United States: Bunge Jumping The Gun

When damages are awarded to compensate for a breach of contract the injured party should “so far as money can do it … be placed in the same situation … as if the contract had been performed” (Robinson v Harman (1848) 1 Ex Rep 850).  This is modified somewhat by the doctrine of mitigation.  The injured party’s true entitlement is to money to represent the difference between (i) the position it would be in if it had acted reasonably on breach; and (ii) the position it would be in if the contract had been performed. 

How does a reasonable injured party act upon breach?  A rule of thumb is that, if there is an available market, the reasonable claimant will promptly resort to that market to obtain substitute performance.  This is reflected in the Sale of Goods Act 1979, but it applies generally.  It is, however, only a presumption, and can be rebutted.  Sometimes it is not reasonable to go to the market immediately.

This presumption about how a reasonable party would act to mitigate its loss was for a time accorded a significance it did not deserve.  It gave rise to an idea that there was an immutable rule to the effect that what a party had lost always fell to be assessed once and for all on the date of breach, and that nothing which happened thereafter could be taken into account. 

The Golden Victory and one-off performance

The Golden Victory [2007] UKHL 12 concerned a seven year charter of an oil tanker.  With four years left to run, the charterer committed a repudiatory breach of the contract.  The owner terminated the contract and claimed as damages the difference between: (i) four years’ hire at the contractual rate; and (ii) four years’ hire at the lower rate which the owner was actually able to obtain.

Fifteen months after the contract was terminated, however, the second Gulf War had broken out.  If the charterer had performed the contract and continued with the hire it would at that point have become entitled to cancel the charterparty under a war clause.  The House of Lords held, by a majority, that the owner’s damages were to be calculated based on 15 months’, not 4 years’, hire. 

The notional substitute contract which a reasonable party would have entered whenever it was made and at whatever market rate, would have made no difference because it too would have been subject to the same war clause as the original contract. 

The post-termination events were to be taken into account in the assessment of damages.  The loss was not to be assessed once and for all at the date of breach.  There was, however, an obiter statement in the judgment of Lord Scott (in the majority) which suggested that subsequent events might still be disregarded where the contract was not one for continuing performance (like a charterparty) but was for a one-off performance.  He said:

“The assessment at the date of breach rule is particularly apt to cater for cases where a contract for the sale of goods in respect of which there is a market has been repudiated.  The loss caused by the breach to the seller or the buyer, as the case may be, can be measured by the difference between the contract price and the market price at the time of the breach. The seller can re-sell his goods in the market. The buyer can buy substitute goods in the market. Thereby the loss caused by the breach can be fixed. But even here some period must usually be allowed to enable the necessary arrangements for the substitute sale or purchase to be made ... The relevant market price for the purpose of assessing the quantum of the recoverable loss will be the market price at the expiration of that period.

In cases, however, where the contract for sale of goods is not simply a contract for a one-off sale, but is a contract for the supply of goods over some specified period, the application of the general rule may not be in the least apt.  Take the case of a three year contract for the supply of goods and a repudiatory breach of the contract at the end of the first year. The breach is accepted and damages are claimed but before the assessment of the damages an event occurs that, if it had occurred while the contract was still on foot, would have been a frustrating event terminating the contract, e.g. legislation prohibiting any sale of the goods. The contractual benefit of which the victim of the breach of contract had been deprived by the breach would not have extended beyond the date of the frustrating event. So on what principled basis could the victim claim compensation attributable to a loss of contractual benefit after that date? Any rule that required damages attributable to that period to be paid would be inconsistent with the overriding compensatory principle on which awards of contractual damages ought to be based.”

Bunge v Nidera

The decision of the Supreme Court in Bunge SA v Nidera BV [2015] UKSC 43 lays this issue to rest.  Post-breach events can be taken into account in the assessment of damages in a one-off sale of goods contract.  The conclusion seems unremarkable.  It would be surprising if, given the decision in The Golden Victory, the courts were nonetheless to persist in following the old approach - which is not reflective of the true loss - only for a particular category of transactions. 

Therefore, rather than discussing the “Golden Victory issue” (which will no doubt be discussed by other commentators) this article focuses on some other aspects of the decision.  The decision concerned a standard form contract which contained a mechanism for the calculation of damages the effect of which was (apparently) “commonly understood in the trade” and which arguably precluded any consideration of post-termination events, even if such events did fall to be considered at common law under The Golden Victory.  The divergence between the various tribunals who considered the proper construction of that clause is arguably more striking than the Supreme Court’s eventual conclusion that The Golden Victory extends to one-off sale contracts.

Bunge v Nidera concerned a contract entered on 10 June 2010 between Bunge (as seller) and Nidera (as buyer) to sell a quantity of Russian milling wheat, for shipment between 23 and 30 August 2010.  The contract incorporated the following provision from the GAFTA (Grain and Feed Trade Association) standard form provided:

“13. PROHIBITION - In case of prohibition 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 therefor and, if required, Sellers must produce proof to justify the cancellation.

20. 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 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) above 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 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 a legislative embargo on exports of wheat from its territory, which was to run from 15 August to 31 December 2010.  On 9 August 2010, the sellers notified the buyers of the embargo and purported to declare the contract cancelled under Clause 13. 

The buyer did not accept that the seller was entitled to cancel the contract.  The embargo might be lifted in time to permit shipment in accordance with the contract.  On 11 August 2010 the buyer gave notice terminating the contract, relying on the seller’s purported cancellation as a repudiation of the contract.  On 12 August 2010 the sellers offered to reinstate the contract on the same terms, but the buyers would not agree.  Instead, the buyers began arbitration proceedings under the GAFTA rules, claiming a little over $3 million in damages as the difference between the contract price and the market price on 11 August 2010.

The seller argued that, even if it had not been entitled to terminate on 9 August 2010, the ban was not, in fact, lifted when the time for shipment came, and so no loss had been suffered.

The GAFTA contract provides for disputes to be resolved by way of a “two tier” arbitration.  The first tier tribunal held that the notice of cancellation was premature and the contract had been repudiated, but agreed with the seller that no loss had been suffered because the embargo was not lifted and the contract would have been cancelled in any event when the time for delivery came.

The buyer appealed to the second tier tribunal.  The second tier tribunal agreed that the sellers had repudiated the contract by cancelling early, but awarded the $3 million+ damages.  The tribunal’s view was that such an award was required by Clause 20(c) of the contract.  This was how that clause was “commonly understood in the trade” it being intended to produce an “easily understood and readily applied” formula for computing damages.

GAFTAs arbitration rules (unlike, say, the ICC or LCIA Rules) do not exclude the right to appeal to the court on a question of law.  The seller duly appealed.  The award was upheld at first instance - Clause 20 was held to be determinative of the measure of damages.  The seller appealed again.  The Court of Appeal upheld the award, agreeing that Clause 20 was determinative.  The seller appealed to the Supreme Court.

The Supreme Court disagreed with the second tier tribunal, first instance judge and Court of Appeal. 

The liability issue

The issue of liability was not pursued before the Supreme Court, and so was only considered at first instance and in the Court of Appeal.

The issue was, essentially, whether the fact that Russia had passed a law prohibiting export during the relevant delivery window was sufficient to mean that export was “restricted” as of 9 August 2010, or merely potentially restricted.

The arbitrators found as a matter of fact that, as at 9 August 2010, it was always possible that before the delivery period under the contract expired the export ban might be revoked or modified so as to permit performance, observing that: “export bans are introduced by governments for domestic policy reasons and the wider international ramifications are not always fully thought through”.  As such, it was held in the Commercial Court and in the Court of Appeal that as of 9 August 2010, the Russian legislation was a “prohibition of export” but not an act “restricting export”.  The prohibition had not yet operated to restrict export, and, when the time came might, or might not, do so. 

In the Commercial Court, Hamblen J’s reasoning included:

“(3) …, if one were to accept the contention of the Sellers it would mean this, that in the event of prohibition by the [Russian] Government, whatever the effect of it in reference to a particular cargo might be, the clause is to operate automatically, and therefore, for instance, if the [Russian] Government issued a prohibition on the morning of some particular day and then three or four hours later withdrew it, the clause would have automatically operated to the great detriment of the Buyers.

(4) … if, as the Board found was always possible, the prohibition was revoked or modified and did not in the event restrict export of goods of the contractual description during the contractual shipment period, the Sellers would be able to re-negotiate the price to reflect the effect of the prohibition of export not withstanding that they could honour their contracts without let or hindrance.

(5) Although both these examples are illustrations of an implausible advantage being conferred on the sellers, if the market had fallen automatic cancellation would work to their disadvantage. Automatic cancellation on the mere announcement of a prohibition regardless of its likely or actual duration, or whether it has any impact on performance, is such a crude re-allocation of contractual risk that it is most unlikely to be intended.

(7) Although the Board’s reasoning was succinct, they, as the trade tribunal, clearly regarded it as axiomatic that the Prohibition Clause requires proof of a causal connection, as apparently had the first tier arbitrators.”

The Court of Appeal reached the same conclusion, but seem to have been most swayed by the fact that Clause 13 applied to “prohibition of export, blockade or hostilities”.  It would make no sense for the parties to have agreed that the fact a blockade was in effect on a date before the last date for delivery would justify the cancellation of the contract - a blockade might be lifted, or hostilities might cease, at any time. 

In such cases, then, it seems that it is insufficient to show that performance will be unlawful under the law as it stands.  A tribunal must ask a further question, second guessing the legislature, or executive, and asking if it is possible that the law might change.  Of course, it is always theoretically possible that any law might change, so presumably there must be more than a merely fanciful possibility of it doing so.  If there were no real possibility that the embargo would be lifted, it may have been that an entitlement to cancel would still have arisen under Clause 13.

Mitigation

The seller argued that the buyer could have mitigated any loss by accepting the offer to re-contract on the same terms.  Restoring to the buyer precisely what had been lost (the right to have the wheat delivered if it should happen that the ban was lifted).

This argument was dismissed at first instance on the grounds that Clause 20 defined what the measure of damages would be, and imposed no obligation to accept any offer to re-contract:

“There is nothing unusual about contracting parties seeking to set out the measure of damages in advance and being confined, for good or bad, to that measure even if it does not reflect the measure that would be available at common law. The words “based on” reflect the fact that the clause is setting out the basic measure of damages recoverable, whilst recognising that additional heads of loss may also be so. They do not mean that that measure is only provisionally recoverable and may be displaced in certain, unspecified circumstances.”

This decision on mitigation was not challenged on appeal.

The Supreme Court’s decision

By the time the issue came before the Supreme Court, the issue was limited to the question of whether the effect of Clause 20 was to exclude from consideration post-breach events.

Regarding the effect of Clause 20, Lord Sumption’s reasoning began as follows (emphasis added):

“… damages clauses are commonly intended to avoid disputes about damages, either by prescribing a fixed measure of loss (as in the case of a liquidated damages clause) or by providing a mechanical formula in place of the more nuanced and fact-sensitive approach of the common law (as in clause 20 of GAFTA 49). In either case, it is inherent in the clause that it may produce a different result from the common law. For that reason there can be no scope for a presumption that the parties intended the clause to produce the same measure of damages as the compensatory principle would produce at common law. The mere fact that in some cases its application will over- or under-estimate the injured party’s loss is nothing to the point. Such clauses necessarily assume that the parties are willing to take the rough with the smooth. However, I would accept a more moderate version of Mr [the seller’s counsel’s] presumption. A damages clause may be assumed, in the absence of clear words, not to have been intended to operate arbitrarily, for example by producing a result unrelated to anything which the parties can reasonably have expected to approximate to the true loss.”

This presumption seems to come from the same root as the requirement that a liquidated damages clause be a genuine pre-estimate of loss.  But could it be said of Clause 20 that the effect argued for by the seller was “unrelated to anything which the parties can reasonably have expected to approximate to the true loss”?  On the contrary, Clause 20 was an approximation of the loss which the parties could reasonably have expected, at the time of entering the contract, to result from a breach by the seller. 

The truth is that in every case where there is a contractual scheme for the assessment of damages, or a liquidated damages clause, one can conceive of a scenario whereby the true loss will be zero, if: (i) one party commits an anticipatory breach; (ii) the other party accepts that as a repudiation and terminates the contract; but (iii) thereafter, some supervening event occurs which would have excused the non-performance.

Lord Sumption’s judgment continues:

“… such clauses are not necessarily to be regarded as complete codes for the assessment of damages. … To treat a damages clause as a complete code in this all-embracing sense is to tax the foresight of the draftsman in a way which is rarely appropriate unless the alternative is to undermine the coherence or utility of the clause.

Sub-clauses (a) to (c) constitute an elaborate, indeed a complete, code for determining the market price or value of the goods that either were actually purchased by way of mitigation or might have been purchased under a notional substitute contract. The clause does not deal at all with the effect of subsequent events which would have resulted in the original contract not being performed in any event. The effect of these events could be excluded from consideration only if clause 20 were treated as a complete code not just for determining the relevant market price or value but for every aspect of the assessment of damages.

In my opinion clause 20 cannot be viewed in that way. In the first place, it neither provides nor assumes that assessment will depend only on the difference between the contract price and the relevant market price or value. It provides that the damages payable “shall be based on” that difference. It does not exclude every other consideration which may be relevant to determine the injured party’s actual loss. … Secondly, this is what one would in any event infer from the limited subject-matter of the clause. Clause 20 is not sufficiently comprehensive to be regarded as a complete code covering the entire field of damages. Sub-clause (c) covers the same territory as sections 50(3) and 51(3) of the Sales of Goods Act, and sub-clauses (a) and (b) cover the territory occupied by the common law principles concerning the mitigation of losses arising from price movements. But this is very far from the entire field. … although the clause deals with the injured party’s duty to mitigate by going into the market to buy or sell against the defaulter, it does not deal with any other aspect of mitigation. It therefore leaves open the possibility that damages may be affected by a successful act of mitigation on the part of the injured party or by an offer from the defaulter which it would have been reasonable for the injured party to accept. Likewise, in my opinion, clause 20 neither addresses nor excludes the consideration of supervening events (other than price movements) which operate to reduce or extinguish the loss.”

The Supreme Court reinstated the first instance tribunal’s decision, awarding the buyer nominal damages.  Lord Sumption concluded:

“This result seems to me to be consistent with principle. The alternative is to allow the clause to operate arbitrarily as a means of recovering what may be very substantial damages in circumstances where there has been no loss at all. In the present case, the sellers jumped the gun. They repudiated the contract by anticipating that the Russian export ban would prevent shipment at a time when this was not yet clear. But fortunately for them their assumption was in the event proved to have been correct. The ban would have prevented shipment when the time came. The buyers did nothing in consequence of the termination, since they chose not to go into the market to replace the goods. They therefore lost nothing, and the arbitrators should not have felt inhibited from saying so.”

This is obviously markedly different from the second tier tribunal’s, the commercial court’s and the Court of Appeal’s reading of the clause. 

One’s sympathies naturally lie with the seller.  Perhaps the worst that could be said of the seller was that it made a mistake - purporting to cancel the contract when the embargo was announced, rather than waiting for it to take effect - “jumping the gun” as Lord Sumption put it.  It is possible that there may also have been some element of opportunism in the seller’s actions.  The market price had risen, and the seller might have hoped to sell the wheat to another buyer for the higher price before the embargo took effect.  Perhaps Bunge realised there was a risk that it was repudiating the contract, and would face a claim by the buyer, but was willing to take a gamble and hope that the embargo would remain in place.  But the fact Bunge immediately offered to re-contract on the same terms when the buyer terminated suggests a mistake and not a calculated ploy.

While sympathies might lie with the seller, one can also see the buyer’s point.  The words “the damages payable shall be based on, but not limited to the difference between the contract price and the default price …” seems to assume that:  (i) damages will be payable; (ii) the damages payable will be at least equal to the difference between the contract price and the default price (i.e. that is the “base” from which one starts); and that (iii) further damages in excess of that amount may also be awarded (say to cover additional expenses incurred by the non-defaulting party).  Yet the “damages payable” following the Supreme Court’s judgment, could not be said to be “based on” the difference between the contract price and the default price. 

Wherever one’s sympathies lie, the matter has been decided.  On the Supreme Court’s view, the clause served to exclude the consideration of any price movement after the repudiation was accepted, but did not prevent consideration of any other supervening event - such as an offer to re-contract on the same terms (as in fact happened) or the continuation of the export ban (as in fact happened).

Lessons and questions

What can be drawn from the case, besides the confirmation that post-termination events can be taken into account in fixing damages even for ‘one-off’ contracts?

In principle it is hard to see any principled distinction between a “code for the assessment of damages” and a liquidated damages clause.  Each has as its primary object “to give the victim of a breach the right simply to sue for the stipulated amount, without recourse to the general law of damages” (Andrews et al  Contractual Duties (2011)). 

It seems that the words “damages shall be based on” are insufficient to create a definitive scheme for the assessment of damages, and exclude the common law rules of mitigation.  But if the clause had simply said “damages shall be …” would that have been sufficient to exclude the effect of supervening events?  Or must the clause recite that the amount payable is not to be adjusted in light of any failure to mitigate or post-termination event which would have excused non-performance, if that is the effect that is required?  It is arguably prudent to assume the latter when drafting such clauses.

Evidently, whenever one is considering relying upon supervening illegality as a ground for treating a contract as cancelled (or, presumably, frustrated at common law), one should ask whether there is any possibility that the law in question might be changed to permit performance.

Suppose that, rather than a contract for a generic commodity like wheat, the contract had been for the manufacture in Russia of some bespoke piece of machinery for export, and that Russia had introduced a ban on the export of such machinery, which would cover the period in which the machine was to be delivered.  Would the manufacturer have had to continue work on the machine, in the hope that the export ban might be lifted?  Would the purchaser have had to continue paying instalments of the purchase price?  On the terms in Bunge v Nidera, the answer to both questions seems to be “yes”.

This scenario (an embargo which might be lifted in time for performance) is not normally addressed in force majeure clauses.  To give just one example, the standard PLC force majeure clause defines as a “Force Majeure Event:  any law or any action taken by a government or public authority, including without limitation imposing an export or import restriction, quota or prohibition” and provides that, provided a party has complied with a requirement to give notice, “if a party is prevented, hindered or delayed in or from performing any of its obligations under this agreement by a Force Majeure Event (Affected Party), the Affected Party shall not be in breach of this agreement or otherwise liable for any such failure or delay in the performance of such obligations. The time for performance of such obligations shall be extended accordingly”.  In the scenario which has been posited, the seller is arguably not yet “prevented hindered or delayed” from continuing to build the machine, and the buyer is not yet “prevented, hindered or delayed” from making payments, just as the seller in Bunge v Nidera was not “restricted” from delivering the wheat. 

The Law Reform (Frustrated Contracts) Act 1943 provides (so far as relevant):

“(2) All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as “the time of discharge”) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable:

Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.”

There seem to be three main possibilities in the posited scenario:

(a) The buyer suspends payment under the contract, thereby committing a breach.  The seller terminates and claims damages.  The buyer must hope that the embargo persists, so that (as in Bunge v Nidera) the seller’s loss is reduced to zero, subject to any claim the seller might have to recover expenses incurred pre-termination.  If the embargo is lifted, the seller recovers its full loss to include profits it would have earned if the contract had remained in effect and the machine been delivered. 

(b) The buyer continues to make payments and the seller continues to do work.  The buyer must hope that the embargo is lifted before the last date for delivery.  If not, then the buyer will have to try and claw back the money under the 1943 Act (which may be problematic if the seller is insolvent or situated in a problematic jurisdiction).  Any recovery will also be discounted to represent any expenses incurred by the seller, though the buyer could argue that it was unreasonable for the seller to have continued incurring such costs after the date that the embargo was announced, such that only expenses incurred before that date should be discounted.

(c) The parties agree to suspend payment and work and wait to see whether the embargo persists beyond the last date for performance.  If the embargo persists, the position is the same as in (b), save that there will have been no payments made or expenses incurred after the date of the suspensory agreement.

The uncertainties are perhaps better avoided by using a modified force majeure clause so as to make clear that it is to operate with effect from the date that an embargo which would prevent performance is enacted.

Another striking point about Bunge v Nidera is that the buyer won three times (before the second tier tribunal, in the Commercial Court and in the Court of Appeal), only to lose in the Supreme Court.  It so happens that (in this case) both parties would have been better off if there had been just one arbitration with the right to appeal excluded, since the Supreme Court’s decision, five years later, ended up being the same as that of the first tier tribunal.

Of course, not every appeal ends up in the Supreme Court, and there may well have been other factors at play which caused the case to be fought to the bitter end.  Bunge and Nidera are substantial companies which presumably conduct a great deal of business on the GAFTA form, and so may have wanted a judgment to establish definitively what the effect of Clause 20 was.  Nonetheless Bunge v Nidera does illustrate how arbitration under rules which permit appeals can raise the stakes and prolong a final resolution.

When damages are awarded to compensate for a breach of contract the injured party should “so far as money can do it … be placed in the same situation … as if the contract had been performed” (Robinson v Harman (1848) 1 Ex Rep 850).  This is modified somewhat by the doctrine of mitigation.  The injured party’s true entitlement is to money to represent the difference between (i) the position it would be in if it had acted reasonably on breach; and (ii) the position it would be in if the contract had been performed. 

How does a reasonable injured party act upon breach?  A rule of thumb is that, if there is an available market, the reasonable claimant will promptly resort to that market to obtain substitute performance.  This is reflected in the Sale of Goods Act 1979, but it applies generally.   It is, however, only a presumption, and can be rebutted.  Sometimes it is not reasonable to go to the market immediately.

This presumption about how a reasonable party would act to mitigate its loss was for a time accorded a significance it did not deserve.  It gave rise to an idea that there was an immutable rule to the effect that what a party had lost always fell to be assessed once and for all on the date of breach, and that nothing which happened thereafter could be taken into account. 

The Golden Victory and one-off performance

The Golden Victory [2007] UKHL 12 concerned a seven year charter of an oil tanker.  With four years left to run, the charterer committed a repudiatory breach of the contract.  The owner terminated the contract and claimed as damages the difference between: (i) four years’ hire at the contractual rate; and (ii) four years’ hire at the lower rate which the owner was actually able to obtain.

Fifteen months after the contract was terminated, however, the second Gulf War had broken out.  If the charterer had performed the contract and continued with the hire it would at that point have become entitled to cancel the charterparty under a war clause.  The House of Lords held, by a majority, that the owner’s damages were to be calculated based on 15 months’, not 4 years’, hire. 

The notional substitute contract which a reasonable party would have entered whenever it was made and at whatever market rate, would have made no difference because it too would have been subject to the same war clause as the original contract. 

The post-termination events were to be taken into account in the assessment of damages.  The loss was not to be assessed once and for all at the date of breach.  There was, however, an obiter statement in the judgment of Lord Scott (in the majority) which suggested that subsequent events might still be disregarded where the contract was not one for continuing performance (like a charterparty) but was for a one-off performance.  He said:

The assessment at the date of breach rule is particularly apt to cater for cases where a contract for the sale of goods in respect of which there is a market has been repudiated.   The loss caused by the breach to the seller or the buyer, as the case may be, can be measured by the difference between the contract price and the market price at the time of the breach. The seller can re-sell his goods in the market. The buyer can buy substitute goods in the market. Thereby the loss caused by the breach can be fixed. But even here some period must usually be allowed to enable the necessary arrangements for the substitute sale or purchase to be made ... The relevant market price for the purpose of assessing the quantum of the recoverable loss will be the market price at the expiration of that period.

In cases, however, where the contract for sale of goods is not simply a contract for a one-off sale, but is a contract for the supply of goods over some specified period, the application of the general rule may not be in the least apt.  Take the case of a three year contract for the supply of goods and a repudiatory breach of the contract at the end of the first year. The breach is accepted and damages are claimed but before the assessment of the damages an event occurs that, if it had occurred while the contract was still on foot, would have been a frustrating event terminating the contract, e.g. legislation prohibiting any sale of the goods. The contractual benefit of which the victim of the breach of contract had been deprived by the breach would not have extended beyond the date of the frustrating event. So on what principled basis could the victim claim compensation attributable to a loss of contractual benefit after that date? Any rule that required damages attributable to that period to be paid would be inconsistent with the overriding compensatory principle on which awards of contractual damages ought to be based.

Bunge v Nidera

The decision of the Supreme Court in Bunge SA v Nidera BV [2015] UKSC 43 lays this issue to rest.   Post-breach events can be taken into account in the assessment of damages in a one-off sale of goods contract.  The conclusion seems unremarkable.  It would be surprising if, given the decision in The Golden Victory, the courts were nonetheless to persist in following the old approach - which is not reflective of the true loss - only for a particular category of transactions. 

Therefore, rather than discussing the “Golden Victory issue” (which will no doubt be discussed by other commentators) this article focuses on some other aspects of the decision.  The decision concerned a standard form contract which contained a mechanism for the calculation of damages the effect of which was (apparently) “commonly understood in the trade” and which arguably precluded any consideration of post-termination events, even if such events did fall to be considered at common law under The Golden Victory.  The divergence between the various tribunals who considered the proper construction of that clause is arguably more striking than the Supreme Court’s eventual conclusion that The Golden Victory extends to one-off sale contracts.

Bunge v Nidera concerned a contract entered on 10 June 2010 between Bunge (as seller) and Nidera (as buyer) to sell a quantity of Russian milling wheat, for shipment between 23 and 30 August 2010.  The contract incorporated the following provision from the GAFTA (Grain and Feed Trade Association) standard form provided:

13. PROHIBITION - In case of prohibition 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 therefor and, if required, Sellers must produce proof to justify the cancellation.

20. 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 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) above 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 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 a legislative embargo on exports of wheat from its territory, which was to run from 15 August to 31 December 2010.  On 9 August 2010, the sellers notified the buyers of the embargo and purported to declare the contract cancelled under Clause 13. 

The buyer did not accept that the seller was entitled to cancel the contract.  The embargo might be lifted in time to permit shipment in accordance with the contract.   On 11 August 2010 the buyer gave notice terminating the contract, relying on the seller’s purported cancellation as a repudiation of the contract.  On 12 August 2010 the sellers offered to reinstate the contract on the same terms, but the buyers would not agree.  Instead, the buyers began arbitration proceedings under the GAFTA rules, claiming a little over $3 million in damages as the difference between the contract price and the market price on 11 August 2010.

The seller argued that, even if it had not been entitled to terminate on 9 August 2010, the ban was not, in fact, lifted when the time for shipment came, and so no loss had been suffered.

The GAFTA contract provides for disputes to be resolved by way of a “two tier” arbitration.   The first tier tribunal held that the notice of cancellation was premature and the contract had been repudiated, but agreed with the seller that no loss had been suffered because the embargo was not lifted and the contract would have been cancelled in any event when the time for delivery came.

The buyer appealed to the second tier tribunal.  The second tier tribunal agreed that the sellers had repudiated the contract by cancelling early, but awarded the $3 million+ damages.  The tribunal’s view was that such an award was required by Clause 20(c) of the contract.  This was how that clause was “commonly understood in the trade” it being intended to produce an “easily understood and readily applied” formula for computing damages.

GAFTAs arbitration rules (unlike, say, the ICC or LCIA Rules) do not exclude the right to appeal to the court on a question of law.  The seller duly appealed.  The award was upheld at first instance - Clause 20 was held to be determinative of the measure of damages.  The seller appealed again.  The Court of Appeal upheld the award, agreeing that Clause 20 was determinative.  The seller appealed to the Supreme Court.

The Supreme Court disagreed with the second tier tribunal, first instance judge and Court of Appeal. 

The liability issue

The issue of liability was not pursued before the Supreme Court, and so was only considered at first instance and in the Court of Appeal.

The issue was, essentially, whether the fact that Russia had passed a law prohibiting export during the relevant delivery window was sufficient to mean that export was “restricted” as of 9 August 2010, or merely potentially restricted.

The arbitrators found as a matter of fact that, as at 9 August 2010, it was always possible that before the delivery period under the contract expired the export ban might be revoked or modified so as to permit performance, observing that: “export bans are introduced by governments for domestic policy reasons and the wider international ramifications are not always fully thought through”.  As such, it was held in the Commercial Court and in the Court of Appeal that as of 9 August 2010, the Russian legislation was a “prohibition of export” but not an act “restricting export”.  The prohibition had not yet operated to restrict export, and, when the time came might, or might not, do so. 

In the Commercial Court, Hamblen J’s reasoning included:

(3)        …, if one were to accept the contention of the Sellers it would mean this, that in the event of prohibition by the [Russian] Government, whatever the effect of it in reference to a particular cargo might be, the clause is to operate automatically, and therefore, for instance, if the [Russian] Government issued a prohibition on the morning of some particular day and then three or four hours later withdrew it, the clause would have automatically operated to the great detriment of the Buyers.

(4)        … if, as the Board found was always possible, the prohibition was revoked or modified and did not in the event restrict export of goods of the contractual description during the contractual shipment period, the Sellers would be able to re-negotiate the price to reflect the effect of the prohibition of export not withstanding that they could honour their contracts without let or hindrance.

(5)        Although both these examples are illustrations of an implausible advantage being conferred on the sellers, if the market had fallen automatic cancellation would work to their disadvantage. Automatic cancellation on the mere announcement of a prohibition regardless of its likely or actual duration, or whether it has any impact on performance, is such a crude re-allocation of contractual risk that it is most unlikely to be intended.

(7)        Although the Board’s reasoning was succinct, they, as the trade tribunal, clearly regarded it as axiomatic that the Prohibition Clause requires proof of a causal connection, as apparently had the first tier arbitrators.

The Court of Appeal reached the same conclusion, but seem to have been most swayed by the fact that Clause 13 applied to “prohibition of export, blockade or hostilities”.  It would make no sense for the parties to have agreed that the fact a blockade was in effect on a date before the last date for delivery would justify the cancellation of the contract - a blockade might be lifted, or hostilities might cease, at any time. 

In such cases, then, it seems that it is insufficient to show that performance will be unlawful under the law as it stands.  A tribunal must ask a further question, second guessing the legislature, or executive, and asking if it is possible that the law might change.  Of course, it is always theoretically possible that any law might change, so presumably there must be more than a merely fanciful possibility of it doing so.   If there were no real possibility that the embargo would be lifted, it may have been that an entitlement to cancel would still have arisen under Clause 13.

Mitigation

The seller argued that the buyer could have mitigated any loss by accepting the offer to re-contract on the same terms.  Restoring to the buyer precisely what had been lost (the right to have the wheat delivered if it should happen that the ban was lifted).

This argument was dismissed at first instance on the grounds that Clause 20 defined what the measure of damages would be, and imposed no obligation to accept any offer to re-contract:

There is nothing unusual about contracting parties seeking to set out the measure of damages in advance and being confined, for good or bad, to that measure even if it does not reflect the measure that would be available at common law. The words “based on” reflect the fact that the clause is setting out the basic measure of damages recoverable, whilst recognising that additional heads of loss may also be so. They do not mean that that measure is only provisionally recoverable and may be displaced in certain, unspecified circumstances.

This decision on mitigation was not challenged on appeal.

The Supreme Court’s decision

By the time the issue came before the Supreme Court, the issue was limited to the question of whether the effect of Clause 20 was to exclude from consideration post-breach events.

Regarding the effect of Clause 20, Lord Sumption’s reasoning began as follows (emphasis added):

… damages clauses are commonly intended to avoid disputes about damages, either by prescribing a fixed measure of loss (as in the case of a liquidated damages clause) or by providing a mechanical formula in place of the more nuanced and fact-sensitive approach of the common law (as in clause 20 of GAFTA 49). In either case, it is inherent in the clause that it may produce a different result from the common law. For that reason there can be no scope for a presumption that the parties intended the clause to produce the same measure of damages as the compensatory principle would produce at common law. The mere fact that in some cases its application will over- or under-estimate the injured party’s loss is nothing to the point. Such clauses necessarily assume that the parties are willing to take the rough with the smooth. However, I would accept a more moderate version of Mr [the seller’s counsel’s] presumption. A damages clause may be assumed, in the absence of clear words, not to have been intended to operate arbitrarily, for example by producing a result unrelated to anything which the parties can reasonably have expected to approximate to the true loss.

This presumption seems to come from the same root as the requirement that a liquidated damages clause be a genuine pre-estimate of loss.  But could it be said of Clause 20 that the effect argued for by the seller was “unrelated to anything which the parties can reasonably have expected to approximate to the true loss”?   On the contrary, Clause 20 was an approximation of the loss which the parties could reasonably have expected, at the time of entering the contract, to result from a breach by the seller. 

The truth is that in every case where there is a contractual scheme for the assessment of damages, or a liquidated damages clause, one can conceive of a scenario whereby the true loss will be zero, if: (i) one party commits an anticipatory breach; (ii) the other party accepts that as a repudiation and terminates the contract; but (iii) thereafter, some supervening event occurs which would have excused the non-performance.

Lord Sumption’s judgment continues:

… such clauses are not necessarily to be regarded as complete codes for the assessment of damages. … To treat a damages clause as a complete code in this all-embracing sense is to tax the foresight of the draftsman in a way which is rarely appropriate unless the alternative is to undermine the coherence or utility of the clause.

Sub-clauses (a) to (c) constitute an elaborate, indeed a complete, code for determining the market price or value of the goods that either were actually purchased by way of mitigation or might have been purchased under a notional substitute contract. The clause does not deal at all with the effect of subsequent events which would have resulted in the original contract not being performed in any event. The effect of these events could be excluded from consideration only if clause 20 were treated as a complete code not just for determining the relevant market price or value but for every aspect of the assessment of damages.

In my opinion clause 20 cannot be viewed in that way. In the first place, it neither provides nor assumes that assessment will depend only on the difference between the contract price and the relevant market price or value. It provides that the damages payable “shall be based on” that difference. It does not exclude every other consideration which may be relevant to determine the injured party’s actual loss. … Secondly, this is what one would in any event infer from the limited subject-matter of the clause. Clause 20 is not sufficiently comprehensive to be regarded as a complete code covering the entire field of damages. Sub-clause (c) covers the same territory as sections 50(3) and 51(3) of the Sales of Goods Act, and sub-clauses (a) and (b) cover the territory occupied by the common law principles concerning the mitigation of losses arising from price movements. But this is very far from the entire field. … although the clause deals with the injured party’s duty to mitigate by going into the market to buy or sell against the defaulter, it does not deal with any other aspect of mitigation. It therefore leaves open the possibility that damages may be affected by a successful act of mitigation on the part of the injured party or by an offer from the defaulter which it would have been reasonable for the injured party to accept. Likewise, in my opinion, clause 20 neither addresses nor excludes the consideration of supervening events (other than price movements) which operate to reduce or extinguish the loss.

The Supreme Court reinstated the first instance tribunal’s decision, awarding the buyer nominal damages.  Lord Sumption concluded:

This result seems to me to be consistent with principle. The alternative is to allow the clause to operate arbitrarily as a means of recovering what may be very substantial damages in circumstances where there has been no loss at all. In the present case, the sellers jumped the gun. They repudiated the contract by anticipating that the Russian export ban would prevent shipment at a time when this was not yet clear. But fortunately for them their assumption was in the event proved to have been correct. The ban would have prevented shipment when the time came. The buyers did nothing in consequence of the termination, since they chose not to go into the market to replace the goods. They therefore lost nothing, and the arbitrators should not have felt inhibited from saying so.

This is obviously markedly different from the second tier tribunal’s, the commercial court’s and the Court of Appeal’s reading of the clause. 

One’s sympathies naturally lie with the seller.  Perhaps the worst that could be said of the seller was that it made a mistake - purporting to cancel the contract when the embargo was announced, rather than waiting for it to take effect - “jumping the gun” as Lord Sumption put it.   It is possible that there may also have been some element of opportunism in the seller’s actions.  The market price had risen, and the seller might have hoped to sell the wheat to another buyer for the higher price before the embargo took effect.   Perhaps Bunge realised there was a risk that it was repudiating the contract, and would face a claim by the buyer, but was willing to take a gamble and hope that the embargo would remain in place.  But the fact Bunge immediately offered to re-contract on the same terms when the buyer terminated suggests a mistake and not a calculated ploy.

While sympathies might lie with the seller, one can also see the buyer’s point.  The words “the damages payable shall be based on, but not limited to the difference between the contract price and the default price …” seems to assume that:   (i) damages will be payable; (ii) the damages payable will be at least equal to the difference between the contract price and the default price (i.e. that is the “base” from which one starts); and that (iii) further damages in excess of that amount may also be awarded (say to cover additional expenses incurred by the non-defaulting party).  Yet the “damages payable” following the Supreme Court’s judgment, could not be said to be “based on” the difference between the contract price and the default price. 

Wherever one’s sympathies lie, the matter has been decided.  On the Supreme Court’s view, the clause served to exclude the consideration of any price movement after the repudiation was accepted, but did not prevent consideration of any other supervening event - such as an offer to re-contract on the same terms (as in fact happened) or the continuation of the export ban (as in fact happened).

Lessons and questions

What can be drawn from the case, besides the confirmation that post-termination events can be taken into account in fixing damages even for ‘one-off’ contracts?

In principle it is hard to see any principled distinction between a “code for the assessment of damages” and a liquidated damages clause.  Each has as its primary object “to give the victim of a breach the right simply to sue for the stipulated amount, without recourse to the general law of damages” (Andrews et al  Contractual Duties (2011)). 

It seems that the words “damages shall be based on” are insufficient to create a definitive scheme for the assessment of damages, and exclude the common law rules of mitigation.  But if the clause had simply said “damages shall be …” would that have been sufficient to exclude the effect of supervening events?  Or must the clause recite that the amount payable is not to be adjusted in light of any failure to mitigate or post-termination event which would have excused non-performance, if that is the effect that is required?  It is arguably prudent to assume the latter when drafting such clauses.

Evidently, whenever one is considering relying upon supervening illegality as a ground for treating a contract as cancelled (or, presumably, frustrated at common law), one should ask whether there is any possibility that the law in question might be changed to permit performance.

Suppose that, rather than a contract for a generic commodity like wheat, the contract had been for the manufacture in Russia of some bespoke piece of machinery for export, and that Russia had introduced a ban on the export of such machinery, which would cover the period in which the machine was to be delivered.  Would the manufacturer have had to continue work on the machine, in the hope that the export ban might be lifted?  Would the purchaser have had to continue paying instalments of the purchase price?  On the terms in Bunge v Nidera, the answer to both questions seems to be “yes”.

This scenario (an embargo which might be lifted in time for performance) is not normally addressed in force majeure clauses.  To give just one example, the standard PLC force majeure clause defines as a “Force Majeure Event:   any law or any action taken by a government or public authority, including without limitation imposing an export or import restriction, quota or prohibition” and provides that, provided a party has complied with a requirement to give notice, “if a party is prevented, hindered or delayed in or from performing any of its obligations under this agreement by a Force Majeure Event (Affected Party), the Affected Party shall not be in breach of this agreement or otherwise liable for any such failure or delay in the performance of such obligations. The time for performance of such obligations shall be extended accordingly”.  In the scenario which has been posited, the seller is arguably not yet “prevented hindered or delayed” from continuing to build the machine, and the buyer is not yet “prevented, hindered or delayed” from making payments, just as the seller in Bunge v Nidera was not “restricted” from delivering the wheat. 

The Law Reform (Frustrated Contracts) Act 1943 provides (so far as relevant):

(2) All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as “the time of discharge”) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable:

Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.

There seem to be three main possibilities in the posited scenario:

(a)        The buyer suspends payment under the contract, thereby committing a breach.  The seller terminates and claims damages.  The buyer must hope that the embargo persists, so that (as in Bunge v Nidera) the seller’s loss is reduced to zero, subject to any claim the seller might have to recover expenses incurred pre-termination.  If the embargo is lifted, the seller recovers its full loss to include profits it would have earned if the contract had remained in effect and the machine been delivered. 

(b)        The buyer continues to make payments and the seller continues to do work.  The buyer must hope that the embargo is lifted before the last date for delivery.  If not, then the buyer will have to try and claw back the money under the 1943 Act (which may be problematic if the seller is insolvent or situated in a problematic jurisdiction).  Any recovery will also be discounted to represent any expenses incurred by the seller, though the buyer could argue that it was unreasonable for the seller to have continued incurring such costs after the date that the embargo was announced, such that only expenses incurred before that date should be discounted.

(c)        The parties agree to suspend payment and work and wait to see whether the embargo persists beyond the last date for performance.  If the embargo persists, the position is the same as in (b), save that there will have been no payments made or expenses incurred after the date of the suspensory agreement.

The uncertainties are perhaps better avoided by using a modified force majeure clause so as to make clear that it is to operate with effect from the date that an embargo which would prevent performance is enacted.

Another striking point about Bunge v Nidera is that the buyer won three times (before the second tier tribunal, in the Commercial Court and in the Court of Appeal), only to lose in the Supreme Court.  It so happens that (in this case) both parties would have been better off if there had been just one arbitration with the right to appeal excluded, since the Supreme Court’s decision, five years later, ended up being the same as that of the first tier tribunal.

Of course, not every appeal ends up in the Supreme Court, and there may well have been other factors at play which caused the case to be fought to the bitter end.   Bunge and Nidera are substantial companies which presumably conduct a great deal of business on the GAFTA form, and so may have wanted a judgment to establish definitively what the effect of Clause 20 was.  Nonetheless Bunge v Nidera does illustrate how arbitration under rules which permit appeals can raise the stakes and prolong a final resolution.

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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