UK Supreme Court explores the scope of appeals of arbitration awards, and the principles underlying the law of damages.
Three key take-aways
- Parties to English law governed arbitrations have a well-established right to appeal, but the Supreme Court confirms that statutory "safeguards" under section 69 of the Arbitration Act 1996 strictly limit appeals to points of law arising out of the arbitral award itself.
- The Supreme Court has elevated the principle that injured parties should seek to mitigate their loss to the same fundamental level as the principle of compensation in the context of the law of damages.
- As soon as a legal wrong has occurred and before proceedings may even be in contemplation, injured parties should consider seeking advice and ensure that they take a systematic approach to mitigating their loss. We provide practical suggestions in the article below.
In Sharp Corp Ltd (Respondent) v Viterra BV (previously known as Glencore Agriculture BV) (Appellant) [2024] UKSC 14, the UK Supreme Court provided useful guidance on the limited scope available to parties seeking to appeal an arbitration award, and the difficulty appellants will face in introducing new arguments after the date of the award. The ruling also contains an interesting decision in relation to the obligation to mitigate.
Background
The appellant sellers sought damages against the respondent buyers on the basis that the buyers had defaulted on payment for 65,000 tons of lentils and peas which the sellers had shipped from Vancouver to Mundra.
The contracts between the parties incorporated terms from the Grain and Feed Trade Association (GAFTA) Contract No 24, including clause 25. Clause 25 addresses what is to happen in default of fulfilment by either party, and is found in many of the GAFTA standard form contracts. The contracts were on Cost & Freight free out (C&FFO) Mundra terms, meaning that the seller was responsible for the cost of the goods and freight to the destination, Mundra.
The goods landed in June 2017 and were then customs-cleared. They remained warehoused in Mundra, under the control (but not the possession) of the seller pending payment from the buyer.
A series of non-payments and contractual amendments followed and continued to the end of 2017.
In November and December 2017, the Government of India had coincidentally imposed import tariffs on peas and lentils. This significantly increased the market value of the goods within India.
Eventually, the seller declared the buyers to be in default. They claimed damages and stated their intention to exercise the right of resale. An arbitration followed.
The GAFTA Appeal Board found in favour of the sellers in respect of substantially all the disputed points. The Appeal Board found that the buyers were in default of the payment obligations and were liable to pay damages under the default clause. It further found that the sellers had been permitted to take back the goods and resell them.
The sellers and buyers made rival submissions as to the way damages should be assessed. The Appeal Board favoured the sellers' version, rejecting the buyers' suggestion that damages should be assessed by reference to the market value in the internal Indian market.
The buyers obtained permission to appeal to court under section 69 of the Arbitration Act 1996 (the Act), in respect of a legal question as to the proper basis for estimating the price. The High Court judge held that there had been no error of law and, faced with two imperfect proxies, the Appeal Board was entitled to prefer the sellers' evidence on pricing.
The Court of Appeal disagreed. It held that by the date of default the contracts had been varied, such that the contracts were no longer on C&FFO Mundra terms, and instead had become ex warehouse Mundra (i.e. the buyer arranges and pays for the transport of the goods from the seller's warehouse). Accordingly, it was wrong to proceed on the basis of C&FFO Mundra terms. Damages should therefore be assessed on the basis of the new pricing terms.
The sellers appealed to the Supreme Court on grounds that the Court of Appeal had exceeded its jurisdiction under section 69 of the Act.
The buyers cross-appealed on grounds that if the sellers' appeal succeeded, damages should be assessed "as is, where is", i.e. on the basis of the price obtainable for the goods in the Indian internal market at the time.
The limited rights to appeal points of law arising out of an arbitral award
Under section 69 of the Act, parties to an arbitration have a right to seek permission to appeal points of law arising out of the arbitral award.
In this case, the sellers submitted that the Court of Appeal had exceeded its jurisdiction under section 69 by wrongly:
- amending the question of law for which permission to appeal had been given;
- deciding a question of law which the Appeal Board had not been asked to determine and on which it had not made a decision; and
- making findings of fact on matters on which the Appeal Board had made no finding.
The Supreme Court found that the first ground failed, but the second and third succeeded.
The Court of Appeal's amendment to the question of law did not change the substance of the question. It merely tied the general question to the specific facts of this case by adding the words "in the circumstances as found by the Appeal Board in the Awards." The Supreme Court said that any question for which permission is sought under section 69 falls to be considered "on the basis of the findings of fact in the award", per section 69(3)(c). Thus the amendment was only stating what was already implicit.
The Court of Appeal should not, however, have decided whether, and if so, how the contracts had been varied (from C&FFO Mundra terms). The Appeal Board had not heard argument on this point, nor did they address it. As such, it was not a question of law for which permission could have been given under section 69 and it was not open to the Court of Appeal to consider it.
Nor should the Court of Appeal have made findings of fact concerning discharge of the cargo (which were relevant to its conclusion that the contract had been varied). Indeed, the Supreme Court added that this was a further reason why it was not open to the Court of Appeal to conclude that the contracts had been varied.
Thus, the Court of Appeal had exceeded its jurisdiction under section 69 of the Act in two ways. The Supreme Court's unanimous decision emphasised that it is "important and indeed necessary that ... safeguards [to the appeal process] are respected and applied, consistently with the general principle ... that 'the court should not intervene expect as provided' in Part of 1 of the Act (which includes section 69)."
The judgment provides useful general guidance on how the right to appeal is subject to various "safeguards" under section 69 of the Act.
- At the permission to appeal stage and in accordance with
section 69(3)(c) of the Act, the court must "on the basis of
the findings of fact in the award" be satisfied that the
decision of the tribunal on a question of law is "obviously
wrong" or "is one of general public importance and the
decision of the tribunal is at least open to serious
doubt".
If the contract is a standard form of the industry, an appellant will be able to rely on this in support of arguments that the award raises a point of law of general public importance since the dispute is more likely to recur. In Sharp Corp Ltd, the default clause was common to many of the GAFTA standard contract forms. The opportunity for the appellate courts to consider, where necessary, the terms of such standard contracts are an opportunity to add to the clarity and certainty of English commercial law.
- The appellate court can amend the question of law for which
permission to appeal has been given, but the substance must remain
the same. Indeed "appeal refinements are often made to the
question of law in order better to reflect the substance of the
question of law raised."
- Under section 69(3)(b) of the Act, the appellate court can only
consider a question of law "which the tribunal was asked to
determine". The Supreme Court clarified that, while the
articulation of the precise question may change at the appeal
stage, the question of law has to have been "fairly and
squarely" put "before the arbitration tribunal for
determination" (original emphasis).
- The appellate court's jurisdiction under section 69 of the
Act is "limited to appeals on questions of law. It has no
jurisdiction in relation to errors of fact and no power to make its
own findings of fact."
- There are limited circumstances under which an appellate court "can infer that the tribunal has made a finding of fact even though it is not expressly set out in the award." The inferred finding of the appellate court would need to follow "inevitably" from the findings which the tribunal made. It must not make new findings – even where they are obvious – if they were not (expressly or otherwise) part of the tribunal's decision.
The law of damages: a dramatic declaration from the Supreme Court
Having allowed the sellers' appeal, the Supreme Court turned to the buyer's cross-appeal in relation to the basis of the Appeal Board's award of damages.
The object of an award of compensatory damages is to put the claimant in the same position as if the wrong had not occurred. In the context of a claim for breach of contract such as in Sharp Corp Ltd, the rule is that the claimant is entitled to be placed, so far as a monetary award can do it, in the same position as they would have been had the contract been performed.
Here, the Supreme Court said that "[t]wo fundamental principles of the law of damages are the compensatory principle and the principle of mitigation of damage." This appears to raise the "guiding principle" of mitigation to an equal footing with the compensatory principle.
Mitigation concerns the injured party taking "all reasonable steps to avoid the consequences of a wrong" whether tort or breach of contract. There are three interrelated rules which comprise this definition of mitigation.
- There is no recovery for loss which the injured party should reasonably have avoided.
- It follows that there is recovery for loss incurred where the injured party has taken reasonable mitigating steps to avoid the loss, even if those steps increase the loss.
- The injured party cannot generally recover for avoided loss – if the loss is successfully reduced by the taking of reasonable mitigating steps, then the party in breach is entitled to the benefit of that.
Here, the Supreme Court emphasised that the measure of damages will often be fixed based on the mitigatory step of obtaining a reasonable substitute sale or purchase, rather than by reference to a contractual price. This means that, where there is an available market, it is "the market price [that] establishes the default price regardless of what the injured party actually does and even if a decision to delay in entering the market is a commercially reasonable business decision". On such an analysis, it will in many cases be difficult to consider compensation without also addressing mitigation.
The Supreme Court held that the sellers should have mitigated their loss by selling their goods in India. Damages should have been awarded therefore on an "as is, where is" basis. The court found in favour of this argument given the goods were readily available to be sold in the internal Indian market and had significantly increased in value, having cleared customs prior to the imposition of customs tariffs. The court rejected the seller's argument that the goods should be valued as if they were sold on the international market as that would involve incurring the costs of re-exporting the goods and losing the increase in value that they could benefit from the internal Indian market. The court concluded that "the guiding principle is that of mitigation and to look to the market in which it would be reasonable for the seller to sell the contract goods".
The practical implications
Section 69
Unless the parties have excluded the application of section 69 of the Act, contractual parties can take advantage of the right to appeal to the English court an English-seated arbitral award on a point of law.
Broadly speaking, parties seeking to challenge an arbitral award must do so within 28 days of the date of the award. Given these time limits and the nuances described above in respect of the scope to appeal on a point of law, parties should take advice at an early stage in order to assess their options for appeal.
Mitigation
For injured contractual parties, mitigating loss should be at the forefront of their approach from the moment a wrong has been committed against them:
- parties should take advice as soon as they suspect that there may have been a breach of contract;
- injured parties would do well to gather contemporaneous documentary evidence of the commercial steps they have taken to mitigate any loss, the alternative options available at that time and the prudent reasons for the course(s) of action taken or not taken; and
- injured parties should not expect to benefit from any windfall resulting from a breach of contract.
While the burden of proof in respect of mitigation is on the defaulting party, an injured party will need to respond to such an argument with evidence of the reasonable steps they have and have not taken in order to mitigate their loss. This judgment therefore serves as a useful reminder of the importance of taking a robust and carefully documented approach to mitigating damage.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.