When one defaults on a trade contract, the crucial question arises: how shall an innocent party to the contract calculate the damages due to be reimbursed by the defaulter? While the majority of players on the market know that damages are calculated based on the market price difference, not everyone is fully aware of the correct quantity of goods to use as the basis for calculating damages under a trade contract.
It is highly important since most trade contracts provide not a strict amount of goods to be delivered, but some range, such as “5.000 – 6.000 mt +/- 10%”.
General principle
According to established principles of English law, damages for breach of contract are assessed on the basis that the defaulting party acts in the least favourable way towards the claimant. This is directly prescribed in the reliable legal sources and confirmed by the leading case law.
What does it mean in practice? Let’s consider the example:
A shall deliver 5.000 – 6.000 mt +/-10% of goods to B, and A fails to do so. In such a case, damages shall be calculated based on the minimal possible quantity of the goods, which A should have been delivered to B, i.e., 4.500 mt.
The above approach is unambiguously confirmed in Bunge Corporation v Tradax Export S.A. [1981]:
In this case, the contract provided for the supply of 15,000 mt of soybeans ±5% at the seller’s option, with deliveries of 5,000 mt per month. When the buyer failed to fulfil their obligations, Gafta arbitration initially calculated damages based on a delivery of 5,000 mt.
However, the Court of Appeal recalculated damages based on the “minimum obligation” – 4,750 mt. The highest instance, the House of Lords, upheld this decision, referring to the above-referenced principle.
Difference under GAFTA and FOSFA contracts
Since more than 90% of the trade contracts for soft commodities are subject to GAFTA / FOSFA proformas, it is important to indicate that the calculation of the damages under the relevant contracts differs from the principle described above.
Thus, under GAFTA / FOSFA contracts, damages are calculated based on the mean contract quantity of the goods.
For instance, under Gafta Contract No. 49 (as under other GAFTA proformas), damages are calculated as follows:
“Damages, if any, shall be computed on the quantity called for, but if no such quantity has been declared then on the mean contract quantity and any option available to either party shall be deemed to have been exercised accordingly in favour of the mean contract quantity.”
Similarly, FOSFA proformas also provide the mean contract quantity of the goods to be used for the calculation of damages. For instance, FOSFA Contract No. 25 provides as follows:
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.
So, under GAFTA / FOSFA contracts, if A shall deliver 5.000 – 6.000 mt +/-10% of goods to B, and A fails to do so, damages shall be calculated based on the mean contract quantity, i.e., 5.500 mt, rather than on the minimal possible volume.
Conclusion
Calculation of damages under a trade contract is a significant legal issue and shall be thoroughly considered in each specific case to preserve your rights to the maximum possible extent.
However, understanding the above basic principles will help you to protect your legitimate interest in case of default under a contract.
Our team is deeply experienced in all issues related to damages, and we will be delighted to support you in case of emergency. If you have any questions on the particular case, please feel free to contact us via [email protected]
