Factual and Procedural Background
The appellants ("the sellers") and the appellees ("the buyers") entered into a contract on 10th June 2010 for the sale of 25,000 metric tonnes of Russian milling wheat on f.o.b. terms, incorporating the standard GAFTA 49 contract form. The shipment period was set for August 2010 and later narrowed to 23rd-30th August 2010. Clause 13 of GAFTA 49, the Prohibition clause, provided for cancellation of the contract in the event of export prohibitions or restrictions imposed by government authorities.
On 5th August 2010, the buyers nominated a vessel to lift the goods, but the Russian government announced Resolution 599, imposing a temporary export prohibition on certain agricultural products, including milling wheat, effective from 15th August to 31st December 2010. The sellers notified the buyers on 9th August 2010 that the contract was cancelled pursuant to the Prohibition clause.
The buyers treated the sellers' cancellation as a repudiation of the contract, which they accepted on 11th August 2010. The sellers offered to reinstate the contract, but the buyers declined. Subsequently, the buyers initiated arbitration claiming damages of approximately US$3,062,500, representing the difference between the contract price and the market price on 11th August 2010, relying on clause 20 ("Default clause") of GAFTA 49.
The Board of Appeal found that the contract was not automatically cancelled on the announcement of Resolution 599 since the export ban had not yet prevented shipment. The sellers' communication was a repudiation, accepted by the buyers. The Board held that the Default clause applied and damages were to be calculated based on the difference between contract and market price on the date of default. The Board declined to decide on the applicability of the House of Lords decision in The 'Golden Victory' or on mitigation, but expressed doubts about the former and rejected the latter submission.
Hamblen J. granted leave to appeal and upheld the award. The sellers appealed against his decision.
Legal Issues Presented
- Whether the announcement of Resolution 599 on 5th August 2010 resulted in the automatic cancellation of the contract under the Prohibition clause.
- If not, whether the buyers were entitled to recover damages calculated by reference to the difference between the contract price and market price on the date of contract termination, including:
- Whether the Default clause applies to a refusal to perform following repudiation.
- Whether the Default clause conclusively determines the measure of damages.
- Whether the buyers were entitled to damages at common law in light of The 'Golden Victory' decision.
- Whether the buyers failed to mitigate their loss by refusing the sellers' offer to reinstate the contract.
Arguments of the Parties
Appellant's Arguments
- The Prohibition clause's phrase "restricting export" applies only to executive or legislative acts, not to the initial events of prohibition of export, blockade, or hostilities, so the contract was automatically cancelled upon announcement of Resolution 599.
- The clause should be read to provide commercial certainty by deeming any export prohibition affecting the contract goods and shipment period as automatically cancelling the contract.
- The Default clause applies only to breaches involving non-delivery or non-acceptance, not repudiation, and damages should be compensatory in line with common law principles, notably The 'Golden Victory'.
- Reliance on certain authorities was made to support the view that the contract was cancelled upon announcement of the embargo.
Appellee's Arguments
The opinion does not contain a detailed account of the appellees' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Golden Strait Corpn v Nippon Yusen Kubishika Kaisha (The 'Golden Victory') [2007] UKHL 12 |
Common law principle that damages are compensatory and may be affected by subsequent events. |
The court declined to decide on its applicability but noted doubts about its application to single parcel sale contracts. |
| Pancommerce S.A. v Veecheema B.V. [1983] 2 Lloyd's Rep 304 |
Prohibition clause requires actual prevention or restriction of performance to apply. |
Supported the conclusion that the embargo must have prevented performance to trigger cancellation. |
| Ross T. Smyth & Co. Ltd v W. N. Lindsay Ltd [1953] 1 W.L.R. 1280 |
Prohibition clause effect on contract performance. |
The case concerned non-delivery, not repudiation; no clear guidance on automatic cancellation. |
| Bremer Handelsgesellschaft m.b.H. v Vanden Avenne Izegem P.V.B.A. [1978] 2 Lloyd's Rep. 109 |
Prohibition clause effect and automatic cancellation upon frustrating event. |
Distinguished as involving failure to deliver, not repudiation; limited assistance to sellers' case. |
| Ford & Sons (Oldham) Ltd v Henry Leetham & Sons Ltd (1915) 21 Com. Cas. 55 |
Prohibition clause satisfied if prohibitions affect substantial sources of supply. |
Contract context differed; decision did not assist sellers. |
| Samuel Sanday & Co. v Cox McEuen & Co. (1922) 10 Ll. L.R. 409 & 459 |
Prohibition clause requires effective prohibition preventing shipment. |
Supported buyers' argument that automatic cancellation requires actual prevention of shipment. |
| Agrokor A.G. v Tradigrain S.A. [2000] 1 Ll. Rep. 497 |
Prohibition clause requires showing of restriction on contract performance. |
Supported the view that the clause does not operate automatically upon announcement without effect on performance. |
| Toprak Mahsulleri Ofisi v Finagrain Compagnie Commerciale Agricole et Financière S.A. [1979] 2 Ll. Rep. 98 |
Limits on raising new arguments on appeal regarding contract clauses. |
Precluded sellers from raising certain arguments in this appeal. |
| Bem Dis A Turk Ticaret S/A TR v International Agri Trade Co. Ltd (The 'Selda') [1998] 1 Ll. Rep. 416 |
Interpretation of Default clause regarding recoverable losses. |
Distinguished as involving different question; confirmed clear words needed to exclude common law losses. |
Court's Reasoning and Analysis
The court analysed the wording of the Prohibition clause, focusing on the phrase "restricting export." It rejected the sellers' argument that this phrase applied only to executive or legislative acts and not to the initial events of prohibition, blockade, or hostilities. The court found it more natural to construe "restricting export" as describing the practical effect on the seller’s ability to perform the contract rather than merely the nature of the event.
The court emphasised the necessity of a causal link between the event and the sellers' inability to perform. It noted that automatic cancellation upon announcement of an embargo without regard to its actual effect would produce commercial uncertainty and potentially unjust results, especially given the uncertain duration and modification of such restrictions.
In reviewing authorities, the court found that cases cited by the sellers mainly concerned non-delivery rather than anticipatory repudiation and did not support automatic cancellation upon announcement of an embargo. The court gave particular weight to decisions indicating that the prohibition must effectively prevent shipment to trigger cancellation.
Regarding the Default clause, the court held that it applies broadly to any failure to perform, including repudiation. The clause provides a conventional, commercially certain measure of damages based on the difference between contract and market price, reflecting a natural commercial response and avoiding penalty characterization.
The court rejected the sellers' argument that the clause should be read subject to common law compensatory principles as established in The 'Golden Victory', considering the clause clear in setting the measure of damages. The court also noted that the sellers did not challenge the judge’s findings on mitigation, which was therefore not addressed.
Accordingly, the court concluded the contract was not automatically cancelled on 5th August 2010 and that the sellers repudiated the contract by treating it as cancelled prematurely. The Default clause governed the calculation of damages.
Holding and Implications
The court DISMISSED the sellers' appeal.
The direct effect is that the contract was not automatically cancelled upon the announcement of Resolution 599; rather, the sellers repudiated the contract by treating it as cancelled prematurely. The buyers were entitled to damages calculated under the Default clause based on the difference between the contract price and the market price at the date of repudiation. No new precedent was established, and the court refrained from deciding on the applicability of The 'Golden Victory' decision or mitigation issues, which were not contested.