The UK Supreme Court has delivered a landmark judgment determining the correct measure of damages under a sale of goods contract. This judgment arose from an appeal by Rotterdam-based Viterra BV (formerly known as Glencore Agriculture B.V.) against an English Court of Appeal ruling in favour of Delhi-based buyer Sharp Corp Limited ("Sharp"). The case hinged on the correct method of calculating damages under the Default Clause of GAFTA Contract No. 24.

Case Overview

The parties entered into GAFTA agreements for the sale and purchase of 65,000 metric tonnes of Canadian Yellow Peas and Crimson Lentils on C&F free-out terms. Following Sharp's default on the original payment terms, the parties agreed to unload and store the goods in a warehouse at Mundra Port while Sharp arranged payment in agreed instalments.

When Sharp failed to pay on time, Viterra declared a default, resold the goods to a related third party, and won two GAFTA arbitrations against Sharp. The GAFTA Appeal Board awarded Viterra damages of around US$6 million based on the theoretical value of replacing the goods FOB Vancouver and shipping them to Mundra.

However, Sharp argued that the correct method of valuation should be based on the values of the goods left in Viterra’s hands as the value of those goods had significantly increased after they were custom cleared as the Indian government had by then imposed custom tariffs (50% on peas, 30.9% on lentils). So valuing the goods based on a theoretical value would not reflect this significant increase.

Zaiwalla & Co's Argument

Zaiwalla & Co, acting on behalf of Sharp, challenged both GAFTA awards, appealing to the courts on the basis that Viterra's losses should have been calculated according to the actual or estimated value of the goods already customs-cleared in India before the tariff increase. This alternative measure would have substantially reduced the damages award.

Initially, the English High Court ruled in favour of Viterra, but the Court of Appeal sided with Sharp after refining the question of law. Viterra filed an appeal against the Court of Appeal decision to refine the question of law and Sharp filed a cross-appeal arguing that refinement was not necessary for the Court of Appeal to allow Sharp’s appeal. Today, the Supreme Court has upheld both the appeals and ordered that the awards should be remitted back to the GAFTA Appeal Board for reconsideration of the damages award to Viterra based on the Court's guidance.

Varun Zaiwalla, commenting on the case, said, “The main issue in this case, quite common in cross-border commercial transactions, was the basis on which to value a seller’s damages when the buyer failed to accept delivery of a cargo after it had been customs cleared and unloaded at the delivery port in India. An arbitration panel of the Grain and Feed Trade Association (GAFTA) found that Sharp (the Buyer) should compensate Viterra (the Seller) on the basis of a notional new contract, a position which was upheld when appealed to the High Court under the Arbitration Act 1996, s. 69.

In finding in Sharp’s favour, the Supreme Court has cut through Viterra’s argument that its losses should be calculated by reference to the costs of a fictitious new contract, even if this meant a significant financial windfall for Viterra. The correct answer was to look at the basic reality of the value of the goods which were actually left in Viterra’s hands.

This judgment reinforces the classical position under the common law and the English Sale of Goods Act, and promotes certainty and stability in international sales transactions, a large number of which are conducted according to English law. As a result, when anything goes wrong in an international sale carried out under English law, traders may rely on the ‘compensatory principle’ to assess their losses, which in the language of the Court provides a “straightforward and readily applicable measure of damages which will enable the innocent party to be put into the same financial position as it would have been in had the contract been performed and which does not depend upon the action actually taken by the innocent party.”

At the same time, the Supreme Court has signalled that when deciding appeals on questions of law under the Arbitration Act 1996, s. 69 the Court should not introduce issues of law or fact that were not before the arbitral tribunal, as the Court of Appeal was found to have done in this case. As such, this judgment reflects the general attitude and approach of English courts to allow considerable deference to arbitrators and to minimise judicial interference in the arbitral process.”

This ruling will have a significant impact on commodity traders and the broader legal community.