When damages are awarded to compensate for a breach of contract the injured party should “so far as money can do it … be placed in the same situaƟon … as if the contract had been performed” (Robinson v Harman (1848) 1 Ex Rep 850). This is modified somewhat by the doctrine of miƟgaƟon. The injured party’s true enƟtlement is to money to represent the difference between (i) the posiƟon it would be in if it had acted reasonably on breach; and (ii) the posiƟon it would be in if the contract had been performed.
How does a reasonable injured party act upon breach? A rule of thumb is that, if there is an available market, the reasonable claimant will promptly resort to that market to obtain subsƟtute performance. This is reflected in the Sale of Goods Act 1979, but it applies generally. It is, however, only a presumpƟon, and can be rebuƩed. SomeƟmes it is not reasonable to go to the market immediately. This presumpƟon about how a reasonable party would act to miƟgate its loss was for a Ɵme accorded a significance it did not deserve. It gave rise to an idea that there was an immutable rule to the effect that what a party had lost always fell to be assessed once and for all on the date of breach, and that nothing which happened thereaŌer could be taken into account. The Golden Victory and one-off performance The Golden Victory  UKHL 12 concerned a seven year charter of an oil tanker. With four years leŌ to run, the charterer commiƩed a repudiatory breach of the contract. The owner terminated the contract and claimed as damages the difference between: (i) four years’ hire at the contractual rate; and (ii) four years’ hire at the lower rate which the owner was actually able to obtain. FiŌeen months aŌer the contract was terminated, however, the second Gulf War had broken out. If the charterer had performed the contract and conƟnued with the hire it would at that point have become enƟtled to cancel the charterparty under a war clause. The House of Lords held, by a majority, that the owner’s damages were to be calculated based on 15 months’, not 4 years’, hire. The noƟonal subsƟtute contract which a reasonable party would have entered whenever it was made and at whatever market rate, would have made no difference because it too would have been subject to the same war clause as the original contract. The post-terminaƟon events were to be taken into account in the assessment of damages. The loss was not to be assessed once and for all at the date of breach. There was, however, an obiter statement in the judgment of Lord ScoƩ (in the majority) which suggested that subsequent events might sƟll be disregarded where the contract was not one for conƟnuing performance (like a charterparty) but was for a one-off performance. He said: “The assessment at the date of breach rule is parƟcularly apt to cater for cases where a contract for the sale of goods in respect of which there is a market has been repudiated. The loss caused by the breach to the seller or the buyer, as the case may be, can be measured by the difference between the contract price and the market price at the Ɵme of the breach. The seller can re-sell his goods in the market. The buyer can buy subsƟtute goods in the market. Thereby the loss caused by the breach can be fixed. But even here some period must usually be allowed to enable the necessary arrangements for the subsƟtute sale or purchase to be made ... The relevant market price for the purpose of assessing the quantum of the recoverable loss will be the market price at the expiraƟon of that period. In cases, however, where the contract for sale of goods is not simply a contract for a one-off sale, but is a contract for the supply of goods over some specified period, the applicaƟon of the general rule may not be in the least apt. Take the case of a three year contract for the supply of goods and a repudiatory breach of the contract at the end of the first year. The breach is accepted and damages are claimed but before the assessment of the damages an event occurs that, if it had occurred while the contract was sƟll on foot, would have been a frustraƟng event terminaƟng the contract, e.g. legislaƟon prohibiƟng any sale of the goods. The contractual benefit of which the vicƟm of the breach of contract had been deprived by the breach would not have extended beyond the date of the frustraƟng event. So on what principled basis could the vicƟm claim compensaƟon aƩributable to a loss of contractual benefit aŌer that date? Any rule that required damages aƩributable to that period to be paid would be inconsistent with the overriding compensatory principle on which awards of contractual damages ought to be based.” Bunge v Nidera The decision of the Supreme Court in Bunge SA v Nidera BV  UKSC 43 lays this issue to rest. Post-breach events can be taken into account in the assessment of damages in a one-off sale of goods contract. The conclusion seems unremarkable. It would be surprising if, given the decision in The Golden Victory, the courts were nonetheless to persist in following the old approach - which is not reflecƟve of the true loss - only for a parƟcular category of transacƟons. Therefore, rather than discussing the “Golden Victory issue” (which will no doubt be discussed by other commentators) this arƟcle focuses on some other aspects of the decision. The decision concerned a standard form contract which contained a mechanism for the calculaƟon of damages the effect of which was (apparently) “commonly understood in the trade” and which arguably precluded any consideraƟon of post-terminaƟon events, even if such events did fall to be considered at common law under The Golden Victory. The divergence between the various tribunals who considered the proper construcƟon of that clause is arguably more striking than the Supreme Court’s eventual conclusion that The Golden Victory extends to one-off sale contracts. Bunge v Nidera concerned a contract entered on 10 June 2010 between Bunge (as seller) and Nidera (as buyer) to sell a quanƟty of Russian milling wheat, for shipment between 23 and 30 August 2010. The contract incorporated the following provision from the GAFTA (Grain and Feed Trade AssociaƟon) standard form provided: “13. PROHIBITION - In case of prohibiƟon of export, blockade or hosƟliƟes or in case of any execuƟve or legislaƟve act done by or on behalf of the government of the country of origin of the goods, or of the country from which the goods are to be shipped, restricƟng export, whether parƟally or otherwise, any such restricƟon shall be deemed by both parƟes to apply to this contract and to the extent of such total or parƟal restricƟon to prevent fulfilment whether by shipment or by any other means whatsoever and to that extent this contract or any unfulfilled porƟon thereof shall be cancelled. Sellers shall advise buyers without delay with the reasons therefor and, if required, Sellers must produce proof to jusƟfy the cancella- Ɵon. … 20. DEFAULT - In default of fulfilment of contract by either party, the following provisions shall apply: (a) The party other than the defaulter shall, at their discreƟon have the right, aŌer serving noƟce on the defaulter, to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price. (b) If either party be dissaƟsfied with such default price or if the right at (a) above is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be seƩled by arbitraƟon. (c) The damages payable shall be based on, but not limited to the difference between the contract price and either the default price established under (a) above or upon the actual or esƟmated value of the goods on the date of default established under (b) above. …” On 5 August 2010 Russia introduced a legislaƟve embargo on exports of wheat from its territory, which was to run from 15 August to 31 December 2010. On 9 August 2010, the sellers noƟfied the buyers of the embargo and purported to declare the contract cancelled under Clause 13. The buyer did not accept that the seller was enƟtled to cancel the contract. The embargo might be liŌed in Ɵme to permit shipment in accordance with the contract. On 11 August 2010 the buyer gave noƟce terminaƟng the contract, relying on the seller’s purported cancellaƟon as a repudiaƟon of the contract. On 12 August 2010 the sellers offered to reinstate the contract on the same terms, but the buyers would not agree. Instead, the buyers began arbitraƟon proceedings under the GAFTA rules, claiming a liƩle over $3 million in damages as the difference between the contract price and the market price on 11 August 2010. The seller argued that, even if it had not been enƟtled to terminate on 9 August 2010, the ban was not, in fact, liŌed when the Ɵme for shipment came, and so no loss had been suffered. The GAFTA contract provides for disputes to be resolved by way of a “two Ɵer” arbitraƟon. The first Ɵer tribunal held that the no- Ɵce of cancellaƟon was premature and the contract had been repudiated, but agreed with the seller that no loss had been suffered because the embargo was not liŌed and the contract would have been cancelled in any event when the Ɵme for delivery came. The buyer appealed to the second Ɵer tribunal. The second Ɵer tribunal agreed that the sellers had repudiated the contract by cancelling early, but awarded the $3 million+ damages. The tribunal’s view was that such an award was required by Clause 20(c) of the contract. This was how that clause was “commonly understood in the trade” it being intended to produce an “easily understood and readily applied” formula for compuƟng damages. GAFTAs arbitraƟon rules (unlike, say, the ICC or LCIA Rules) do not exclude the right to appeal to the court on a quesƟon of law. The seller duly appealed. The award was upheld at first instance - Clause 20 was held to be determinaƟve of the measure of damages. The seller appealed again. The Court of Appeal upheld the award, agreeing that Clause 20 was determinaƟve. The seller appealed to the Supreme Court. The Supreme Court disagreed with the second Ɵer tribunal, first instance judge and Court of Appeal. The liability issue The issue of liability was not pursued before the Supreme Court, and so was only considered at first instance and in the Court of Appeal. The issue was, essenƟally, whether the fact that Russia had passed a law prohibiƟng export during the relevant delivery window was sufficient to mean that export was “restricted” as of 9 August 2010, or merely potenƟally restricted. The arbitrators found as a maƩer of fact that, as at 9 August 2010, it was always possible that before the delivery period under the contract expired the export ban might be revoked or modified so as to permit performance, observing that: “export bans are introduced by governments for domesƟc policy reasons and the wider internaƟonal ramificaƟons are not always fully thought through”. As such, it was held in the Commercial Court and in the Court of Appeal that as of 9 August 2010, the Russian legislaƟon was a “prohibiƟon of export” but not an act “restricƟng export”. The prohibiƟon had not yet operated to restrict export, and, when the Ɵme came might, or might not, do so. In the Commercial Court, Hamblen J’s reasoning included: “(3) …, if one were to accept the contenƟon of the Sellers it would mean this, that in the event of prohibiƟon by the [Russian] Government, whatever the effect of it in reference to a parƟcular cargo might be, the clause is to operate automaƟcally, and therefore, for instance, if the [Russian] Government issued a prohibiƟon on the morning of some parƟcular day and then three or four hours later withdrew it, the clause would have automaƟcally operated to the great detriment of the Buyers.
(4) … if, as the Board found was always possible, the prohibi- Ɵon was revoked or modified and did not in the event restrict export of goods of the contractual descripƟon during the contractual shipment period, the Sellers would be able to renegoƟate the price to reflect the effect of the prohibiƟon of export not withstanding that they could honour their contracts without let or hindrance. (5) Although both these examples are illustraƟons of an implausible advantage being conferred on the sellers, if the market had fallen automaƟc cancellaƟon would work to their disadvantage. AutomaƟc cancellaƟon on the mere announcement of a prohibiƟon regardless of its likely or actual dura- Ɵon, or whether it has any impact on performance, is such a crude re-allocaƟon of contractual risk that it is most unlikely to be intended. … (7) Although the Board’s reasoning was succinct, they, as the trade tribunal, clearly regarded it as axiomaƟc that the ProhibiƟon Clause requires proof of a causal connecƟon, as apparently had the first Ɵer arbitrators.” The Court of Appeal reached the same conclusion, but seem to have been most swayed by the fact that Clause 13 applied to “prohibiƟon of export, blockade or hosƟliƟes”. It would make no sense for the parƟes to have agreed that the fact a blockade was in effect on a date before the last date for delivery would jusƟfy the cancellaƟon of the contract - a blockade might be liŌed, or hosƟli- Ɵes might cease, at any Ɵme. In such cases, then, it seems that it is insufficient to show that performance will be unlawful under the law as it stands. A tribunal must ask a further quesƟon, second guessing the legislature, or execuƟve, and asking if it is possible that the law might change. Of course, it is always theoreƟcally possible that any law might change, so presumably there must be more than a merely fanciful possibility of it doing so. If there were no real possibility that the embargo would be liŌed, it may have been that an enƟtlement to cancel would sƟll have arisen under Clause 13. MiƟgaƟon The seller argued that the buyer could have miƟgated any loss by accepƟng the offer to re-contract on the same terms. Restoring to the buyer precisely what had been lost (the right to have the wheat delivered if it should happen that the ban was liŌed). This argument was dismissed at first instance on the grounds that Clause 20 defined what the measure of damages would be, and imposed no obligaƟon to accept any offer to re-contract: “There is nothing unusual about contracƟng parƟes seeking to set out the measure of damages in advance and being confined, for good or bad, to that measure even if it does not reflect the measure that would be available at common law. The words “based on” reflect the fact that the clause is seƫng out the basic measure of damages recoverable, whilst recognising that addiƟonal heads of loss may also be so. They do not mean that that measure is only provisionally recoverable and may be displaced in certain, unspecified circumstances.” This decision on miƟgaƟon was not challenged on appeal. The Supreme Court’s decision By the Ɵme the issue came before the Supreme Court, the issue was limited to the quesƟon of whether the effect of Clause 20 was to exclude from consideraƟon post-breach events. Regarding the effect of Clause 20, Lord SumpƟon’s reasoning began as follows (emphasis added): “… 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 providing a mechanical formula in place of the more nuanced and fact-sensiƟve 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. For that reason there can be no scope for a presumpƟon that the parƟes intended the clause to produce the same measure of damages as the compensatory principle would produce at common law. The mere fact that in some cases its applicaƟon will over- or under-esƟmate the injured party’s loss is nothing to the point. Such clauses necessarily assume that the parƟes are willing to take the rough with the smooth. However, I would accept a more moderate version of Mr [the seller’s counsel’s] presumpƟon. A damages clause may be assumed, in the absence of clear words, not to have been intended to operate arbitrarily, for example by producing a result unrelated to anything which the parƟes can reasonably have expected to approximate to the true loss.” This presumpƟon seems to come from the same root as the requirement that a liquidated damages clause be a genuine preesƟmate of loss. But could it be said of Clause 20 that the effect argued for by the seller was “unrelated to anything which the par- Ɵes can reasonably have expected to approximate to the true loss”? On the contrary, Clause 20 was an approximaƟon of the loss which the parƟes could reasonably have expected, at the Ɵme of entering the contract, to result from a breach by the seller. The truth is that in every case where there is a contractual scheme for the assessment of damages, or a liquidated damages clause, one can conceive of a scenario whereby the true loss will be zero, if: (i) one party commits an anƟcipatory breach; (ii) the other party accepts that as a repudiaƟon and terminates the contract; but (iii) thereaŌer, some supervening event occurs which would
have excused the non-performance. Lord SumpƟon’s judgment conƟnues: “… such clauses are not necessarily to be regarded as complete codes for the assessment of damages. … To treat a damages clause as a complete code in this all-embracing sense is to tax the foresight of the draŌsman in a way which is rarely appropriate unless the alternaƟve is to undermine the coherence or uƟlity of the clause. Sub-clauses (a) to (c) consƟtute an elaborate, indeed a complete, code for determining the market price or value of the goods that either were actually purchased by way of miƟga- Ɵon or might have been purchased under a noƟonal subsƟ- tute contract. The clause does not deal at all with the effect of subsequent events which would have resulted in the original contract not being performed in any event. The effect of these events could be excluded from consideraƟon only if clause 20 were treated as a complete code not just for determining the relevant market price or value but for every aspect of the assessment of damages. In my opinion clause 20 cannot be viewed in that way. In the first place, it neither provides nor assumes that assessment will depend only on the difference between the contract price and the relevant market price or value. It provides that the damages payable “shall be based on” that difference. It does not exclude every other consideraƟon which may be relevant to determine the injured party’s actual loss. … Secondly, this is what one would in any event infer from the limited subjectmaƩer of the clause. Clause 20 is not sufficiently comprehensive to be regarded as a complete code covering the enƟre field of damages. Sub-clause (c) covers the same territory as secƟons 50(3) and 51(3) of the Sales of Goods Act, and subclauses (a) and (b) cover the territory occupied by the common law principles concerning the miƟgaƟon of losses arising from price movements. But this is very far from the enƟre field. … although the clause deals with the injured party’s duty to miƟgate by going into the market to buy or sell against the defaulter, it does not deal with any other aspect of miƟgaƟon. It therefore leaves open the possibility that damages may be affected by a successful act of miƟgaƟon on the part of the injured party or by an offer from the defaulter which it would have been reasonable for the injured party to accept. Likewise, in my opinion, clause 20 neither addresses nor excludes the consideraƟon of supervening events (other than price movements) which operate to reduce or exƟnguish the loss.” The Supreme Court reinstated the first instance tribunal’s decision, awarding the buyer nominal damages. Lord SumpƟon concluded: “This result seems to me to be consistent with principle. The alternaƟve is to allow the clause to operate arbitrarily as a means of recovering what may be very substanƟal damages in circumstances where there has been no loss at all. In the present case, the sellers jumped the gun. They repudiated the contract by anƟcipaƟng that the Russian export ban would prevent shipment at a Ɵme when this was not yet clear. But fortunately for them their assumpƟon was in the event proved to have been correct. The ban would have prevented shipment when the Ɵme came. The buyers did nothing in consequence of the terminaƟon, since they chose not to go into the market to replace the goods. They therefore lost nothing, and the arbitrators should not have felt inhibited from saying so.” This is obviously markedly different from the second Ɵer tribunal’s, the commercial court’s and the Court of Appeal’s reading of the clause. One’s sympathies naturally lie with the seller. Perhaps the worst that could be said of the seller was that it made a mistake - purporƟng to cancel the contract when the embargo was announced, rather than waiƟng for it to take effect - “jumping the gun” as Lord SumpƟon put it. It is possible that there may also have been some element of opportunism in the seller’s acƟons. The market price had risen, and the seller might have hoped to sell the wheat to another buyer for the higher price before the embargo took effect. Perhaps Bunge realised there was a risk that it was repudiaƟng the contract, and would face a claim by the buyer, but was willing to take a gamble and hope that the embargo would remain in place. But the fact Bunge immediately offered to re-contract on the same terms when the buyer terminated suggests a mistake and not a calculated ploy. While sympathies might lie with the seller, one can also see the buyer’s point. The words “the damages payable shall be based on, but not limited to the difference between the contract price and the default price …” seems to assume that: (i) damages will be payable; (ii) the damages payable will be at least equal to the difference between the contract price and the default price (i.e. that is the “base” from which one starts); and that (iii) further damages in excess of that amount may also be awarded (say to cover addiƟonal expenses incurred by the non-defaulƟng party). Yet the “damages payable” following the Supreme Court’s judgment, could not be said to be “based on” the difference between the contract price and the default price. Wherever one’s sympathies lie, the maƩer has been decided. On the Supreme Court’s view, the clause served to exclude the consideraƟon of any price movement aŌer the repudiaƟon was accepted, but did not prevent consideraƟon of any other supervening event - such as an offer to re-contract on the same terms (as in fact happened) or the conƟnuaƟon of the export ban (as in fact happened).
Lessons and quesƟons What can be drawn from the case, besides the confirmaƟon that post-terminaƟon events can be taken into account in fixing damages even for ‘one-off’ contracts? In principle it is hard to see any principled disƟncƟon between a “code for the assessment of damages” and a liquidated damages clause. Each has as its primary object “to give the vicƟm of a breach the right simply to sue for the sƟpulated amount, without recourse to the general law of damages” (Andrews et al Contractual DuƟes (2011)). It seems that the words “damages shall be based on” are insuffi- cient to create a definiƟve scheme for the assessment of damages, and exclude the common law rules of miƟgaƟon. But if the clause had simply said “damages shall be …” would that have been suffi- cient to exclude the effect of supervening events? Or must the clause recite that the amount payable is not to be adjusted in light of any failure to miƟgate or post-terminaƟon event which would have excused non-performance, if that is the effect that is required? It is arguably prudent to assume the laƩer when draŌing such clauses. Evidently, whenever one is considering relying upon supervening illegality as a ground for treaƟng a contract as cancelled (or, presumably, frustrated at common law), one should ask whether there is any possibility that the law in quesƟon might be changed to permit performance. Suppose that, rather than a contract for a generic commodity like wheat, the contract had been for the manufacture in Russia of some bespoke piece of machinery for export, and that Russia had introduced a ban on the export of such machinery, which would cover the period in which the machine was to be delivered. Would the manufacturer have had to conƟnue work on the machine, in the hope that the export ban might be liŌed? Would the purchaser have had to conƟnue paying instalments of the purchase price? On the terms in Bunge v Nidera, the answer to both quesƟons seems to be “yes”. This scenario (an embargo which might be liŌed in Ɵme for performance) is not normally addressed in force majeure clauses. To give just one example, the standard PLC force majeure clause de- fines as a “Force Majeure Event: any law or any acƟon taken by a government or public authority, including without limitaƟon imposing an export or import restricƟon, quota or prohibiƟon” and provides that, provided a party has complied with a requirement to give noƟce, “if a party is prevented, hindered or delayed in or from performing any of its obligaƟons under this agreement by a Force Majeure Event (Affected Party), the Affected Party shall not be in breach of this agreement or otherwise liable for any such failure or delay in the performance of such obligaƟons. The Ɵme for performance of such obligaƟons shall be extended accordingly”. In the scenario which has been posited, the seller is arguably not yet “prevented hindered or delayed” from conƟnuing to build the machine, and the buyer is not yet “prevented, hindered or delayed” from making payments, just as the seller in Bunge v Nidera was not “restricted” from delivering the wheat. The Law Reform (Frustrated Contracts) Act 1943 provides (so far as relevant): “(2) All sums paid or payable to any party in pursuance of the contract before the Ɵme when the parƟes were so discharged (in this Act referred to as “the Ɵme of discharge”) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable: Provided that, if the party to whom the sums were so paid or payable incurred expenses before the Ɵme of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.” There seem to be three main possibiliƟes in the posited scenario: (a) The buyer suspends payment under the contract, thereby commiƫng a breach. The seller terminates and claims damages. The buyer must hope that the embargo persists, so that (as in Bunge v Nidera) the seller’s loss is reduced to zero, subject to any claim the seller might have to recover expenses incurred pre-terminaƟon. If the embargo is liŌed, the seller recovers its full loss to include profits it would have earned if the contract had remained in effect and the machine been delivered. (b) The buyer conƟnues to make payments and the seller conƟnues to do work. The buyer must hope that the embargo is liŌed before the last date for delivery. If not, then the buyer will have to try and claw back the money under the 1943 Act (which may be problemaƟc if the seller is insolvent or situated in a problemaƟc jurisdicƟon). Any recovery will also be discounted to represent any expenses incurred by the seller, though the buyer could argue that it was unreasonable for the seller to have conƟnued incurring such costs aŌer the date that the embargo was announced, such that only expenses incurred before that date should be discounted. (c) The parƟes agree to suspend payment and work and wait to see whether the embargo persists beyond the last date for performance. If the embargo persists, the posiƟon is the same as in (b), save that there will have been no payments made or expenses incurred aŌer the date of the suspensory agreement. The uncertainƟes are perhaps beƩer avoided by using a modi- fied force majeure clause so as to make clear that it is to operate
with effect from the date that an embargo which would prevent performance is enacted. Another striking point about Bunge v Nidera is that the buyer won three Ɵmes (before the second Ɵer tribunal, in the Commercial Court and in the Court of Appeal), only to lose in the Supreme Court. It so happens that (in this case) both parƟes would have been beƩer off if there had been just one arbitraƟon with the right to appeal excluded, since the Supreme Court’s decision, five years later, ended up being the same as that of the first Ɵer tribunal. Of course, not every appeal ends up in the Supreme Court, and there may well have been other factors at play which caused the case to be fought to the biƩer end. Bunge and Nidera are substan- Ɵal companies which presumably conduct a great deal of business on the GAFTA form, and so may have wanted a judgment to establish definiƟvely what the effect of Clause 20 was. Nonetheless Bunge v Nidera does illustrate how arbitraƟon under rules which permit appeals can raise the stakes and prolong a final resoluƟon.