Paul Griffiths Partner
Court of Appeal considers GAFTA Default Clause and damages for non-acceptance
Sharp Corp Limited v. Viterra B.V.  EWCA Civ 7
The Court of Appeal has considered, for the first time, the correct method of assessing damages in accordance with Default Clause 25(c) of GAFTA Contract No.24.
The dispute originally went to arbitration and the GAFTA Appeal Board issued two awards, determining the correct basis on which damages should be awarded to the Sellers for the Buyers’ default in failing to take delivery of, and pay for, goods discharged into a warehouse and customs cleared at the discharge port of Mundra.
The key question was this: where goods are sold C&F, free out, and located at the discharge port on the date of default, is the “actual or estimated value of the goods, on the date of default” under sub-clause 25 (c) of GAFTA 24 to be assessed by reference to: (a) the market value of the goods on the date of default; or (b) the theoretical cost, on the date of default, of buying those goods FOB at the port of shipment, plus the market freight rate for transporting the goods from that port to the discharge port, free out?
The GAFTA Appeal Board awarded damages on the basis of (b). The Commercial Court dismissed the Buyers’ appeal. However, the Court of Appeal has now held that, in the circumstances existing as at the date of default, as found by the Appeal Board in the awards, that was not the correct conclusion. The issue was remitted to the Board for reconsideration.
The background facts
By two nearly identical GAFTA No 24 contracts dated 20 January 2017, cargoes of lentils and peas were sold C&F, free out, from Vancouver to Mundra in India. Payment for each contract could be made either by letter of credit or cash against documents (CAD). If CAD was chosen, payment was to be made five days before the vessel’s arrival at the discharge port, following the presentation of certain documents. Each contract had a unique Non-Payment Clause stating that in case of non-payment, the Buyers agreed to cooperate if the Sellers chose to resell or transfer the goods.
On 18 May 2017, the Buyers declared CAD as their payment option, but they could not pay five days before the vessel’s arrival and proposed to pay by the end of July 2017 with 4% interest.
The vessel arrived at Mundra on 17 June 2017 and the Buyers sent a letter of indemnity (LOI) requesting the Sellers to discharge the cargo and promising payment by the end of July. Accordingly, the cargo was discharged and placed into storage after customs clearance was granted, with a final agreed payment deadline of 30 September 2017.
Addenda were then signed, further varying the payment terms and price of the goods; however, following the Buyers’ further failure to pay, the Sellers declared the Buyers in default under both contracts on 9 November 2017. The Sellers claimed damages, pursuant to the GAFTA Default Clause 25 (c), and indicated their intention to sell the goods to a third party. However, the Buyers did not initially cooperate to provide the relevant documents for the Sellers to complete the sale.
The full Default Clause provides as follows:
In default of fulfilment of contract by either party, the following provisions shall apply:
- The party other than the defaulter shall, at their discretion have the right, after serving a notice 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.
- If either party be dissatisfied with such default price or if the right at (1) is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be settled by arbitration.
- The damages payable shall be based on, but not limited to, the difference between the contract price of the goods and either the default price established under (1) above or upon the actual or estimated value of the goods, on the date of default, established under (2) above.”
The arbitration awards
The GAFTA Board of Appeal held that the Buyers were in default for failing to pay for the goods and were liable to pay damages under paragraph (c) of the GAFTA Default Clause. They further breached the Non-Payment Clause by not cooperating with the Sellers in releasing the cargoes from storage until 2 February 2018. The Board considered this to be the date of default. By that time, the market value of these customs cleared goods had increased because the Indian authorities imposed higher import tariffs for these types of cargoes.
The Buyers argued that since the goods were cleared of customs in Mundra on the default date, their value should be determined by a notional sale of similar goods on the domestic market in India which are also customs cleared. The Sellers contended that the value of the goods should be determined by constructing a theoretical C&F free out contract on the date of default for the purchase of identical goods comprising the cost of buying equivalent goods from Vancouver and the freight cost for transporting to Mundra.
The Board of Appeal agreed with the Sellers. This meant that the damages of US$5,067,000 awarded to the Sellers were some US$3,639,000 more than if the Board had valued the unaccepted goods based on the domestic market at Mundra.
The Commercial Court dismissed the appeal. The Buyers appealed to the Court of Appeal.
The Court of Appeal decision
As noted by the Court of Appeal, the aim of damages is to put the injured party in the same position they would have been in had the contract been fulfilled. The damages awarded should reflect the exact bargain that the innocent party has lost, not the terms that were originally agreed upon.
The Default Clause mirrors this, as the measure of loss is the difference between the contract price and the price which would have been agreed under a notional substitute contact entered into on the date of the breach.
The Court of Appeal found that the arbitration awards failed to address the status of the contractual arrangements at the date of default. The conclusion as to the measure of damage being according to a C&F free out Mundra was inconsistent with the Board’s findings regarding the terms of the LOI, discharge, customs clearance, storage and amendment of payment terms. Those findings in the awards suggested that the contracts were not C&F free out Mundra at the date of default.
Accordingly, the Court of Appeal found that at the date of default, the contract between the parties ceased to be C&F, but was instead an ex-warehouse Mundra of the stored goods on 2 February 2018 as the goods had been placed into warehouses by virtue of the amended agreement between the parties. The Buyers would not receive a “windfall” if the assessment of damages were to take place on the date of default. The increase in value of the goods due to customs clearance was simply a consequence of the parties varying the contract.
The Court of Appeal, therefore, reversed the Commercial Court decision and found that the GAFTA Appeal Board was wrong in assessing damages on the basis of a C&F free out Mundra. The awards were remitted to the GAFTA Appeal Board for reconsideration.
In light of this decision, it is clearly important that parties consider carefully the precise terms of their contract and any subsequent variation of those terms, as well as the circumstances existing at the date of default when considering what losses may be claimed.
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