The Gafta default clause

The Gafta default clause: a closer focus on mitigation

Sharp Corp Ltd -v- Viterra BV (formerly known as Glencore Agriculture BV) [2024] UKSC 14

In this case, the Supreme Court has decided the proper measure of damages under the Gafta default clause. Whilst the facts of the case as presented are a little unusual, the Supreme Court’s conclusion provides guidance as to how damages are to be assessed generally in cases of default under standard Gafta contracts. The Court’s focus is as much on the principle of mitigation as it is on the compensatory principle.

The background facts

In summary, the chronology is as follows:

Contractual terms 

The contracts incorporated Gafta Contract No. 24 and therefore the standard Gafta default clause, which provides as follows:

“DEFAULT. In default of fulfilment of contract by either party, the following provisions shall apply:

1. 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 has established the default price. 
2. 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. 
3. 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.” 

Date of default

Usually, the date of default would be the date on which sellers declare their buyers to be in default. In this case, although the Sellers had held the Buyers in default in November 2017, the Gafta Board of Appeal had found that the date of default for the purposes of assessing damages was 2 February 2018. This was the date on which the Sellers were able to take back possession of the Goods and re-sell them. This point was apparently not in issue before the Court.

Status of the Goods as at that date of default

As at 2 February 2018, the Goods were landed, customs cleared and stored in warehouse. They had an increased value because of the import tariff changes imposed in November and December 2017.

Sellers’ re-sale contracts

The re-sale contracts were to a related company and so were not arms’ length transactions. They did not necessarily reflect the market price. In this case, neither of the parties suggested before the Court that the re-sale contracts evidenced the default price.  

The issues for consideration 

Since the re-sale contract was not considered appropriate, the Gafta Board of Appeal and therefore the Supreme Court had to consider the “actual or estimated value of the goods, on the date of default”. That value was then the default price used to establish the Sellers’ damages after taking account of the original contract price.

There was no evidence before the Board of Appeal and, therefore, the Court of an available market on the original C&FFO Mundra terms (save for the Sellers’ re-sale contracts which the parties had not suggested were relevant). The Gafta Board of Appeal and, therefore, the Supreme Court were presented with two options:

• C&FFO Mundra, i.e. a notional sale basis which reflects the original terms of the contracts. This was the Sellers’ position, who argued for a FOB Vancouver market price with appropriate adjustments to convert it to a C&FFO Mundra price. This approach had been agreed by the Gafta Board of Appeal and the Commercial Court.  
• Effectively “As is where is” i.e. estimated price ex warehouse Mundra - landed, customs cleared and stored in warehouse. This was the Buyers’ position, which they argued reflected the increased value following the import tariff changes.

The Supreme Court agreed with the Buyers’ position. It decided that ex warehouse Mundra was the “obvious” and “reasonable” market in which these Goods were to be re-sold.

How did the Supreme Court arrive at this decision?

In calculating damages, the Supreme Court focused on the two common law fundamentals: the compensatory principle and the principle of mitigation of damage. 

The compensatory principle is the rule under English law that the aim of damages is to put the innocent party back into the position that they would have been in had the breach of contract not occurred. In short, the principle of mitigation is that the injured party is required to take reasonable steps to reduce its losses. 

The Supreme Court determined that the Gafta default clause is intended to reflect both of these principles. They agreed with the comments of Lord Sumption in the Supreme Court’s decision in Bunge -v- Nidera [2015] UKSC 43 that subsection (c) of the Gafta default clause “covers the same territory as sections 50(3) and 51(3) of the Sale of Goods Act”’, which reflect the principle of mitigation. 

Per the Supreme Court in this case, these sections of the Sale of Goods Act “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. As has often been observed, this is based on a deemed mitigation”. That approach, the Supreme Court considered, is consistent with the compensatory principle, putting the innocent party back in the same position it would have been in.

In summary, under the Gafta default clause:

• The starting point is the price achieved in a substitute sale or purchase contract (paragraph (a)). Only when a sale or purchase does not occur, or a party is dissatisfied with the price achieved, then do damages come to be determined by the Gafta tribunal.
   
• If the tribunal decides that the default price under paragraph (a) is inappropriate, or there was no sale or purchase, then damages are to be determined under paragraph (c) on the basis of the actual or estimated value of the goods on the date of default. 
   
• Where there is an available market for a sale or purchase on the same terms as the original contract on the default date, that sets the default price. 
   
• If there is no available market on the same terms, then the estimated value of the goods should be determined by reference to what market it would have been reasonable to sell the goods on. This approach recognises that goods are left in the seller’s hands when a buyer defaults. What steps the seller should then take will be influenced by the location of the goods and their circumstance. This then is consistent with the compensatory principle, for example where that circumstance means the goods have a greater value.

Against this background, the Supreme Court concluded that the actual or estimated value of the Goods as at February 2018 was on an ex warehouse Mundra basis.  

Comment

The Supreme Court’s judgment provides useful guidance on the approach to damages under the Gafta default clause and generally in sale of goods disputes.

Evidently, many cases turn on their own facts. Apparently, this one was slightly unusual given the facts and evidence before the Gafta tribunal including the relevant date of default, market evidence, and the circumstance of the import tariff changes.  

Generally, as the Supreme Court appeared to recognise, a degree of flexibility is built into the Gafta default clause allowing the tribunal to determine whether a re-sale or purchase is appropriate and what is the relevant market in the particular circumstance, all against the background of the principles of compensation and mitigation.

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