In the recent judgment in Sharp Corp Ltd v Viterra BV [2024] UKSC 14, the Supreme Court upheld the Sellers’ appeal, confirming that the Court of Appeal had exceeded its jurisdiction under the Arbitration Act 1996. It also provided welcome clarification of the interplay between the mitigatory and compensatory principles when assessing damages, write Alex Hudson, Director, and William Reed, Trainee Solicitor, CJC.
Facts
Viterra BV (“Sellers”) sold one shipment of Canadian lentils and one of Canadian yellow peas (together the “Cargo”) to Sharp Corp (“Buyers”). The sales were made via two sales contracts, both dated 20 January 2017 (the “Sales Contracts”). Each Sales Contract contained a standard GAFTA non-payment clause (the “Default Clause”) which provided that, should the Buyer fail to pay for the Cargo, damages would be payable to the Seller based on the difference between the contract price and “the actual or estimated value of the goods, on the date of default”.
Buyers failed to pay for the Cargo prior to its arrival at the discharge port Mundra, India, on 19 June 2017. The Cargo was subsequently landed, cleared through customs in Mundra and stored at a local warehouse whilst the parties engaged in various without prejudice exchanges, signed various addenda to the Contracts and generally disputed ownership. Ultimately, the Sellers recovered possession of the Cargo on 2 February 2018 following a local Court Order.
Importantly, during the period following the landing of the Cargo in Mundra but before the Seller’s recovery of the Cargo on 2 February, the Indian Government imposed import tariffs of 50% and 30.9% on lentils and peas respectively. The Cargo, which was customs cleared prior to the tariffs being imposed, subsequently increased in value significantly.
Sellers brought claims to recover their losses. The matter was referred to GAFTA arbitration where it was found that the Buyers had breached the contract through their failure to pay. The date of Buyers’ default on the Sales Contracts was determined to be the day on which the Sellers were able to regain the Cargo (2 February 2018) as the Sellers had no way to sell the Cargo before that date. In ruling on recoverable damages, the GAFTA Appeal Board determined that the value of the goods was to be calculated by reference to the original Sales Contracts as at the later date of 2 February 2018. The Sales Contracts provided for the international sale of the goods applying a market price of FOB Vancouver with additional freight for on-carriage to Mundra.
In ruling on this basis, the GAFTA Appeal Board gave primary weight to the compensatory principle which 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 ordinarily 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”.
Buyers’ position was that the decision failed to consider the significantly increased value of the Cargo which the Sellers found in their possession on 2 February 2018 by reference to a sale in the domestic market in India. Buyers therefore appealed the decision to the High Court, which upheld the arbitration decision, and then again to The Court of Appeal. The Court of Appeal allowed the appeal determining that the Sales Contracts had been varied with reduced damages subsequently being permitted under the substitute contracts. Sellers, in turn, appealed this decision to the Supreme Court on the grounds that, by finding that the contracts had been varied, the Court of Appeal had exceeded its jurisdiction under s.69 of the Arbitration Act.
Judgment
The Supreme Court upheld the Sellers’ appeal and found that the Court of Appeal had exceeded its jurisdiction under the Arbitration Act. Specifically, s.69 of the Arbitration Act limits an appellant court’s jurisdiction to questions of law. The Court of Appeal’s finding that the Sales Contracts had been varied was not a finding of law but a finding of fact. The Supreme Court thus held that the Court of Appeal had exceeded its jurisdiction and was not entitled to make its legal ruling on the basis of these new altered facts.
On the issue of recoverable damages, the Supreme Court held that the value of the Cargo should be determined by reference to the market where “it is reasonable for the seller to dispose of the goods”. This was held to be the domestic market in India. In finding this, the Supreme Court discussed the principle of mitigation at some length. This requires that an injured party 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.
Comment
Sharp v Viterra serves as a useful reminder of the fundamental principles of the law of damages.
By applying a heightened value to the mitigatory principle, and concluding that, along with the compensatory principle, it was one of two fundamental principles to the law of damages, the Supreme Court ultimately reached an (arguably) more commercially sensible conclusion that the increased value of the Cargo in India should be considered when assessing the Sellers’ recoverable damages from the Buyers.
Further, the Supreme Court’s ruling on the limits of an appellant court’s powers when considering a first instance decision is to be welcomed. The clear limits placed on the Court regarding findings of fact as opposed to findings of law is an important consideration and highlights the importance of the Tribunal’s initial decision when assessing the prospect of an appeal.