UK: Export Ban: Court Construes FOSFA 201 Prohibition And Default Clauses

Last Updated: 12 March 2013
Article by Stuart Shepherd and Reema Shour

Novasen S.A. v. Alimenta S.A [2013] EWHC 345 (Comm)

The parties here entered into a contract for the sale of Senegalese crude groundnut oil in bulk. Before the goods were shipped, a Senegalese government prohibition on export that applied to this commodity was declared. This stayed in force for just over two months. The Sellers immediately notified the Buyers of the prohibition in accordance with the FOSFA 201 Prohibition clause incorporated into the sale contract, the result of which was that the shipment period was automatically extended by 30 days. At the same time however, the Sellers also purported to terminate the sale contract on the grounds of the prohibition. The Buyers declared this to be an anticipatory repudiatory breach of contract which they accepted as bringing the contract to an end and sought damages. The Sellers argued that the Buyers had suffered no loss because, pursuant to the Prohibition clause, the contract would, in any event, have come to an end without any liability on the Sellers' part after the 30 day extension had expired. The FOSFA Board of Appeal disagreed and held that, by terminating the contract prematurely, the Sellers had deprived themselves of the right to rely on the potential automatic cancellation of the contract without any liability on their part, under the provisions of the Prohibition Clause. The Board awarded the Buyers default damages at the difference between the contract price and the market price as at the date of the termination. The Commercial Court has now allowed the Sellers' appeal, finding that the Default clause in the contract placed a ceiling on the recoverable damages and conferred no right to recover damages if no loss had been suffered.

The sale contract

The sale contract incorporated the terms of FOSFA Contract 201, a standard set of CIF terms for the sale of African crude groundnut oil. The two relevant clauses, the Prohibition and Default clauses, read as follows:

"22. PROHIBITION: In the event, during the contract shipment period, of prohibition of export or any other executive or legislative act by or on behalf of the Government of the country of origin or of the territory where the port/s of shipment named herein is/are situate, or of blockade or hostilities, 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 extended by 30 days.

In the event of shipment within the extended period still proving impossible by reason of any of the causes in this clause, the contract or any unfulfilled part thereof shall be cancelled. Sellers invoking this clause shall advise Buyers with due dispatch. If required, Sellers must produce proof to justify their claim for extension or cancellation under this clause."...

"25. DEFAULT: In default of fulfilment of this contract by either party, the other party at his discretion shall, after giving notice, have the right either to cancel the contract or the right to sell or purchase, as the case may be, against the defaulter who shall on demand make good the loss, if any, on such sale or purchase. If the party liable to pay shall be dissatisfied with the price of such sale or purchase, or if neither of the above rights is exercised, the damages, if any, shall, failing amicable settlement, be determined by arbitration. The damages awarded against the defaulter shall be limited to the difference between the contract price and the actual or estimated market price on the day of default. Damages to be computed on the mean contract quantity. If the arbitrators consider the circumstances of the default justify it they may, at their absolute discretion, award damages on a different quantity and/or award additional damages.

Prior to the last day for making a declaration of shipment a Seller may notify his Buyer of his inability to ship but the date of such notice shall not become the default date without the agreement of the Buyer. If, for any other reason, either party fails to fulfil the contract and is declared to be in default by the other party and default is either agreed between the parties or subsequently found by arbitrators to have occurred, then the day of the default shall, failing amicable settlement, be decided by arbitration."

The background facts

The contract provided for shipment from Senegal between December 2007 and 10 January 2008. This shipment period was, however, held open after 10 January 2008 and was still open when the export ban came into force on 2 April 2008. On that same day, the Sellers notified the Buyers of the prohibition in accordance with the Prohibition clause. This automatically extended the shipment period for 30 days up to 2 May 2008. As it happened, the prohibition was still in force on 2 May 2008 and was not in fact lifted until 6 June 2008. The Sellers did not, however, wait for the 30 day extension to expire before declaring the contract automatically cancelled. Instead, they notified the Buyers that it was cancelled as soon as the export ban came into force.

In the FOSFA arbitration proceedings, the Board of Appeal found in favour of the Buyers. The Sellers appealed to the Commercial Court on the following point of law: whether the FOSFA tribunal should have taken account of matters occurring after 2 April 2008 when assessing whether or not the Buyers suffered a loss and whether or not the Buyers were consequently entitled to damages. Relying on the majority House of Lords decision in The Golden Victory and the common law principle that the purpose of an award of damages for breach of contract is to compensate an innocent party for the losses it suffers as a result of its counterparty's breach, the Sellers argued that the Buyers were only entitled to nominal damages. The Buyers contended that subsequent events after the date of default should be ignored because they and the Sellers had agreed, in the form of the Default clause, a contractual scheme for measuring recoverable damages which replaced the common law measure.

The Commercial Court decision

Mr Justice Popplewell rejected the Buyers' argument that the Default clause conferred a right to damages where none had been suffered and where there would otherwise have been no right to such damages under the common law. Rather, the Judge said that, insofar as the Buyer went into the market to buy replacement goods, the defaulting Seller would have to reimburse him for any difference between the market price and the contract price (if lower). To that extent, the Buyer was entitled to compensation irrespective of subsequent events and the effect they might have had on the contract had it remained in force. However, if the Buyer chose not to buy against the default, then he could only recover such damages, "if any", based on the common law position. That meant that, if subsequent events demonstrated that the contract would, in any event, have been terminated without any liability on the Seller's part (as in this case), then the Buyer might recover only nominal damages because his losses were in fact nil. In the Judge's view, while this might mean that the Buyer who decided not to replace his lost bargain was in an uncertain financial position and would have to wait and see what subsequently happened with the export ban before knowing whether or not he had made the right decision in not buying against the default, this "might be seen as an acceptable uncertainty inherent in his decision not to replace the lost bargain, or at least one which from the seller's point of view should not override the compensatory principle".

A further issue that the Judge was asked to consider was whether an effective cancellation under the Prohibition clause required only one notice, as the Sellers argued, that being the notice of the prohibition which triggered the running of the 30 day extension of the shipment period (on expiry of which the contract was cancelled) or whether a second notice on expiry of the extension was required stating that the Sellers were cancelling the contract. The Judge was not inclined to accept the Sellers' argument on this; he tended to the view that two separate notices would be required but did not express a final view because the question would then be whether the Sellers would in fact have given a final notice of cancellation. That was an issue for the tribunal to decide and so the Judge remitted the arbitration award back to the FOSFA Board of Appeal for further consideration in the light of his judgment.

Comment

This decision comes hot on the heels of the Commercial Court decision in Bunge S.A v. Nidera, in which Mr Justice Hamblen construed the GAFTA 49 Prohibition and Default clauses against the background of the Russian wheat export ban in 2010. In that case, Mr Justice Hamblen upheld the GAFTA Board of Appeal's decision to award the Buyers substantial damages under the GAFTA Default clause, while acknowledging that this was, in essence, a victory for certainty (as provided for in the Default clause) over fairness in the assessment of damages. However, there is a material difference in the wording of the FOSFA Default clause,in that the FOSFA clause provides that, where the claiming party does not sell or purchase against the defaulter, his claim is for "damages, if any". This was sufficient for Mr Justice Popplewell to distinguish this case from the decision in Bunge S.A v. Nidera. However, whether trading on GAFTA or FOSFA terms, the clear message for sellers is to refrain from any premature declarations that their contract has been cancelled due to an export prohibition.

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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