Time and method for calculating damages

Nidera BV (Nidera) contracted with Bunge SA (Bunge) to buy 25,000 tonnes of Russian wheat, to be shipped in August 2010. The contract incorporated GAFTA Form 49, which was a standard form sale contract for grain and food.

The Contract/GAFTA Form 49

GAFTA Form 49 contained two key relevant clauses:

Clause 13 PROHIBITION "In case of prohibition… by or on behalf of the country of origin of the goods… any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction… this contract or any unfulfilled portion thereof shall be cancelled."

Under clause 20 a party which was not in breach of contract was given the right to sell or buy the wheat, as the case might be and thereby establish a "default price". Disputes about the default price were to be settled by arbitration under which "damages… shall be based on, but not limited, to the difference between the contract price and either the default price… or upon the actual or estimated value of the goods on the date of default".

On 5 August 2010, Russia introduced an embargo on the export of wheat, to run from 15 August 2010, and on 9 August 2010 Bunge told Nidera of the embargo and purported to cancel the contract. Nidera treated the cancellation as a repudiation which they accepted on 11 August 2010. On the next day, Bunge offered to reinstate the contract on the same terms as before, but Nidera refused and began arbitration, claiming USD 3,062,500 – this was the agreed market price of the promised cargo on 11 August 2010.

The first arbitral tribunal held that there had been a repudiation because Bunge's cancellation had been premature. The embargo might have been lifted before the time for delivery under the contract was reached. However, the tribunal held that Nidera had suffered no loss because, in the event, the embargo was never lifted. This meant that the contract would inevitably have been terminated anyway, in accordance with its terms, without the sellers incurring any liability.

On appeal, the GAFTA Appeal Board accepted that, if Bunge had not repudiated on 9 August 2010, the contract would nonetheless later have been cancelled because of the embargo. But it reversed the first tribunal's decision, and awarded Nidera the damages claimed on the grounds that they represented the difference between the contract, and market, prices on 11 August 2010, ie when Nidera accepted the repudiation. The appeal board considered this was the approach required by clause 20.

Andrew Smith J subsequently gave permission to appeal against the award and the case was considered in due course by the Court of Appeal. The Court of Appeal also held that normal common law rules were displaced by clause 20, and that the buyers were therefore entitled to damages of USD 3,062,500, based on clause 20.

Supreme Court: date for establishing market price

In his judgment, Lord Sumption noted that "an accepted renunciation gives rise to particular problems when it comes to assessment of damages". The starting point for any damages award is to put an injured party "so far as money can do it…in the same situation as if the contract had been performed" (Robinson v Harman [1848] 1 Exch). In a contract for sale where there is an available market, the damages can normally be fixed by comparing the contract price agreed between the parties, with the cost of comparable goods or services in the market at, or as soon as reasonable after, the date the contract was breached.

However, Lord Sumption noted that determining a date for establishing the "market price" was not straightforward where repudiation is accepted before the time for delivery of the relevant goods or services has arrived. The prima facie approach here is that, where an available market exists, the appropriate date is the contractual delivery date – ie a date after the repudiation (though the buyer necessarily cannot know, at the time of repudiation, what the later market price will be), unless the buyer should have mitigated by going to market earlier.

Events following repudiation should be taken into account

A further question arises about whether, and if so how, events following repudiation should be taken into account where those events would have reduced the value of performance – even without a breach – had the contract continued in being. This question had been answered by The Golden Victory [2007] 2 AC. If events after repudiation showed that a contract would not, in fact, have been performed, or that the value of any performance would have been reduced, this had to be reflected in any award of damages.

Contractual damages clause v common law

In this case, where there was a clause dealing with damages, it was "inherent in the clause that it [might] produce a different result from the common law… [but] 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". Thus, such bespoke clauses must also be construed in accordance with rational commercial expectations. Further, "such clauses are not necessarily to be regarded as complete codes for the assessment of damages… it is a question of construction whether… it must have been intended to do so exhaustively".

In this case, clause 20 did not provide for what was to happen where subsequent events intervened (for example, an embargo) such that the contract would never have been performed. As it was not a comprehensive code dealing with all questions of non-performance, it did not necessarily oust common law principles in all cases. Further, it provided that damages were to be payable "based on, but not limited to" the difference between the contract and market prices. It therefore did not exclude "every other consideration which [might] be relevant to determine the injured party's actual loss". It was thus consistent with a finding that an event after repudiation meant that the same loss would have been suffered even if there had been no repudiation.

The Supreme Court thus concluded that Nidera had suffered no loss as a result of the repudiation, because of the later embargo on wheat exports.

Comment: Lord Sumption referred in his judgment to the "so-called "breach-date" rule". This is the commonly made, but potentially highly misleading, statement that damages for breach of contract are based on the loss as computed at the date the contract was breached. Such a rule, if it existed, might massively under- or over-compensate an innocent party. Such an approach works reasonably well for commodities where the party not in breach has ready access to identical goods etc – for example, quoted shares. It does not necessarily work at all for unique or highly illiquid goods such as buildings or large and complex equipment. The correct date for assessing damages is, ideally, the date judgment is given, or as close to that date as reasonably practical.

In this case, the Supreme Court firmly upheld the common law principle, which has existed – not always without challenge – since at least the nineteenth century, that damages must be assessed with the benefit of knowledge of events which happened after the breach. This is consistent with the compensatory principle that underpins damages. The basis for damages is to try to put an innocent party in the position he would have been in if a contract had been performed. That may mean that no damages are awarded where, as here, a breach proved, in the event, not to have caused loss.

In this case, even if the seller had not repudiated the agreement, it would never have been in a position to perform its side of the bargain once the date for performance had arrived – the Russian embargo would have made performance illegal. Thus, the buyer would have been left with nothing, and no claim, even if the seller had not wrongfully repudiated.

The Supreme Court's judgment – and the chequered findings in lower courts and tribunals – suggests that there was some difficulty reconciling the contractual provision for damages with the requirements which would apply under common law. However, the Supreme Court found sufficient areas of silence, and sufficient scope for latitude in the contractual basis for calculating damages, in clause 20 to allow the common law presumption to prevail.

As a general point, a party faced with an apparent repudiation is often in a difficult position. First it has to decide whether the other party is indeed in fundamental and wrongful breach. If so, it must decide whether to accept the repudiation and, if appropriate, seek damages, or whether to refuse to accept the repudiation and continue with any remaining performance obligations of its own. If it wrongly decides that a contract has been repudiated, and so decides not to continue with its own performance obligations, it may itself risk an action for breach of contract. In this case, the difficulty was compounded by the fact that the buyer failed to take sufficient account of the possibility that the seller could repudiate without liability. This was perhaps understandable, given that the application of clause 20 was uncertain.