In the summer of 2010, Russia was in the spotlight for reasons that differ from those holding our interest today. Following concerns over the harvest, the Russian Government introduced a complete ban on the export of various agricultural commodities on 5 August 2010. The ban was to take effect between 15 August and 31 December 2010. The stage was set for a raft of arbitrations concerning the rights and obligations of those buying and selling Russian origin goods. One of those cases - Bunge SA -V- Nidera BV - has made its way through the Commercial Court, and the Court of Appeal, and will now receive the attention of the Supreme Court.

There are two facets to Bunge: the first addresses the effect of the Prohibition Clause that commonly appears in the very widely used standard contract forms published by the Grain and Feed Trade Association (GAFTA).  The second is concerned with the operation of the Default Clause that also features in those GAFTA forms. 

The Prohibition Clause

The Prohibition Clause provides for the cancellation of the contract without liability in the event, among other things, of ‘prohibition of export… or in case of any executive or legislative act done by or on behalf of the government of the country of origin of the goods, or of the country of the origin of the goods, or of the country from which the goods are to be shipped, restricting export, whether partially or otherwise’.  The clause goes on to state that ‘any such restriction shall be deemed by both parties to apply to this contract’. Until recently, there was a dearth of case-law authority as to the proper construction of those ‘deeming’ words: did they cancel a contract automatically as soon as a restriction came into being or did a seller have to prove a clear link between the restrictions and an inability to perform?  We have a clear answer from the Court of Appeal.

In Bunge -v- Nidera, the sellers had a contract for an FOB delivery of Russian wheat, with delivery under the contract between 23 and 30 August 2010. Shortly after the announcement of the export ban on 5 August, and prior to the beginning of the delivery period, the sellers on 9 August sent the buyers a notice of cancellation, purporting to cancel the contract early. The buyers in turn held the sellers in anticipatory repudiatory breach of the contract (the ban not having yet entered into force) and stated that they were ‘accepting’ that breach by holding the sellers in default. The case proceeded on the acceptance by both parties that, had the sellers’ notice been sent on 31 August 2010, after the expiry of the contractual delivery period, the sellers would have been entitled to treat the contract as cancelled without liability under the terms of the Prohibition Clause.

As usual, the matter went before first tier GAFTA arbitrators and was then the subject of an appeal to the GAFTA Board of Appeal, which found in favour of the buyers. From there, the sellers appealed to the Commercial Court where 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 Prohibition Clause, they must prove that the event relied upon in excusing performance actually prevented performance when the time came to so perform. On 9 August, it was impossible to say that such prevention had occurred.

The sellers appealed to the Court of Appeal. In dismissing the sellers’ appeal, Lord Justice Moore-Bick, giving the leading judgment, recognised that the term ‘restricting export’ was the phrase lying at the heart of the Prohibition Clause. In deciding that the wording was linked to the practical effects on the sellers’ ability to perform the contract, Lord Justice Moore-Bick confirmed that a contract is not automatically cancelled merely because an event of the type described in the clause has occurred. In order to take the benefit of the clause, it is necessary for a seller to demonstrate that the event in question had in fact restricted or prevented the export of the contract goods. 

By adopting a narrow interpretation, the Court of Appeal underlined the English law approach to exclusion clauses in interpreting them against the party seeking to rely on them. In turn, the court provided GAFTA traders with greater certainty, so far as the Prohibition Clause is concerned. By holding that a seller is required to demonstrate that a particular act or event actually prevented or restricted the shipment in question, the Court of Appeal has left the trade in no doubt that a party would be well advised to wait until the period of delivery has expired before seeking to rely on the GAFTA Prohibition Clause.

The Court of Appeal’s findings on the Prohibition Clause are not subject to a further appeal to the Supreme Court and so represent the current state of the law on the wording of that clause.

The Default Clause

In the circumstances of the Bunge case, the GAFTA Default Clause provides that ‘the damages payable shall be based on, but not limited to, the difference between the contract price and […] the actual or estimated value of the goods on the date of default […]’.

The sellers argued in the arbitration that the Default Clause did not oust the ordinary common law position concerning awards of damages. On that basis, the sellers said that principles established by the House of Lords in the "GOLDEN VICTORY" should apply, so that the damages would be assessed on the basis that the contract would have been cancelled in any event due to prohibition. The result would have been, on the sellers’ case, that the buyers were entitled only to nominal damages. The buyers argued before the Board of Appeal that the Default Clause was a complete code for the assessment of damages on the date of default and had always operated as such in the GAFTA trade. Accordingly, the buyers’ case was that the Board of Appeal did not have to consider common law principles and should simply award damages based on the difference between the contract and market prices on the default date.  The board agreed with the buyers and awarded them default damages. That award was also the subject of an appeal to the Commercial Court, before Hamblen J. 

In further agreeing with the Board of Appeal, Hamblen J 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. He accordingly upheld the Board of Appeal’s award of damages. The sellers appealed to the Court of Appeal, which upheld the decision of Hamblen J.

This judgment confirms that a contractual mechanism for calculating damages will be upheld even if it may be said to differ from common law principles in certain respects. However, at the time of going to print, the Supreme Court had just granted permission for sellers to appeal against the Court of Appeal’s finding on the operation of the GAFTA Default Clause. 

Upcoming amendments to the GAFTA forms

Whilst the latest amendments to the GAFTA contract forms, which are examined in another article in this edition of trade advantage, have elided the Prohibition and Force Majeure clauses, the wording of the Prohibition Clause that was examined in Bunge is still relevant. The judgment stands as useful guidance in the interpretation of the words ‘restricting export’ and assists our understanding of the manner in which these exemption clauses are to be treated, particularly where a seller wishes to say that a contract is automatically cancelled.

The Default Clause, meanwhile, will remain unchanged. As such, the position concerning its relationship to the common law will remain as set by the Court of Appeal in Bunge

A further update will follow the Supreme Court decision in due course.