On 18 February 2022, Mrs Justice Cockerill DBE handed down her judgment in Sharp Corp Ltd v Viterra BV [2022] EWHC 354 (Comm) (February 18, 2022) dismissing the appeal brought by Sharp Corp Limited (“Buyers”) under section 69 of the Arbitration Act 1996 concerning two arbitration awards made by the Gafta Board of Appeal in arbitration proceedings between the Buyers and Viterra B.V. (“Sellers”) under which the Buyers were ordered to pay default damages to the Sellers.
In their section 69 application, the Buyers argued that the Board of Appeal had erred in its approach to the default clause of Gafta Contract No 24 (the “Default Clause”) when assessing the default damages owed by the Buyers to the Sellers. In particular, the Court was asked to decide whether “the actual or estimated value of the goods, on the date of default” under sub-clause (c) of the Default Clause was to be assessed by reference to the market value of the goods at the discharge port where they were located on the date of default or the theoretical cost of buying those goods on Free on Board (“FOB”) terms at the original port of shipment plus the market freight rate for transporting the goods from that port to the discharge port free out.1
In essence, the question was whether “goods” in the context of sub-clause (c) of the Default Clause meant “goods of the description sold on the terms on which they were sold” or “goods at the market where these goods could have been sold”.2
The Court confirmed that for the purposes of assessing default damages under the Default Clause the correct approach to valuing goods on the date of default was to value the goods based on the same terms and conditions as those of the original contract under which there was a dispute between parties (i.e. a “like for like” sale).
Reed Smith and Michael Collett QC of Twenty Essex represented the successful Sellers. It remains to be seen whether Mrs Justice Cockerill DBE will grant the Buyers permission to appeal to the Court of Appeal.
The Default Clause
Agricultural commodities traders trading on Gafta standard form contracts will be familiar with the Default Clause mechanism for calculating damages in the event of default by a contracting party. The Default Clause, which was at the centre of this dispute, states in part as follows:
“25. DEFAULT
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.” 3
Background facts
The Buyers’ section 69 application arose out of two sale contracts, one for lentils and one for peas (the “Goods”), between the Sellers and the Buyers (the “Contracts”). The Contracts were on C&F Free Out Mundra, India terms. The Goods were shipped at Vancouver on board the MV “R B Leah” and arrived at Mundra, India.
The Buyers did not pay for the Goods. Upon arrival in Mundra, the Goods were discharged against letters of indemnity, cleared through customs by the Buyers, and put into storage in a warehouse pending payment. The Sellers retained property in the Goods, and these were held to their order.
In the meantime, the Government of India imposed import tariffs on peas and lentils. As the Buyers did not pay for the Goods, the Sellers held the Buyers in default under both Contracts. The Sellers successfully pursued proceedings in the local courts in order to obtain the release of the Goods to them and they subsequently resold the Goods in the local market.
The Board of Appeal found that the Buyers were in default by their failure to pay for the Goods in accordance with the terms of the Contracts and liable to pay default damages to the Sellers in accordance with the Default Clause.
The section 69 application issue – two different approaches to valuing goods
“Like for like” basis
During the course of the arbitration proceedings, the Sellers relied on evidence from commodity brokers of FOB Vancouver prices and freight rates for a voyage from Vancouver to Mundra, India, on or around the date of default (February 2, 2018), which ultimately the Board of Appeal accepted as evidence of the value of the goods by way of a substitute sale on the date of default.
In their section 69 application, the Buyers argued that the Board of Appeal had erred in its assessment of default damages under the Default Clause, and in particular in its assessment of “the actual or estimated value of the goods, on the date of default” pursuant to sub-clauses (b) and (c) of the Default Clause by taking the approach of valuing such goods based on:
(1) A “constructed theoretical cost of buying equivalent goods on the default date; and
(2) The cost of shipping such goods to the contractual destination under the Contracts, over a month after the default date”4 (i.e. the “like for like” sale basis).
Parties involved in Gafta arbitrations will be familiar with the “like for like” sale approach that the Board of Appeal preferred, as that has consistently been the approach taken by parties presenting their cases on the assessment of default damages in arbitrations under sub-clauses (b) and (c) of the Default Clause.
“As is where is” basis
By contrast, the Buyers argued that the correct approach to take in valuing the Goods under the Default Clause was to value them on the available market at the contractual destination, as at the date of default (i.e. an “as is where is” basis). During the course of the arbitration, the Buyers presented the Board of Appeal with evidence of the market value of the Goods on the domestic market in India.
In particular, the Buyers argued in their section 69 application that for the purposes of assessing damages under sub-clause (c) of the Default Clause one should look at the market price at the place where the Goods were on the date of default (i.e. the domestic market in Mundra, on the facts of this case) and that the best evidence of such market price was the value of the unaccepted goods .5
A question of general public importance
It is noteworthy that the Buyers’ section 69 application was allowed by Jacobs J, who commented that the question on the correct approach to the assessment of damages pursuant to the Default Clause was one of “general public importance”, not least because “GAFTA form 24 is used extensively in trading grains and feed and the wording of the default clause also appears in many other GAFTA forms.” He noted that “the correct construction of the default clause may, depending on the issue, raise a question of general public importance.”6.
Indeed, given that it is estimated that 80 percent of the world’s trade in grain is shipped on Gafta standard form contracts, the construction of the Default Clause will be of importance to agricultural commodities traders.7
The importance of submitting satisfactory price evidence
The Board of Appeal had to ascertain the quantum of damages under sub-clause (c) of the Default Clause by searching for the “actual or estimated value of the goods on the date of default”, with reference to a substitute or surrogate contract. This would have been a relatively straightforward exercise had the parties been able to produce evidence of “independent trades of goods of the contract description C&F FO Mundra” 8. In the judge’s view, had the Board of Appeal been presented with “clear evidence of the value of a substitute cargo at Mundra on the date of default there is no reason to think they would not have accepted that”.9
The judge noted that the Board of Appeal had been presented with “two imperfect alternatives” in terms of market price evidence, and found itself in a position where it needed to undertake an exercise of choosing evidence that would be the best estimate of the value of the goods. In the judge’s own words, the Board of Appeal took the approach of forming “an evaluative view on the evidence of which price best equated to a value of a true substitute transaction”.10
The Board of Appeal formed the view that lacking any evidence of C&F FO Mundra values, the Sellers’ price evidence better answered that question than the price evidence submitted by the Buyers. The judge noted that the FOB plus freight to destination approach is the usual mechanism of establishing a market price in the absence of further and better alternatives. Crucially, the Court considered that the authorities overall supported the Sellers’ position that the correct approach was to value the goods based on the same terms and conditions as the original goods sold pursuant to the contract at issue.11
On that basis, the judge did not therefore consider that the Board of Appeal had erred in law and dismissed the Buyers’ appeal.
Key takeaways
The judge confirmed that the correct approach to valuing goods on the date of default for purposes of assessing default damages was to value the goods based on the same terms and conditions as the terms and conditions of the contract under which the dispute between the parties arose (i.e. a “like for like” sale). Indeed, the judge further noted that in a dispute involving goods sold on C&F terms, the “FOB plus freight approach is fairly conventional as a mechanism of establishing a proxy”. A sale on an “as is where is” basis, where the goods sold do not match the contractual terms of the original goods, is not the same as a “like for like” sale price and is not to be preferred.
This judgment also serves as a reminder of the importance of submitting satisfactory price evidence to assist the arbitrators in their assessment of the value of goods on the relevant date of default when calculating default damages.
- See para. 1 of the judgment. The Goods were sold on C&F Free Out Mundra, India, terms and were loaded onto the vessel in Vancouver, Canada. On these terms, the Buyers had to pay for the cost of the goods, the freight from the loadport to the agreed discharge port (Mundra, India) and the costs of unloading the Goods from the vessel at the port of discharge.
- See para. 65 of the judgment
- See para. 2 of the judgment. The Sellers brought claims against the Buyers for default damages under sub-clause (c) of the Default Clause.
- See para. 39 of the judgment
- Albeit the unaccepted goods were customs-cleared goods in Mundra whose value “had undoubtedly increased” as a result of the Indian Government’s imposition of import tariffs [see para. 61 of the judgment]. Crucially, they were no longer bulk and non-customs cleared goods, pursuant to the terms of the Contracts.
- See para. 38 of the judgment
- See gafta.com
- See para. 57 of the judgment
- See para. 112 of the judgment
- See para. 112 of the judgment
- See para. 93 of the judgment
In-depth 2022-049
