Содержание
Default clause is a damages compensation mechanism built into standard GAFTA contracts. When one party commits a material breach (breach of condition), the injured party may declare default and demand compensation equal to the difference between the contract price and the market price of the goods on the date of default.
The fundamental difference from the general rules for damages recovery under English law: the GAFTA default clause locks in a specific formula for calculating damages directly in the contract, which reduces uncertainty and accelerates dispute resolution.
When Default Occurs: Typical Scenarios
Default is not every breach of contract. It is a breach of an essential term (condition) that deprives the injured party of the substantial benefit of the bargain. A breach of a non-essential term (warranty) entitles the party to compensation (allowance) only, not to termination of the contract.
Seller’s Default Under a CIF Contract (GAFTA 48)
- Shipment of goods that do not match the contract description (e.g., barley instead of wheat)
- Complete failure to ship within the agreed period
- Shipment outside the shipment period
- Failure to provide a valid notice of appropriation
- Failure to provide proper shipping documents
Buyer’s Default Under a CIF Contract (GAFTA 48)
- Refusal to accept and pay for shipping documents (including failure to pay in accordance with the contract’s payment terms)
- Failure to open a letter of credit (if required) by the start of the shipment period or by the agreed date
Buyer’s Default Under an FOB Contract (GAFTA 64)
- Failure to provide a vessel by the end of the delivery period
- Failure to pay for delivered goods
- Failure to open a letter of credit (if required) by the first day of the delivery period
In all these cases, the breach is sufficiently serious to qualify as a breach of condition — a breach of an essential term of the contract. This gives the injured party the right to terminate the contract and demand damages through the default clause. If the breach had been less significant (breach of warranty — a breach of a non-essential term), the injured party could have sought only monetary compensation (allowance), not termination.
How the GAFTA Default Clause Works: The Calculation Principle
The purpose of the clause is compensation, not punishment. The default clause puts the injured party in the financial position it would have been in had the contract been properly performed.
The formula:
Damages = |Contract Price − Market Price on Date of Default|
This corresponds to the formula in Sale of Goods Act 1979, sections 50(3) and 51(3): damages are determined as the difference between the contract price and the market price at the moment when goods should have been accepted or delivered.
Three Methods to Establish the Default Price
GAFTA contracts provide three options for determining the market price (default price) for the purposes of calculating damages:
Method 1: Purchase/Sale Against the Defaulter (Buy-in / Sell-out)
The injured party purchases (if it is the buyer) or sells (if it is the seller) similar goods on the market and fixes the difference from the contract price. To do this, you must:
- Send a notice to the defaulter of your intention to buy/sell goods on the market
- Execute a transaction in goods that correspond as closely as possible to the contract description and on comparable terms
- Submit an invoice for the difference between the contract price and the price of the replacement transaction
The advantage of this method: you obtain objective evidence of the market price, supported by an actual transaction.
Method 2: Market Evidence
If a replacement purchase or sale is not possible or not economical, the market price is established on the basis of evidence — broker quotations, data on transactions in similar goods during the same period. This method is less reliable because different sources may provide conflicting data.
Method 3: Determination by Arbitrators
If the parties cannot agree on the default price, the matter is submitted to the GAFTA arbitral tribunal. The arbitrators assess all presented evidence and determine the market value of the goods on the date of default.
The Date of Default: Why Timing Matters
Calculating the date of default is the most important and simultaneously most problematic element in applying the default clause. An error of a single day can change the damages amount by tens of thousands of dollars if the market has moved sharply.
On What Date Are Damages Assessed?
The GAFTA default clause ties the damages calculation to the “date of default” — but the clause itself does not define what constitutes this date. In practice, this is one of the most contentious issues in GAFTA arbitrations, and the answer depends on whether we are dealing with an actual breach or an anticipatory breach.
Under the general rule of English law, damages for actual breach are assessed as of the date when the goods should have been delivered or accepted (Sale of Goods Act 1979, ss. 50(3), 51(3)). With anticipatory breach, it is more complicated — there are several competing positions:
Position 1: date of default = date of breach / refusal to perform. In Toprak Mahsulleri Ofisi v Finagrain [1979] 2 Lloyd’s Rep 98, Judge Goff J held that “date of default” within the meaning of the GAFTA default clause is the date of the breach itself, not the date when the injured party accepted (acceptance of repudiation). This approach was extended to anticipatory breach in Thai Maparn Trading Co Ltd v Louis Dreyfus Commodities Asia Pte Ltd [2011] 2 Lloyd’s Rep 104, where Judge Beatson J determined the date of default as the date when the anticipatory repudiation became clear and unambiguous.
Position 2: date of default = the last day for performance of the contract. In the Supreme Court decision Bunge SA v Nidera BV [2015] UKSC 43, Lord Sumption stated in obiter dictum (paragraph 28(3)) that “default of fulfilment” means non-performance of the contract, and for the purposes of the default clause it is immaterial whether the contract was repudiated in advance or simply not performed on time. This statement was taken by some practitioners as an indication that in anticipatory breach, the date of default should be determined by the last day for performance, not the date of the refusal itself.
Position 3: date of default = the date of acceptance of repudiation. This is how the GAFTA Board of Appeal reasoned in Sezer v Agroinvest, assessing damages as of the date when the injured party accepted the repudiation (7 May 2018), not the date of the refusal itself (27 April 2018).
Current state of the law. In Ayhan Sezer v Agroinvest SA [2024] EWHC 479 (Comm), the High Court of London (HHJ Pearce) found the Board of Appeal’s approach erroneous and returned to the position of Toprak/Thai Maparn: in anticipatory breach, the date of default is the date of repudiation, not the date of its acceptance. The Court also clarified that Lord Sumption in Bunge v Nidera did not establish the date of default for anticipatory breach, but merely stated that upon repudiation, the contract is considered unperformed.
However, Sezer is a High Court decision, not a Court of Appeal or Supreme Court decision. Lord Sumption’s obiter dictum is formally not binding, but it comes from the highest instance. Therefore, the question cannot be considered definitively closed, and when preparing for arbitration, all three positions should be taken into account.
Practical Takeaway: current case law tends to establish the date of default as the date of the breach itself or of the clear refusal to perform. But in each specific case, determining the date of default requires careful analysis of the circumstances.
When You Can Declare Default: Examples
GAFTA contracts give the parties a certain time to perform their obligations. You cannot declare the counterparty in default before all applicable deadlines have expired — otherwise you yourself will be in breach. Let us work through specific examples.
Example 1 — CIF Contract under GAFTA 48. The shipment period ends on 31 March. Under Clause 11(b) of GAFTA 48, the seller must provide notice of appropriation within 3 business days of the bill of lading date. If the notice of appropriation is not received, Clause 24(f) provides for deemed default: the seller is considered in default if notice has not been served by the 5th business day after the last day of the appropriation period. The date of default is the first business day thereafter. If the buyer declares default before all these deadlines have expired, the buyer will itself be in breach of contract.
Specific timelines vary from proforma to proforma, so always refer to the current version of the contract on gafta.com.
Example 2 — FOB Contract under GAFTA 64. The delivery period ends on 28 March (Friday). Under Clause 8 of GAFTA 64, the buyer has the right to extend the vessel provision period for up to 10 consecutive days if notice is provided no later than the next business day after the end of the delivery period — that is, no later than 29 March (if that is a business day). This means that the seller cannot declare the buyer in default on 28 March: you must wait until 30 March to confirm that the buyer has not exercised its right to extend. If the seller rushes — the seller will itself be in default.
The Danger of Premature Declaration of Default
This is one of the most common and costly mistakes in GAFTA practice.
If a party declares the counterparty in default before the deadline for performance has expired, it itself commits an anticipatory repudiatory breach — an anticipated material breach of the contract. Result: the “accuser” itself is in the position of a defaulter and is liable for the other party’s damages.
Anticipatory breach can also arise in another way: one party expressly states that it does not intend to perform the contract. In this case, the injured party may accept such a statement as termination of the contract and immediately declare default, or it may wait for the actual expiration of the performance deadline. Importantly: if the injured party remains silent and does not accept the repudiation, the contract remains in force — and the breaching party gets additional time to perform.
Practical Rule
Never declare default before all applicable deadlines under the contract have fully expired. It is better to wait one extra day than to find yourself in the position of the breaching party.
What the GAFTA Default Clause Excludes
Loss of profits on resales (sub-sales / sub-purchases) is directly excluded from the default clause. A buyer who has resold goods at a higher price cannot recover the difference between its sub-sale price and the contract price from the defaulter. It can recover only the difference between the market price and the contract price.
Exception: an arbitral tribunal or the Board of Appeal may award lost profits if it finds special or compelling reasons to do so. In practice, this happens extremely rarely.
Calculation Based on Mean Contract Quantity
If goods were not appropriated to the contract, damages are calculated on the basis of the mean contract quantity. For example, in a contract for 10,000 mt ±10% at the buyer’s option, the mean quantity is 10,000 mt (the average between 11,000 and 9,000).
Checklist: What to Do When a Counterparty Defaults
- Send a notice — explain why you consider the counterparty in default, citing the specific breached contract terms
- Specify the nature of the breach — are you accepting the breach as termination of the contract (breach of condition) or only seeking compensation (breach of warranty)
- Determine the method for establishing the default price — will you buy/sell on the market or gather market evidence
- Notify the counterparty of the steps you have taken to establish the default price
- Offer settlement — request payment. If the counterparty refuses — initiate GAFTA arbitration
The Impact of Market Conditions on the Decision to Declare Default
Declaring default is not only a legal but also a commercial choice. The injured party has the right, but is not obliged to accept the breach as termination.
Rising Market
A buyer whose seller has breached the contract may prefer not to terminate the contract: if the market has risen, the buyer will have to purchase goods at a higher price. Yes, the buyer can recover the difference through the default clause, but it is simpler to give the seller additional time to perform.
Falling Market
In this case, the buyer is likely to declare default and purchase goods on the market at a lower price. It will not incur market losses and may even come out ahead.
Business Relationships
If the parties intend to continue trading, the injured party may show flexibility — accept nominal compensation or grant additional time. Long-term relationships in grain trading are often more valuable than winning a single dispute.
Conclusion
The GAFTA default clause is a clear contractual mechanism that, when properly applied, ensures predictable compensation for damages. Three key points: calculate the date of default precisely (not prematurely!), choose the correct method for establishing the default price, and record all evidence for potential arbitration.
If you have questions about the application of the GAFTA default clause or need assistance in preparing for GAFTA arbitration, please contact me:
