In the recent decision of Sharp Corp Ltd v Viterra BV [2024] UKSC 14, the Supreme Court ruled that mitigation is just as important as the compensatory principle when calculating damages and should in fact be the guiding principle in certain situations.
The decision arose out of two Grain and Feed Trade Association (“GAFTA”) appeal awards where the buyers did not pay for the goods and the sellers had to re-sell them.
The sales had been on C&FFO (Cost & Freight free out) Mundra. However, where, at the date of default, the goods were customs cleared and at a warehouse in India, the Court considered that this was the relevant market for the purposes of ascertaining the value of the goods (and not the international market) since that was where it would be reasonable for the sellers to sell the goods.
Background
Viterra BV (formerly known as Glencore Agriculture BV), as Sellers, and Sharp Corp Ltd, as Buyers, entered into two contracts on identical terms incorporating GAFTA Contract No. 24 and on C&FFO (Cost & Freight free out) Mundra basis - a contract for 20,000 mt of Canadian Crimson Lentils and a contract for 45,000 mt of Canadian Yellow Peas.
The goods were loaded in Vancouver under bills dated 10 May 2017. Payment in cash against documents (CAD) was due within 5 days prior to the vessel’s arrival at Mundra but was not made. Upon arrival on 19 June, the lentils and part of the peas were customs cleared. A few days later, the Buyers issued a LOI asking the Sellers to discharge the cargo to reduce demurrage exposure; payment would be made within July. Subsequently it was agreed the Buyers would make payment for the goods in three instalments, but they then failed to pay the first instalment due in October. On 9 November 2017, the Sellers declared the Buyers in default under both contracts, claiming damages and the right to sell the cargoes.
Adani Port, where the goods were stored, refused to release them and the Sellers commenced proceedings in the High Court of Gujarat, eventually taking possession of the goods on 2 February 2018 and subsequently re-selling the peas and lentils to an associated company.
In the meantime, the Government of India had imposed an import tariff on Yellow Peas of 50% and an import tariff of 30.9% on lentils. As a result, the value of both products increased significantly.
The GAFTA Appeal Board Awards
The Appeal Board found that the Buyers were in default for failing to pay for the goods and were liable to pay damages in accordance with the Default Clause:
25. 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 a notice on the defaulter to sell….and such sale….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.
The Appeal Board found that the date of default was 2 February 2018 (rather than 9 November 2017 when default was declared) because that was when the Sellers took possession of the goods. The Board rejected the Buyers’ case that damages should be assessed by reference to the value of the goods in India and found that the estimated value of the goods on or about the date of default should be composed of the FOB market prices of both products in Vancouver (since there was no evidence of trades based on C&FFO Mundra) plus the market freight for carriage of the products from Vancouver to Mundra.
The proceedings in the lower courts
The Buyers were granted permission to appeal under section 69 of the Arbitration Act. The question that the court was asked to determine was whether the value of the goods under sub-clause (c) of the Default Clause should be assessed by either:
a) reference to the market value of the goods at the discharge port; or
b) the theoretical value of buying the goods FOB at the original port of shipping plus the market rate for transporting them to the port of discharge (the Board’s approach).
The Commercial Court dismissed the appeal, holding that 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 was better. Permission to appeal to the Court of Appeal (“CA”) was granted.
The CA allowed the appeal ruling that damages were to be assessed based on notional substitute contracts on the same terms as the parties’ contracts at the date of default, however this was not a C&FFO Mundra contract because by then the contracts had been varied so as to become contracts for the sale of the goods ex-warehouse. The Supreme Court granted permission to the Sellers to appeal and permission was also given for the Buyers’ cross appeal.
The Supreme Court decision
For the purposes of this article and the Buyers’ cross-appeal, which concerned the Appeal Board’s award of damages to the Sellers, the Supreme Court said there are two fundamental principles of the law of damages:
1) The compensatory principle – which aims to put the injured party in the same position as if the breach had not occurred, i.e. the injured party is ‘so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed (Robinson v Harman (1848) 1 Exch 850 )’; and
2) The principle of mitigation – which requires the innocent party to take steps to mitigate its losses and which means that: i) there is no recovery for loss which could have been avoided; ii) loss incurred in mitigating steps can be recovered; and iii) there is no recovery for avoided loss.
The Court said that both principles were reflected in the default clause, the starting point (sub-clause (a)) being the expectation that the injured party will go into the market to find a substitute sale or purchase where there is an available market. If the parties are satisfied with the default price under the substitute transaction, then sub-clause (c) determines that damages will be the difference between the contract price and the default price. Sometimes, however, the price under the substitute transaction will be not acceptable, say, for example, in this case, where the price under the substitute sales could not be said to reflect the market price because the sales were to a related company and, therefore, not arms-length transactions. In such cases, or where no substitute sale/purchase is made, under sub-clause (c) the damages are to be assessed on the basis of ‘the actual or estimated value of the goods on the date of default’.
Case law indicates that sub-clause (c) of the default clause covers the same issues as sections 50 (3) and 51(3) of the Sale of Goods Act (Bunge SA v Nidera BV [2015] UKSC 43). Both sections assume that, where there is an available market (on the same or similar terms), the injured party will go into the market and therefore, normally, the market price will establish the default price, regardless of what the injured party actually does.
In this case, since there was no evidence of an available market for a substitute transaction on C&FFO Mundra terms, the issue was - by reference to what market was the estimated value of the goods to be established? The Court said that the principle of mitigation required considering the market in which it would be reasonable for the Sellers to sell the goods. On the default date, the Sellers were left with goods which had been landed, customs cleared and stored in a warehouse in Mundra. The goods had also significantly increased in value because of the imposition of the customs tariffs. It would not have been reasonable to sell the goods in the international market as this would mean paying the costs of re-exporting the goods and losing the increase in value resulting from customs clearance before the tariffs increase. It followed that the obvious market in which to sell the goods would be the ex-warehouse Mundra market and damages should be calculated on that basis. In the Supreme Court’s assessment, the Appeal Board looked at notional sales of further consignments and ignored the fact that the Sellers were left with the actual contract goods as and where they were, thus ignoring the principle of mitigation and commercial realities.
The Supreme Court also said, referring to several passages of Benjamin’s Sales of Goods, that their approach was consistent with the common law approach to damages for non-acceptance in CIF (Carriage, Insurance & Freight) contracts, where the time at which the market price is relevant is when the acceptance of the documents is to take place. If there is no market for goods afloat where the documents should have been accepted, any other market in which it would be reasonable to dispose of the goods would be relevant and the market at the destination would be the obvious choice.
The Court also mentioned FOB (Free on Board) contract cases where the courts looked at the market where the goods had been discharged and a passage in the case of Aryeh v Lawrence Kostoris & Son Ltd [1967] 1 Lloyd’s Rep 63 cited with approval by the Court of Appeal in The Selda [1999] 1 Lloyd’s Rep 729. In that case it was stated that where the goods are bought CIF or FOB for shipment to a particular market, the relevant values are the values of the goods in that market upon arrival.
Finally, the Court considered that their approach was consistent with the compensatory principle. The imposition of the tariffs increased the value of the goods and this was a benefit that should be brought into account when calculating damages.
Comments
The decision emphasises the importance of the principle of mitigation and provides useful guidance for the assessment of damages where a true substitute contract is not available following a breach. It will have implications beyond GAFTA contracts as the Court was very keen to draw parallels with the position at common law and might also guide the quantification of damages outside the sale of goods context.
