The English Supreme Court has just given a judgment, 1 July 2015, on this very interesting case. The dispute dates back to August 2010 and in less than 5 years it has gone through five instances; two GAFTA arbitration tribunals and up to the Supreme Court in England.
Very complex issues have been dealt with by the Courts and arbitrators regarding a GAFTA 49 sale contract form, and particularly the implications for this case of the prohibition and default clauses and whether The Golden Victory doctrine applied to the present dispute.
The Supreme Court has accepted the appeal of BUNGE and has held that The Golden Victory applies to the case and therefore the Buyers’ claim for substantial damages, US$3,062,500, should be reduced to nominal damages only, that is US$5.
As put it in the judgment of Lord Sumption “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 result, it is suggested, might have been different if NIDERA, the Buyers, had chosen to go into the market to replace the goods following the anticipatory repudiation of BUNGE.
The facts of the case were succinctly as follows:
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. The buyers did not accept that the sellers were entitled to cancel the contract at that stage. They treated the purported cancellation as a repudiation, which they accepted on 11 August 2010. On the following day, the sellers offered to reinstate the contract on the same terms, but the buyers would not agree. Instead, they began arbitration proceedings under the GAFTA rules, in support of a claim for damages of US$3,062,500.
The Supreme Court has reminded the position regarding mitigation and the rule of damages, stating:
“The answer to the first question, although like section 51(3) it is only a prima facie answer, is that where there is an available market for the goods, the market price is determined as at the contractual date of delivery, unless the buyer should have mitigated by going into the market and entering into a substitute contract at some earlier stage: Garnac Grain Co Inc v HMF Fauré & Fairclough Ltd  AC 1130, 1168; Tai Hing Cotton Mill Ltd v Kamsing Knitting Factory  AC 91, 102. Normally, however, the injured party will be required to mitigate his loss by going into the market for a substitute contract as soon as is reasonable after the original contract was terminated. Damages will then be assessed by reference to the price which he obtained. If he chooses not to do so, damages will generally be assessed by reference to the market price at the time when he should have done: Koch Marine Inc v d’Amica Societa di Navigazione (The Elena D’Amico)  1 Lloyd’s 75, 87, 89. The result is that in practice where there is a renunciation and an available market, the relevant market price for the purposes of assessing damages will generally be determined not by the prima facie measure but by the principles of mitigation.”
“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. The clause is consistent with a conclusion that because of a subsequent supervening event the contract would never have been performed and the same loss would have been suffered even if it had not been renounced. 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. These provisions bring a valuable measure of certainty to issues arising from price movements which have given rise to difficulty and dispute at common law for 150 years. That is a valuable purpose which the clause achieves whatever the answer to the question now before us. But clause 20 is not concerned with bases of assessment which do not depend on the terms of a notional substitute contract or on any determination of the market price: for example expenses incurred by the buyer in the course of performance, which are not occasioned by the breach of contract but have been rendered futile by it, and would normally be recoverable as an alternative to the prima facie measure. Moreover, 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.
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.”
As concluded by Lord Sumption: “In my opinion the answer to question 2.3 in Andrew Smith J’s order granting permission to appeal from the award is that the compensatory principle established in The Golden Victory is not limited to instalment contracts, and that the GAFTA Appeal Board was in error in thinking that it was. The answer to question 2.2(ii) in the order is that the default clause in GAFTA 49 does not exclude the principle identified in The Golden Victory  2 AC 353. In both respects, the correct conclusion had been reached in the first tier award. It follows that I would allow this appeal and vary the award of the Appeal Board by excising so much of it as awards substantial damages to the buyers and substituting an award of nominal damages in the sum of US$5. The parties should be directed to deal in writing with the question whether the award should also be varied so far as it awarded costs against the sellers (para 6.4), and with the incidence of costs of the proceedings following the award.”
For a copy of the full judgment click here.