Mitigation, the compensatory principle and the law of damages: Sharp Corp Ltd v Viterra BV [2024] UKSC 14 

By Tajwinder Atwal, Trainee

Overview

The Supreme Court handed down judgment in Sharp Corp Ltd v Viterra BV [2024] UKSC 14 and found that the compensatory principle and principle of mitigation were both, indeed, fundamental to the law of damages. In respect of Clause 25 of the Grain and Free Trade Association (“GAFTA”) Contract No. 24 (“GAFTA Default Clause”) this meant that where damages were awarded, they would be assessed by reference to “the market in which it would reasonable for the seller to sell the contract goods” at the date of default. The judgment also provides authoritative guidance on the limits within which the English Court can act on an appeal under section 69 of the Arbitration Act1 (the “Act”). 

Facts

In January 2017, Viterra BV (the “Sellers”) and Sharp Corporation Limited (the “Buyers”) entered into two Cost & Freight free out (“C&FFO”) Mundra terms. One contract was for the sale of lentils (the “Lentils Contract”) and the other the sale of peas (the “Peas Contract”, collectively, the “Contracts”). The Contracts were identical save as to commodity, quantity and price. It is important to note that both Contracts incorporated the GAFTA Default Clause.

In April 2017, the Sellers nominated the vessel RB Leah (the “Vessel”) for both Contracts. In May 2017, the lentils and peas (“Goods”) were loaded on board the Vessel in Vancouver. As per the Contracts, the Buyers did not make payment for the Goods within five days prior to the Vessel’s arrival at Mundra. This meant that under the non-payment provisions of the Contracts, the Sellers retained the Goods and had the right to resell them. 

By June 2017, the Goods were cleared at customs and remained at the discharge port. The Buyers refused the authorities to release the Goods to the Sellers and, in November 2017, the Sellers declared the Buyers in default under both Contracts, claiming damages of their intended exercise of the right to resale. 

Late in the year, the government of India imposed an import tariff on yellow peas of 50% with immediate effect and, subsequently, imposed a tariff of 30.9% on lentils with immediate effect. As a result, the Goods had significantly increased in value in the domestic market. On 2 February 2018, by way of contract, the Sellers re-sold the Goods. 

GAFTA Board of Appeal

The Sellers declared the Buyers in default and commenced arbitration seeking damages. The GAFTA Board of Appeal found that while the date of the Seller’s declaration of default was in November 2017, it was impossible to re-sell the Goods until they were able to obtain possession of the Goods on 2 February 2018; thus, the GAFTA Appeal Board accordingly found that 2 February 2018 was the date of default. 

Commercial Court Decision 

The Buyers appealed against the GAFTA Board of Appeal’s decision and, in Commercial Court, the appeal was rejected by Justice Cockerill. It was held that the Buyers had not shown that the GAFTA Appeal Board had erred in law, which was the basis for dismissing the appeal. 

Court of Appeal Decision 

However, the Court of Appeal2 overturned Justice Cockerill’s decision. Lord Justice Popplewell concluded that the damages payable under the Default Clause were to be assessed on the basis of a notional substitute contract for the Goods on the same terms as the parties’ Contract, save as to price, at the date of default. It held instead that damages should have been assessed on the basis of the terms ex warehouse Mundra, in instalments, with risk having passed on shipment. This is because the parties had varied the contracts to be on ex warehouse Mundra terms. 

Supreme Court Decision 

The Sellers appealed against the Court of Appeal’s decision on the grounds that it had exceeded its jurisdiction under section 69 of the Act, in finding that the contract had been varied. 

The Buyers cross-appealed on the basis whether damages should have been awarded on an “as is, where is” basis, being the estimated ex warehouse Mundra value of the Goods. 

The Supreme Court held that the Court of Appeal had exceeded its jurisdiction under the Act, in relation to errors of fact and no power to make its own findings of fact. 

In respect of damages, the Supreme Court reversed the GAFTA Board of Appeal and the Lower Courts basis on which they had assessed the damages. Instead, it held that that two fundamental principles of the law of damages are the compensatory principle3 and principle of mitigation4 of damage.5 Both principles are reflected in the GAFTA Default Clause. Applying both principles meant that the GAFTA Appeal Board should have considered “the market in which it would reasonable for the seller to sell the contract goods” at the date of default.

The Sellers were left with the Goods which had landed in Mundra, whereby the value had increased significantly because of the imposition of the customs tariffs. Therefore, it was held that the answer to the question of law is that the value of Goods under paragraph (c) of the Default Clause falls to be measured by reference to a notional sale of the Goods in bulk ex warehouse Mundra on 2 February 2018.

Conclusion 

The Supreme Court’s decision clarifies that damages are to be assessed on a compensatory principle and principle of mitigation. This approach clearly departs from the earlier decision in Bunge SA v Nidera6 and Golden Strait Corpn v Nippon Yusen Kubishika Kaisha (The Golden Victory),7 whereby both decisions focused heavily on the compensatory principle.

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• 1. https://www.legislation.gov.uk/ukpga/1996/23/section/69
• 2. On Appeal from [2023] EWCA Civ 7.
• 3. Paragraph 84 of the Judgment – “The compensatory principle aims to put the injured party in the same position as if the breach of duty had not occurred. In relation to contractual damages this means that the injured party is “so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”
• 4. Paragraph 85 of the Judgment – “The principle of mitigation requires the injured party to take all reasonable steps to avoid the consequences of a wrong. This means that (i) there is no recovery for loss which should reasonably have been avoided; (ii) there is recovery for loss incurred in taking reasonable mitigating steps, even if that increases the loss and (iii) if the loss is successfully reduced by the taking of reasonable mitigating steps then the party in breach is entitled to the benefit of that - there is no recovery for avoided loss.”
• 5. Paragraph 83 of the Judgment.
• 6. [2015] UKSC 43.
• 7. [2007] UKHL 12.