No Loss, No Damages

This article was first published in Solicitors' Journal: August 2015.

The Supreme Court has confirmed the compensatory principle of damages and the requirement of mitigation in the case of Bunge SA v Nidera BV [2015] UKSC 43.

Facts

The appellants (“the sellers”) had contracted to sell to the respondents (“the buyers”) Russian milling wheat. The contract, incorporating the GAFTA 49 form, allowed for cancellation of the contract in circumstances of an export ban and contained an express damages clause for the calculation of damages for non-performance.

On 5 August 2010 Russia introduced an embargo on exports of wheat from 15 August 2010. On 9 August 2010, the sellers notified the buyers of the embargo and declared the contract cancelled. The buyers treated the purported cancellation as a repudiation on the basis that it was premature, which they accepted on 11 August 2010. On the following day, the sellers offered to reinstate the contract, but the buyers would not agree. Instead, they began arbitration proceedings under the GAFTA rules. The export ban was not lifted and was later extended by Russia.

The GAFTA first-tier arbitration tribunal dismissed the claim on the grounds that the contract would have been cancelled in any event. The buyers had therefore not suffered any loss and were not entitled to damages. The GAFTA Board of Appeal however held that the buyers were entitled to apply the contract versus market price test on the date of default (in accordance with Clause 20(c) of GAFTA 49) and so recover US$3,062,500 in damages. This decision was upheld by the High Court and the Court of Appeal.

The appeal to the Supreme Court raises questions about the construction and the applicability and correctness of the compensatory principle in Golden Strait Corporation v Nippon Yusen Kubisha Kaisha (“The Golden Victory”) [2007] UKHL 12.

Key aspects

The Supreme Court handed down a unanimous decision to award only notional damages of $5, holding that: 

• When assessing damages the overriding principle is the compensatory principle, as laid down in The Golden Victory. The Court must therefore take into account contingencies known at the date of the assessment of damages. This included the fact that the contract would have been lawfully cancellable in any event. 
• It is inherent in a damages clause that it may produce a different result from the common law. For that reason there can be no presumption that the parties intended the clause to produce the same measure of damages as the compensatory principle at common law; such clauses necessarily assume that the parties are willing to take the rough with the smooth. However, 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.
• It cannot be presumed that damages clauses are ‘complete codes’ for the assessment of damages. Construing the GAFTA Default Clause it was not a complete code, and did not preclude the operation of the common law principle on mitigation of loss. The Court should accordingly take into account supervening events (other than price movements which had to be determined in accordance with in the damages clauses), which reduce or extinguish the loss.
• In the present case, sellers had offered to reinstate the contract. There was no finding that the offer was not genuine, and on the fundamental compensatory principle it provides a full answer to the buyers' claim.
• As no loss had been suffered, only notional damages of $5 were appropriate.

Lessons learnt

Although the case concerned the construction of particular clauses of GAFTA, it affirmed some important general principles of the assessment of damages:

• Firstly, if parties seek to exclude the compensatory principle so as to allow recovery of damages where no loss has been sustained, this required clear and express wording.
• Secondly, damages clauses which provide for a test for calculating damages are not necessarily compressively codes for the assessment of damages and absent express wording, the common law principle on mitigation of loss will apply.

The reasoning of the Supreme Court yielded a common sense and fair result. However, it will create greater commercial uncertainty and potentially more litigation in the future.