Bunge SA v Nidera BV

Facts

The parties entered into a contract for the supply of 25,000 metric tonnes of Russian milling wheat, which was to be shipped in the latter part of August 2010. It incorporated GAFTA Form 49, which provided procedures for termination and default damages.

When Russia introduced a legislative embargo on exports of wheat from its territory (which ran from 15 August to 31 December 2010), Bunge (the "Seller") notified the Buyer of the embargo and purported to declare the contract cancelled. Nidera (the "Buyer") did not accept that the Seller was entitled to cancel the contract and treated the purported cancellation as a repudiation, which it accepted on 11 August 2010. The following day the Seller offered to reinstate the contract on the same terms, but the Buyer would not agree. Instead, it began arbitration proceedings under the GAFTA rules in support of a claim for damages of US$3,062,500.

GAFTA's first-tier tribunal held that the contract had been repudiated, and its ruling was upheld by the GAFTA Appeal Panel, which awarded the Buyer its claim in full. The ruling was subsequently upheld by the Commercial Court and the Court of Appeal of England and Wales.

Judgment

The Supreme Court found in favour of the Seller, reversing all of the lower tribunals, and awarded the Buyer nominal damages of only US$5. In his ruling, Lord Sumption succinctly expressed the relevant principle in assessing damages:

In that regard, he held that:

1. Damages clauses, such as the one incorporated in GAFTA 49, are not to be regarded as complete codes for the assessment of damage. It did not address the effect of subsequent events that would have resulted in the original contract not being performed in any event, nor did it exclude every other consideration that may be relevant to determine the innocent party’s actual loss. In those circumstances, common law principles on recoverable damages would continue to apply.
2. While damages clauses may prescribe a fixed measure of loss that differs from the measure of damages recoverable at common law, in the absence of clear words, a court will not conclude that a damages clause was intended to operate arbitrarily and produce a result unrelated to anything that the parties can reasonably have expected to approximate to the true loss.
3. A construction of the default clause that would place the Buyers in a financially far better position than if the breach had not occurred was most unlikely to have been intended by those drafting the clause. It was far more likely that the clause was intended to apply to the usual situation of a non-delivery or non-acceptance of goods for which there was an available market, rather than a situation where the contract would not have been performed due to supervening events leading to its inevitable cancellation.
4. The Golden Victory cannot be distinguished from the present case. The principle that damages should be compensatory applied equally to a contract for a one-off sale and an instalment contract.

Significance

The Golden Victory, when it was handed down, attracted considerable discussion among jurists and academics, with one former judge of the Commercial Court declaring that it was "‘the worst decision on any aspect of English commercial law, and certainly shipping law, that has come out of the House of Lords in my entire career in the legal profession..." Academics raised several concerns about the majority decision, stating that it damages the certainty which is one of the major advantages of English commercial law, and it encourages the breaching party to delay settlement or prolong litigation. However, it has also been pointed out that the majority decision also reinforced the risk allocation function of contract, and the rule stated in it is both socially desirable and it provides an incentive to inform the other party as early as possible of their intention to breach, thus creating a more efficient outcome from a game theory perspective. Bunge has resolved the uncertainty that had arisen from this ruling.

As GAFTA 49 is a standard form that is widely used in commodities transactions, Bunge is expected to have broad consequences. Most commentators point out that clear and express words will need to be incorporated into such contracts to oust the common law principles involved, which will make the relevant clauses more complex.