Practical Law

The recent Supreme Court case of Bunge SA v Nidera BV has reinforced the principle stated in The Golden Victory that damages for breach of contract are awarded to compensate the innocent party for the actual losses suffered as a result of the breach.

That may seem an obvious statement of the law but the Supreme Court continues to emphasise that since the purpose of contractual damages is to compensate the innocent party for the actual loss suffered, it will not award substantial damages in situations where the innocent party would not have received the full benefit of the contract in any event.

In Bunge, the Supreme Court held that where a seller had committed a repudiatory breach of contract by purporting to terminate a contract in circumstances where it was not entitled to do so, the court should take into account the fact that had the contract continued, the seller would have been entitled, in any event, to terminate it lawfully at a later stage. Therefore, the Supreme Court held that the buyer had suffered no loss as a result of the seller’s repudiatory breach and should only be awarded nominal damages.

This case should serve as a further reminder to parties considering suing for a repudiatory breach to consider events subsequent to the breach taking place

The key points arising from the judgment are set out below.

Supervening events

The point of damages is to compensate the innocent party for the loss of its contractual bargain. Therefore, if subsequent events mean that the innocent party would, in any event, not have received any benefit under the contract, awarding substantial damages would over-compensate them. There is no difference in this regard between “one-off” sale contracts and instalment contracts. Because the overriding principle for an award of damages is the compensatory principle (which aims to avoid over or under compensation), it is necessary to take into account any contingencies known to have occurred since the date of breach that would have resulted in the contract being lawfully terminated at or before its term in any event.

Accordingly, where there has been a breach of a sale of goods contract and a supervening event occurs after that breach which dictates that neither the original contract nor the hypothetical substitute contract would have been performed, no loss is sustained and therefore no damages are recoverable. It is only just, given the compensatory principle, to take account of that supervening event.

Where export bans or sanctions are proposed, parties should wait until the date those restrictions are in place before serving notices of termination based on such legislative actions, in order to avoid liability for repudiatory breach.

Mitigating loss

The innocent party is under a duty to mitigate its losses. When calculating the difference between the contract price and the market price of the goods (assuming a market existed), the relevant date for assessing the market price is the contractual date of delivery, except where the buyer should have mitigated its losses by entering into an alternative contract on an earlier date. In this situation, where the innocent buyer has failed in its duty to mitigate, the relevant date is the date on which the buyer should have entered into the alternative contract.

Damages clauses

The court will not presume that express damages clauses are intended to produce the same level of damages as common law. However, the court will assume that they were not intended to operate arbitrarily, so as to produce a level of compensation (and in particular over-compensation) that bears no relation to the actual loss suffered.

Damages clauses may not be sufficiently comprehensive so as to constitute “complete codes” covering the entire field of damages, and the court is entitled to take into account other considerations not expressly covered by the clause. In this case, the clause in question did not deal with the effect of subsequent events which would have resulted in non-performance of the contract and, accordingly, it was open to the court to consider their effect on the level of damages to be awarded.