Bunge SA v Nidera BV

This is an appeal from the order of Hamblen J. upholding an award made by the Board of Appeal of the Grain and Feed Trade Association (“GAFTA”). It concerns the effect of the Prohibition clause in the standard form of contract published by GAFTA for delivery on f.o.b. terms of goods from Central and Eastern Europe in bulk or bags, generally known as Gafta 49.

By a contract made on 10^th June 2010 incorporating the terms of Gafta 49 the appellants, Bunge S.A., agreed to sell the respondents, Nidera B.V., 25,000 metric tonnes (+/- 10% in buyer’s option) Russian milling wheat f.o.b. Novorossyisk for delivery in August 2010. The shipment period was subsequently narrowed under the terms of the contract to 23^rd-30^th August 2010. It is convenient to refer to Bunge as “the sellers” and Nidera as “the buyers”.

Clause 13 of Gafta 49 provides as follows:

“PROHIBITION - In the case of prohibition of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the government of the country of origin of the goods, or of the country from which the goods are to be shipped, restricting export, whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment whether by shipment or by any other means whatsoever and to that extent this contract or any unfulfilled portion thereof shall be cancelled. Sellers shall advise Buyers without delay with the reasons therefor and, if required, Sellers must produce proof to justify the cancellation.”

On 5^th August 2010 the buyers nominated the ‘Royal’ to lift the goods, but on the same day the Russian government announced the passing of Resolution 599 imposing what was described as a temporary prohibition on the export from Russian territory of various kinds of agricultural products, including milling wheat, between 15^th August and 31^st December 2010. As a result, on 9^th August 2010 the sellers wrote to the buyers informing them of the export ban. They concluded by saying:

“In accordance with Gafta 49, clause 13, sellers hereby advise buyers, and declare the contract in reference as cancelled.”

On 11^th August 2010 the buyers responded by treating the sellers’ conduct as a repudiation of the contract, which they accepted. On the following day the sellers offered to reinstate the contract on the original terms, but the buyers declined to do so.

In due course the buyers gave notice of arbitration in respect of a claim for damages in the sum of US$3,062,500 representing the difference between the contract price and the market price on 11^th August 2010. The claim was made pursuant to the terms of clause 20 of Gafta 49, the Default clause, which provides as follows:

“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 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 and either the default price established under (a) above or the actual or estimated value of the goods on the date of default established under (b) above.

(d)

In all cases the damages shall, in addition, include any proven additional expenses which would directly and naturally result in the ordinary course of events from the defaulter’s breach of contract, but shall in no case include loss of profit on any sub-contracts made by the party defaulted against or others unless the arbitrator(s) or board of appeal, having regard to special circumstances, shall in his/their sole and absolute discretion think fit.

(e)

Damages, if any, shall be computed on the quantity called for, but if no such quantity has been declared then on the mean contract quantity and any option available to either party shall be deemed to have been exercised accordingly in favour of the mean contract quantity.”

The dispute raised two main questions: (i) whether the prospective effect of Resolution 599 resulted in the automatic cancellation of the contract when it was announced on 5^th August; and (ii) if not, whether the buyers were entitled to recover damages by reference to the difference between the contract price and the market price on the date the contract was terminated. The second question breaks down into four further questions: (a) whether the Default clause applies in the case of a refusal to perform of the kind that occurred in this case; (b) if so, whether it is conclusive of the measure of damages that applies in this case; (c) if not, whether the buyers were entitled to recover substantial damages at common law having regard to the decision of the House of Lords in Golden Strait Corpn v Nippon Yusen Kubishika Kaisha (The ‘Golden Victory’) [2007] UKHL 12, [2007] 2 AC 353; (d) if so, whether by refusing the sellers’ offer to reinstate the contract the buyers failed to mitigate their loss.

The Board of Appeal found as a fact that export embargoes of the kind introduced by Resolution 599 are often modified or withdrawn soon after their introduction and that in order for the contract to be cancelled Resolution 599 must have prevented the sellers from shipping the goods when the time came to do so. They were not, therefore, entitled to treat the contract as cancelled on 11^th August 2010 and their message constituted a repudiation of the contract which the buyers accepted on that date. The Board also held that the Default clause applied in such a case and that the buyers were entitled to recover damages calculated by reference to the difference between the contract price and the market price on the date of default. That made it unnecessary for it to determine either the effect of the decision in The ‘Golden Victory’ or the question of mitigation. The Board did, however, express doubts about the application of the decision in The ‘Golden Victory’ to a case such as the present. It also rejected the submission that the buyers had failed to mitigate, holding that the parties’ obligations were governed by the Default clause and making findings of fact which in any event made it impossible for the sellers to establish that the buyers had failed to act reasonably.

On 10^th October 2012 Andrew Smith J. gave leave to appeal and in due course Hamblen J. upheld the award on both grounds. He expressed some doubt about the applicability of The ‘Golden Victory’ to a contract for the sale of a single parcel of goods of the kind with which this case is concerned, but did not need to decide the point. This is the sellers’ appeal against his decision.

Mr. Baker Q.C. on behalf of the sellers based his submissions on the language of the clause, on such support as he could obtain from various observations to be found in the decided cases and on general commercial considerations. Recognising that the words “restricting export” in the fifth line of the citation above presented a potential difficulty, his first submission was that they do not govern the opening group of events (prohibition of export, blockade and hostilities), but only the second group (executive and legislative acts), so that the clause is to be understood as if it read “In case of prohibition of export blockade or hostilities . . . any such restriction shall be deemed to apply to this contract etc . . .” This submission depends on reading the words “or in case of” in the second line of the citation as disjunctive so as to create two quite separate categories of event, but however one might read those words in another context, I am unable to accept that that is how they are to be read in this clause. The expression “any such restriction”, which is clearly intended to apply in all situations, naturally refers back to the earlier words “restricting export”. That strongly suggests that that phrase is also intended to apply in all situations, a conclusion which is further supported by the awkward syntax produced by the seller’s proposed reading, which lacks any explicit link between the event and the contract. Although it may be said that the link is implicit in the case of a prohibition of export, its absence is rather more startling in the context of blockade or hostilities. I think that the clause necessarily assumes that the event in question will have had some effect on the contract, but on the seller’s reading the link is unexpressed, despite the presence of words capable of performing that function. In my view, therefore, the words “restricting export” must be read as governing the events identified in the opening words as well as the executive or legislative acts to which the clause subsequently refers.

This brings me to the central question on this part of the case, namely, whether the words “restricting export” are intended to be purely descriptive of the nature of the event in question, as Mr. Baker suggested, or whether they are intended to describe its effect on the performance of the contract. As Mr. Baker pointed out, Resolution 599 can quite properly be described as an executive act “restricting export”, notwithstanding that its effect was postponed for some days, and his argument gains some support from the provision that “any such restriction” is to be deemed to apply to the contract. So, it is said, any prohibition of export which is expressed to apply to goods of the contract description and to the contract period of shipment is one which restricts export and must be deemed to apply to the contract, which is thereupon cancelled. Moreover, he submitted, that construction of the clause provides the degree of commercial certainty which both parties need in order to organise their affairs.

This argument certainly has it attractions, especially when considered in the context of a prohibition of export of the kind introduced by Resolution 599, but it is less persuasive in the context of blockade and hostilities, with which the clause is also concerned. In respect of events of both those kinds the words “restricting export” can only describe their effect on the performance of the contract, but since the clause treats all three events in the same way, the same must be true as regards prohibition of export. On this footing the purpose of the deeming provision is less easy to understand, but the Prohibition clause is worded in standard terms designed for inclusion in many Gafta contracts and thus is intended to operate in a variety of circumstances. I think it likely that its purpose was to relieve the parties of the need to show that they were unable to avoid the operation of the relevant event by taking advantage of a limited exemption, for example, in relation to goods already in the course of loading, or vessels flying a limited range of flags. As Mr. Edey reminded us, when in June 1973 the United States government prohibited the export of soyabean meal save for so-called “loophole” goods on lighters and in the course of loading, sellers were faced with a great deal of difficulty in excluding the possibility that they held or had a right to receive such goods. The memory of that experience may well have been in the minds of those responsible for the language of the present clause.

Mr. Baker drew our attention to a number of authorities which he submitted tended to support his construction of the clause, although he accepted that none of the decisions were binding on us and in many cases the dicta were of limited value. I shall consider them in the order in which he dealt with them. The first was the decision of this court in Pancommerce S.A. v Veecheema B.V. [1983] 2 Lloyd’s Rep 304. The case concerned a contract for the sale of 1,500 to 2,000 metric tonnes at seller’s option of Spanish sugar beet pulp pellets c.i.f. Ghent, shipment July 1976. The contract was on Gafta form 100, which included a prohibition clause in substantially the same terms as clause 13 of the present contract. It was necessary to obtain a licence for the export of sugar beet pulp pellets from Spain, but they were obtainable as a matter of course until 1^st July 1976 when the Ministry of Commerce imposed an embargo on the granting of further licences. The seller already held licences to export 3,000 tonnes in July 1976, but it had agreed to sell 1,500 tonnes to another buyer, Lucerna B.V., and had agreed informally to give it first refusal on a further 1,500 tonnes if any more goods became available. When the embargo was imposed the seller was faced with a moral commitment to deliver 1,500 tonnes to Lucerna and a legal commitment to deliver 1,500 tonnes to Veecheema. It solved the dilemma by delivering part of the goods to each. In response to a claim by Veecheema the seller sought to rely on the prohibition clause, which, it said, had made it unnecessary to enquire whether the embargo had in fact affected its ability to deliver. The court rejected that submission. It held that the restriction imposed by the embargo was on the export of sugar beet pellets not covered by a licence issued before 1^st July 1976. Since the seller had such a licence, the embargo had not prevented it from fulfilling its contract.

Mr. Baker submitted, correctly, that the case differs from the present in that the embargo, properly understood, did not apply to the goods covered by the contract. It also differs in that it was a case of a failure to tender the full contractual quantity, not one in which the seller had indicated before the date for performance that it would not fulfil its obligations when the time came. The question whether the imposition of an embargo from a date in the future falls within the clause so as to bring about the immediate cancellation of the contract was not discussed and I do not think that one can find in the judgment of Sir John Donaldson M.R. any support for that proposition. On the contrary, I think that the decision lends some support to the proposition that in order for the Prohibition clause to apply it must be shown that the event in question in fact prevented or restricted the performance of the contract.

The next case was Ross T. Smyth & Co. Ltd (Liverpool) v W. N. Lindsay Ltd (Leith) [1953] 1 W.L.R. 1280. The case concerned a contract for the sale of Sicilian horsebeans c.i.f. Glasgow for shipment in October or November 1951. On 20^th October 1951 the Italian government imposed a licensing requirement in respect of shipments on and after 1^st November. The sellers failed to ship the goods and sought to rely on the prohibition clause which provided that “should the fulfilment of this contract be rendered impossible by prohibition of export, blockade or hostilities this contract . . . to be cancelled.” Mr. Baker submitted that one can glean from certain remarks of Devlin J. that he proceeded on the assumption that as from the date it was announced the embargo was to be treated as effective from 1^st November and that it was unnecessary for the seller to show that it had actually prevented shipment during that month. That may be so, but again the case was one of non-delivery and not of renunciation and the question with which we are concerned did not arise. I do not think it is possible to draw from the judgment any indication of how the Prohibition clause in this contract is intended to operate.

Bremer Handelsgesellschaft m.b.H. v Vanden Avenne Izegem P.V.B.A. [1978] 2 Lloyd’s Rep. 109 is one of the leading cases on the construction of the Prohibition clause in Gafta 100 which arose out of the soyabean meal embargo imposed by the United States government in June 1973. The contract in that case was for the sale of 500 metric tonnes each month May to September 1973 of soyabean meal of United States origin c.i.f. Rotterdam. As a result of the imposition of the embargo on 27^th June 1973 the sellers failed to deliver the June instalment. The Prohibition clause provided that “in case of prohibition of export . . preventing fulfilment, this contract . . . shall be cancelled”. The buyers argued that in order to establish that the prohibition had prevented fulfilment it was necessary for the sellers to prove that he had goods ready to ship within the contract period and a ship to carry them. Lord Wilberforce rejected that submission, holding that the occurrence of a frustrating event, in that case the prohibition of export, immediately and automatically cancelled the portion of the contract affected by the prohibition (page 114, col.1). Viscount Dilhorne expressed the view that the sellers could have treated the contract as cancelled when the embargo was imposed (page 121, col.1). Lord Salmon was of the opinion that, since the embargo was absolute until after the end of June, it was impossible to ship before the end of that month. It therefore prevented shipment and the June instalment was automatically cancelled (page 128, col.1). Lord Russell simply observed that the prohibition made the shipment of the June instalment impossible during the contract period (page 130, col.2) and Lord Keith agreed with Lord Wilberforce.

In my view the sellers do not obtain much help from any of these observations. The issues before their Lordships were not the same as those which we have to decide, partly because the breach of contract consisted in a failure to deliver and partly because the sellers did not seek to treat the contract as cancelled before the end of the shipment period, by which time it could be seen that the embargo had affected the whole of the remaining period available for performance.

The next case to which Mr. Baker referred was Ford & Sons (Oldham) Ltd v Henry Leetham & Sons Ltd (1915) 21 Com. Cas. 55. The case concerned a contract made in July 1914 for the sale of 200 sacks of flour. It included a clause which provided that “in case of prohibition of export, blockade or hostilities preventing shipment or delivery of wheat to this country, the sellers shall have the option of cancelling this contract”. On 31^st July 1914 a number of countries, including Russia, prohibited the export of wheat, but the United States, Canada and British East Indies, which were the principal sources of supply to this country, did not. The sellers failed to deliver part of the goods and claimed to cancel the contract. The court noted that there was no requirement that the prohibition of export should affect the sellers’ ability to perform the contract and held that the clause was satisfied if prohibitions of export affected one or more substantial sources of supply. The contract was not one which required shipment of goods from a foreign country and did not therefore give rise to issues comparable to those which arise in this case. I do not think that the sellers in this case can derive any assistance from the decision.

The final authority to which Mr. Baker drew our attention was the decision of this court in Samuel Sanday & Co. v Cox McEuen & Co. (1922) 10 Ll. L.R. 409 & 459. The case concerned a contract for the sale of a cargo of wheat to be shipped from Buenos Aires. The contract contained a clause which provided that “in the event of prohibition of export the wheat to be received by the buyers in the Argentine Republic or to be resold by [the sellers] there for buyers’ account”. It had been substituted by the parties for the corresponding clause in the printed form of contract, which provided that the contract should be cancelled if shipment were prevented by prohibition of export. Before the vessel arrived at Buenos Aires the Argentine government prohibited the export of wheat without a special permit, which the sellers could have obtained, but did not. They argued that the substitution of the new prohibition of export clause showed that the parties intended it to apply whether or not the embargo prevented shipment. The court rejected that submission. Bankes L.J. observed that if the sellers were right, the clause would operate automatically to cancel the contract, even if the embargo were lifted a short time later and did not prevent performance. He was not prepared to accept that construction and held that the clause must have been intended to refer to an effective prohibition, i.e. one that prevented the shipment of the goods. Atkin and Younger L.JJ. were of a similar view. Again, the case is not entirely the same as that with which we are concerned, but it tends to support the conclusion that commercial considerations favour the buyers’ argument.

The only other authority it is necessary to mention in this connection is Agrokor A.G. v Tradigrain S.A. [2000] 1 Ll. Rep. 497. The case concerned one contract (R-350) for the sale of 20,000 metric tonnes of European milling wheat f.o.b. Split or Rijeka for shipment by 15^th June 1996 and a second contract (363) for the sale of 40,000 metric tonnes of the same goods f.o.b. the same ports for shipment by 22^nd May 1996. Both contracts incorporated the terms of Gafta 64 which included a Prohibition clause in the same terms as clause 13. On 22^nd April 1996 the body responsible for deliveries of wheat announced that it would be delivering no more goods and on 3^rd May 1996 the government of Croatia issued a decree forbidding the export of wheat from that country until 31^st December 1996 or earlier revocation. On 28^th March 1996 the sellers informed the buyers that they could not deliver the balance due under the contracts and the Board of Appeal found that contract 363 came to an end on 28^th March 1996 when the buyers accepted the sellers’ professed inability to deliver the balance of the contract goods as a repudiation. It also held that since the repudiation had occurred before the restriction was imposed on the export of wheat from Croatia, it was unnecessary to consider whether the Prohibition clause had any effect.

On appeal the sellers submitted that the Board of Appeal had wrongly treated the Prohibition clause as requiring the complete prevention of shipment, but Longmore J., following and applying the decision in Pancommerce v Veecheema, held that in order to be able to rely on that clause the sellers had to show not only that there was a ban which restricted the export of wheat, but also that it had the effect of restricting performance of the contract with the buyers. Since the Board had not made such a finding, the sellers’ appeal failed. I agree with Mr. Edey that this observation lends some support to the present buyers’ case, but since it substantially reflects what had been said by Sir John Donaldson M.R. in Pancommerce v Veecheema, it does not carry the matter much further.

In both Sanday v Cox McEuen and Pancommerce S.A. v Veecheema the court expressed some strong views about the commercial consequences of adopting a construction of the clause which would free the seller from his obligation to deliver goods immediately on the announcement of an embargo, regardless of whether it was subsequently lifted or modified in a way that permitted shipment of the goods. That is a powerful consideration and one that was not lost on the Board of Appeal in the present case, which found that “export bans are introduced by governments for domestic policy reasons and the wider international ramifications are not always fully thought through” and that the initial ban could have been curtailed later in August. The judge, agreeing with the arbitrators and the Board of Appeal on this point, held that the Prohibition clause requires a causal link between the event in question (usually, but not necessarily, a total or partial prohibition of the shipment of goods) and the sellers’ inability to perform their contract and in my view he was right to do so. The words “restricting export” lie at the heart of the clause. On the sellers’ construction they are essentially descriptive of the nature of the event, so that a restriction or embargo affecting goods of the contract description and shipment period announced, as in this case, some days before it comes into force results in the immediate cancellation of the contract. However, it is more natural, in my view, to construe them as describing the practical effect on the seller’s ability to perform the contract, particularly since the various events covered by the clause are likely to be of uncertain duration and effect. That appears most clearly in the case of blockades and hostilities. I do not obtain any assistance from the terms of the Force Majeure clause; although there is a degree of overlap, I agree with Mr. Edey that it is seeking to address mainly different kinds of events in a different way. It follows that in my view the judge’s decision was correct. The contract was not automatically cancelled on 5^th August 2011 when Resolution 599 was announced and by treating it as cancelled the sellers repudiated it.

The Default clause contains certain principles agreed between the parties to govern the calculation of damages in cases where the contract has not been performed. Mr. Baker submitted that the opening words “In default of fulfilment of contract” limit its operation to cases in which there has been a breach of contract by non-delivery or non-acceptance, when the difference between the contract price and the market price would be the natural measure of damages (see sections 50(3) and 51(3) of the Sale of Goods Act 1979), rather than to a default resulting from an accepted repudiation of the contract. This was not an argument that he had pursued before the Board of Appeal or before the judge and indeed, as he recognised, was not open to him in this court by virtue of the decision in Toprak Mahsulleri Ofisi v Finagrain Compagnie Commerciale Agricole et Financière S.A. [1979] 2 Ll. Rep. 98. He therefore formally reserved his position on it for another day. His main argument before us was that the clause is to be read as being subject to the established common law principle that damages are intended to be compensatory: see The ‘Golden Victory’. Clear words, he submitted, are required to depart from such a well established rule and in the absence of any such words the clause should be construed as dealing not with the existence of loss, but only with the measure of damages payable in respect of any loss which the innocent party can prove it has suffered. Since, as has now become clear, Resolution 599 remained in force throughout the shipment period, the seller would have been unable to perform the contract and the buyer suffered no loss as a result of the failure to ship the goods.

The Board of Appeal rejected that submission, as did the judge, rightly in my view. Although it can be said that the words “in default of fulfilment” are particularly apt to describe a failure to make or accept delivery at the required time, they are also suitable to refer to any failure to perform, including a failure to perform brought about by a wrongful repudiation of the contract. Once it is clear that the contract will not be fulfilled, the natural response of the innocent party is to cover his position by going into the market. So the measure of damages for which the clause provides is one that reflects a natural commercial response as well as a reasonable step to avoid the greater loss that may otherwise be suffered by a buyer who does not have goods at his disposal or a seller who has goods which he cannot dispose of. That is why it is not to be regarded as a penalty. The distinction between the loss itself and the measure of damages, on which Mr. Baker based his argument, may be valid as a matter of legal principle, but it is not a distinction which is likely to appeal to commercial men. I agree with the judge that for all practical purposes the identification of a loss and the assessment of damages in respect of it are so closely related as to be part of the same process, but in any event, as the Board of Appeal pointed out, the Default clause is intended to be easily understood and readily applied by traders and trade arbitrators alike in a variety of cases whose only common feature is that the contract has not been performed. It is worded in clear terms, is based on recognised principles and provides the commercial certainty that the trade requires.

Mr. Baker sought to rely on the decision in Bem Dis A Turk Ticaret S/A TR v International Agri Trade Co. Ltd (The ‘Selda’) [1998] 1 Ll. Rep. 416 in support of the proposition that paragraph (c) of the Default clause itself, by using the expression “damages payable shall be based on, but not limited to” the difference between the contract price and the default price, recognises that common law principles are not to be disregarded altogether, but, as the judge pointed out, the case was dealing with a different question. In that case the question was whether the clause operated to prevent the sellers recovering certain losses which would have been recoverable at common law. The court held that, although it was open to the parties to agree that such losses should not be recoverable, clear words were necessary to achieve that result and the language of the clause was not clear enough for the purpose. Here, by contrast, the question is whether by their agreement the parties have established a conventional measure of damages which, on one view of the law, was more generous than would otherwise apply. In my view the effect of the Default clause is quite clear and leaves no room for doubt in that respect.

Having reached the conclusion that the Default clause contains the parties’ conventional measure of damages for a failure to perform under circumstances such as those which existed in the present case, it is unnecessary to consider the effect of the decision in The ‘Golden Victory’ and since we have not heard argument on the point, I prefer to express no opinion on it. The sellers did not challenge the judge’s decision on mitigation, which therefore did not arise for consideration before us.

For these reasons I have reached the conclusion that the appeal should be dismissed.

I agree.

I also agree.