Thu, 26 July, 2018
A seller enters into a sale contract with a buyer for the sale and purchase of generic goods. The buyer in turn enters (or has already entered) into a sale and purchase contract (‘the sub-sale’) with a sub-buyer for the sale and purchase of the same generic goods. The seller breaches its contract with the buyer, in that the goods are either (for example) not delivered at all (‘non-delivery’) or delivered in a defective condition (‘defective delivery’).
Is the sub-sale relevant to the assessment of the buyer’s damages for breach of the sale contract?
In a judgment handed down on 25 July 2018, the Court of Appeal (‘CA’) has considered this issue in the context of a claim analogous to one for non-delivery. The answer that the CA has given is that it “depends on the particular circumstances”, being an answer which it is suggested accords with both basic contractual principles and earlier authority (properly understood).
The Starting Point – Sections 51 / 53 of the Sale of Goods Act (‘SOGA’) 1979
The starting point of any assessment of damages for claims in respect of non-delivery or defective delivery is sections 51 and 53 (respectively) of the SOGA 1979.
As regards non-delivery, section 51 of the SOGA provides:
“ …(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract.
(3) Where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver.”
In similar vein, as regards defective delivery, section 53 of the SOGA 1979 provides:
“…(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract.
(3) In the case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty.”
Sub-sections 51/53(2) amount to a statutory codification of the well-known rule in Hadley v Baxendale (1854) 9 Exch. 341. Sub-sections 51/53(3) then lay down a presumption of a market replacement measure (in the case of non-delivery) and a difference in market value measure (in the case of defective delivery), i.e. in both cases, a ‘market measure’. Whilst this is trite law, it is worthy of repetition. In the words of Lord Sumption in Bunge SA v Nidera BV  UKSC 43 at , “Section[s] 51 … reflect[s] common law principles which had already been established at the time of the earlier Act. Section 51(2) states the compensatory principle in the context of a seller's non-delivery. Subsection (3) states the prima facie measure of damages where there is an available market, but it is not so much a rule as a technique which is prima facie to be treated as satisfying the general principle expressed in subsection (2)”.
The rationale for this presumptive market measure is straightforward; put simply, the law presumes that, where there is an available market, the buyer both can and should go out into the market to purchase replacement goods in the event of a default by the seller.
The Apparent Controversy and Earlier Case Law / Commentary
The question that has given rise to some controversy (arguably more apparent than real) in both the case-law and commentary is: in what circumstances might this presumptive market measure be displaced? In particular, when might it be possible – and appropriate – to take a sub-sale into account? Early case law has often been understood as suggesting that, in the event that there was an available market, then such circumstances are very few (if any). In Rodocanachi v Milburn (1886) 18 QBD 67 (CA) (at pages 76-77), Lord Esher MR held it to be “well settled that in an action for non-delivery or non-acceptance of goods under a contract of sale the law does not take into account in estimating the damages anything that is accidental as between the plaintiff and the defendant, as for instance an intermediate contract entered into with a third party for the purchase or sale of the goods”. Whilst this dictum was made in the context of a claim for non-delivery under a contract of carriage, its reasoning was followed and endorsed by the House of Lords (‘HL’) in Williams Bros v Agius  AC 510, in which the HL held that, in a claim for non-delivery, where goods sold were available on the market and there was evidence of a market price at the date of the seller’s breach, the buyer’s damages for non-delivery were not to be reduced by reference to the fact that they were in fact resold at a price below the market price at the time fixed for delivery. Lord Moulton noted (at page 530) that “Rodocanachi v. Milburn case rests on the sound ground that it is immaterial what the buyer is intending to do with the purchased goods.”
Similar reasoning was applied by the CA in the later well-known case of Slater v Hoyle & Smith Ltd  2 KB 11, being a case of defective delivery under a contract for the sale of cloth. The buyer had entered into a sub-contract for the sale of the cloth and was in fact able to deliver the defective cloth under its sub-contract without facing any claim for damages by its sub-buyer. The CA nonetheless upheld the buyer’s claim for damages based on the market measure (i.e. the difference between the market value of the sound cloth and the damaged cloth), rejecting the seller’s argument that damages should be assessed with reference to the sub-sale. In so doing, Scrutton LJ reasoned as follows (at page 20):
“Neither sub-contract formed the basis of the original contract; the buyers were under no obligation to deliver the goods of the original contract to the sub-buyer … It is well settled that damages for non-delivery or delay in delivery of goods, where there is a market price, do not include damages for the loss of any particular contract unless that contract has been in contemplation of the parties to the original contract: Horne v. Midland Ry. Co. The value of the goods in the market independently of any circumstances peculiar to the plaintiff is to be taken”
This reasoning suggests two potential ‘exceptions’ to what Scrutton LJ expressed as the general ‘rule’ (i.e. the irrelevance of the sub-sale): the first, where the buyer is under a legal obligation to deliver the very same goods sold under the original contract under the sub-contract; and the second where the sub-sale is in the contemplation of the parties to the original contract. What is not immediately obvious from Slater v Hoyle, however, is why a legal obligation to on-sell the very same goods should matter, or the sort of situation when a sub-sale may properly be taken to have been in the contemplation of the parties such that it may be taken into account in the assessment of damages.
This second point arose directly for consideration in the equally well-known case of Bence Graphics International Ltd v Fasson UK Ltd  QB 87. The claim was one for damages by a buyer in respect of the defective delivery of vinyl film bought from the seller as raw material for the buyer’s manufacture of decals (self-adhesive transfers for use in identifying bulk containers) to be sold to multiple third parties. The vast majority of the film was sold on as decals before the buyer discovered the defect and, whilst the film was found by the trial judge to be worthless, very few of the ultimate users complained. The trial judge nonetheless awarded the market measure of damages. On appeal, the CA (by majority) overturned that decision, finding as a fact that the seller had had detailed knowledge of the buyer’s business and knew at the time of contracting the specific use to which the buyer intended to put the film. In those circumstances, the CA reduced the damages award in respect of the film that had been on-sold to one based on the buyer’s liability (if any) to the ultimate users. In other words – and in what some have (it is suggested mistakenly) viewed as a volte face in terms of the earlier case law – the buyer’s damages were based on the sub-contract, notwithstanding that there was an available market.
Whilst the majority’s reasoning in Bence Graphics v Fasson was not entirely consistent in all respects, on the key points, its reasoning was unanimous:
(1) Otton LJ emphasised (at 97C) that section 53(3) laid down only a prima facie rule, from which the court could depart in appropriate circumstances (the burden of proof lying on the party who sought such a departure).
(2) Otton LJ also held that (at 100B) that, in circumstances where the cloth had been converted in the manner contemplated by the parties then damages were to be assessed with reference to the sub-sale, “whether the plaintiff likes it or not”. He made the further point that it was not for the claimant to choose the outcome most favourable to it; rather it was for the court to determine the correct measure of damages.
(3) Otton LJ summarised his reasoning at 101A as follows: “Thus, in my view, at the time of making their contract the parties were aware of facts which indicated to both that the loss would not be the difference between the value of the goods delivered and the market value and accordingly the prima facie measure ceased to be appropriate.”
(4) The reasoning of Auld LJ at 102B-C was similar in all essential respects: “As to section 53(3), there is, in my view, a danger of giving it a primacy in the code of section 53 that it does not deserve. The starting point in a claim for breach of a warranty of quality is not to determine whether one or other party has “displaced” the prima facie test in that subsection. The starting point is the Hadley v. Baxendale principle reproduced in section 53(2) … namely an estimation on the evidence, of “the . . . loss directly and naturally resulting in the ordinary course of events from the breach of warranty.” The evidence may be such that the prima facie test in section 53(3) never comes into play at all.”
The CA’s reasoning in Bence Graphics v Fasson was the subject of criticism by G.H. Treitel in his article “Damages for Breach of Warranty of Quality” LQR (1997) Vol. 113 at pp. 188-195. Treitel’s criticisms are adopted in Chitty on Contracts and received a measure of obiter endorsement at both first instance and in the CA in OVM Petrom SA v Glencore International AG  EWHC 666 (Comm);  2 CLC 651 (CA). Treitel’s criticisms found themselves on two main points. First, Treitel states that the CA wrongly treated the issue as one of remoteness; whereas remoteness is not relevant where the claim is simply for the difference in value between what was contracted for and what was received. Second, Treitel stresses the significance of whether or not the buyer is under a legal obligation to use the identical goods purchased under the sale contract for the purposes of the sub-contract. In the absence of such a legal obligation, according to Treitel, the sub-contract is irrelevant.
It is respectfully suggested that neither point is correct. The first merely begs the question of the buyer’s actual loss (assuming the actual loss in all cases to be equivalent to the market measure) and puts the cart before the horse: the proper starting point is ss. 51/53(2) and not ss. 51/53(3) SOGA 1979 (as per Lord Sumption and Auld LJ above). That is contrary to both the compensatory principle and the rule in Hadley v Baxendale. The second point seeks to ascribe too much significance to Scrutton LJ’s reference in Slater v Hoyle to the relevance of such a legal obligation (see above). The reason why such a legal obligation to on-sell the very same goods is relevant is because, in that situation, the buyer neither cannot – nor can the buyer be expected to – go out into the market and mitigate its loss. It is thus merely one example – perhaps the paradigm example – of where the market measure (which itself internalises questions of causation and mitigation) may be displaced. But as Bence Graphics v Fasson and now the decision in Euro-Asian Oil SA v Credit Suisse AG make clear, it is not necessarily the only situation in which it may be so, even where there is an available market.
The Facts of Euro-Asian Oil SA v Credit Suisse SA
It is pertinent at this juncture to consider the facts of Euro-Asian Oil SA v Credit Suisse AG. The claim arose out of a sale contract concluded between Abilo UK and Euro-Asian for the sale and purchase (respectively) of Ultra-Low Sulphur Diesel (‘ULSD’). Pursuant to a sub-contract concluded between Euro-Asian and a further company, Real Oil (on the same date), Euro-Asian agreed to sell an identical quantity of ULSD to Real Oil. Cranston J at first instance found as a fact that both Abilo UK and Real Oil were creatures of a Mr Igniska and that the raison d’être of the transactions was that it was a financing arrangement for the benefit of Mr Igniska (enabling him to obtain larger quantities of gasoil than he could otherwise afford, and save on costs such as freight), the incentive for Euro-Asian being its ‘financing fee’, comprising the difference between contract sale price and the sub-contract price.
The sale contract which was the subject of the claim was the fourth in a series of similar contracts (and sub-contracts). As regards those earlier sale contracts, Cranston J found that they had been performed by way of what was described as ‘carousel’. In short, the carousel operated by way of Abilo UK presenting documents (comprising a letter of indemnity (‘LOI’) and invoice in lieu of a bill of lading) under the relevant letter of credit in respect of a shipment previously discharged at the discharge terminal and providing a holding certificate (representing the physical ULSD in the terminal) based on the subsequent sale contract concluded with Euro-Asian. Upon the collapse of the carousel, Euro-Asian was left in the position whereby it had paid for four cargoes of ULSD, but received only three. It accordingly brought a claim against Credit Suisse as co-signatory to the LOI on the ground that Credit Suisse had warranted to it that Abilo UK had passed title to Euro-Asian of a cargo of ULSD, which was never in fact delivered to Euro-Asian (i.e. the claim was analogous to one for non-delivery). It was common ground that there was an available market for the ULSD and Euro-Asian claimed the sound arrived value of the ULSD, agreed at US$18,360,320. Credit Suisse, however, sought to limit Euro-Asian’s damages to US$15,889,500, being the sale price under its sub-contract with Real Oil.
Decision of Cranston J
Cranston J found that Credit Suisse was liable to Euro-Asian under the LOI. Having recorded that there was an available market for the ULSD (at ), Cranston J rejected Euro-Asian’s argument on damages in brief terms, holding that (in a single paragraph at ):
“In my judgment Euro-Asian’s damages should be capped at US$15,889,500, the price which Euro-Asian invoiced Real Oil under the Fourth Real Oil contract. It was always contemplated that Euro-Asian would nominate the same cargo to perform the Real Oil contracts which Abilo had nominated to perform the sale contracts. The market value rule for damages for failure to deliver goods under section 51(3) of the Sale of Goods Act 1979 is displaced.”
The Arguments on Appeal
Cranston J’s ruling on damages was the subject of a cross-appeal by Euro-Asian, on the alleged ground that there was no proper basis for disapplying the measure of loss set out in s. 51(3) of the SOGA 1979 in circumstances where there was an available market for the ULSD. The thrust of Euro-Asian’s case was that Cranston J’s decision was inconsistent with what Euro-Asian described as the ‘classic damages logic’ represented by Slater v Hoyle (namely, on Euro-Asian’s case, the irrelevance of the sub-contract). For good measure, Euro-Asian also sought to adopt the criticisms of Treitel summarised above.
Credit Suisse’s case in response was two-fold. First and foremost, Credit Suisse emphasised that, on the facts as found by Cranston J, Euro-Asian’s actual loss was US$15,889,500, being the price it would have been paid for the ULSD by Real Oil. The considerably greater market measure of US$18,360,320 was an entirely theoretical loss which in no sense reflected the position that Euro-Asian would have been in, had the sale contract been properly performed. The sole purpose of both transactions was for Euro-Asian to acquire ULSD that it would immediately sell to Real Oil and there was never, submitted Credit Suisse, any possibility of (and neither party would ever have contemplated) Euro-Asian doing anything else with the ULSD. Nor was there ever any realistic prospect of Euro-Asian ever going out into the market to purchase a replacement cargo in the event of Abilo UK’s failure to deliver the ULSD under the fourth sale contract – a fortiori in light of the carousel (of which the Judge had found Euro-Asian was well aware at the time of conclusion of the fourth sale contract).
On these particular facts, it was Credit Suisse’s case that the Real Oil sub-sale was not res inter alios acta (as the sub-contract in Slater v Hoyle was found to be: see Scrutton LJ at p. 22) and was not too remote (as were the sub-contracts in each of Rodocanachi v Milburn, Williams v Agius and Slater v Hoyle). On the contrary, on the particular facts of the case, the sub-sale was inextricably linked with the principal sale contract and both parties had contracted with reference to it. They would accordingly have contemplated, in the event of breach, that Euro-Asian’s loss would be the price it would have been paid for the ULSD under its contract with Real Oil. In those circumstances, Cranston J had properly awarded damages with reference to the sub-sale. Indeed, it was Credit Suisse’s case that not to do so would flout both the compensatory principle and the rule in Hadley v Baxendale, for it would be contrary to the basis on which the parties had contracted and would serve to put Euro-Asian in a much better position than it ever would have been in but for the breach.
As regards any alleged tension between Slater v Hoyle and Bence Graphics v Fasson, it was Credit Suisse’s case that, properly analysed, there was in fact no such tension, with the consequence that Treitel’s criticisms were misplaced. Rather, each case was correctly decided on its own particular facts in accordance with the basic principles of causation, mitigation and remoteness. But Credit Suisse also submitted that it was not in fact necessary for the CA to determine that point in light of Credit Suisse’s case that the application of the reasoning in Slater v Hoyle itself to the particular facts of the case led to the conclusion that the sub-sale was to be taken into account.
The CA Decision
In its judgment handed down yesterday, the CA dismissed Euro-Asian’s cross-appeal and upheld Cranston J’s damages award based on Euro-Asian’s sub-contract with Real Oil. In so doing, the CA expressly referenced the compensatory principle and the rule in Hadley v Baxendale (as relied upon by Credit Suisse) and considered the earlier case-law such as Williams v Agius, which it relied on as making clear that “in such cases what was referred to as ‘accidental between the plaintiff and the defendant’ for example a contract between the plaintiff and a third party was irrelevant” (see the Judgment at , emphasis added).
Having done so, however, the CA then returned to the wording of section 51 of the SOGA 1979 and the particular facts of the case, and held as follows at -:
“72. The normal measure of damages for a failure to deliver goods is the estimated loss directly and naturally resulting, in the ordinary course of events from the seller's breach of contract, see s.51(2). Where there is an available market for the goods, the measure of damages is prima facie the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver, see s.51(3). However, the application of s.51(2) may mean that the prima facie rule in s.51(3) is not applied, or may be ‘displaced’ in the particular circumstances of the case. An example was given by Devlin J in the Kwei Tek Chao case (above): a string contract for specific goods. The issue in each case depends on the particular circumstances.
73. In the present case, the sale contracts formed part of a series of what were effectively financing transactions involving Abilo, Euro-Asian and Real Oil (or another of Mr Igniska’s companies). They were not exactly string contracts, and I would accept that Euro-Asian could have performed its delivery obligation under the sub-sale other than through the purchase from Abilo. Nevertheless, there was a proper factual foundation, as set out at - of the judgment, which I have endeavoured to summarise at  to  above, for the Judge’s conclusion that ‘it was always contemplated’ that Euro-Asian would nominate the same cargo to perform the Real Oil contracts that Abilo nominated to perform the sale contracts, so that he was entitled to his view that the damages he awarded was the measure of loss contemplated by the parties.”
Thus, the CA found that, in circumstances where the parties would only ever have contemplated a loss based on the sub-contract, the prima facie market measure was displaced and Euro-Asian’s damages fell to be assessed with reference to its sub-contract with Real Oil.
It is submitted that the CA’s decision was correct on the facts before it. Properly understood, even the case-law relied upon by Euro-Asian does not support the existence of any ‘rule’ that a sub-contract cannot be taken into account in the assessment of damages where there is an available market (or that it can only be taken into account where the buyer is under a legal obligation to supply the very same goods under the sub-contract). Rather, and as the CA has confirmed, whether or not a sub-contract should be taken into account will depend on the particular facts and the application of the basic principles of causation, mitigation and remoteness to those particular facts.
As numerous judges at all levels have emphasised, and the CA in Euro-Asian Oil SA v Credit Suisse AG has reiterated, the presumptive market measure in sections 51/53 SOGA 1979 is based on a presumption that losses can – and can reasonably be expected to be – avoided by a particular type of mitigation, i.e. going out into the market. Where, as in Euro-Asian Oil SA v Credit Suisse AG, there are facts to rebut that presumption, it should not apply.
The fact that a loss is not too remote is a necessary – but not in and of itself sufficient – factor that may lead to the displacement of the presumption. By parity of reasoning, the presence of a legal obligation to use the identical goods under the sub-contract might suffice to render the sub-contract relevant, but it is not necessary.
Put another way, it is suggested that a sub-contract will determine the assessment of damages for non-delivery (or defective delivery) where that sub-contract is within the reasonable contemplation of the parties and the parties contemplate that, in the event of non-delivery / defective delivery, the buyer could not or would not buy replacement goods in the market and his action in not doing so would be reasonable. In such circumstances, where the buyer cannot reasonably be expected to go out into the market to mitigate its loss, or cannot do so in fact, the parties would never have contemplated that the innocent party would suffer a loss in the amount of the market measure. Nor, in such circumstances, does the breach in question cause the innocent party to suffer a loss in the amount of the market measure. Instead, in these circumstances, the buyer’s actual loss based on the sub-contract is the loss directly and naturally resulting in the ordinary course of things from the seller’s breach of contract. Such reasoning has the benefit of principle and, once applied to the particular facts of the particular cases, obviates any suggestion of inconsistency between cases such as Bence Graphics v Fasson and Slater v Hoyle.
A decision on Euro-Asian’s application for permission to appeal is awaited as at the time of writing.
Caroline Pounds acted on behalf of Credit Suisse AG, led by Jeffrey Gruder Q.C. and instructed by Jeremy Davies, Olivier Bazin and Caroline West of HFW, Geneva. A copy of the judgment is available here.
 Credit-Suisse having (in the event, unsuccessfully) appealed the finding that it was liable to Euro-Asian.
Caroline’s practice encompasses the broad range of general commercial litigation and arbitration. Her particular areas of specialism include shipping, carriage of goods, shipbuilding, energy and commodities. She undertakes drafting and advisory work in all areas of her practice and regularly appears in the Commercial Court and in arbitration, both as sole counsel and as junior. She is a sought after junior and enjoys a significant amount of led work. In particular, she is regularly led by Luke Parsons QC, Simon Rainey QC, Lionel Persey QC, and Simon Croall QC