GAFTA prohibition and default clauses – sellers’ cancellation pursuant to prohibition clause held to be repudiatory – nominal damages awarded
Russian milling wheat was sold FOB Novorossiysk.
A prohibition clause read as follows:
“In the case of prohibition of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the government of the country of origin of the goods, or of the country from which the goods are to shipped, restricting export, whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment whether by shipment or by any other means whatsoever and to that extent this contract or any unfulfilled portion thereof shall be cancelled. Sellers shall advise Buyers without delay with the reasons therefore and, if required, Sellers must produce proof to justify the cancellation.”
After the buyers had nominated a vessel to load, the Russian government published an export ban which extended over, and beyond, the contractual delivery period of 7 days. The ban was published 18 days before the commencement of the contractual delivery period.
Immediately upon the publication of the ban, sellers claimed cancellation. Buyers contended that the cancellation was repudiatory and claimed substantial damages under a cancellation clause which read as follows:
“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 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 (emphasis added) , but not limited to, the difference between the contract price and either the default price established under (a) above or 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 of profit on 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.”
The next day, sellers offered to reinstate the contract. This was refused by buyers.
Sellers argued that the plain meaning of the prohibition clause entitled them to cancel. Buyers argued that because the possibility existed that the ban might be revoked, sellers had to wait and see before cancelling.
In the event, the ban remained in place over the period of intended delivery.
The first tier tribunal upheld the buyers’ argument on the repudiation point but held on the authority of the Golden Victory that ex post facto knowledge of events proved that the contract would have been cancelled in any event and that no damages were suffered.
The GAFTA Appeal Board, Hamblen J and the Court of Appeal (Moore-Bick, Floyd and Christopher Clarke LJJ) were of the opinion that the Golden Victory principle applied only to contracts which extended over a period of time and not to once-off situations such as the present. Applying the default clause, substantial damages in excess of $3 M were awarded to buyers.
The UKSC (Lords Neuberger, Mance, Clarke, Sumption and Toulson – judgments by Lords Sumption and Toulson) restored the GAFTA first tier tribunal findings and awarded nominal damages of $5.
The UKSC held that, despite powerful judicial and academic dissent, the majority in the Golden Victory were correct. Events occurring after the breach could show that no loss would have been (and therefore was not) suffered: why gaze into the crystal ball when you can read the book?
Lord Sumption pointed out that the essence of the difference of opinion in the Golden Victory was not the date of assessing damages but what was being assessed as the loss: the majority were valuing the chartered service that would actually have been performed; the minority (the Lords Bingham and Walker) were valuing the contract itself as a capital asset.
The fact that the contract in this case contained a formula for assessing the extent of the loss did not eliminate the necessity of determining that loss. If events showed that there was no loss, the formula was redundant. Put differently, the default damages clause was intended as a guideline and not a comprehensive code for determining loss.
By the time the matter reached the UKSC it was no longer in issue that the sellers had repudiated the contract or “jumped the gun”, the phrase used by both Lords Sumption and Toulson.
The assessment that the right to cancel arises only when the prohibition is actually enforced is consistent with the view that the contract’s value in itself is irrelevant in computing damages.
A legitimate alternative view – held by the dissenting camp – is that the intrinsic value of the contract (the value of injured party’s bargain) should be taken into account. Speculation on the commodities market is based on this principle. The date of breach is of vital importance because that is when the speculative decision (with the risk of uncertain future events factored in) is made.
A preferable solution, yielding the same result as in the UKSC, would have been to accept that the sellers’ cancellation was not repudiation but a right given by a fair reading of the contract.
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