Anticipatory breach or resiliation, an arbitrators´perspective
I have had the pleasure of reading Michael Robinson’s article scheduled to be published in this same issue of Arbitration Watch and agree with all that he says.
Michael, of course, has written his article from a practising lawyer’s perspective. I shall attempt to complement his article by writing from the perspective of an arbitrator frequently confronted with anticipatory breach situations or, as Benjamin would put it: “anticipatory resiliations”.
Two recent arbitrations in which I have been involved, one under FOSFA and the other under GAFTA Rules of Arbitration, have piqued my interest in this subject because these cases have shown what I have experienced throughout my life as an arbitrator: that commodity arbitrators simply do not apply the law in relation to the assessment of damages in cases of anticipatory resiliation as set out in Benjamin (Eighth Edition) at paras 16-081 and 17-014.
What Benjamin says is that in assessing damages in the case of an anticipatory resiliation you do not base damages on the market price of the goods at the date on which the resiliation was communicated to the other side or the date on which the other side accepted that resiliation but you take the last date on which contractual performance was still possible. In other words, you treat an anticipatory resiliation as you would treat an actual default.
And it is here that commodity arbitrators do not apply the law (for the law is undoubtedly correctly set out in Benjamin). Indeed, commodity arbitrators, who are largely down to earth commercial men, in my experience, NEVER apply the law in this type of situation.
Rather, commodity arbitrators opt for assessing damages at the first date on which the innocent party might reasonably be expected to re-purchase or re-sell the goods which the party resiling from the contract has indicated that he will not supply.
Depending on the circumstances of the case and the arbitrators concerned, this will either be the date on which the resiliation was communicated or the date on which the resiliation was accepted.
What commodity arbitrators do not do is to apply the law as set out in Benjamin i.e. they do not take the last date on which contract performance was still theoretically possible.
Accordingly, anyone who advises a potential claimant or respondent in a case of anticipatory resiliation will have to advise his client that these situations are situations where the law says one thing but that the arbitrators say another and that they will decide on the basis of what makes commercial sense but not in accordance with the law.
This is not a happy state of affairs. Indeed, it undermines one of the key arguments in favour of arbitration under English law, namely, that the decisions of English arbitral tribunals will be predictable as they will be rendered in accordance with English law.
So where, as here, there is a divergence between the law and the “arbitri-prudence” of commercial arbitrators, what should be done to bring the two into harmony?
For once, I fear, the dictum the “law is an ass” is justified.
For it is commercially nonsensical to require an innocent buyer or seller faced with a clear refusal from his contract partner on Day 1 to perform to have to wait until Day 31 before re-purchasing or re-selling on the market the “resiled” goods.
Take a hypothetical example: Seller “S” sells 10,000 MT Russian Milling Wheat CIF Marseilles on 1st November for shipment 1st-31st December at the then market price of USD 300/MT.
On 3rd December, the seller unequivocally tells his buyer that he will not ship the wheat.
On 3rd December, the market value of the wheat is USD 310/MT.
His buyer accepts this declaration as a repudiation of the contract on the same day, i.e. 3rd December.
Instead of buying in replacement wheat on 4th December at USD 310/MT, the buyer feels constrained to wait until (as per Bremerhandel v. Van Den Avenne) 1st January or, more realistically, 2nd January before buying in replacement wheat basis the law as expressed in Benjamin.
On 2nd January, the market price is USD 450/MT. The buyer accordingly buys in at USD 450/MT.
The consequence of this will be that the actual damages of the innocent buyer will be USD 150/MT x 10,000 MT against damages of USD 10/MT x 10,000 MT if he had bought in immediately after the resiliation, resulting in a damages claim of USD 1,500,000 as against a damages claim of USD 100,000.
In principle, basis under the law as it now stands the buyer should be able to recover his actual damages of USD1,500,000 but, as Michael Robinson has pertinently pointed out, the calculation of damages basis the market price at the end of the contractual period of shipment is subject to the duty of the innocent party to mitigate.
So, under the law as it stands, the buyer cannot be at all sure that he will recover his actual damages because the seller may successfully argue that in re-purchasing at the end of the contract period of shipment the buyer failed to mitigate his damages. Thus, with the benefit of hindsight, he should have re-purchased immediately following the repudiatory message and instead of incurring damages of USD 1,500,000 he would then only have incurred damages of USD 100,000. And this, the seller will argue is what he should have done to meet his duty to mitigate, as this is what any sensible trader would have done in a rising market.
In the world of trading one thing is absolutely sure: no one knows, on Day 1, where the market will be on Day 31. So in the present example on 4th December, being the day after his seller has unjustifiably cancelled the contract, our buyer cannot know that if he waits (as the law, in principle, requires him to wait) until 31st December or, more correctly, 1st or 2nd January, the buying-in price will be higher or lower than that at which he could immediately re-purchase replacement goods on 4th December. The law accordingly puts the innocent buyer in an impossible dilemma: either he buys in on 4th December and in so doing runs the risk that if the market price is higher on 4th December than, say, on 1st/2nd January, he will effectively lose in recoverable damages the difference between the two prices (as his seller will rely on the “rule” that the date for assessing damages in an anticipatory resiliation is the same as that applicable to an actual default). On the other hand, if he waits until, say, 1st January before buying in and the market has gone up, as in our example, from USD 310/MT on 4th December to USD 450/MT, his entirely uninnocent seller will be able to argue that his buyer should have bought in right away at USD 310/MT to meet his obligation to mitigate, because all contemporaneous market indicators pointed to a significant rise in the price of replacement Russian Milling Wheat.
To put the innocent party – and it could just as well be the seller as the buyer – into such an obviously “damned if you do; damned if you don’t” situation cannot possibly be right. And while the path chosen by the arbitrators makes better sense than the law, that path too is one which arbitrators should not be required to tread; for it forces arbitrators to misapply the law and that is entirely contrary to their obligation to decide in accordance with the law and may be sanctioned by successful s.69 applications.
While it would be possible for GAFTA and FOSFA to alter their Default Clauses to provide that the provisions of the Default Clause should also apply to situations of anticipatory resiliation of contracts as well as to actual defaults, that would not bring the law into line with commercial commonsense; for there are other situations and other trades and other commodities not governed by GAFTA or FOSFA contracts. No. What is required is a change in the law so that arbitrators can decide in accordance with both commercial as well as legal logic for where, after all, is the logic in making compensation for a breach depend on the market price at a date by which the contract has already (long before) been validly terminated?
J.S. (Stephen) Smid
Vernate, January 2012