How are damages to be assessed where a buyer defaults on the acceptance of unique goods? Specifically, does the valuation of those goods require the positing of a hypothetical substitute contract on the original terms, or a valuation of the goods in the seller’s hands “as is where is”? In Sharp Corp Ltd v Viterra BV [2024] UKSC 14, the Supreme Court addressed this tension in the context of the GAFTA Default Clause. While the dispute arose from a standard form commodity contract, the judgment serves as a significant restatement of the relationship between the available market rule and the compensatory principle across the law of contract.
The facts were these. Viterra (sellers) contracted to sell lentils and peas to Sharp (buyers) on C&FFO Mundra terms. Following the buyers’ failure to pay, the parties agreed that the goods would be discharged and stored in a warehouse at Mundra to the order of the sellers pending payment. Crucially, after customs clearance but prior to the date of default, the Indian government imposed significant import tariffs on such pulses.
Lord Hamblen, delivering the unanimous judgment of the Court, upheld the “as is where is” approach. Where a seller retains unique goods following a breach, damages cannot be assessed by reference to a theoretical substitute contract on the original terms if that market is impossible in reality. Instead, damages must reflect the value obtainable by a reasonable seller mitigating their loss in the actual market. It followed that the relevant value was the warehouse price at the time of breach, rather than a notional C&FFO price which ignored the intervening tariffs. To hold otherwise would detach the assessment from the compensatory principle, either awarding the seller a windfall or denying them recovery for their actual loss.
This note focuses on the Supreme Court’s treatment of mitigation and the “available market”.
The “Normative Hierarchy” of Damages
Where there is an available market, the notional “substitute contract” is the starting point. However, that measure cannot prevail if the market it posits is impossible or unreasonable in reality. The Supreme Court used Sharp to clarify the normative hierarchy of damages.
Lord Hamblen held that damages are assessed according to a hierarchy where fundamental principles govern specific rules (at [83]-90]). At the apex reside the fundamental principles: the compensatory principle and the duty to mitigate (at [83]). Subordinate to these is the “market rule” (or the GAFTA default clause) which is a mechanism to enforce reasonable mitigation, effectively “deemed mitigation” (at [90]).
However, this “market rule” mechanism is a servant, not a master. As Lord Hamblen observed, a rigid application of the market rule could, for example, rely on “sales to a related company” which are not arms-length transactions, thereby undermining the compensatory principle (at [89]). It follows that evidence of actual reasonable mitigation must displace the presumption of the “market rule” to give effect to the twin pillars of compensation and mitigation. This clarification privileges commercial substance over legal fiction.
Correcting the Interpretation of Bunge
Lord Hamblen’s judgment brings welcome clarity to Bunge v Nidera [2015] UKSC 43. The Court of Appeal (and lower courts post-Bunge) had interpreted Lord Sumption’s judgment in Bunge as establishing a strict canon: that damages must be assessed based on a “notional substitute contract” on the exact same terms. Lord Hamblen criticised this approach, noting that the lower courts had applied the measure ‘robotically’, engaging in a search for an identical contract that was divorced from principles of mitigation and compensation (at [118]). His Lordship clarified that while the starting point is the value of the contractual rights (i.e., a “true substitute” on the same terms), if that market is non-existent or inaccessible, the overriding principles require the valuation of the actual goods.
Lord Hamblen’s two-stage valuation method is sound in principle and practice. It privileges commercial substance over legal fiction. A hypothetical valuation of warehoused goods as if they were still afloat, on an abstracted ship, invites speculation and detaches the assessment from the evidence. Conversely, a focus on the actual goods aligns legal incentives with economic efficiency, encouraging the prompt realisation of assets for the highest available value to minimise waste and economic loss for all parties.
In Bunge, Lord Sumption warned against treating a damages clause as a purely financial instrument independent of real-world events (at [21]). Sharp acts as a necessary corrective since then, ensuring that the logic of Bunge is applied practically rather than merely theoretically.
