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...