Supreme Court promotes certainty and stability in international sales transactions

This landmark victory for Sharp Corp, who were represented throughout its actions in the English courts by Zaiwalla & Co, reaffirms the English law’s practical, reasonable and realistic approach to commercial law. The Supreme Court has rejected an argument that damages for failure to accept goods should be calculated according to notional replacement contracts, and has instead reaffirmed the principles of compensation and mitigation. International traders who choose English law will now thankfully be protected from claims that are inflated by the use of mechanistic readings of contract provisions and legal precedents.

The decision applies in a wider sense to all arbitration appeals, and so will affect all parties who arbitrate under the Arbitration Act 1996, who will be reminded of the limits of the jurisdiction of the courts to supervise arbitrations and to intervene with arbitral awards.

When it comes to applying under section 69 of the Arbitration Act 1996 for permission to appeal to the High Court against arbitration awards, English legal practitioners know that many are called but few are chosen. Persuading the court at the permission stage that the original decision was ‘obviously wrong’, or that the question is one of general public importance and the decision at least open to doubt, is a high bar to clear in the context of the exacting standards that arbitrators bring to bear in English-seated commercial arbitration.

As is well known, only the most important questions of law qualify to be determined by the UK’s Supreme Court, which is why on average fewer than 100 cases per year are heard at that level. Out of those few cases, most raise constitutional questions or matters of general importance to everyday citizens. Hardly any touch on questions of commercial law. So, when the Supreme Court resolved to hear the dispute arising out of a Grain and Feed Trade Association (GAFTA) contract between Delhi-based commodities trader Sharp Corp and agri-conglomerate Viterra BV (formerly Glencore Agriculture BV) of Rotterdam, both the English arbitration community and the world of international trade sat up and took notice.

Given that, it was therefore a genuine privilege for Zaiwalla & Co to obtain permission to commence this matter in the High Court and then see it progress all the way to the Supreme Court.

The dispute

The background to the dispute will feel fairly typical to international traders. The parties entered into contracts for the sale of Canadian peas and lentils C&F Free Out to the Indian port of Mundra. Following the goods’ arrival at port the parties agreed new purchase terms for payment by instalments (that agreement proved to be significant, of which more later). Ultimately, however, Sharp declined to make payment, and Viterra resold the goods to a sister company before claiming damages against Sharp in GAFTA arbitration.

Crucially, after the goods were customs cleared at Mundra, but before they were sold, the Indian government introduced import tariffs on both peas and lentils, significantly raising the value of the goods in question, which had been left with Viterra to re-sell as it chose.

In order to establish what Viterra’s actual losses were, the GAFTA tribunal had to decide what value to give to the goods which had been left on its hands and resold to the sister company. Under GAFTA Contract No. 24 this should be ‘the actual or estimated value of the goods, on the date of default’. Each party proposed a different method of calculation for deciding that value:

• Sharp’s method was to take the actual or estimated market value of the goods which were in Viterra’s hands on the date of the default, which by that time were customs cleared and stored in a warehouse at Mundra.
• Viterra’s method was to take the theoretical cost on the date of default of (1) buying those goods Free on Board at the original port of shipment, plus (2) the market freight rate for transporting the goods from that port to the discharge port free out. It based its argument on a previous Supreme Court case (Bunge SA v Nidera BV [2015] UKSC 43) which applied the same GAFTA clause in a case of non-acceptance. However, that was a case where the goods were never shipped, so there had been no possibility for the innocent seller to re-sell them at the destination port.

As can be seen, the real difference between these positions is that Sharp’s method takes account of the real-world value of the goods that Viterra retained and re-sold and that had significantly risen in value, while Viterra’s method imagined that no goods had ever been left in its hands, which would significantly increase its damages.

The proceedings

The GAFTA first instance tribunal approved Viterra’s approach, and this was upheld by the GAFTA appeal board in April 2021. Sharp then applied to the English High Court for permission to bring an action under section 69, which permits the courts to decide appeals based on questions of law arising out of an arbitration award. As observed above, few such appeals are permitted, but on 13 May 2021 Mr Justice Jacobs gave permission to Sharp, saying that in his view the board’s decision was ‘obviously wrong’. Jacobs J certified the following question for a decision by the High Court:

‘Where goods sold C&F Free Out are located at their discharge port on the date of the buyer’s default, is “the actual or estimated value of the goods, on the date of default” under sub-clause (c) of the GAFTA Default Clause to be assessed by reference to

1. the market value of goods at that discharge port (where they are located on the date of default); or
2. the theoretical cost on the date of default of (i) buying those goods FOB at the original port of shipment plus (ii) the market freight rate for transporting the goods from that port to the discharge port free out?’

The full appeal came before Mrs Justice Cockerill in February 2022. Despite Jacob J’s view that the GAFTA board had been obviously wrong, Cockerill J decided that she could not overturn the board’s decision. Clearly sensing the difficulty of the case, she gave permission to Sharp to put the question to the Court of Appeal.

The Court of Appeal did overturn the decision on 11 January 2023, but not for the reasons which the parties originally had in mind. Its key reason for doing so was that the two arbitrations and the High Court appeal had wrongly treated the contract in question as being the original C&F contract between Sharp and Viterra, when what should have been considered was the revised agreement for payment by instalments, which the parties made after discharge of the goods. The Court of Appeal rejected Viterra’s argument that it could not change the question certified by Jacobs J, and revised the question before it by adding the underlined words:

‘Where goods sold C&F Free Out are located at their discharge port on the date of the buyer's default, in the circumstances as found by the Appeal Board in the Awards…’

As a result, the Court of Appeal resolved that Sharp’s method for calculating damages was the correct one in the circumstances. However, that did not resolve the commercial question of wider importance, which was whether Sharp’s or Viterra’s method was correct under the original C&F contract. The decision also raised a new question of how far a court can go on an appeal under section 69 if it considers that the wrong questions of law were asked at the previous stage.

The Supreme Court

As can be seen, the issues in this case were considered at every possible level, by every possible type of tribunal, and various answers were reached. Finally, on 8 May 2024, the Supreme Court used its ultimate authority to cut through the controversy and deliver a clear and principled answer to the legal questions raised by this case.

The question of law

Cutting through the debate, the Supreme Court decided that there was no problem with the Court of Appeal changing the question of law in the way it did. This was because adding those words did not change the ‘substance’ of the question: Cottonex Anstalt v Patriot Spinning Mills Ltd [2014] 1 Lloyd's Rep 615.

However, it then concluded that the Court of Appeal had gone too far in the way that it answered the revised question, because it did not respect the fact that section 69 limits the courts to considering those questions of fact and law which were raised before the arbitral tribunal. The Supreme Court found that the Court of Appeal had made findings of fact which had not been made by the GAFTA board, and had answered a question of law which had not been put before the board.

In summary, the Supreme Court confirmed that in a section 69 appeal the court could fine-tune the question which had been certified at the start of the appeal process, but was not permitted to trammel upon the limitations provided by the Arbitration Act by deciding matters of fact or law which were not argued in the underlying arbitration.

The assessment of loss

The Supreme Court rejected Viterra’s proposed application of Bunge v Nidera, and the windfall profit that would produce. It restated that two principles govern the English law of damages: the ‘compensatory principle’ which means putting the injured party in the position it would have been in had the contract been performed, and the duty to mitigate loss which falls on parties who seek damages.

Confirming that these principles were reflected in the terms of GAFTA contracts but also in the Sale of Goods Act 1979 and the common law generally, the Supreme Court held that Sharp’s method of valuation, which took account of the increase in value of the goods, was the correct one. Its key finding was at paragraph 100:

‘In the present case, on the default date the Sellers were left with goods which had been landed, customs cleared and stored and were situated in a warehouse in Mundra. Moreover, the goods so situated had significantly increased in value because of the imposition of customs tariffs. In such circumstances the obvious market in which to sell the goods, and in which it would clearly be reasonable to do so, is the ex warehouse Mundra market. Indeed, this was the market into which the Sellers did sell the goods, albeit to a related company. Conversely, it is difficult to see how it could be reasonable to sell those goods in the international market involving, as it would, the costs of reexporting the goods and losing the increase in value resulting from the goods being customs cleared before the significant increase in tariffs.’

In coming to this conclusion, the Supreme Court confirmed a principle that every law student knows: contractual damages are assessed by placing the innocent party in the position in which they would have been in had the contract been performed, on the assumption that that party has taken reasonable steps to mitigate its losses.

The future

The Supreme Court has reinforced the classic position under the common law and the English Sale of Goods Act. As a result, when anything goes wrong in one of the huge annual number of international transactions carried out under English law, the innocent party will have to consider the applicability of the ‘compensatory principle’ to assess their losses, which would provide a ‘straightforward and readily applicable measure of damages which will enable the innocent party to be put into the same financial position as it would have been in had the contract been performed and which does not depend upon the action actually taken by the innocent party.’

By deciding the point at the highest level, transacting parties can be confident that it is very unlikely that their counterparts will in future attempt to argue for higher damages by taking up the same flawed position as Viterra.

As for parties in arbitrations, the most important lesson from this decision is that if the correct questions are not raised and fully argued at the stage of the arbitration, and decisions on those questions not included in the awards, the courts will usually be powerless to consider them. It is now all the more important therefore that parties consider carefully all of the issues that may arise in the dispute at the very start.

Please note: Zaiwalla & Co represented Sharp Corp in the landmark Supreme Court decision of Sharp Corp Ltd v Viterra BV [2024] UKSC 14.