for considering the proper assessment of damages for reliance loss (being loss incurred for acting in reliance upon other party’s contractual obligations), and for highlighting familiar difficulties in scoping the appropriate counterfactual question in a claim made for wasted expenditure, when taking account of whether mitigating steps were taken by an innocent party in anticipation of contractual breach.

Facts

In relation to a residual fuel oil trading contract (treated as being governed by BP Oil’s widely used General Terms and Conditions for Sales and Purchases of Crude Oil Petroleum Products), BP Oil had contracted to sell to Galtrade straight run fuel oil. The contract had also specified maximum/ minimum values for certain characteristics of the fuel oil, including for its sulphur content.

The first two cargos of straight run fuel oil delivered to Galtrade had been off-specification, for having exceeded the sulphur content value, albeit the off-specification had subsequently been settled between the parties through an agreed downward price adjustment, and through a return of the second cargo in contractual breach. A third cargo had similarly exceeded the maximum sulphur tolerance, which had given rise to the litigation. Galtrade communicated its intention to reject this third delivery, which was then received by BP Oil, albeit on a basis that was entirely without prejudice to its position that Galtrade had no contractual right to reject. Unsurprisingly, BP Oil subsequently admitted breach by virtue of sulphur content exceedance.

Classifying a contractual guarantee

In considering the consequences of the accepted breach, Galtrade argued an entitlement to have rejected the third cargo on the basis, it submitted, that a requirement to supply compatibly with a maximum sulphur value amounted to a condition of contract, or alternatively, if it was not a condition of contract, because the exceedance had, in effect, deprived Galtrade of its principal benefit under the contract. BP Oil contrarily argued that the contractual term was merely innominate or intermediate, with the effect that its breach had not given rise to any right to reject, and that consequently, Galtrade’s rejection had meant a repudiatory breach.

The Court agreed with BP Oil that, on the true construction of the obligation to supply compatibly with the maximum sulphur value, it had amounted to a mere innominate term. Notably, this did not pose for the Court any problematic categorisation exercise. The Court’s approach finds consistency with analogous judgments, in widely construing innominate terms. Broadly put, a term will most likely be found to be innominate unless: the term has been expressly designated as a condition by the contract; the outcome by necessary implication of the nature of the contract, the conduct of the parties or the overall circumstances, indicates otherwise; or, the contrary outcome has been expressly provided by statute (see: Tradax Internacional SA v Goldschmidt[2], at 612, per Slynn J).

Assessing damages for reliance loss

In deciding Galtrade’s claim for loss arising from wasted expenditure incurred in the transportation of the third cargo, the Court considered whether there had been an entitlement to recover abortive expenses arising in close connection with the breach of the innominate term, rather than any breach of condition. Galtrade had argued that its loss had been caused by the breach, because the sulphur tolerance exceedance had of itself meant that the fuel was practically incapable of use, and that arising transportation costs would otherwise prove unrecoverable. The Court rejected that the loss had naturally or directly arisen from the breach (of warranty), so excluding any entitlement to damages for abortive expenditure and confining recovery to a claim for damages for breach (of warranty). Galtrade’s loss here had not been caused by BP Oil’s breach but rather by its own repudiation of the contract, having unreasonably rejected the third cargo.

The judgment can be forgiven for not having further discussed an interesting question of reliance loss, for wasted expenditure in the form of transportation costs, in the event that Galtrade had elected not to reject the third cargo. This is certainly one for debate.

Counterfactual questions: Claimant’s steps in anticipation of breach and assessing damages

In relation to a reliance loss claim, the Court had to grapple with an obvious difference of principle between the parties regarding the relevant counterfactual question to be answered for the purpose of determining whether, ultimately, Galtrade would, or would not, have broken even, in respect of the third cargo in breach (of warranty), in circumstances where there had evidently been a significant drop in price at the date of delivery.

BP Oil had argued, on the basis that a damages assessment must properly put the Claimant in the position it would have enjoyed but for the breach, that the relevant counterfactual must arise at the date of breach, and take account of steps taken subsequently. The breach being the failure to deliver an on-specification cargo, on BP Oil’s case, the counterfactual question would essentially involve asking what would have happened had BP Oil delivered on-specification, rather than, in breach, off-specification.

Galtrade argued a notably wider counterfactual, one taking account of what it characterised as representing “the whole factual scenario”, meaning, in turn, that the Court should have regard to the fact that Galtrade could not reasonably have arranged any onward sale of the third cargo in anticipation of breach, given that this would likely have caused loss to a transacting partner, as well as other more remote damage, not least because Galtrade could not reasonably then have known of the precise extent to which the cargo would be off-specification.

In revisiting the authorities on the principle of scoping counterfactual questions, the Court identified the “real question” as being, whether, even though the innocent party has no duty to mitigate in advance of breach, any steps which in fact have been taken in mitigation in advance of an expected breach, can be taken to have achieved legal relevance by virtue of the fact that they occur before breach. The Court resounded the pragmatic approach that just because steps are taken in advance of breach, without legal obligation, will not of itself provide a principled reason to exclude them from consideration (see further: Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA[3]).

In the circumstances, the Claimant’s mitigation of loss was found to have been effective, in having reasonably elected not to enter into any contract for onward sale of the third cargo, or contractually commit more generally, in reasonable anticipation of breach. The Court (very sensibly) found that it would have been inappropriate to configure the relevant counterfactual question from the date of delivery of the cargo, and in a way that overlooks entirely the related question of whether the Claimant had taken reasonable mitigation in anticipation of loss. Therefore, in the circumstances, the relevant counterfactual question had been whether Galtrade, as innocent party, could have broken even, had BP Oil delivered the third cargo on- (rather than off-) specification and had Galtrade been able to take any reasonable steps in anticipation of breach, to effectively plan for an on-specification cargo.

The judgment is certainly helpful for its considered discussion of the scope of a contractual guarantee and of reliance loss, but is, in the author’s view, most significant for recognising the common impracticalities of configuring an appropriate counterfactual question in the context of a wasted expenditure claim, especially where the contractual breach has been anticipated, given that the economic analyses of the parties are (if unavoidably) largely hypothetical, complex and diffuse. The author very much shares the Judge’s expression of sympathy, from paragraph [136] of the judgment!