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In international trade of agricultural commodities, issues of calculating damages for non-delivered goods are of key importance. In this article, we will consider how damages are calculated under Gafta and FOSFA contracts, as well as under English law.
General Principles of Calculating Damages under English Law
Under English law, damages for breach of contract are calculated on the assumption that the breaching party acts in the least favourable manner for the claimant. This rule is described in classic legal sources such as Benjamin’s Sale of Goods and Chitty on Contracts.
Bunge Corporation v Tradax Export S.A
In Bunge Corporation v Tradax Export S.A [1981] 1 W.L.R. 711, the contract provided for the supply of 15,000 tonnes of soybeans ±5% at the seller’s option, with deliveries of 5,000 tonnes per month. The contract used Gafta proforma 119, in which clause 22 stated:
… In the event of default in shipment or delivery any damages shall be computed upon the mean contract quantity.
When the buyer failed to fulfil their obligations, Gafta arbitration calculated damages based on a delivery of 5,000 tonnes. However, the Court of Appeal recalculated damages based on the “minimum obligation” – 4,750 tonnes. The highest instance, the House of Lords, upheld this decision, noting that clause 22 applies only to the seller’s default, not the buyer’s. The judges opined that if Gafta meant otherwise, they should change the proformas. Subsequently, Gafta indeed altered the texts of the proformas, and now they do not mention “default in shipment/delivery”.
Specifics of Calculating Damages under Gafta and FOSFA Contracts
Gafta and FOSFA contracts contain specific rules for calculating damages that differ from the general principles of English law.
Modern Gafta proformas have excluded references to “default in shipment/delivery”, which eliminates ambiguity. For instance, under Gafta contract 49, damages are calculated based on the mean contract quantity:
The damages payable shall be based on, but not limited to, the difference between the contract price and either the default price… Damages… shall be computed on the quantity called for, but if no such quantity has been declared then on the mean contract quantity.
Similarly, FOSFA proformas provide for damages to be calculated based on the mean contract quantity. For example, FOSFA contract 54 also provides that the mean contract quantity is used for the purposes of damages:
The damages awarded against the defaulter shall be limited to the difference between the contract price and the actual or estimated market price on the day of default. Damages to be computed on the mean contract quantity.
Thus, if a contract provides for the supply of “2,000 tonnes ±5%” and incorporates any Gafta or FOSFA proforma, damages will be calculated based on the mean quantity – 2,000 tonnes, rather than the minimum volume.
If Gafta and FOSFA proformas do not apply to the contract, then the general rule of the “minimum obligation” will apply, and damages will be calculated based on a quantity of 1,900 tonnes.
Conclusion
Calculating damages for non-delivered goods under English law and Gafta and FOSFA contracts requires an analysis of the contract terms and the application of relevant rules. Understanding these nuances will help protect your interests in case of breach of obligations.
If you need help or advice on a specific case, please contact me for detailed information.
