Frances Drain Senior Associate
Relevance of sub-sale contract in assessing damages for non-delivery
Euro-Asian Oil SA v. (1) Credit Suisse AG and others  EWCA Civ 1720
The Court of Appeal has considered when the market measure of damages will be displaced in cases of non-delivery of goods.
The market measure is the difference between the contract price and the market price of the goods at the time when they ought to have been delivered. Here, both parties were fully aware of the sub-sale contract and would not have expected the buyer to go into the market to buy a replacement cargo. They were, therefore, taken to have contemplated that any loss would be limited to the value of the sub-sale contract. On that basis, the Court of Appeal decided not to award damages based on the market measure, which would have resulted in the award of a significantly greater sum.
The background facts
The dispute arose out of the fourth in a series of contracts between Euro-Asian Oil SA (“Euro-Asian”) and Abilo (UK) Ltd (“Abilo”), under which Euro-Asian agreed to purchase a parcel of ultra-low sulphur diesel from Abilo (“the Contract”). In each case, Euro-Asian had entered a sub-contract to sell the cargo to one of several companies controlled by a Mr Igniska, who also controlled Abilo. The sub-sale for the Contract was to a company named Real Oil.
This was essentially a financing arrangement, under which Mr Igniska’s companies were able to purchase larger quantities of cargo than would otherwise have been possible. Euro-Asian’s incentive was that they would retain the difference between the contract price and the sub-contract price, usually around US$2 – US$3.50 per metric tonne.
Each contract was supported by a letter of credit (“LC”) in favour of Credit Suisse, with Euro-Asian named as the applicant and Abilo as the beneficiary.
In practice, the contracts were performed by way of what was described as a ‘carousel’. In short, the contracted cargo was not delivered according to the terms of the sale contracts on conventional CIF terms, but by means of tank holding certificates issued to Euro-Asian by the discharge terminal. In each case, Abilo sought payment under the relevant L/C by presenting documents relating to cargo that had already been delivered under an earlier contract.
The ‘carousel’ collapsed when Abilo suffered financial problems and were unable to obtain a physical cargo to deliver to Euro-Asian under the fourth contract. Nevertheless, Abilo obtained payment under the LC by presenting the bill of lading relating to the cargo that had already been delivered to Euro-Asian under the third contract. They also presented a letter of indemnity countersigned by Credit-Suisse (“the LOI”). The LOI included warranties that Abilo (i) had marketable title to the cargo and (ii) had full right and authority to transfer title to Euro-Asian. Given, however, that Abilo did not have a physical cargo to deliver under the Contract, Euro-Asian brought a claim against Abilo and Credit-Suisse, as co-signatories of the LOI.
Euro-Asian sought to recover damages of approximately US$18.3 million, based on the market measure – being the prima facie measure of loss in such cases - set out in section 51(3) of the Sale of Goods Act 1979 (“the SOGA”). This provides that, as long as there is an available market for the goods, damages will be calculated based on the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered.
Credit-Suisse argued that the prima facie rule should not be applied and that Euro-Asian’s damages should be limited to the price that they would have received under the sub-sale contract with Real Oil, being approximately US$15.9 million.
At first instance, the judge found in favour of Credit Suisse and concluded that Euro-Asian’s damages should be capped at the price that would have been payable under the sub-contract. Euro-Asian appealed, arguing that as there was an available market, there was no proper basis for displacing the measure of loss set out in section 51(3).
The Court of Appeal decision
In rejecting Euro-Asian’s argument, the Court of Appeal emphasised that the starting point in the assessment of damages for non-delivery is section 51(2) of the SOGA, which states that the normal measure of damages is “the estimated loss directly and naturally resulting, in the ordinary course of events” from the breach. Depending on the circumstances of the case, the application of section 51(2) may mean that the prima facie market measure should not be applied. This might be the case, for example, with transactions involving string contracts, where specific goods are going to be sold on and the seller knows that the buyer is not purchasing for general re-sale, but to satisfy a particular contract which could only be completed with the onward sale of those particular goods.
The contracts in this case were not exactly string contracts and Euro-Asian could have performed their obligations under the sub-sale contract by purchasing an alternative cargo. Nonetheless, on the facts, the Court of Appeal found that the judge was justified in his decision not to apply the market measure of loss. It was always contemplated by both parties that Euro-Asian would nominate the same cargo to satisfy the sub-sale contract as was nominated by Abilo to satisfy the Contract. Neither party contemplated that Euro-Asian would perform the Contract or sub-sale contract by any other means. Therefore, it was appropriate to limit the damages awarded to Euro-Asian by reference to the price that they would have received under the sub-sale contract with Real Oil.
This decision confirms that, where appropriate, the English courts will look beyond the market value of the goods when assessing the damages that are recoverable for breaches of a sale contract. While each case will depend on its facts, in cases where there is a sub-sale contract and there is evidence that both parties contemplated that the goods delivered under the primary contract would be used to perform the sub-sale contract, the damages for breach of the primary contract may well be assessed by reference to the value of the sub-contract.
This decision reflects the compensatory purpose of awarding damages for breach of contract. In circumstances where both parties to a contract proceed on a common understanding that specific goods delivered under a sale contract will be used to perform a particular sub-sale contract, it stands to reason that that sub-sale contract should be taken into account when assessing damages for breach of the primary contract.
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