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Introduction

In Sharp BV v Viterra BV [2023] EWCA Civ 7 the Court of Appeal considered the meaning of sub-clause 25 (c) of the GAFTA Contract No.24.

It was held that this meant that the value of the goods should be measured according to a notional substitute contract based on the same terms as the contract entered into between the parties on the date of default, save as to price.

Background Facts

Pursuant to two contracts dated 20 January 2017 (the “Contracts”), Viterra BV (“Sellers”) agreed to sell to Sharp Corp Ltd (“Buyers”) :

• 20,000 mt of Canadian lentils in Bulk at USD600/mt; and
• 45,000 mt of Canadian yellow peas at USD339/mt (together the “Cargo”).

Both contracts were C&F out Mudra, India and incorporated GAFTA Contract No.24. The Vessel “RB Leah” was nominated to transport the Cargo from Vancouver to Mundra, India.

The contracts incorporated clause 25 GAFTA (the “Default clause”), whose subclause (c) states:

(c) The damages payable shall be based on, but not limited to, the difference between the contract price of the goods and … the actual or estimated value of the goods, on the date of default …).

In accordance with both Contracts, payment would be effected either by a letter of credit against documents or cash against documents, at the Buyers’ option. If the Buyers opted for the latter, then payment would need to be made 5 days prior to the vessel’s arrival at the discharge port. Subject to the non-payment clause in the contract, in the event of non-payment, the parties agreed that the Sellers could resell the goods to a third party.

Upon arrival of the cargo at the discharge port, the cargo was discharged against letters of indemnity from the Buyers as the Buyers had failed to provide payment for the cargo. The Sellers retained property in the Cargo which was customs cleared and stored in a warehouse in Mundra pending payment from the Buyers.

Despite varying the contract in order to enable the Buyers to pay for the cargo in three instalments, the Buyers had once again failed to provide payment of the first instalment when it was due. Accordingly, the Sellers prevented the cargo from being released to the Buyers. Payment remained outstanding when the Indian Government placed import tariffs of 50% on the peas and 30.9% on the lentils.

The Sellers held the Buyers in default of the Contracts and obtained a possession order in the Gujarat Court on 2 February 2018, which allowed the Sellers to re-sell the goods to a third party, Agricore Commodities Ltd.

Key issue

The question of law was:

Does the wording under paragraph 25(c) of GAFTA 24 require that damages due to the Sellers should be measured by reference to:

• the market value of the cargo at the discharge port on or about 2 February 2018 (the default date); or
• the theoretical cost of purchasing the cargo FOB at the load port on the default date plus the market freight rate of transporting the cargo to the discharge port?

GAFTA Board of Appeal

The Board of Appeal determined that the damages were to be measured based on the same terms and conditions as the terms and condition of the contracts under which the dispute arose. Specifically, this meant that damages would be assessed according to the market value of the cargo C&F free out of Mundra on the 2 February 2018, plus the freight cost to transport the cargo to the discharge port.

Commercial Court

The Buyers were granted permission to appeal to the Commercial Court. However, the Commercial court upheld the GAFTA Award.

Court of Appeal 

On appeal to the Court of Appeal, the Buyers’ position was that the valuation of the cargo under sub-clause 25(c) should be on the basis of “as is where is” on the date of default. Ultimately, due to the import tariffs, this would have given the Sellers damages based on the higher market price in India, therefore limiting the amount payable to the Sellers.

Focusing on the decision of the Supreme Court in Bunge SA v Nidera BV, the Court of Appeal held that the value of the Cargo should be measured according to a notional substitute contract based on the same terms and conditions as the terms and conditions of the contract on the default date, 2 February 2018. Accordingly, damages would be assessed by reference to the notional sale of goods in bulk ex warehouse Mundra on the default date, 2 February 2018, based on instalment payment terms.

The reasoning behind the Court of Appeal’s decisions was as follows:

• Clause 25(c) did not stipulate that the notional sale was required to be based on the same market rate in India;
• The non-Payment clause in the Contract simply required that the Buyers would assist in the resale of the Cargo and did not foresee that such a resale would be on an “as is where is” basis;
• As the Cargo had been discharged, had been customs cleared and had been placed in storage in a warehouse in Mundra, and since the risk had passed to the Buyers, the Contracts were no longer under a C&F arrangement; but instead were for a notional sale of goods in bulk ex warehouse Mundra.

A Supreme Court ruling?

The Sellers have applied for permission to appeal the Court of Appeal’s decision to the Supreme Court. We await to hear whether such permission will be granted. However, for now, it appears that the correct interpretation of clause 25(c) of GAFTA 24 will be based on the Court of Appeal’s recent ruling, until otherwise determined.