Reema Shour Professional Support Lawyer
GAFTA default clause and assessment of damages: Supreme Court hands Sellers a golden victory
Bunge SA v. Nidera BV  UKSC 43
The Supreme Court has recently ruled that the Buyers under a sale contract on GAFTA 49 terms could only recover nominal damages for the Sellers’ wrongful cancellation of the contract. A Russian legislative embargo on the export of wheat having been announced, the Sellers wrongfully purported to cancel the contract prematurely before the end of the shipment period. As it transpired, the embargo was maintained throughout and beyond the shipment period, such that if the Sellers had not acted prematurely, they would have been contractually entitled to cancel the contract at the end of the shipment period. The Supreme Court unanimously held that, on its true construction, the GAFTA default clause did not entitle buyers to recover significant damages for sellers’ breach of contract where they had suffered no loss as a result of that breach.
The significance of this decision is not limited to those dealing with contracts incorporating GAFTA default clauses. It is relevant to the interpretation of express damages clauses in any commodities contract or, indeed, other commercial contract. The Supreme Court has made it clear that an express damages clause will not override the common law principle for the assessment of damages, namely that they are intended to compensate an innocent party for its loss, unless it says so in clear and unambiguous terms.
In coming to its conclusions on recoverable damages, the Supreme Court disagreed with the decisions of the Court of Appeal, the Commercial Court and the GAFTA Appeal Board (but agreed with the GAFTA first tier arbitration tribunal). The lower courts inclined to the view that, in assessing damages for breach of contract, the market favoured certainty over fairness and that is what the GAFTA default clause provided. The Supreme Court considered, on the other hand, that while commercial certainty was undoubtedly important, it would rarely justify an award of substantial damages to someone who has not suffered any.
The background facts
On 10 June 2010, the Buyers entered into a sale contract with the Sellers for Russian wheat. The shipment period was 23 to 30 August 2010. The contract incorporated GAFTA 49, a standard set of FOB terms designed for contracts for goods sold in bulk or bags from Central or Eastern Europe. On 5 August, Russia introduced a legislative embargo on the export of wheat, which was to run from 15 August to 31 December 2010. On 9 August, the Sellers notified the Buyers of the embargo and purported to cancel the contract under the GAFTA 49 prohibition clause. The Buyers maintained that the Sellers’ cancellation of the contract was premature because the anticipated embargo might not happen or might not impact the shipment required under the contract. The Buyers treated the purported cancellation as a repudiation of the contract, which they accepted on 11 August. On 12 August 2010, the Sellers offered to reinstate the contract on the same terms, but the Buyers refused and commenced GAFTA arbitration, claiming damages of over US$3 million. In the event, the export ban did come into force and was in fact extended.
Had the Sellers waited until the end of the shipment period, they could have cancelled the contract without liability pursuant to the prohibition clause. Instead, they jumped the gun. In arbitration and in the lower courts, one of the issues was whether the Sellers were in breach of contract or whether the prohibition clause entitled them to terminate the contract when they did. By the time the dispute reached the Supreme Court, the Sellers had conceded that they were in breach of contract but maintained that the Buyers were not entitled to substantial damages because they had suffered no loss due to the breach.
The GAFTA default clause
The relevant parts of the GAFTA default clause provide as follows:
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 discretion have the right, after serving 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.
(b) If either party be dissatisfied 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 settled by arbitration.
(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 estimated value of the goods on the date of default established under (b) above.
The Golden Victory
The Golden Victory was a charterparty dispute, in which the Charterers unlawfully terminated a seven-year time charter when it still had another four years to run but only 14 months before it would have been cancelled in any event under a war clause in the charter when the second Gulf War broke out. The majority of the House of Lords held that an assessment of the Owners’ damages should take into account that the charter would have terminated early without fault in any event. So where a subsequent event would have resulted in the original contract not being performed after all or performed for only a truncated period, an innocent party might only be entitled to recover reduced or even nominal damages to reflect this.
The Sellers in this case argued, among other things, that
(1) the GAFTA default clause did not exclude the application of the common law principle that damages awarded to an innocent party should be calculated to compensate it for its actual loss; and
(2) the majority decision in the Golden Victory meant that any damages awarded to the Buyers in this case should take into account the fact that the export ban would have resulted in the Sellers legitimately cancelling the contract in any event.
The Buyers argued that the fact that the contract would subsequently have been cancelled was irrelevant and that the default clause required the loss to be assessed on the date of default i.e. 11 August 2010, and that no regard could be had to events post-dating the default date.
The Supreme Court decision
The Supreme Court found in favour of the Sellers and awarded the Buyers nominal damages of only US$5, as opposed to the substantial damages of over US$3 million they had been awarded by the GAFTA Board of Appeal, whose award had been upheld by the lower courts.
The Court stated that damages clauses, such as the GAFTA default clause, are not to be regarded as complete codes for the assessment of damages. The GAFTA default clause provided a detailed 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. It did not however address the effect of subsequent events that would have resulted in the original contract not being performed in any event, nor did it exclude every other consideration that may be relevant to determine the innocent party’s actual loss. In those circumstances, common law principles on recoverable damages would continue to apply.
Further, while damages clauses may prescribe a fixed measure of loss that differs from the measure of damages recoverable at common law, in the absence of clear words, a court will not conclude that a damages clause was intended to operate arbitrarily and produce a result unrelated to anything that the parties can reasonably have expected to approximate to the true loss.
The Supreme Court took the view that a construction of the default clause that would place the Buyers in a financially far better position than if the breach had not occurred was most unlikely to have been intended by those drafting the clause. It was far more likely that the clause was intended to apply to the usual situation of a non-delivery or non-acceptance of goods for which there was an available market, rather than a situation where the contract would not have been performed due to supervening events leading to its inevitable cancellation.
The Court also dismissed the argument that the Golden Victory could be distinguished from the present case, because that case related to a period contract whereas this case involved a single sale contract. The Supreme Court held that the principle that damages should be compensatory applied equally to a contract for a one-off sale and an instalment contract.
On a practical note, those drafting and entering into contracts containing express damages clauses, including liquidated damages clauses, should keep in mind that clear and express words are required if the parties intend to exclude general common law principles in relation to the assessment of damages. In particular, if the contractual damages regime is intended to fix the damages at a particular moment in time, such as the date of default, clear words will be required to exclude from consideration any future events that might impact on the actual loss suffered by the innocent party.
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