Our team in the Supreme Court this week in a case relating to the correct measure of damages under the GAFTA Default Clauses

February 19 2024

On 22 February 2024, the UK Supreme Court will hear an appeal by Rotterdam based Viterra BV (previously known as Glencore Agriculture B.V.)  against an English Court of Appeal judgment in favour of Delhi based buyer Sharp Corp Limited (“Sharp”). At issue is the correct method of calculating damages under the Default Clause of GAFTA Contract No. 24.

This case is likely to lead to a groundbreaking ruling affecting commodities traders as well as the legal community.

The case:

The parties had entered into GAFTA agreements for the sale and purchase of 65,000 metric tonnes of Canadian Yellow Peas and Crimson Lentils on C&F free out terms. Subsequent to Sharp’s default of the original payment terms, the parties agreed that the goods would be discharged, cleared through Indian customs and stored in a warehouse at the Mundra Port whilst Sharp arranged payment in instalments. Therefore, at the date of default, the contract between the parties had ceased to be a C&F contract and the legal ownership had changed to a contract for sale ex warehouse for those specific goods. When Sharp failed to pay on time Viterra declared a default, resold the goods to a third party and commenced two successful GAFTA arbitrations against Sharp.

The GAFTA Appeal Board permitted the calculation of loss and damage owing to Viterra (circa $6 million excluding costs and interest) to be on the theoretical value of: (i) buying equivalent goods FOB Vancouver and (ii) shipping those goods to Mundra, where in theory they would arrive over a month after the default date.

After the goods had been cleared at customs and were being stored in a warehouse, the Indian government imposed tariffs on the goods (50% on peas and 30.9% for lentils). The value of the goods Viterra re-sold were therefore ‘substantially increased’ and higher than the international market value.

International Arbitration specialist law firm, Zaiwalla & Co, acting for Sharp, challenged both GAFTA Awards by appealing to the Court of a point of law under the Arbitration Act 1996 on the basis that the GAFTA Appeal Board should have calculated Viterra’s losses on the actual or estimated value of those goods which had already been customs-cleared in India at the date of default i.e. before the Indian government imposed the tariff increase. This alternative measure would have resulted in a significantly lower damages award.

The English High Court first found in favour of Viterra but the Court of Appeal (“CoA”) sided with Sharp, albeit often effecting a slight refinement to Sharp’s question of law for which the permission to appeal was granted. The two Awards were ordered to be remitted back to the GAFTA Board for reconsideration.

Viterra has appealed to the Supreme Court asserting that the CoA was wrong to refine Sharp’s question of law. Viterra also argues that the CoA made incorrect findings of fact which were not based on the facts presented in the GAFTA proceedings, but rather the Court’s own interpretation of the parties’ contemporaneous written communications.

Sharp has cross-appealed to uphold the CoA’s decision on its original argument on how goods should be valued, independently of the refinement to the question of law done by the CoA.

Commodities arbitration specialist Saurabh Bhagotra of law firm Zaiwalla & Co acting for Sharp says:

“This is an important case that shows clearly how serious legal consequences can attach to ad hoc arrangements between traders to mitigate the effect of a default under GAFTA contracts or other trade associations using standard forms. Here, this altered not only the legal characteristics of the parties’ contractual relationship, but also led to a very significant change in the relevant measure for calculating this.”

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