Sanhe Hope Full Grain Oil Foods Production Co Ltd v Toepfer International Asia Pte Ltd

A contractual default clause requiring the defaulter to make good the innocent party’s loss, subject to a specified upper limit, is not necessarily a liquidated damages clause. The loss must first be assessed, if any, and the contractual formula operates as a limit. Where an arbitral tribunal applies the correct contractual approach but its findings do not resolve whether the claimant would have earned a profit from another contract absent the breach, the award should be remitted for that factual issue to be determined.

The Buyer appealed under section 69(1) of the Arbitration Act 1996 against a FOSFA Appeal Arbitration Award which had overturned a first-tier award. The dispute arose from the Buyer’s repudiatory failure to pay a required advance instalment under a contract for Brazilian soyabeans.

The Appeal Board awarded the Seller the difference between the contract price and the market price. The Buyer argued that the Seller had suffered no loss because the cargo had been, or would have been, sold under a more profitable contract with Henan. The central issue was whether the Appeal Board had correctly construed and applied the contractual default clause.

1. Appeal allowed to the extent of remission. The Appeal Board had wrongly concluded that the first-tier umpire had misinterpreted the default clause. The umpire’s analysis was unimpeachable: the clause required assessment of the loss sustained, if any, while imposing an upper limit based on the difference between the contract price and the actual or estimated market price.
2. The clause was therefore not a liquidated damages provision. The words requiring the defaulter to make good the loss, if any, were substantive. The market-price comparison operated as a limitation on damages which otherwise fell to be awarded.
3. The Appeal Board’s findings established that the Seller had validly appropriated the cargo, that the contract had ended following the Buyer’s failure to pay the second deposit, and that the Seller could withdraw the appropriation and dispose of the goods. They did not, however, expressly determine whether only one cargo was available for appropriation to either the Buyer’s contract or the Henan contract.
4. The award was remitted to the Appeal Board for reconsideration in light of the judgment. The issue was whether the Buyer had shown that, but for its repudiatory breach, the Seller would not have earned the profit from the Henan contract.

• FOSFA first-tier arbitration: The Umpire found that the Seller had to establish actual loss and awarded damages on that basis.
• FOSFA appeal arbitration: The Appeal Board overturned the first-tier award and awarded the Seller approximately $2,778,600 by reference to the difference between the market and contract prices.
• High Court (Commercial Court): Cooke J granted leave to appeal on 10 August 2007. The court found an error in the Appeal Board’s characterisation of the first-tier reasoning and remitted the award for reconsideration.