DAMAGES PAYABLE WHEN A BUYER FAILS TO ACCEPT AND PAY FOR DELIVERY OF GOODS
This week’s blog covers Sharp Corp Ltd (Respondent) v Viterra BV (previously known as Glencore Agricultre BV) [2024] UKSC 14, a UK Supreme Court case on the measure of damages payable by a buyer for non-acceptance of goods.
Facts. Viterra BV (the “Sellers”) and Sharp Corporation (the “Buyers”) Limited entered into two Cost & Freight free out Mundra sales contracts for the sale of 20,000 metric tons of Canadian Crimson Lentils of Canadian origin at a price of US$600 per mt (“Lentils Contract”) and the sale of 45,000 metric tons of Canadian Yellow Peas of Canadian origin at a price of US$339 per mt (“Peas Contract”). The Contracts were identical save as to commodity, quantity and price.
On 26 April 2017, the Sellers nominated the vessel RB Leah (the “Vessel”) under both contracts.
On 10 May 2017, the lentils and peas were loaded on board the Vessel in Vancouver.
The Contracts required payment for the goods were due within 5 days prior to the Vessel’s arrival at Mundra (being 14 June 2017). However, the Buyers did not make the payment.
From May to October 2017, Parties corresponded with each other with the Buyers requesting for more time to make payment.
Subsequently, on 8 November 2017, the Government of India imposed an import tariff on Yellow Peas of 50% with immediate effect.
On 9 November 2017, the Sellers declared the Buyers in default under both Contracts claiming damages. The Sellers also notified the Buyers of the Sellers’ intention to sell the goods to a third party (which the Sellers were entitled to do under the terms of the Contracts) and the Seller’s intention to enforce the Buyers’ contractual undertaking to co-operate to enable a change in the buyer.
Meanwhile, the goods were stored by Adani Port, who refused to release them to the Sellers without the Buyers’ permission. However, the Buyers refused to co-operate to allow the Goods to be released to the Sellers.
On 18 December 2017, the Sellers commenced proceedings in the High Court of Gujarat against the Buyers and Adani Port to obtain possession of the goods.
On 21 December 2017, the Government of India imposed an import tariff of 30.9% on lentils with immediate effect.
On 2 February 2018, a consent order in the Gujarat proceedings provided for the Sellers to obtain possession of the goods.
And by contracts dated 7 February 2018 and 9 February 2018 respectively, the Sellers re-sold the peas and the lentils at US$378 and US$431 per mt.
Arbitration proceedings. The Sellers claimed damages from the Buyers in arbitration.
In two arbitral awards dated 1 April 2021 (the “Awards”) issued by the GAFTA Appeal Board (the “Appeal Board”), the Appeal Board found that the Buyers were in default by their failure to pay for the goods in accordance with the terms of the Contracts and liable to pay damages for default in accordance with the following clause of the Contracts (the “Default Clause”):
“25. 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 a 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] 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 of the goods 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.”
The Appeal Board found the date of default to be 2 February 2018. This is because while the Sellers declared the Buyers to be in default of 9 November 2017, it was impossible for the Sellers to re-sell the goods until they obtained possession on 2 February 2018.
The Appeal Board accepted the Sellers’ argument and found that the damages should be assessed “on the market value of the goods on or about 2 February 2018 C&FFO Mundra in bulk.” The Appeal Board found that the Contracts were not for “the sale of varying quantities of goods ex-warehouse into the domestic market in India… but was for the sale of goods in bulk on the international market.”
This was significant because if the goods were to be assessed based on the market value of the goods on the domestic market in India, the market value would have been higher due to the imposition of the import tariffs, which would reduce the damages payable by the Buyers.
The Appeal Board then awarded, among others, damages for default to the Sellers of US$4,163,250 for the Lentils Contract and US$903,750 for the Peas Contract.
Issues. The Buyers were granted permission to appeal the Awards on the following question of law:
“Where goods sold C&F free out are located at their discharge port on the date of the buyer’s default, is “the actual or estimated value of the goods, on the date of default” under sub-clause (c) of the GAFTA Default Clause to be assessed by reference to
(A) the market value of goods at that discharge port (where they are located on the date of default); or
(B) the theoretical cost on the date of default of (i) buying those goods FOB at the original port of shipment plus (ii) the market freight rate for transporting the goods from that port to the discharge port free out?”
While the UK Supreme Court dealt with the appeal on other grounds, the UK Supreme Court also made some important observations relating to the law of damages.
Principles of the law of damages. The UK Supreme Court observed that there are “two fundamental principles of the law of damages” which are the “compensatory principle and the principle of mitigation of damage” (at [83]).
The compensatory principle aims to put the injured party, “as far as money can do it, … in the same situation … as if the contract had been performed” (at [84]).
The principle of mitigation requires the injured to take reasonable steps to mitigate its loss which means that (at [85]):
“[T]here is no recovery for loss which should reasonably have been avoided”;
“[T]here is recovery for loss incurred in taking reasonable mitigating steps, even if the taking of these steps increase the loss”; and
“[I]f the loss is successfully reduced through the taking of reasonable mitigating steps then the party in breach is entitled to the benefit of that - there is no recovery for the avoided loss”.
Why is this relevant?
Principles reflected in the Default Clause. This is because the UK Supreme Court observed that both the compensatory principle and the principle of mitigation are reflected in the Default Clause (at [87]).
Sub-clause (a) of the Default Clause addresses the situation where the injured party goes into the available market to make a substitute sale or purchase, which is what an injured party is expected to do in acting reasonably to mitigate its loss (at [87]).
If neither party is dissatisfied with the price of the substitute transaction, then that price would fix the default price, and under sub-clause (c), the damages payable will be the difference between the contract price and the default price. Accordingly, “[t]he damages will therefore by established by reasonable steps taken by the injured party in mitigation of its loss” (at [87]).
And if either party is dissatisfied with the default price, then the assessment of damages would be settled by arbitration where the tribunal may decide to “take the default price of the substitute contract as the basis for assessment of damages” or to base the default price on “the actual or estimated value of the goods, on the date of default” (at [88]).
The UK Supreme Court observed that the basis for the tribunal’s decision would be “by application of the principle of mitigation and compensatory principle – ie whether that default price derived from a substitute contract reasonably made so as to result in a reasonable measure of the injured party’s loss in accordance with the compensatory principle.” (at [88]).
The UK Supreme Court also noted that Sub-clause [c] of the Default Clause covered the same territory as sections 50(3) and 51(3) of the UK’s Sales of Goods Act 1979 (at [90]) and held that as long as there was an available market, the market price would establish the base upon which damages are assessed (at [95]).
The “market”. So, what is the relevant market on the facts of the case?
The Sellers contended that it should be the FOB Vancouver market with appropriate adjustments to arrive at a C&FFO Mundra price, while the Buyers contended it should be the ex-warehouse Mundra market (at [99]).
The UK Supreme Court held that the proper approach is to consider the market in which it would be reasonable for the Sellers to do a substitute sale of the goods (at [100]).
In the present case, on the default date, the goods had already landed, customs cleared and stored in a warehouse in Mundra (at [100]).
Moreover, the goods so situated had significantly increased in value because of the imposition of the tariffs by the Indian government (at [100]).
In such circumstances, “the obvious market in which to sell the goods, and in which it would clearly be reasonable to do so, is the ex warehouse Mundra market. Indeed, this was the market into which the Sellers did sell the goods, albeit to a related company. Conversely, it is difficult to see how it could be reasonable to sell those goods in the international market involving, as it would, the costs of re-exporting the goods and losing the increase in value resulting from the goods being customs cleared before the significant increase in tariffs (at [100]).
The UK Supreme Court observed that the Sellers’ approach involved a “notional purchase of a further consignment of goods in a different market in a different continent (FOB Vancouver) resulting in the arrival of goods at Mundra weeks after the date of default”, and that this was not an approach that reflects the mitigation principle nor “the commercial realities of a seller left with contract goods following a buyer’s default” (at [109]).
Accordingly, the UK Supreme Court held that the damages should be quantified on the basis that there was an available market for sale of the goods in bulk ex-warehouse Mundra on or about the default date for the Sellers to make a substitute sale in (at [122]).
Significance. While this is a foreign law case, it is important to note that Singapore law on contract damages also adopts the compensatory and mitigatory principles espoused by the UK Supreme Court.
Therefore, if a similar case arose, the Singapore Courts may follow the reasoning in this.
Furthermore, the Default Clause in this case is found in the GAFTA Contract No. 24, a standard form contract used frequently by international parties worldwide in the shipping industry.
Sellers and buyers who have incorporated GAFTA Contract No. 24 in their shipping contracts should therefore take note of how the UK Supreme Court has dealt with the effects of the Default Clause.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.