Senior Associate London
"Useful guidance regarding the importance of the principle of mitigation in sale of goods cases."
It did both whilst allowing both an appeal and a cross appeal in the commodities sale dispute Sharp Corp Ltd v Viterra BV (previously known as Glencore Agriculture BV) [2024] UKSC 14.
Background
Viterra BV (the “Sellers”) and Sharp Corporation Ltd (the “Buyers”) entered into two English law Cost & Freight free out (“C&FFO”) Mundra sales contracts dated 20 January 2017 for the sale of lentils and peas (the “Contracts”). The Contracts were identical save as to commodity, quantity and price, and were subject to English law and GAFTA arbitration. The Contracts also contained a GAFTA default clause (the “Clause”), which stated:
“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 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.
[b] If either party be dissatisfied with such default price or if the right at [a] 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 of the goods 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”.
On 26 April 2017, the Sellers nominated the vessel RB Leah (the “Vessel”) to lift the goods under the Contracts. On 10 May 2017, a total quantity of 21,000 tonnes of lentils and 47,250 tonnes of peas was loaded on board the Vessel in Vancouver. Buyers were required by the Contracts to pay for the goods prior to the Vessel’s arrival at Mundra, India but they failed to do so. The goods were discharged at Mundra, customs cleared and stored in a warehouse, pending payment by the Buyers.
"Sellers took the position that the Buyers’ continued failure to pay was a repudiatory breach of the Contracts."
In November and December 2017, the value of the goods at Mundra increased due to substantial import tariffs that the government of India imposed on peas and lentils with immediate effect.
On 2 February 2018, the Sellers took the position that the Buyers’ continued failure to pay was a repudiatory breach of the Contracts, terminated the Contracts and obtained an Indian Court order allowing them to sell the goods to Agricore Commodities Limited (“Agricore”), one of their affiliated companies.
Judicial history
GAFTA Appeal Board
The Sellers commenced GAFTA arbitration, claiming damages for the Buyers’ repudiation of the Contracts. The GAFTA Appeal Board ruled that the Buyers had indeed repudiated the Contracts on 2 February 2018 and were liable to pay damages. The parties agreed that the sale price the Sellers obtained from Agricore should not be used as the “default price” under sub-clause I of the Clause, as it was not an arms-length transaction. The question then was: what should the “default price” be?
Agreeing with the Sellers, the Appeal Board ruled that the default price should be the theoretical cost on the date of default (2 February 2018) of (i) buying the goods free on board (“FOB”) at Vancouver plus (ii) the market freight rate for transporting the goods from Vancouver to Mundra. In other words, the benefit to the Sellers of the increased value for the goods at Mundra (due to the import tariffs) should not be taken into account. On this basis, Sellers were awarded a little under $5 million in damages (plus storage costs).”
High Court
The Buyers appealed the ruling on the assessment of damages to the High Court pursuant to s.69 of the Arbitration Act 1996, on the basis that the Appeal Board had erred in law and damages should be the difference between the contract price and the value of the goods on an ‘as is, where is’ basis (i.e. customs cleared and warehoused in Mundra). The appeal was dismissed by Cockerill J, who held that the Appeal Board had not erred in law: in the absence of any C&FFO Mundra market evidence, the Appeal Board was faced with two imperfect alternatives and was entitled to conclude that the Sellers’ evidence better answered the question. However, she also granted permission to appeal the question of law.
"It did not change the substance of the question of law."
Court of Appeal
The Court of Appeal found in favour of the Buyers, albeit by amending the question of law. The question of law for which permission to appeal was given asked how damages under the Clause are to be assessed “where goods sold C&F free out are located at their discharge port on the date of the buyer’s default”. The Court of Appeal amended the question of law by adding “in the circumstances found by the Appeal Board in the Awards”.
The Court of Appeal went on to find that because by the date of the default the Contracts had become contracts for the sale of the goods ex-warehouse in Mundra (although the Appeal Board had made no such finding of fact), damages were to be assessed on that basis, i.e. taking into account the benefit to the Sellers as a result of the import tariffs. The Court of Appeal further justified its decision on the basis that delivery of the goods had been given against presentation to the Vessel’s agent of the original bills of lading which had thereby ceased to be documents of title and had become “accomplished”.
The Sellers appealed to the Supreme Court on the grounds that the Court of Appeal had exceeded its jurisdiction. Buyers cross-appealed on the basis that, if the Sellers’ appeal succeeded, damages should be awarded on an “as is, where is” basis, i.e. the estimated ex-warehouse Mundra value of the goods (thus taking into account the benefit obtained by the Sellers as a result of the import tariffs).
Decision of the Supreme Court
Sellers’ Appeal
Regarding the Court of Appeal’s amendment of the question of law, the Supreme Court held that the question was framed in abstract terms and the effect of the amendment was to tie that generally expressed question to the facts found in the awards – it was a permissible amendment. It did not change the substance of the question of law.
"Described by the Supreme Court as 'two fundamental principles of the law of damages'."
The question of whether (and if so, how) the Contracts had been varied was neither argued before nor addressed by the Appeal Board. The Supreme Court therefore held that it was not a question of law for which permission to appeal could be given under s.69 and so the Court of Appeal had made an error in deciding this question of law.
Further, the Court of Appeal had also erred by making a finding of fact that discharge of the cargo was made against presentation of the original bills of lading. This finding was central to the Court of Appeal’s conclusion that the Contracts had been varied and the Appeal Board had not made such a finding.
Buyers’ Cross Appeal
The parties agreed that damages fell to be assessed under the Clause, which in the Supreme Court’s view reflected both the compensatory principle and the mitigation principle, which were described by the Supreme Court as “two fundamental principles of the law of damages”.
The Supreme Court said that the proper approach to assessing damages (and it is clear they mean this to apply generally, and not just where there are clauses such as the Clause) is to be guided by the principle of mitigation and to consider the market in which it would be reasonable for Sellers to sell the goods following a breach of contract by the Buyers. On the date of default on 2 February 2018 the Sellers were left with goods, which were landed, customs cleared and stored in a warehouse. The goods had also significantly increased in value because of the imposition of tariffs. In such circumstances, the obvious market in which to sell the goods and in which it would clearly be reasonable to do so was ex-warehouse Mundra. As a result, the value of the goods under paragraph (c) of the Default Clause was to be measured by reference to a notional sale of the goods in bulk ex warehouse Mundra on 2 February 2018, i.e. on an “as is, where is” basis as contended for by Buyers.
The Supreme Court therefore unanimously allowed both appeals and remitted the matter to the Appeal Board for reconsideration.
"There is no iron-clad principle that damages should be assessed on the basis of a substitute contract."
Conclusion
With this decision the Supreme Court has made clear that the mitigation principle is equally important to the compensatory principle and not secondary to it, as was believed by some following earlier case law such as the Golden Victory and Bunge v Nidera (another case involving the Clause wording). The Court noted that this parity of the principles is shown by the fact that the mitigation principle usually works in tandem with the compensatory principle, with the injured party taking reasonable steps to mitigate their loss and this then setting the benchmark by which to assess the compensatory principle.
Consequently, there is no iron-clad principle that damages should be assessed on the basis of a substitute contract identical to the original except in relation to price. Instead, the approach shall be to apply both the mitigation and compensatory principles – “i.e. whether [the] default price derived from a substitute contract reasonably made so as to result in a reasonable measure of the injured party’s loss in accordance with the compensatory principle”.
Going forward, this should be the approach taken when considering damages generally – the mitigation principle does not give way to the compensatory principle, they need to be made to work together.
Finally, the Supreme Court has imposed limits on the way English Courts can approach s.69 appeals. While the intention of the Court of Appeal was seemingly in line with the Supreme Court’s ultimate view, which was to find a way to allow the increase in value due to the import tariff to be taken into account, this did not allow the Court of Appeal to make findings of fact or seek to answer a legal question which had not in fact been appealed.
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Senior Associate London
Senior Associate London
