Anticipatory breach under sale of goods contracts
The legal doctrine of anticipatory breach or repudiation of contract is well known and, apart from the issue of damages with which this article is concerned, is easily understood. If a party indicates by words or action that he is unable or unwilling to perform a contract the other party has a choice. He may either accept what has been said or done as a repudiation bringing the contract immediately to an end, or he may treat the contract as continuing to be binding on both parties. An unaccepted anticipatory breach has no effect. Both parties remain liable to fulfil their contractual obligations.
The problem is damages. What recoverable losses flow from the repudiation of the contract? Specifically what is the relevant market price date for calculating the damages for which the defaulting party should be made liable?
If the anticipatory breach or repudiation is accepted and the contract is thus terminated, the buyer or seller, as the case may be, may immediately bring a claim for damages. A party making a claim for a failure to perform a sale of goods contract will normally be seeking damages based on the difference between the sale price and the market price of the contract goods. In the case of an actual breach, which has the effect of bringing the contract to an end, the relevant date for ascertaining the market price is the date of the failure to perform, the default date. Logic and common sense suggest that the performance failure, when an anticipatory repudiation is accepted, occurs at the time of acceptance and that damages should accordingly be calculated by reference to the market price on that day (or, on established principles, on the next following business day).
Unfortunately English law has not followed logic or common sense. If you consult any legal text book you will find that the relevant date for ascertaining the market price is stated to be the date fixed for delivery of the goods (see for example Benjamin’s Sale of Goods (Eighth Edition) paragraphs 16-081 and 17-014). An impressive number of cases are cited as authority for this proposition. However, the qualification is added that this is the prima facie position and that it is subject to the rules on mitigation.
Applying the mitigation rules Benjamin states that, in the case of a repudiation by the seller, if the buyer ought reasonably to have gone into the market to buy substitute goods on a day before the date fixed for delivery, the relevant market price is that existing on that earlier date (paragraph 17-015). Benjamin derives support for this view from a number of cases (see in particular Kaines v Osterreichische [1993] 2 Lloyd’s Rep 1).
In my view what is said about mitigation in this context by the learned editors of text books and by learned judges betrays considerable confusion of thought. The principle of mitigation is that the claimant must act reasonably to minimise his loss. He is not permitted to recover losses that he could have avoided by taking reasonable steps. However, I do not understand how this principle can sensibly be applied to the situation of an anticipatory repudiation of a contract for the sale of goods.
It is not possible for anyone to know whether the price of a particular commodity in, say, four weeks time is going to be higher or lower than its present price. If the price level, either higher or lower, could confidently be predicted, we would all be able to make our fortunes in the commodities markets. Therefore it cannot sensibly be asserted that a buyer acting reasonably should go into the market and buy substitute goods immediately. Buying immediately is just as likely to increase the loss as to reduce it.
However, the repeated references in decided cases to a rising or falling market show that judges do not understand this simple point. They view the position with the benefit of hindsight. Thus, if the market has been falling in the period immediately before the repudiation is accepted, and the price continues to fall, a buyer who has bought substitute goods immediately after his acceptance of the repudiation would risk being deprived of his actual losses because it might be concluded that he had acted unreasonably by buying prematurely “on a falling market”. Conversely, if the price starts to rise after acceptance of the repudiation, and continues to rise, the conclusion that may be reached is that the buyer who has not bought substitute goods immediately has failed to mitigate because he has delayed buying “on a rising market”.
This is illustrated by this comment made by Benjamin at paragraph 17-015:
“If the market price was rising after the date when the repudiation was accepted, it would normally have been reasonable that the buyer should have bought in the market immediately … ”
This is nonsense. It is only with hindsight that you can see that the market price was rising. At the time all you know is that the market price has in the past been rising or falling. You cannot know whether in the future it is going to rise or fall.
By concluding that the rule for assessing damages for anticipatory repudiation is that the relevant market price is the price on the due date for delivery, and then by misguidingly seeking to apply mitigation principles, English judges have created confusion and uncertainty.
Apart from the authority of decided cases, there is no good legal, logical or commercial reason why the relevant market price date should be last day of the delivery period. On the contrary there are overwhelming commercial reasons why the relevant date should the date when the contract has been brought to an end. It should not be postponed to a date that may be far in the future.
My advice to arbitrators is to follow what I believe most arbitrators would think is the sensible commercial approach and not to be constrained by what lawyers advise them is the law. However, the risk that the defaulting party might make a successful application to the Court under section 69 of the Arbitration Act 1996 can be eliminated by making the finding that a buyer/seller acting reasonably would have gone into the market to buy/sell against the defaulting seller/buyer as soon as practicable after acceptance of the repudiation. This would be an unchallengeable finding of fact on the issue of mitigation, although for the reasons I have given it may not be a finding that could strictly be justified.
Michael Robinson
Secretary, International Commodity & Shipping Arbitration Service (ICSAS)
3rd November 2011