s duty, at common law, to mitigate loss [4], then the clearest express wording will be required.