Damages under GAFTA Contracts

Under GAFTA’s standard forms (e.g. GAFTA 24, 48, 100, 125), the Default Clause is the linchpin for calculating damages when a party fails to perform. It provides that damages are normally the difference between the contract price and the market or resale price on the date of default, plus or minus any incidental costs or savings. This formula is overlaid on the general English common-law duty to mitigate loss.

As an example, Clause 24 of Gafta No.100 Contract provides as follows:

(a) The party other than the defaulter shall, at their discretion have the right, after serving notice on the defaulter to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price.

(b) If either party be dissatisfied with such default price or if the right at (a) above is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be settled by arbitration.

(c) The damages payable shall be based on, but not limited to, the difference between the contract price and either the default price established under (a) above or upon the actual or estimated value of the goods, on the date of default, established under (b) above.

(d) In no case shall damages include loss of profit on any sub-contracts made by the party defaulted against or others unless the arbitrator(s) or board of appeal, having regard to special circumstances, shall in his/their sole and absolute discretion think fit.

(e) Damages, if any, shall be computed on the quantity appropriated if any but, if no such quantity has been appropriated 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.

(f) Sellers may declare themselves in default at any time after expiry of the contract period, and the default date shall then be the first business day after the date of Sellers' advice to their Buyers. If default has not already been declared then (notwithstanding the provisions stated in the Appropriation Clause) if notice of appropriation has not been served by the 5th business day after the last day for appropriation laid down in the contract, the Seller shall be deemed to be in default and the default date shall then be the first business day thereafter.

Substitute Purchases

A non-defaulting buyer may cover by making a substitute purchase in the market. The price actually paid for the substitute cargo, if made within a reasonable time, is often strong evidence of the prevailing market price. However, tribunals will still examine whether the purchase was commercially reasonable in quantity, quality, shipment window and terms. If the substitute cargo differs materially from the contract goods, the tribunal may revert to published market prices instead.

Market Price Evidence and Broker Statements

Where no substitute purchase is made or if its terms are not comparable market price must be proved by other contemporaneous evidence. Common sources of price evidence include executed contracts, broker price statements, mark-to-market valuations. Evidence must reflect the price on the date of default and must reflect the commodity in dispute. Secure contemporaneous records of comparable trades at the time of default or delivery.

Mitigation and Deduction of Saved Expenses

English law imposes a general duty on the injured party to mitigate its loss. The leading authority is Bunge SA v Nidera BV [2015] UKSC, which confirmed that damages must reflect any “saved expenses” or benefits obtained because of the default. In this case the seller purported to cancel a GAFTA 49 contract for Russian wheat following an export ban. The buyer treated this as repudiation and claimed the contractual measure of damages under the Default Clause. Both the GAFTA Board of Appeal and the Commercial Court awarded substantial damages on the basis of the formula price difference. The Court of Appeal upheld that approach.

The Supreme Court reversed. It held that the GAFTA Default Clause did not exclude the common-law principles of compensation and mitigation. Damages under the clause had to reflect the actual economic loss suffered, taking into account subsequent events and any savings achieved. Because the export ban meant the buyer would never have received the wheat and would not have been able to profit from it, its real loss was nil. The Court therefore reduced the award to nominal damages of US$5.

The decision illustrate that saved expenses must be deducted. If non-performance spares the claimant costs such as storage, freight, insurance, or handling, those savings reduce the recoverable loss even if the Default Clause formula appears to produce a higher figure. Additionally, subsequent events can extinguish loss. Tribunals must consider what would actually have happened if the contract had been performed. If later events would have prevented delivery or nullified any benefit to the claimant, damages may be reduced or eliminated.

For example, if a buyer’s onward sale contract is cancelled at the same time as the seller’s breach, or if the buyer is able to resell the goods at the same or better price, those benefits must be credited against the claim. Equally, if a seller avoids paying freight or handling costs because the shipment never occurs, the buyer cannot claim those amounts as damages.

Conclusion

The GAFTA Default Clause provides a contractual framework for calculating damages. Tribunals and courts will not award damages mechanically by applying a contract-market price differential; they will instead test the claimant’s evidence of loss, examine the commercial reasonableness of any substitute purchase, and deduct any benefits or avoided costs arising from non-performance. Subsequent events that would have prevented performance or eliminated profit must also be taken into account. For traders, this implies the importance of contemporaneous records of market values and substitute deals. Ultimately, GAFTA’s damages regime seeks to place the innocent party in the position it would have been in had the contract been performed, while avoiding windfall recoveries.