UK: Russian Wheat Ban: Court Construes GAFTA 49 Prohibition And Default Clauses

Last Updated: 7 February 2013
Article by Stuart Shepherd and Reema Shour

Bunge S.A. v. Nidera B.V. [2013] EWHC 84 (Comm)

The parties here entered into a contract for the sale of Russian wheat shortly before the Russian government announced a ban on wheat exports for a period of four and a half months extending over the whole of the contractual shipment period. The sellers immediately notified the buyers of the prohibition and cancelled the contract. The sellers argued that, pursuant to the GAFTA 49 Prohibition clause incorporated into the sale contract, the contract was automatically cancelled as soon as the export ban was announced. The buyers contended that was not so since, at the time the sellers purported to declare the contract cancelled, the ban had not yet in fact prevented the sellers from performing under the contract and that the sellers were consequently in repudiatory breach of the sale contract. The GAFTA Board of Appeal found in favour of the buyers and awarded them substantial damages pursuant to the GAFTA 49 Default clause in the contract. The Commercial Court has upheld that decision, confirming that the sellers' purported cancellation of the contract was premature as, at the time of the purported cancellation, it was not certain that the prohibition would in fact prevent shipment of the cargo. The Court also agreed with the Board of Appeal that the buyers were entitled to receive damages calculated by reference to the scheme set out in the Default clause, irrespective of any argument that, under common law, they might only have recovered nominal damages, because the sellers would have been entitled to cancel the contract if they had waited until the end of the shipment period.

The contractual terms

The sale contract was concluded on 10 June 2010 and incorporated the GAFTA 49 contract form, a standard set of f.o.b. terms designed for contracts for goods sold in bulk or bags from Central or Eastern Europe. The two relevant clauses, the Prohibition clause and the Default clause, read as follows:

Prohibition clause

"In the case of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the government of the country of origin of the goods, or of the country from which the goods are to be shipped, restricting 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 whether by shipment or by any other means whatsoever and to that extent this contract or any unfulfilled portion thereof shall be cancelled. Sellers shall advise Buyers without delay with the reasons therefore and, if required, Sellers must produce proof to justify the cancellation..."

Default clause

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

  1. 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.
  2. 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.
  3. 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 the actual or estimated value of the goods on the date of default established under (b) above.
  4. In all cases the damages shall, in addition, include any proven additional expenses which would directly and naturally result in the ordinary course of events from the defaulter's breach of contract, but shall in no case include loss of profit on any sub-contracts made by the party defaulted against or others unless the arbitrator(s) or board of appeal, having regard to special circumstances, shall in his/their sole and absolute discretion think fit.
  5. Damages, if any, shall be computed on the quantity called for, but if no such quantity has been declared then on the mean contract quantity and any option available to either party shall be deemed to have been exercised accordingly in favour of the mean contract quantity."

The background facts

On 5 August 2010, the buyers nominated a vessel to load the cargo. However, on the same day, the Russian government announced a ban on exporting wheat between 15 August and 31 December 2010. The contractual delivery period was 23 to 30 August 2010. On or around 9 August, the sellers declared the contract cancelled under the Prohibition clause. On 11 August, the buyers declared the sellers to be in anticipatory repudiatory breach of the sale contract which they, the buyers, accepted. The buyers contended that at the time the sellers declared the contract cancelled, it could not be said with certainty that the export ban would prevent the sellers from performing. They sought substantial damages from the sellers for breach of the sale contract.

The GAFTA Board of Appeal upheld the buyers' claim. The Board commented that it was always possible that, before the delivery period under the contract expired, the export ban might be revoked or modified in some material way that permitted performance by the seller; it was not unknown for such export bans to be subsequently varied.

On appeal to the Commercial Court, the sellers argued that, on its true construction, the Prohibition clause meant that the contract was automatically cancelled as soon as the export ban was announced and the sellers did not have to prove that the prohibition had in fact had any effect on their ability to perform the contract. The buyers, on the other hand, contended that the sellers had to show that the ban effectively prevented performance, in the sense that it remained in place during the entire delivery period. In other words, the sellers should have waited until the time for performance had expired and then declared the contract cancelled.

With regard to damages under the Default clause, the sellers argued that the whole clause was subject to, and limited by, the general common law in relation to the recoverability and mitigation of damages. They said that the buyers should get only nominal damages because: (a) damages are designed to compensate the innocent party for being deprived of his bargain and since, if matters had been allowed to run their course, the sellers would have been entitled to cancel the shipment at the end of the shipment period in any event (as the ban was not in fact lifted before the end of the shipment period); and (b) the buyers had failed to mitigate their loss, because they had refused an immediate offer to reinstate the contract.

The Commercial Court decision

Mr Justice Hamblen dismissed the sellers' appeal. He held that the sellers had to show that the prohibition prevented them from exporting goods of the contractual description within the shipment period. On the facts, the Board had found that it was possible that the ban would be revoked or modified before the shipment period expired. The fact that the export ban had ultimately remained in place without revocation or modification, so that the sale contract would have been cancelled in any event without liability under the Prohibition clause had it continued, was irrelevant for the purposes of the buyers' claim.

The Judge also upheld the Board's decision to award the buyers substantial damages under the Default clause. He dismissed the sellers' argument that, pursuant to the House of Lords decision in The Golden Victory [2007] 2 AC 353, when assessing the buyers' losses the Court should take into account the fact that, but for the premature termination, the contract would have been legitimately cancelled anyway at the end of the shipment period. The Golden Victory involved the wrongful early termination of a time charterparty which would, in the event, have been frustrated had it continued, due to a subsequent outbreak of war. The Judge was not convinced that The Golden Victory approach applied to a one off sale of goods contract such as the present one, where there was an available market, as opposed to a long-term or period contract. Furthermore, the parties, by virtue of the inclusion of the Default clause, had already agreed in advance to the measure of damages recoverable in the event of default. That clause was neither expressly nor implicitly subject to any common law principles limiting the recovery of damages generally.

Finally, the Judge dismissed the sellers' arguments that the buyers had failed to mitigate their losses by refusing the sellers' subsequent offers to reinstate the sale contract on the same terms. The Default clause did not require the buyers to agree to the sellers' offer and, in any event, the buyers had no guarantee that they would receive the goods because the ban remained in place.

Comment

The judge's decision in this case is an important one for all those who trade on GAFTA terms as it settles, for now at least, debate as to the proper interpretation of the standard form GAFTA Prohibition and Default clauses.

As to Prohibition clauses, the sellers in this case will have learnt to their cost the dangers of shooting too early. It is crucial that any seller seeking to rely on the Prohibition clause holds his fire until the sun has well and truly set on the shipment period.

The ruling in relation to the effect of the Default clause is, as the Court in essence acknowledges, a victory for certainty over fairness. Since the sellers would, but for their impetuosity, have been able validly to cancel the contract anyway, it might be said that it is rather harsh to treat them as "common defaulters" and subject to the full force of the Default clause. However, the GAFTA Board, with whom the Judge agreed, took the view that in terms of assessing damages for default (technical or otherwise), the market preferred certainty and that the Default clause provided that certainty untrammelled by the subtleties of the normal common law rules formulated by the courts in order to bring fairness into the assessment of damages generally.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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