Sharp Corp Ltd v. Viterra BV [2022] EWHC 354 (Comm)
The High Court has preferred fiction to fact when valuing commodities – what will the Court of Appeal say about that?
In shipping disputes involving commodities which were not delivered by the seller, or not accepted by the buyer, the amount of damages recoverable by the innocent party often depends on the “value” to be given to the goods in question. For good historical reasons, defaulting parties cannot just point to the price in the sale contract – mainly because where market prices shift, this would create incentives for parties not to perform the contract. For example, if the market goes up, a seller may decide to sell the goods instead to someone else for more, as they would be in profit even if they then paid the original sale price back to the buyer. The buyer would be left without the goods it needed. The value principal broadly means that the seller in that case would have to pay its extra profit to the buyer, making it more likely that the original contract would be honoured.
I have recently led the Zaiwalla & Co team dealing with the latest high-profile case about how tribunals and courts should determine the “value” of unaccepted goods so as to produce a fair conclusion. To illustrate how finely balanced this case is, one High Court Judge (Mr Justice Jacobs) took the initial view that the arbitration tribunal’s decision was “obviously wrong”, but the other High Court Judge Mrs Justice Cockerill who finally decided the appeal held that the original decision was actually correct. Immediately after her decision, Mrs Justice Cockerill took the unusual step of giving the Applicant Sharp Corp, whom Zaiwalla & Co represent, permission to appeal against her own decision to the Court of Appeal noting the appeal had a real prospect of success.
The case involves contracts to sell 20,000 tonnes of lentils and 45,000 tonnes of peas to Sharp and to ship them from Canada to India. At the time, the good were imported tariff free in India. Sharp did not pay for the goods when they arrived, and there was no space at the port for the goods to be stored awaiting payment. Sharp therefore took the goods off the ship and cleared them through customs before storing them in India. Shortly after that the Indian government imposed import tariffs on both lentils and peas, meaning that the value of the customs cleared goods in the warehouse increased significantly. Upon non-payment by Sharp, Viterra collected the goods and sold them to its own Indian subsidiary.
Viterra then made a claim against Sharp for breach of contract and the arbitration tribunal had to decide what the value of the unaccepted goods were. The default clause in the standard form Grain and Feed Trade Association (GAFTA) contract said that Viterra should receive the difference between the contract price and either the price it sold them for or the “the actual or estimated value of the goods, on the date of default.” In the arbitration:
- Sharp argued that the value should be the price on the Indian market at the time that Viterra collected the goods in India, since that was the true value of the goods they received. In that case, Viterra suffered no loss since the value had gone up.
- Viterra argued that the value of the goods should be decided by estimating the price of an imaginary new contract for supplying the same goods by combining their cost on the default date in Canada with the costs of shipping them to India.
The GAFTA Tribunal and the High Court agreed with Viterra. The main reason for that was said to be that the original contract had been to provide goods which were not customs cleared, which was better reflected in Viterra’s imaginary scenario. The Court was also wary of allowing Sharp to have the benefit of the effect of the new tariffs, when it was the party who breached the contract.
International traders will be looking out for the Court of Appeal’s decision on this case with interest. Around 80% of the world’s grain trade is estimated to be carried out using GAFTA standard forms and wording of the default clause in this case appears in many other GAFTA forms. In fact, identical Default Clauses appear in 27 of the 78 current GAFTA standard forms and almost identical ones in a further 37 standard forms. Thus, 64 out of 78 GAFTA forms contain this default clause or one substantially identical to it. Depending on the final decision, traders may not be able to rely on actual market prices when dealing with disputes and may instead have to start obtaining evidence of the theoretical cost of buying identical goods on the default date plus shipping these identical goods to the discharge port.
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