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Ally Tow
Ally Tow,
SENIOR ASSOCIATE - CHARTERED LEGAL EXECUTIVE
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Liquidated damages - actual losses only
13 October 2015

The recent Supreme Court case of Bunge SA V Nidera BV [2015] has restated the principle that damages for breach of contract are only awarded to compensate the innocent party for actual losses suffered as a result of the breach.  This is particularly relevant in circumstances where the innocent party would not have received the full benefit of the contract in any event.

Facts

In Bunge, Nidera entered into a contract with Bunge to buy 25,000 metric tonnes of Russian milling wheat crop. The shipment period was August 2010, although the contract made provision to narrow that period by notice. In the event it was narrowed to 23-30 August 2010. The contract incorporated GAFTA Form 49 (“GAFTA”), a standard form of FOB sale contract of the Grain and Feed Trade Association for goods delivered from central or eastern Europe in bulk or bags commonly used in the grain trade.

There was a provision within GAFTA which allowed Bunge to cancel deliveries under the contract in circumstances involving prohibition of export, blockade or hostility resulting in an inability to fulfil the contract. In the event of default of fulfilment of the contract by either party, the following provisions applied under GAFTA:

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 of (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.

(d)  In all cases the damages shall, in addition, include any proven additional expenses which would directly and naturally result in the ordinary course of events from the defaulter’s breach of contract, but shall in no case include loss or profit in any sub-contracts made by the party defaulted against or others unless the arbitrator(s) or board of appeal, having regard to special circumstances, shall in his/their sole and absolute discretion think fit.

(e)  Damages, if any, shall be computed on the quantity called for, but if no such quantity has been declared then on the mean contract quantity and any option available to either party shall be deemed to have been exercised accordingly in favour of the mean contract quantity.”

At the beginning of August 2010 Russia introduced a legislative embargo on exports of wheat from its territory which was to run from 15 August to the end of the year. Bunge notified Nidera of the embargo and purported to declare the contract cancelled. Nidera did not accept that Bunge had the right to cancel the contract choosing to treat the notice as a repudiation which they accepted on 11 August 2010. The following day Bunge offered to reinstate the contract on the same terms but Nidera refused and instead began arbitration proceedings under the GAFTA rules in support of a claim for damages of $3,062,500, being the difference between the contract and the market price on 11 August 2010.

The arbitration proceedings

The first arbitration award was issued on 1 November 2011. It held that Bunge had repudiated the contract because their notice of cancellation was premature - the embargo might have been lifted in time to permit shipment. It was therefore impossible to say at the date of purported cancellation that shipment would be prevented. However, the tribunal declined to award substantial damages holding that no loss had been suffered because in fact the embargo had not been lifted.  It followed that the contract would have been cancelled in any event.

Both parties appealed. The appeal award was issued on 22 June 2012. Whilst it agreed that Bunge had repudiated the contract by cancelling too early and that the contract would have been cancelled in any event, it awarded damages as claimed by Nidera.

Appeal

In October 2012 permission was given to appeal against the appeal award under Section 69 of the Arbitration Act 1996.  Both the Commercial Court and the Court of Appeal upheld the appeal award. Bunge therefore sought and obtained permission to appeal to the Supreme Court.

The Supreme Court unanimously allowed the appeal holding that when assessing damages it was necessary to take account of supervening events known at the date of assessment if their effect was that the contract would have been lawfully terminated at or before its contractual termination.

In their Lordships’ view it was fundamental to any assessment of damages to consider at the date of assessment what would have happened if the repudiation had not occurred. The Court considered what Nidera had lost was the chance of obtaining a benefit in the event of the export ban being lifted before the wheat was meant to be delivered.

As to clause 20, the Court found that damages clauses were not necessarily to be regarded as complete codes for the assessment of damages. A damages clause, like any other clause, was conclusive of the matters with which it dealt. Clause 20 did not deal with supervening events. The effect of these supervening events was that Bunge would have been entitled to lawfully terminate the contract in any event. Thus, no actual loss had been suffered by Nidera as a result of Bunge’s repudiatory breach. Accordingly, Nidera were only entitled to nominal damages of $5.

Conclusion

This case serves as a useful reminder to parties considering any claim for damages for a repudiatory breach of contract to have regard to events subsequent to the date of the breach. The purpose of the damages claim is to compensate the innocent party for the loss of its contractual bargain. Therefore, if subsequent events mean that the innocent party would not have received any benefit under the contract in any event, substantial damages will not be awarded as this would over-compensate the innocent party.

In this particular case, whilst Bunge should have waited until the date when the export restrictions came into force before serving any notice of termination, Nidera should have considered subsequent events before deciding to treat the notice as a repudiation of the contract and seeking damages for the breach. 

For more information about this case or to find out more about how the Dispute Resolution team can help you please contact Ally Tow on [email protected]  or phone 0118 952 7206.

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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