Supreme Court clarifies law of damages in sale of goods case

October 02, 2024

Charlotte Winter Andrew Judkins

Posted in Contractual interpretation

The Supreme Court’s decision in Sharp Corp Ltd v Viterra BV [2024] UKSC 14 provides useful clarification on how damages in sales of goods cases are calculated, illustrating how parties can protect their recoverable damages. By departing from previous case law, the Supreme Court held that both the compensatory and the mitigation principle are fundamental to the law of damages. The Supreme Court also provided guidance on how the English Courts should approach appeals under s. 69 of the Arbitration Act 1996.

Background

Sharp Corporation BV (the Buyers) entered into two contracts to purchase bulk amounts of lentils and peas from Viterra BV (the Sellers) on Cost & Freight free out (C&FFO) terms from Vancouver to the port of Mundra in India. In other words, the Buyer agreed to pay the value of the goods and the freight costs to the destination. The two contracts applied the standard GAFTA Contract No. 24 (the GAFTA Contract) and contained a bespoke non-payment clause.

The Buyers failed to pay for the goods before they arrived at the discharge port of Mundra. The Sellers granted the Buyers more time to pay and meanwhile stored the goods in Mundra. After several months, the Sellers declared the Buyers in default and terminated the contracts. The Sellers, as entitled under the non-payment clause, resold the goods to an associated company and later to a third party. While the goods were being stored, but before the Sellers obtained possession, the Indian government imposed import tariffs on lentils and peas which increased the value of goods in the Indian domestic market.

Arbitration

The Sellers commenced arbitration proceedings against the Buyers, claiming damages for repudiatory breach under the GAFTA Contract. The GAFTA Appeal Board (the Appeal Board) held that the Buyers were liable to pay damages in accordance with the GAFTA Contract’s default clause (Default Clause). The Appeal Board rejected the Buyers’ argument that damages should be based on the value of goods in the domestic market in India at the time of default. Instead, it held damages should be assessed based on the C&FFO value at the time of default, based on the market value of the goods (deemed to be the FOB market price in Vancouver) and market freight rate, both values calculated at the time of default.

The Buyer’s appeal under s. 69 Arbitration Act

The Buyers appealed to the High Court under section 69 Arbitration Act 1996 (i.e. appeal on a point of law) on the interpretation of the Default Clause. Specifically they argued that damages under the Default Clause should be calculated by reference to the market value of the goods left on the Sellers’ hands on the default date. Permission was granted by the High Court, but the substantive appeal against the Appeal Board was rejected.

The Buyer made a further appeal to the Court of Appeal. It held that damages under the Default Clause were to be assessed on the basis of a notional substitute contract, but based on a contract for the sale of the goods ex warehouse, not C&FFO Mundra terms.

The Supreme Court’s decision: s. 69 of the Arbitration Act 1996

The Sellers argued that the Court of Appeal had misapplied s. 69 Arbitration Act 1996 when finding that damages should be assessed by reference to the sale contracts as amended on the basis that it made findings outside the scope of the Appeal Board’s decision and/or the High Court’s permission to appeal under s. 69 of the Act.

The Supreme Court held that:

The Court of Appeal was right to amend the question of law for which permission to appeal had been given. The Supreme Court held that amendments to questions of law were permissible, provided that “the substance of the question of law remains the same”, and the amendment in question tied the abstract question of law to the facts found in the Award.
However, the Court of Appeal should not have introduced the question of whether the contracts had been varied. This amounted to deciding a question of law which the Appeal Board was not asked to determine, which is impermissible under s. 69 of the Act. The Supreme Court noted that a tribunal must have been asked to determine a question of law and that “the point has to be fairly and squarely” before the tribunal “for determination”. The Supreme Court also held that the Court of Appeal had erred in making findings of fact. Under s. 69, it was only possible to rely on express findings of fact by a tribunal in an award, or potentially infer a finding of fact which a tribunal has made.

Cross-appeal: Damages

The Supreme Court allowed the Buyers’ cross-appeal, reversing the basis on which the Appeal Board and the Courts had assessed damages, and remitting the award to the Appeal Board.

The Supreme Court observed that the two “fundamental principles” of the law of damages are compensatory and mitigation damages. The two principles “work together” in that reasonable steps taken in mitigation damages fix the measure of compensatory damages. The Supreme Court held that the two principles are present in the GAFTA Contract’s default clause, which reflects the common law provision under sections 50(3) and 51(3) of the Sale of Goods Act 1979. Consequently, “where there is an available market, the reasonable injured party will go into that market and make a substitute sale or purchase” and that market will establish the default price. This reflects the fundamental principle that damages are compensatory.

The Sellers were left with goods landed, customs cleared and stored in a warehouse in Mundra and which increased in value because of the tariffs imposed by the Indian government. Therefore the obvious market in which to sell the goods and where “it would clearly be reasonable to do so” was the ex-warehouse Mundra market. Selling the goods in an international market would have been unreasonable due to the costs of re-exportation and the loss in uplift value.

Key takeaways

The decision provides clarification on the approach taken to damages in Bunge SA v Nidera BV [2015] UKSC 43 and The Golden Victory [2007] UKHL 12. It provides a useful reminder that the principles that damages are compensatory and that failure to mitigate reduces recoverable damages go hand in hand. What a party could reasonably do to mitigate damages should guide the assessment of the likely level of recoverable damages. Parties must assess the range of options in relation to an available market for a transaction on similar terms or where it would be reasonable to sell the goods. The overarching principle is what is reasonable to mitigate loss, rather than necessarily being tied to a substitute contract approach.

The decision also provides additional guidance on the narrow scope of s. 69 Arbitration Act 1996, i.e. the limited scope of the English Courts’ power to review questions of law and that the review power must be exercised based on the facts established by the Tribunal.