In the case of Sharp Corp Ltd v Viterra BV (previously known as Glencore Agriculture BV), the Supreme Court has emphasised the importance of the principle of mitigation when calculating damages.
Viterra (the Seller) entered into two substantially similar contracts dated 20 January 2017 for the sale of lentils and peas to Sharp (the Buyer). The contracts were Cost & Freight free out Mundra (C&FFO) and incorporated the terms of the Grain and Free Trade Association (GAFTA) Contract No 24. One such term incorporated into the contracts was a default clause which stated:
25. 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 a 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, but not limited to, the difference between the contract price of the goods and either the default price established under [a] above or upon the actual or estimated value of the goods, on the date of default, established under [b] above.
On 10 May 2017, the goods were shipped to the Buyer in India. Unfortunately, the Buyer failed to pay for the goods and they sat in a warehouse at the port of Mundra.
On 8 November 2017, the Indian government imposed an import tariff on peas of 50% and, on 21 December 2017, the government imposed a tariff of 30.9% on lentils. Both of these tariffs came into force with immediate effect and increased not only the cost of importing lentils and peas into India, but also the value of lentils and peas already on Indian soil. All the while, the Buyer failed to pay for the goods.
The lentils and peas remained at the warehouse until 7 February 2018 when the Seller, having declared the Buyer to be in default of the contracts, sold the goods to an associated company (called Agricore) (as permitted under clause 25(a) of the original contracts). These sales were not conducted on an arms-length basis.
The Seller then commenced arbitration proceedings against the Buyer for damages. The GAFTA Appeal Board determined that the Buyer was “liable to pay damages based on the estimated value of the goods on the date of Default [being 2 February 2018, the date on which the Sellers obtained a consent order to take possession of the goods in the warehouse] which they assessed by reference to the theoretical cost on the date of default of (i) buying those goods free on board (“FOB”) at the original port of shipment plus (ii) the market freight rate for transporting the goods from that port to the discharge port free out. The damages awarded to the Sellers were US$ 4,163,250 under the Lentils Contract and US$ 903,750 under the Peas Contract”. [NE1]
The Buyers appealed this decision to the Court of Appeal. The Court of Appeal concluded that “the damages payable under the default clause were to be assessed on the basis of a notional substitute contract for the goods on the same terms as the parties’ contract, save as to price, at the date of default. This, however, was not a C&FFO Mundra contract because by the date of default the contracts had been varied so as to become contracts for the sale of the goods ex warehouse, subject to the same qualification in relation to risk, and on the instalment payment terms set out in the addenda. … In the light of this variation of the contracts it was held that the Appeal Board had erred in treating the notional substitute contract as one on C&FFO Mundra terms and that the case should be remitted to the Appeal Board to determine the damages on the correct basis”.
The Sellers appealed the Court of Appeal’s decision (specifically with regards to whether the Court of Appeal was entitled to determine that the contracts had been varied) to the Supreme Court. The Supreme Court allowed this appeal, as well as a cross appeal from the Buyer to determine “whether damages should have been awarded on an “as is, where is” basis, being the estimated ex warehouse Mundra value of the goods”. In its judgment, the Court discussed the importance of both the compensatory principle and the principle of mitigation when assessing damages claims, calling them “[t]wo fundamental principles of the law of damages”.
As is now well established, the compensatory principle aims to put the injured party in the same position as if the breach had not occurred (in relation to contractual damages this means that the injured party is to be placed in the same situation as if the contract had been performed). Meanwhile, the principle of mitigation requires the injured party to take all reasonable steps to mitigate the consequences of the injury (for example, by reselling the peas and lentils to a new buyer), and so means that the injured party cannot recover damages for loss that it did in fact avoid, or it should reasonably have avoided. Usually, this new sale would form the basis of the calculation of the damages recoverable; however, in this case, the parties agreed that the price of the goods under the new sales should not be used to calculate damages as the new sales were not conducted on an arms-length basis. Therefore, instead, the calculation of damages fell to be assessed on the basis of “the actual or estimated value of the goods, on the date of default” under clause 25(c) of the contracts (which, incidentally, “covers the same territory as sections 50(3) and 51(3) of the Sales of Goods Act … [which] assume that, where there is an available market, the reasonable injured party will go into that market and make a substitute sale or purchase, and normally that market price will then establish the default price”).
Based on the above, the Supreme Court ultimately decided that there was no evidence of an available market for a substitute transaction on C&FFO Mundra terms and, instead, determined:
This approach was supported by a number of considerations, including that, “where goods are left in the seller’s hands the question is what reasonable steps should be taken to sell those goods”, particularly where those goods have increased in value (as in this case due to the imposition of import tariffs by the Indian government).
While the principle of mitigation isn't new law, its elevation by the Supreme Court to a “fundamental principle” in the assessment of damages is.
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