The Supreme Court in London has delivered a much expected judgment settling down a dispute on damage compensation principles, the text stands as an interesting fresh take on damages assessment in GAFTA sales contracts.
This decision on an appeal and cross-appeal on the Court of Appeals jurisdiction touches on the limits and powers that said Court of Appeals may act on appeals.
For the background, the case stems from two contracts between Viterra (the Buyers) and Sharp (the Sellers) for the sale of lentils and peas, dated 20 January 2017. Each contract followed the GAFTA Contract 24 and was identical save for commodity, quantity, and price.
After nominating a vessel, the Buyers did not pay the goods as called by the contract, prior to arrival, but were customs cleared and stored in Mundra Port. The Buyers issued a letter that no delivery shall take place unless written instructions from the Buyers are received. After a washout agreement and failure to pay compensation installments, the Sellers declared the Buyers in default on 9 November 2017, claiming damages and their intentions to re-sell the goods. However, the Port refused to release the goods to the Sellers without the Buyers’ permission, thus proceedings in the High Court of Gujarat were commenced to obtain possession of the goods, and by 7 and 9 February 2018 the Sellers re-sold the goods to an associated company. It must also be noted that in November and December 2017 the Government of India imposed import tariffs on peas and lentils.
The Sellers contended that the damages should be based on the market value of C&FFO Mundra, but due to lack of evidence for this value, the next best thing was the FOB Vancouver price plus the market freight rate for carriage to Mundra on 2 February 2018. The Buyers contended that the damage should be assessed by reference to the market value of the goods in the domestic market in India.
Ultimately, the Board should that the damages should be assessed “on the market value of the goods on or about 2 February 2018 C&FFO Mundra in bulk”, stating the contract subject to arbitration “was not for the sale (…) of goods ex-warehouse into the domestic market in India (…) but for the sale of goods in bulk on the international market”. The Board did award the Buyers the reimbursement of costs incurred in discharging the goods at Mundra.
On these grounds, the Board found that the value of goods had increased on the domestic market due to the tariffs; the Buyers were in default for not paying for the goods in compliance to contract, and not the Sellers for taking back and re-selling the goods. The date of default was 2 February 2018. Although the Seller’s declaration of default was on 9 November 2017, the Board found it was impossible for the Seller to re-sell the goods until they obtained possession on 2 February 2018.
The appeal and cross-appeal from this decision touch on the following issues:
- whether the Court of Appeal was entitled to determine that the contract had varied and in particular whether it erred in (i) amending the question of law for which appeal was granted; (ii) deciding on a question of law which the Board was not asked to determine, and (iii) making findings of facts on matters on which the Board had made no finding.
- Whether the damages should have been on an “as is, where is” basis (the estimated ex warehouse Mundra value)
On the damage valuation the Supreme Court draws on two fundamental principles of the law of damages, the compensatory principle and the damage mitigation principle, both reflected in the default clause written in the contract, which follows the same direction as covered in Section 50 of the Sale of Goods Act.
The first step for loss mitigation in damages is for the injured to go into the market for a substitute sale/purchase. In this case, although a re-sale of pulses was made, neither party addressed it as a substitute and basis for the default price, since the sale was not an arms-length transaction. Therefore, in applying the mitigation and compensatory principles, the default price must be based on the actual or estimated value of the goods on the date of the default, as per the default clause.
As Lord Hamblen states, in taking into consideration the importance of the mitigation principle, the proper approach was to consider the market in which it would be reasonable to sell the goods. Due to the goods being customs cleared and stored in Mundra, plus their value increased by tariffs, the obvious option would be to sell the goods is the ex warehouse Mundra market.
In their judgment, the Appeal Board’s approach was deemed wrongful: it involved a notional purchase of goods in a different market and continent, neglecting both the mitigation principle and the commercial reality of a seller, who is more willing to sell the goods where they are located or destined to.
His Lordship explains that, whether there is an available market that could make a true substitute, the interpretation of the Sales of Goods Act must not be as a statutory text: a flexible approach is always needed, as there may be cases where the available market will not be an exact substitute but might be a reasonable approach.
On the first point regarding the Board’s powers, the ruling found that the Court of Appeal (i) did not err in amending the question of law, as the amendment made was to tie the question to the facts found, and it did not change the substance of the question of law, since any question of law for which permission to appeal under section 69 of the Arbitration Act 1996 is to be considered “on the basis of the finding of fact in the award (section 69 (3)(c)), thus any amendment that simply stating what is implicit does not exceed the legal limit.
On the other hand, Lord Hamblen did find that the Court erred on (ii) the question of law decided, since the fact that the contract between the parties had varied into sale contracts of goods ex warehouse Mundra was a question that had not been argued nor addressed by the Appeal Board, nor they were asked to determine it. Thus, the Court of Appeal was not open to decide on it.
Furthermore, the Court was also found to err on (iii) making findings of facts. The Board found that discharge was made against presentation of the original bills of lading, and that the word “discharge” was missing from the Buyer’s letter to the Seller, finding that was critical to their decision of the contract variation.
The judgment states how, under section 69, the Court has no power to make its own finding of facts, however there might be circumstances in which one finding is mandatory for an express finding, or the inevitable consequence thereof. Nonetheless, in this case the findings were not open to the Court and impermissibly made, another reason why it had no power to conclude on the contract variation.
Ultimately, the Lords in the Supreme Court partially allowed the appeal on grounds ii and iii, and allow the cross-appeal and remit the Awards to the Appeal board for reconsideration.