Not just a question of timing – Supreme Court rules on the assessment of damages for premature cancellation

The Supreme Court has held that a party could only recover nominal damages for premature cancellation (repudiation) of a sales contract on GAFTA Form 49[1].

The wording of a clause which the lower courts found mechanically calculated damages was not explicit enough to preclude the application of standard compensatory principles in common law. 

Background

On 10 June 2010, Nidera BV (the "Buyers") entered into a contract with Bunge SA (the "Sellers") to buy 25,000 MT of Russian milling wheat.  The shipment period was August 2010.  The contract incorporated GAFTA Form 49. 

GAFTA 49 Clause 13 provides (inter alia):

"In case of prohibition of export…whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment… and to that extent this contract or any unfulfilled portion thereof shall be cancelled…" 

GAFTA 49 Clause 20 provides (inter alia):

"In default of fulfilment of contract by either party, the following provisions shall apply…

 (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." 

On 5 August 2010, Russia introduced an embargo on the export of wheat for the period of 15 August to 31 December 2010.  On 9 August 2010, the Sellers notified the Buyers of the embargo and declared the contract cancelled under Clause 13. 

The Buyers did not accept that the Sellers were entitled to cancel, and treated the purported cancellation as a repudiation of the contract, which they accepted on 11 August 2010.  

The Buyers brought a claim against the Sellers for damages.  The case made its way to the Supreme Court via GAFTA's first tier arbitration tribunal and Appeal Board as well as the High Court and Court of Appeal. 

Each of the arbitration tribunals and the High Court found that Sellers had repudiated the contract because their notice of cancellation was premature.  That was no longer in dispute by the time the case reached the Supreme Court. The question there was whether the Buyers were entitled to substantial damages. 

Earlier decisions

Overturning the GAFTA first tier tribunal, the GAFTA Appeal Board held (and the High Court and Court of Appeal agreed) that the Buyers were entitled under Clause 20(c) to damages for the difference between the contract and market price on 11 August 2010, the date that the repudiation was accepted.  In doing so, they held that this was the damages calculation required by Clause 20(c) of GAFTA 49.  Damages were consequently calculated at over US$3 million. 

This was widely seen as a victory for commercial certainty over fairness. 

Critics noted that, had they not cancelled prematurely, the Sellers would have been able to cancel the contract anyway, once the embargo made the contract impossible to perform.  This seemed to conflict with the House of Lords decision in The "GOLDEN VICTORY"[2], and to be a particularly harsh result for the Sellers (and a windfall for the Buyers). 

However, the High Court and Court of Appeal held that, by Clause 20(c), the parties had agreed between themselves the appropriate measure of damages for the breach of contract in question, and the Court had to respect the parties' choice and enforce it without regard to events occurring after the breach.  

The Sellers appealed to the Supreme Court.

The questions for the Supreme Court were essentially limited to the following.

1.       Does the GAFTA default clause exclude common law principles for the assessment of damages for anticipatory repudiatory breach, and in particular the compensatory principle identified in The "GOLDEN VICTORY"? 

2.       Is the "overriding compensatory principle" established by The "GOLDEN VICTORY" limited to instalment contracts? 

Supreme Court decision

The Supreme Court was critical of the lower Courts' emphasis on certainty in place of fairness.  Lord Sumption, who gave the leading judgment, commented (at paragraph 23):

"… commercial certainty is undoubtedly important, although its significance will inevitably vary from one contract to another.  But it can rarely be thought to justify an award of substantial damages to one who has not suffered any…" 

The Buyers argued that Clause 20 of GAFTA 49 replaced the common law compensatory system of damages in favour of a mechanical formula, an argument which the High Court and Court of Appeal accepted.  The Sellers, on the other hand, argued that there was a presumed intention on behalf of the parties that the clause would produce the same measure of damages as the compensatory principle would at common law. 

The Supreme Court were not convinced by the Sellers' argument.  However, Lord Sumption accepted that, in line with the ordinary rules of construction, the clause would be assumed "not to have been intended to operate arbitrarily".  In other words, where there are multiple possible interpretations of a clause, the Court will not construe the clause in an uncommercial way.  

In addition, the Court held that damages provisions in contracts (such as Clause 20 of GAFTA 49) were "not necessarily to be regarded as complete codes for the assessment of damages."  The Court implied that there would be a presumption against such an interpretation, however it would be a matter of construction in each case.  

In this case, the Supreme Court held that the GAFTA default clause did not exclude the common law principles of compensatory damages.  Lord Sumption stated (at paragraph 27):

"…it is a question of construction whether the mere fact that [the Clause] deals with damages means that it must have been intended to do so exhaustively, thereby impliedly excluding any considerations which it has not expressly addressed." 

The GAFTA default clause was not sufficiently explicit to operate as a complete code for the calculation of damages and to exclude events occurring after the breach.  The Sellers would have been entitled to cancel the contract as a result of events occurring post-breach, and the Buyers had therefore suffered no loss.  The damages awarded to the Buyers were reduced by the Court from over US$3 million to nominal damages of just US$5. 

The Supreme Court also expressly endorsed the decision in The "GOLDEN VICTORY" and restated the fundamental compensatory principle that any assessment of damages must reflect the "nature of the bargain which the injured party has lost as a result of the repudiation".  

Separately, the Court gave short shrift to the argument that this principle only applied to instalment contracts, with Lord Toulson commenting (at paragraph 87) that this made "no sense".  The Court held that the compensatory principle applied equally to a contract with multiple instalments as it did to a single sale. 

Comments

This decision is a welcome restatement by the Supreme Court of the basic rule that the purpose of damages for breach of contract is to put the innocent party back in the position they would have been, had the contract been performed. 

If follows that as a matter of fairness (and, dare we say, common sense), an innocent party should not be allowed to turn a profit on a contract which would have been cancelled in any event, simply by virtue of the other party jumping the gun and cancelling too early.  

The decision of the Supreme Court leaves open the possibility of parties contracting out of The "GOLDEN VICTORY".  However, very clear words will be needed to show that was what the parties intended, and the presumption will be that they did not intend to displace such a fundamental principle.

[1]    Bunge SA v Nidera BV [2015] UKSC 43 

[2]    [2007] UKHL 12.   In that case, a long-term time charterparty was prematurely cancelled.  It was accepted that this was an anticipatory repudiatory breach of contract.  However, the charterparty would have been terminated early in any event by operation of the war clause, as a result of the Iraq War.  The majority Judgment of the House of Lords was that the owners were only entitled to losses they had actually suffered, which did not include the period after the outbreak of the Iraq War.  Irrespective of the date at which the market price was established for the purposes of calculating damages, it was necessary to take account of contingencies known to have occurred.  Lord Carswell stated (at paragraph 63 of the Judgment): "principles of certainty and finality have in this case to yield to the greater importance of achieving an accurate assessment of the damages based on the loss actually incurred."