The Gafta Default Clause: Guidance from the English Commercial Court

22-04-2022


In a recent Commercial Court decision, Cockerill J considers the correct approach to the quantification of damages under the Gafta Default Clause. This significant (and somewhat controversial) Judgment provides guidance to Courts and Tribunals on how damages for non-acceptance of goods should be assessed.

The Gafta Default Clause is an important mechanism for the assessment of the damages payable by a party in default of their contractual obligations. The default clause in Gafta Contract No. 24 provides that an innocent party may “sell or purchase… against the defaulter”, i.e. to replace the bargain it had lost with an equivalent one. The innocent party may then claim damages based on the difference between the contract price of the goods and either: (i) the default price (i.e. the sale or purchase price of the replacement contract); or (ii) “the actual or estimated value of the goods, on the date of default”.

In Sharp v Viterra, the parties entered into two contracts for the sale and purchase of red lentils and yellow peas on C&F Free Out Mundra terms. Upon their arrival at the discharge port, the goods were customs cleared and Buyers placed them into storage – but did not pay the purchase price. Sellers eventually took possession of the goods and arranged for their re-sale. In the interim, the Indian Government imposed new import tariffs. As a consequence, the value of the goods on the domestic market increased substantially. Sellers claimed damages from Buyers under the Gafta Default Clause.

A Gafta Board of Appeal was tasked with determining whether the actual or estimated value of the goods should be assessed by reference to their market price at their location on the date of default, or by reference to the cost of a new shipment on the default date from the original load port. Under the first scenario, Buyers benefitted from the goods’ increase in value; under the second, Sellers had the benefit of this. Notably, neither party contended that damages should be assessed by reference to the difference between the contract price and the price at which the goods were eventually resold.

The Board of Appeal accepted Sellers’ submission that the value of the goods should be assessed by reference to the cost of new shipments on terms equivalent to the contracts concluded between the parties. Buyers issued an appeal to the English Commercial Court under Section 69 of the Arbitration Act 1996.
In her Judgment, Cockerill J noted that she was faced with “two imperfect proxies”. On the one hand, the methodology put forward by Buyers would not have resulted in a like for like sale, as the goods had benefitted from customs clearance and the absence of the tariff. On the other, there was an “obvious artificiality” in assessing damages by reference to the notional purchase of similar goods for arrival at the port of discharge over a month after the date of default, as Sellers proposed.

While there was “obvious force” in some of Buyers’ arguments, Cockerill J found that the authorities supported Sellers’ position and dismissed Buyers’ appeal. In doing so, she noted that, as a consequence of the goods’ increase in value, one way or another one of the parties would have gained a windfall. Given that Buyers were “responsible for the problem in the first place”, they could not complain that they had not been the party to reap the benefit of it.

As with previous decisions on the Gafta Default Clause, Cockerill J’s Judgment is not without controversy and appears to have divided specialists and practitioners. Given the importance and wide application of default clauses in Gafta contracts, we anticipate that their interpretation will be subject to further scrutiny in future.

This article was first published in the April 2022 edition of GaftaWorld.


Katie Dyson

Partner
Commercial Disputes

Chris Felton

Partner
Commercial Disputes

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