Calculating Loss: Supreme Court rules on the interpretation of "default clauses"

15 July 2015

Andrew White, Rachel Glass

Bird & Bird & First for Disputes

Bunge SA v Nidera BV (formerly Nidera Handelscompagnie BV) [2015] UKSC 43

The English Supreme Court has clarified the principles to be applied in interpreting express damages clauses, and closed down some of the debate triggered by a milestone decision on damages in the earlier shipping case The Golden Victory [Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] UKHL 12].

These decisions naturally have particular resonance in an international trading environment impacted by sanctions and trade embargoes. However, they have significant implications for contracting and for damages claims in any industry sector.

Facts

Bunge agreed to sell a consignment of wheat, to be shipped from a Russian port on the basis of standard GAFTA Form terms. Shipment was to take place between 23-30 August 2010. On 5 August, Russia embargoed exports of wheat, with effect from 15 August to 31 December 2010. The contract permitted Bunge to terminate in the event of such a prohibition, which it purported to do on 9 August 2010. Nidera responded that the termination was premature, and constituted a repudiatory breach of contract; it accepted the repudiation and commenced arbitration proceedings. Nidera chose not to re-contract to purchase the wheat. The Russian embargo was not subsequently lifted.

The GAFTA standard form terms included a "Default" provision (clause 20), in respect of the actions that the innocent party was permitted to take in the event of default, and the calculation of damages. The clause provided that: "the damages payable shall be based on, but not limited to the difference between the contract price and either the default price established [by a market purchase] or upon the actual or estimated value of the value of the goods on the date of default…"

The Golden Victory

In The Golden Victory (which was decided in 2007), the Supreme Court (then the House of Lords) had decided by a majority of 3:2 that in calculating damages in respect of a time charter repudiated by the charterers, the outbreak of the second Gulf War following termination could be taken into account. The war was a contingency which - had the contract continued - would have entitled the charterers (lawfully) to terminate. The dissenting opinions objected to the reasoning on the basis that taking account of events subsequent to the breach introduced uncertainty into the calculation of damages. That decision has since generated criticism and debate.

The New Supreme Court Decision

The Default Clause

The Supreme Court in Bunge has clarified that clauses which deal expressly with the calculation of damages will not necessarily constitute a complete code for doing so. In addition, there is no presumption that the parties intended that the default clause would mirror the common law method of calculating damages; it is inherent in such clauses that they may well produce a result which is different. Such clauses may, however, be assumed not to be intended to operate arbitrarily.

As regards the GAFTA default clause, the Court held that this constituted a complete code only insofar as it regulated the determination of market price. It did not address every aspect of damages; in particular, it was silent on the effect of subsequent events. It also dealt narrowly with mitigation of losses, leaving scope to apply common law principles.

Contingencies

The Supreme Court in Bunge has expressly affirmed the majority approach in The Golden Victory and thus resolved the uncertainty which the case triggered. Subsequent contingencies such as the Russian embargo should be taken into account in calculating loss: this reasoning correctly seeks to value what would have delivered under the terminated contract. The minority reasoning in The Golden Victory, which effectively tried to ascertain the replacement value of the contract itself at or around the date of breach, was rejected.

The Supreme Court has also clarified that there is no distinction to be drawn between long-term and one-off sale contracts in this respect.

Outcome

Bunge had indeed "jumped the gun" in cancelling the contract early. However, as the export ban was in the event maintained, and Nidera did nothing in consequence of the cancellation, Nidera had suffered no loss. The default clause did not operate so as to require an award of damages in these circumstances. Accordingly, Nidera’s award of US$3m in the lower courts was substituted for notional damages of US$5.

Key Practice Points

When drafting or incorporating a contract provision concerning calculation of damages, bear in mind that the contract is not the "whole story" as regards assessment of losses. To the extent that common law principles are intended to be excluded, it is best to do so expressly, particularly where the outcome would appear very different to that under common law.

As a result of Bunge, the majority reasoning of The Golden Victory will be applied to events following the date of termination and will affect in particular cases where the contract remained wholly or partly to be performed. In long-running disputes or fast-changing circumstances, this may impact the overall outcome.

Even where a clause touches on the principle of mitigation, careful consideration should be given to whether it truly "ousts" common law rules, and the risk which may be inherent in doing nothing to minimise losses.