Contractual damages: Supreme Court confirms overriding compensatory principle in case of one-off sale

In a recent judgment, the Supreme Court has confirmed that the overriding compensatory principle applies in the case of an anticipatory breach of a contract for a one-off sale. This means that events occurring after the date of breach can be taken into account in considering whether the claimant has suffered any loss. In the present case, the court concluded that the buyer had suffered no loss because it was clear the seller would have been entitled to cancel the contract without penalty before the contractual date of performance: Bunge SA v Nidera BV [2015] UKSC 43.

The principle that events occurring after the date of breach are relevant to the assessment of loss, even if those events were not seen as inevitable or even likely at the date of breach, was established by the majority decision of the House of Lords in The Golden Victory [2007] 2 AC 535. The decision has sometimes been criticised as offending against the so-called "breach-date rule" (that, where there is an available market, contractual damages are assessed as at the date of breach) and leading to uncertainty. There has also been some doubt as to whether the principle would apply in the case of a one-off sale, as opposed to a contract requiring performance over a period of time.

The present decision gives strong support for the principle, describing it as "neither new nor heterodox", and confirms that it applies equally where there is an anticipatory breach of a contract for a one-off sale. 

Background

The claimant contracted with the defendant to buy Russian wheat for shipment 23-30 August 2010. On 5 August, Russia introduced an embargo on wheat exports, to run from 15 August to 31 December 2010. On 9 August the sellers notified the buyers of the embargo and purported to declare the contract cancelled under a clause which provided for cancellation in the event of relevant export restrictions being imposed.

The buyers did not accept that the sellers were entitled to cancel at that stage, as the embargo had not yet commenced. They treated the sellers' notice as a renunciation of the contract, which they accepted on 11 August. They began proceedings claiming damages of approximately US$3 million, representing the difference between the contract and market price as at 11 August.

By the time of the appeal to the Supreme Court, it was accepted that the sellers had not been entitled to cancel the contract when they did, and so the contract came to an end as a result of the sellers' renunciation. The question was the measure of damages. That depended on the construction of certain terms in the relevant industry standard contract (GAFTA Form 49), as well as the principles governing assessment of damages at common law. This note addresses the latter.

The sellers argued that at common law it was necessary to take account of subsequent events which showed that the same loss would have been suffered in any event, relying on the "overriding compensatory principle" established by the House of Lords decision in The Golden Victory. The buyers had, they said, suffered no loss because shipment under the contract would have been subject to the export ban in any event.

The question for the Supreme Court was whether the "overriding compensatory principle" applied in this case, in particular because it was a contract for a one-off sale rather than an instalment contract over a period of time as in The Golden Victory.

Decision

The Supreme Court held unanimously that it did, Lord Sumption and Lord Toulson delivering lead judgments. Where a contract for the supply of goods or services is terminated following one party's renunciation, there are two questions that must be considered:

1. Assuming there is an available market, at what date is the market price to be determined for the purpose of assessing damages?
2. In what circumstances will it be relevant to take account of subsequent events which would have reduced the value of performance regardless of the repudiation?

The answer to the first is the contractual date of delivery, unless the buyer should have mitigated the loss by going into the market and entering into a substitute contract at an earlier stage - as will normally be the case, where there is an available market, so the relevant market price will often be determined by reference to a date before the contractual date of delivery.

The answer to the second was established by The Golden Victory. In that case a charterer repudiated a seven-year time charter four years early but only fourteen months before it would have been cancelled in any event under a war clause. The majority of the House of Lords held that in assessing damages for the repudiation, it was necessary to take account of events after the repudiation (to the extent known at the date damages were assessed) if they meant the contract would have been lawfully terminated before the end of the contractual term. Therefore damages were to be assessed on the assumption that the charter would have lasted for another 14 months. (The minority view in The Golden Victory was that subsequent events should only be taken into account if they were perceived as possible or probable at the time of the renunciation, so that they affected the market value of the contract as at that date.)

In the present case, both Lord Sumption and Lord Toulson expressed strong support for the majority decision, rejecting various criticisms of that approach, including on grounds that it leads to commercial uncertainty. Lord Sumption stated that although commercial certainty is undoubtedly important, "it can rarely be thought to justify an award of substantial damages to someone who has not suffered any".

The leading speech for the majority in The Golden Victory, delivered by Lord Scott, contains dicta which have sometimes been taken to suggest a distinction between a contract for a one-off sale and a contract for the supply of goods or services over a period of time. However, in the present case, both Lord Sumption and Lord Toulson said they did not think that was Lord Scott's intention. The nature of the problem does not differ according to whether the contract provides for a single act of performance or several successive ones, and there is no reason why the assessment of damages should be different in the two cases.