It ain't over till it's over: the Supreme Court has the final word on damages in Bunge SA v Nidera BV in the context of the GAFTA Default Clause
On 1 July 2015 the Supreme Court, being the last instance in a five year long dispute, delivered a unanimous judgment in Bunge SA v Nidera BV,1 a case which will be very familiar for grain industry participants trading in the Black Sea region as it concerned the consequences of the Russian grain export embargo in 2010.
The judgment has immediately been labelled in London legal circles as a "landmark decision" and a "long awaited ruling" on damages for repudiation of commercial contracts. While it is still arguable how much practical impact the case will have on the resolution of commercial disputes, and GAFTA arbitration in particular, it is nevertheless of significance.
First of all, the Supreme Court has provided valuable guidance on the application of general common law principles for the assessment of damages to cases of wrongful repudiation of contract. In doing so, the Court upheld it's own findings in The Golden Victory; a case perhaps better known for the amount of received criticism and the careful resistance of a number of commercial judges and arbitrators in following it.
Secondly, the Supreme Court considered the GAFTA Default Clause and clarified several key aspects of its interpretation. While this is not the first judicial attempt to construe the clause, it is certainly one of the most comprehensive attempts to date to merit a detailed review.
The facts and procedural history
The dispute arose out of a contract for the sale of 25,000mt of Russian milling wheat FOB Novorossiysk with delivery in August 2010. The contract incorporated GAFTA 49, containing the now abolished GAFTA prohibition clause and the standard GAFTA Default Clause. On 5 August 2010 Russia introduced a grain export embargo to run from 15 August to 31 December 2010. On 9 August 2010 the sellers purported to cancel the contract pursuant to the GAFTA Default Clause, which the buyers treated as repudiation of contract and proceeded to claim damages for the difference in market price of approximately USD3 million.
The dispute went to GAFTA arbitration where the first-tier tribunal found that sellers had repudiated the contract by cancelling early but awarded no damages to the buyers since the contract would have been cancelled in any event and no loss would have been suffered. The Appeal Board agreed with the first-tier tribunal on liability but nevertheless awarded damages to the buyers, stating that such an approach was required by the GAFTA Default Clause. On appeal, Hamblen J and, subsequently, the Court of Appeal agreed with the Board and upheld the award of damages in favour of the buyers. The Supreme Court, however, disagreed with all findings on damages post appeal and reversed the decision of the lower courts endorsing the approach of the first-tier tribunal.
Before turning to the actual findings of the Supreme Court, it is worth making a few preliminary observations, especially for the benefit of those reviewing the decision with a view to finding a "one fits all" answer.
- First of all, the case concerned "a repudiation of contract before the time for performance came" or, in simple terms, an anticipatory breach, and did not test any other breach scenarios; therefore, the findings should be read and understood primarily from this perspective.
- Secondly, it dealt with an assessment of damages in circumstances where liability was no longer in dispute; consequently, the findings of Hamblen J in respect of the GAFTA Prohibition Clause2 (later endorsed by the Court of Appeal3) remain good law, as they were before the judgment.
- Thirdly, a number of issues were agreed as common ground and were not the subject of argument before the Court. Among these issues were the date of default and also the determination of the actual market price, which usually occupy a substantial part of the argument in any GAFTA dispute. It therefore remains unclear whether the Court's findings might have been affected by argument on these issues and to what extent.
The key question for the Supreme Court was whether the GAFTA Default Clause excluded application of common law principles for the assessment of damages for anticipatory breach, namely, the compensation principle identified in The Golden Victory and, if not, whether such application was limited to instalment contracts (the type of contract repudiated in The Golden Victory).
The judgment, delivered by Lord Sumption and Lord Toulson in two separate speeches, essentially addressed two main blocks of issues: construction and effect of the GAFTA Default Clause per se (the "clause") and applicability of The Golden Victory compensation principle to the assessment of damages conducted under the clause.
The GAFTA Default Clause
General observations in respect of damages clauses: Express damages clauses are commonly intended to avoid disputes about damages, either by prescribing a fixed measure of loss (as in the case of a liquidated damages clause) or by a providing a mechanical formula in place of the more nuanced and fact-sensitive approach of the common law (as in clause 20 of GAFTA 49). In either case, it is inherent in the clause that it may produce a different result from the common law. In addition, such clauses are not necessarily to be regarded as complete codes for the assessment of damages. A damages clause, like any other contractual provision, is conclusive of the matters with which it deals. But it is a question of construction whether the mere fact that it deals with damages means that it must have been intended to do so exhaustively and exclude any considerations not expressly addressed.
The clause is concerned with non-performance: As a matter of ordinary language, the "fulfilment" of the contract means its performance, and "default of fulfilment" means its non-performance. Consequently, the clause is concerned with non-performance and is equally applicable to cases of anticipatory repudiation of the contract and failure to perform the contract when the time for performance came.
Mitigation is discretionary yet essential for establishing the default price: The Court decided that the clause did not exclude mitigation, even though the application of this principle to the facts of the case was not argued before the Court.4 Sub-clause (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". However, either party is at liberty to reject such default price 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 in accordance with sub-clause (c). The net result, which differs from the common law approach, is that the injured party is not required to mitigate by going into the market and buying or selling against the defaulter, but has a discretion whether to do so. Yet, as Lord Toulson pointed out, in common law the so-called duty to mitigate is not a duty in the sense of the innocent party's obligation owed to the defaulter but it is rather an aspect of the principle of causation; the contract breaker will not be held to have caused loss which the claimant could have reasonably avoided. Consequently, in line with the mitigation principle, damages can be assessed as at the date when the injured party accepted the repudiation only if he actually went into the market to fix a price at that date.
The clause is sufficiently complete for determining the value of the replacement goods: Sub-clause (c) provides for two alternative bases for assessment of damages by the arbitrators. 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 basis of assessment is the difference between the contract price and the "actual or estimated value" of the contract goods at the "date of default", which means the date of the "default of fulfilment" referred to in the opening words of the clause, i.e. the date on which the contract should have been "fulfilled" by performance in accordance with its terms. The words "established under (b) above" merely refer to the value "settled by arbitration", that being the only basis on which (b) provides for a value to be fixed. Consequently, sub-clauses (a) to (c) constitute an elaborate and indeed a complete code for determining the market price or value of the goods that either were actually purchased by way of mitigation or might have been purchased under a notional substitute contract.
The clause does not cover the entire field of damages: Notwithstanding the above, it is the Supreme Court's view that the clause is not sufficiently comprehensive to be regarded as a complete code covering the entire field of damages for a number of reasons.5
- The clause neither states nor assumes that assessment of damages will depend only on the difference between the contract price and the relevant market value ("shall be based on" is not to be construed as synonymous with "shall consist exclusively of" or "shall be limited to"6); however, it is not concerned with bases of assessment which do not depend on the terms of a notional substitute contract or on any determination of the market price, and is limited in that sense.
- Other than dealing with the injured party's duty to mitigate, the clause does not deal with any aspect of mitigation which may otherwise affect damages, such as a successful act of mitigation by the injured party or a reasonable offer from the defaulter.
- The clause neither addresses nor excludes the consideration of supervening events which may reduce or extinguish the loss, such as those that would have resulted in the original contract not being performed in any event.
Application of the Golden Victory
The Golden Victory, also known as Golden Strait Corporation v Nippon Yusen Kubishika Kaisha7 concerned a repudiation (AKA: premature cancellation) of a time charterparty by the charterers with nearly four more years of its term still to run. As the charterparty contained a clause allowing for its termination in case of hostilities, which did start two years later, the key question was whether any damages should be recoverable for the period following the outbreak of hostilities. The arbitrator, whose decision was upheld on appeal by the judge, the Court of Appeal and a majority of the House of Lords, found that no damages were recoverable in respect of that period.
The compensatory principle revisited and reaffirmed: In general terms, 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".8 Therefore, any method of assessment of damages must measure the extent to which the innocent party is or would be financially worse off under the substitute contract. This is usually achieved by comparing the contract price with the price agreed under a substitute or a notional substitute contract at the market rate but otherwise on the same terms, provided there is an available market for such substitute contract. However, as the Court confirmed, it is not the only available method: in both The Golden Victory and Bunge the lost contract and its hypothetical substitute contract were both subject to automatic cancellation at a later stage; therefore, the extent to which the buyers were worse off could not be measured by a simple comparison between the contract price and the price of a hypothetical substitute contract, prompting a different approach. Consequently, 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 the arbitrator's assessment to have occurred, if their effect was that the contract would have been lawfully terminated at or before its contractual term.
Previous criticism unjustified: The decision in The Golden Victory provoked a certain amount of judicial doubt and academic critique with the two main criticisms being that (a) it failed to distinguish the different supervening events (successful mitigation by the defaulting party, inability of the innocent party to perform, cancellation under an express provision etc.) and (b) it attached insufficient weight to the commercial value of certainty. In dismissing such criticisms, the Supreme Court pointed out that the principle itself was neither new nor heterodox and that there was no principled reason why, in order to assess the value of the lost performance, one should not consider what would have happened if the repudiation had not occurred. On the contrary, this seemed to be fundamental to any assessment of damages designed to compensate the injured party for the consequences of the breach. As to commercial certainty, while appreciating its significance Lord Sumption emphasised that it could rarely be thought to justify an award of substantial damages to someone who had not suffered any loss.
Uniform application to both instalment and one-off sale contracts: Following several observations in The Golden Victory there had been some doubt as to whether the principle was equally applicable to one-off sales and period contracts (such as the time charterparty in question). In Lord Toulson's view, the differentiation made no sense as the relevant criterion was whether the contract was reasonably replaceable by a substitute contract at a readily ascertainable market price, in which case it would be right to measure the innocent party's loss by reference to the substitute contract.
- Current wording of the GAFTA Default Clause does not exclude application of general common law principles for assessment of damages so clear language must be used if the parties wish to exclude it.
- Normal mitigation rules apply to damages claimed under the GAFTA Default Clause, even though the extent of their application is not entirely clear (not least because this point was not argued before the Court).
- The Court-endorsed approach to the assessment of damages prompts and indeed requires consideration of the events known "at the date of assessment" rather than "at the date of breach" if such events materially affect performance of the contract or the innocent party's loss.
- If the innocent party suffered no loss or failed to mitigate, he may now not be entitled to an award of damages, even where such an award could otherwise be made under the GAFTA Default Clause.
- For the above reasons, quantum issues in commodity disputes are likely to become more technical and law driven, making it yet another area where it would be strongly advisable to seek timely legal advice at an early stage to prevent any adverse developments.