Legal Test For Remoteness In Indemnity Claims For Losses Occurred Up In The Contractual Supply Chain
In Mitsui & Co (USA) Inc. v. Asia-Potash International Investment (Guangzhou) Co. Ltd.1, a cargo of 60,000 MT of Brazilian Soyabeans was sold along a chain of sellers and buyers on FOBST terms. The sale contracts in the chain incorporated the terms of FOSFA Contract No.4 and ANEC Contract No.41 forms. The last contract in the chain was concluded with a Chinese buyer and included the Chinese purchase terms that were different from the terms of the other contracts in the chain in respect of the quality specifications, loading terms, payment terms, futures give-up, cargo surveyors, safe port/berth warranty and minimum draft guarantee at loading port.
The seller in the last contract in the chain claimed indemnities from the Chinese buyer for claims under which it became liable to the shippers and prior sellers in the contractual supply chain as a result of the buyer`s repudiation of contract upon the partial shipment of the cargo.
The seller contended that since he became liable for claims made by the shippers and prior sellers up in the contractual supply chain, the buyer must in turn be liable to the seller to the extent that the buyer`s breach caused the loss.
In the English law, in the case of contractual claims, it must be considered:
- the legal test for causation, i.e. whether the defendant breached the contract;
- the legal test for mitigation, i.e. whether that breach caused the loss in question;
- the legal test for remoteness, i.e. whether the loss was not too remote.
In Mitsui & Co (USA) Inc. v. Asia-Potash International Investment (Guangzhou) Co. Ltd., the question in dispute was whether the types of loss claimed by the final seller in the chain were not too remote given that some of the contractual terms agreed by the final seller with the Chinese buyer were different from the terms of the other contracts in the chain.
A requirement in string trading is that the terms of each contract in the string must match the terms of the others, except for the price. On that basis the FOSFA Board of Appeal held that since some of the terms in the contract in dispute were different from the other contracts, it meant that the respective contract was a stand-alone contract and was not in a string or even a chain with the purchase contracts between the seller (claimant) and the prior sellers. As a result, the FOSFA Board of Appeal dismissed the seller`s indemnity claims considering that they were too remote.
The FOSFA Board of Appeal considered that the fact that the contract in dispute was not in a string was what mattered for remoteness purposes.
In appeal, the English Commercial Court held that:
"The FOSFA Board of Appeal focused exclusively on the string/back-to-back issue when they ought to have asked themselves whether the indemnities which [Seller] was claiming were of a type or kind which would have been in the parties` contemplation."
Even if there were differences between the terms of the contract in dispute and the terms of the other contracts in the chain, the correct remoteness approach would have been to determine:
- first, whether, due to the nature of the buyer`s breach, the types/kinds of loss claimed were foreseeable irrespective of any difference of terms between the contracts;
- secondly, which terms in each contract were relevant to those types/kinds of loss and whether such terms differed between the purchase contracts concluded by the seller (claimant) with the prior sellers and the sale contract concluded with the Chinese buyer;
- and thirdly, whether, in any event, the same or greater losses would have flowed had the contracts been 100% back-to-back.
The English Commercial Court remitted the case to the FOSFA Board of Appeal to consider whether the losses incurred by the shippers and prior sellers in the chain were a type of losses which the Chinese buyers ought to have realised, at the time they concluded the purchase contract, that were not unlikely to result in the event of their repudiation of contract.
In the English law, it is not the precise circumstances that occur that must be foreseeable, but the type or kind of loss. The fact that the seller (claimant) would suffer loss in the string in the event that the Chinese buyer in the event that the Chinese buyers refused to perform the contract was entirely foreseeable.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Grain Trade Review Edition No. 9.
1.  EWHC 1119 (Comm)