In its judgment in Sharp Corporation Ltd v. Viterra BV[1] handed down last month, the UK Supreme Court held that damages for nonacceptance of goods should be determined by reference to the realisable value of the goods left in the seller’s hands in consequence of nonacceptance – and not on the basis of a notional substitute contract on the same terms as the parties’ contract.

In reaching this decision, the court provided important clarification as to the appropriate application of the principles set out in the Supreme Court’s judgment in Bunge SA v. Nidera BV,[2] which has until now been taken as dictating that the substitute contract approach must be adopted. 

Background

The parties had entered into two contracts for the sale of lentils and yellow peas on Cost & Freight Free Out (C&FFO) Mundra[3] terms.

The seller delivered the cargo to Mundra and, although the buyer had failed to pay for it, allowed it to be landed and customs-cleared. When the buyer continued to withhold payment, the seller declared it to be in default and claimed damages.

The buyer subsequently resold the cargo to an associated party. Importantly, prior to that sale, the Indian government had imposed heavy import tariffs on lentils (30.9%) and yellow peas (50%). This significantly increased the value of the goods on the Indian domestic market.

In the event of default of fulfilment of the contracts by either party, the contracts[4] provided that the damages payable are to be based on the difference between the contract price of the goods and ‘the actual or estimated value of the goods, on the date of default’.

There was a dispute between the parties as to the correct approach to valuing the goods on the date of default. The seller contended that the correct approach was to take the market value of a notional replacement C&F Mundra contract on the date of default – i.e., on the basis of a notional substitute contract for the goods on the same terms as the parties’ contract. The buyer contended that the correct approach was to take the market value of the goods on the domestic market in India – i.e., on an ‘as is, where is’ basis.

The dispute first came before the Grain and Feed Trade Association Board of Appeal, which found that the damages should be assessed on the market value of the goods C&FFO Mundra at the date of default. The case then made its way through the High Court and the Court of Appeal, finally coming before the Supreme Court.

The Supreme Court’s judgment

Lord Hamblen, who delivered the unanimous judgment, emphasised the fundamental role of the principle of mitigation to the law of damages, alongside the compensatory principle, in determining contractual damages. The compensatory principle requires that the injured party is to be placed – so far as money can do it – in the same situation as if the contract had been performed. However, the principle of mitigation requires the injured party to take all reasonable steps to avoid the consequences of the breach. 

The importance of mitigation was, the judge said, reflected both in the specific wording of the contracts’ default clause and in the wording of the Sale of Goods Act: Damages are to be determined on the basis that the innocent party has achieved a substitute sale or purchase of the goods, whether or not it has actually done so. Provided there is an available market, the market price establishes the default price regardless of what the injured party actually does.

The question is, which market? The answer, Lord Hamblen explained, is to be guided by the mitigation principle, and to consider ‘the market in which it would be reasonable for the Sellers to sell the goods’. In the present case, the seller was left with goods which had been landed, customs-cleared and situated in a warehouse in Mundra. Given the significant increase in the value of the goods in the Indian domestic market brought about by the hike in import taxes, it was clear that the only reasonable market for the seller to sell the goods would be the ex warehouse Mundra market. To substitute that with a notional sale in the international market, which would involve the costs of reexporting the goods and losing the increase in value in the domestic market, would be unreasonable.

Lord Hamblen noted the dicta in Bunge v. Nidera that the compensatory principle ‘is ordinarily achieved by comparing the contract price with the price that would have been agreed under a notional substitute contract assumed to have been entered into in its place at the market rate but otherwise on the same terms’, and that ‘the measurement of damages by reference to an available market … presupposes that the substitute contract is a true substitute’. He agreed that where there is an available market for a true substitute contract that is no doubt the correct approach. However, he cautioned against interpreting these passages as if they are a statutory test: ‘They are not laying down the approach which must be adopted in all cases regardless of the circumstances.’ The available market often will not be an exact substitute but may nevertheless be reasonably used to set the default price.

Takeaway

This judgment catapults the mitigation principle into the spotlight. And rightly so: To ignore the reality in this case and insist that market value should be determined by reference to an exact substitute contract as the parties agreed would be nonsensical.

[1] [2024] UKSC 14.

[2] [2015] UKSC 43.

[3] Under C&FFO terms, the seller is responsible for the delivery of the cargo to the final destination port (in this case, Mundra), and the buyer is liable for port fees and the cost of unloading the cargo.

[4] The contracts incorporated much of the Grain and Feed Trade Association Contract No. 24, including this default clause.

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