Gulf Agri Trade FZCO v Aston Agro Industrial AG  ALL ER 73
There can be many pitfalls in holding a contractual counterparty in “default”, particularly the danger of “jumping the gun”.
The issue recently arose before the High Court in the context of a “Default Notice” under GAFTA 48. Notice was given wrongly by the Buyers prior to the end of the contractual shipment period, as a result of which the Buyers unwittingly found the tables turned on them.
The case is of particular interest because the High Court clarified that:
- In the context of GAFTA contracts, when a Default Notice is sent, the assumption is that the • contract is being brought to an end.
- The burden is on the party giving such notice to show it was not its intention to terminate the contract.
Brief word on anticipatory breach
An anticipatory repudiatory breach occurs where prior to the time for performance, a party clearly indicates that he intends not to be bound by the contract, or he is or will be unable to perform a fundamental term. Where a party commits an anticipatory repudiatory breach, it is open for the innocent party to accept such a breach as bringing the contract to an end, terminate and claim damages. Alternatively, the innocent party may ignore the breach and elect to keep the contract alive until the time for performance has expired.
Importantly, if a party wrongly holds the other party in breach and tries to terminate the contract prematurely, he will have committed an anticipatory repudiatory breach of contract himself.
That is the context in which the present case arose.
Summary of the facts
Aston sold to Gulf 6,000 mt Russian feed barley CFR for shipment during August to 10 October 2004. The Contract incorporated GAFTA 48. Shipment had not been made by the end of September and Gulf’s sub-buyers sent them a fax stating that they considered the contract as defaulted. Gulf forwarded that fax to Aston on 4 October, asking Aston to treat the email as coming from Gulf and requesting Aston to “find an amicable settlement in order to close this file”.
In turn Aston held Gulf in repudiatory breach on the basis that Gulf had sent a premature notice of termination. The notice was indeed premature because of the shipment period, which lasted until 10 October. Aston accepted the Gulf breach with the effect that they considered the contract to be at an end. Gulf responded by pointing out that it had not intended that email to put Aston in default and that it still intended to settle the matter amicably. However, Aston repeated its previous message. Gulf then gave notice of default for the purpose of Clause 24 of GAFTA 48 and commenced GAFTA arbitration seeking damages for non-shipment.
At First Tier the Tribunal dismissed Gulf’s claim. Gulf appealed to the Board of Appeal, contending that even if its notice of default was premature, it was not repudiatory because (a) it was sent under a misapprehension as to the date of expiry of the shipment period, and (b) the notice was a negotiating ploy.
The Board of Appeal dismissed the appeal finding that (i) Gulf’s email of 4 October had been a notice of default under Clause 24 of Gafta 48 purporting to terminate the contract; (ii) at that point Aston was not in breach of contract through impossibility of performance or renunciation of performance; and so (iii) Gulf had wrongfully repudiated the contract on 4 October.
Gulf was given leave to appeal to the High Court in respect of certain questions of law including whether a party incorrectly serving a notice of default under the GAFTA default clause either alone or accompanied with an expression of hope that the parties might talk their way out of a crisis at the eleventh hour had thereby committed a repudiatory breach of contract.
What does it mean to invoke the Default Clause?
In assessing whether a default notice should be said to be treated as repudiating a contract, the Court took the starting point from existing authority1 which requires asking what - objectively speaking - was the intention of the party who gave that notice. In other words, was it that party’s intention to abandon/repudiate the contract?
The Board of Appeal had concluded that Gulf’s notice of default demonstrated an intention to abandon the contract for these reasons:
(a) Firstly, the very fact that the notice was sent.
(b) Secondly, in the context of a GAFTA contract, the default clause was clearly based on the termination of a contract. Gulf’s notice had to be considered in the context of general market background in the commodity trade and found that “In the context of a GAFTA contract, where the “Default” clause is clearly predicated on the termination of a contract, with sales or purchases against the defaulting party, a declaration of default, even a grammatically imperfect one, is likelier than not to be construed as a repudiatory notice”. As such it would be considered a termination for breach of contract by the other side.
(c) Thirdly, there was nothing to rebut the presumption that Gulf intended the notice of default to terminate the contract. The Board of Appeal made no findings of any mistaken belief on Gulf’s part as to the timing of the notice. The Board also found that it made no difference that the notice of default had expressed the hope that the parties might be able to reach a compromise agreement. Crucially, there was no evidence of any on going negotiations.
Gulf argued that the Board of Appeal had made two errors of law by (i) concluding that in the context of a GAFTA contract when a notice of default was sent the prima facie assumption had to be that the contract was at an end and (ii) holding that there was therefore some kind of burden upon the party who sent such a notice to show that it had not been its intention to terminate the contract. However, on the basis of the available facts, the Court held that the Board was entitled to draw on its experience and that it was reasonable find that in GAFTA trades, when a notice of default was sent, it had clearly been based on the termination of the contract. Therefore, prima facie, a notice of default under Clause 24 of the GAFTA 48 is likelier than not to be interpreted as notice of a “termination for breach” of contract by the other side.
The Court also agreed that if a party had sent a notice of default but asserted that the notice had not been intended to terminate the contract (and that its intention had remained to perform its side of the bargain), then an “evidential” burden was bound to fall on that party to demonstrate that that had been the case. On that basis, the Court again agreed with the Board of Appeal that there was no such evidence. In particular, the Board had made no findings such as discussions between the parties about Gulf’s possible notice of default before it was sent. On the contrary, there was a finding that Gulf had claimed compensation at the same time as it gave Aston the notice of default, thereby indicating that it regarded the contract as at an end. It also followed that there was no finding that Gulf would continue to perform the contract should their statement that Aston was in default be proved wrong.
For those reasons, the Court concluded that the Notice of Default demonstrated that Gulf’s intention was to abandon the contract. Therefore, Gulf was in repudiatory breach and the appeal was dismissed. The result means that:
- Aston did not perform.
- Aston had only 6 days of the shipment period remaining.
- Gulf terminated too soon – and so found themselves in breach.
- Gulf lost its claim for damages of $220,000.
- Gulf would have won if it had waited a few more days (if Aston had not made a late shipment).
- Whether or not a default notice should be treated as terminating a contract can be crucial. Where such notice is given wrongly/prematurely, it can result in a party “shooting himself in the foot”.
- Unsurprisingly, what matters is the parties’ objective intentions.
- In the context of default notices under GAFTA contracts, this case provides useful guidance in determining such intention. There is a strong presumption based on trade experience that the intention was to terminate the contract. This can catch a party unaware and cost dearly.
- It is vital to think twice before holding a party to be “in default”. Always consider if you really intend to terminate the contract. If so, check carefully the timing before doing so.
- If the answer is no, then using the word “default” in correspondence carries a risk.
- If there is any doubt as to whether or not to hold a party in default, the general rule is to err on the side of caution and avoid it unless there are good commercial reasons for doing so. Instead, ensure that all rights are reserved.
- A note on timing: Trade arbitration is, it is hoped, a speedy way of reaching a decision. It is • disappointing to see that this dispute arose in October 2004, the first award was January 2006, the Appeal Award in May 2007 and the Court decision in June 2008: nearly 4 years for a final resolution.