Jayam NV v The Diamond Trading Company Ltd

Where a contract requires a party to use reasonable endeavours while taking account of specified criteria, the absence of an express reference to a particular decision-making mechanism does not prevent its adoption. In a market where demand exceeds supply, a capping mechanism may be used to match supply and demand, including by using historic purchases as a proxy for requirements and allowing for growth. The mechanism must remain within the contractual criteria and operate fairly and reasonably, without discrimination or arbitrariness. The choice of machinery is left to the contracting party where the contract is not prescriptive. Whether the mechanism satisfies those standards is primarily evaluative. The appeal was dismissed.

Jayam, a long-standing purchaser of rough diamonds, claimed damages and declaratory relief against DTC concerning the application capping mechanism used under DTC’s Supplier of Choice arrangements. Jayam contended that paragraph 2.4 of the Policy Statement made four criteria exclusive and that the capping mechanism introduced an additional criterion based on historic purchases.

Henderson J dismissed the claim on 1 March 2007. Permission to appeal was initially refused, but the Court of Appeal granted limited permission on points of contractual construction. The central issue was whether paragraph 2.4 permitted DTC to use the capping mechanism in determining allocations.

Appeal dismissed. Sir Peter Gibson gave the judgment of the court. Wilson LJ and Keene LJ agreed.

1. The permission to appeal was confined to pure questions of construction. Jayam could not reopen the judge’s evaluative conclusions on fairness, reasonableness, irrationality or arbitrariness.
2. Paragraph 2.4 required DTC to use reasonable endeavours to meet applications while taking account of the four specified criteria. DTC had to act within the scope of those criteria and take criterion (a), concerning requirements, into account fairly and reasonably, without discrimination or arbitrariness. The obligation imposed a relatively low hurdle and left DTC substantial latitude as to method.
3. The absence of an express reference to an application capping mechanism did not prevent DTC from adopting one. Since demand substantially exceeded supply, a cap could form part of the machinery for taking account of criteria (a) and (d). It did not thereby become a new or inconsistent contractual criterion.
4. The judge had correctly assessed the mechanism by reference to paragraph 2.4. A cap based on purchases during the previous ten Sights, combined with an uplift allowing for growth, could reasonably address tactical over-application while accommodating seasonal variation and potential expansion. The mechanism was not inherently unfair or unreasonable.
5. The judge was also entitled to consider whether Jayam entered the system at an inappropriately depressed level. If prior purchases could not reasonably be used as an indicator of requirements, that issue could affect liability as well as damages, although it was principally a question of reasonableness rather than construction.

The dismissal of Jayam’s claim was upheld.

• Court of Appeal (Civil Division): On 20 December 2007, the appeal was dismissed: [2007] EWCA Civ 1360.
• Chancery Division: Henderson J dismissed Jayam’s claim on 1 March 2007. Permission to appeal was refused by the judge; limited permission was later granted by Lawrence Collins LJ.