Lloyd's Maritime and Commercial Law Quarterly
THE NATURE AND PARAMETERS OF THE “MARKET SUBSTITUTE” RULE
Serena Lee*
Sharp v Viterra
The relationship between mitigation and the “market substitute” rule has not always been consistently explained.1 The market substitute rule denotes the proposition that, where a party breaches a contract, and there exists a market in which its counterparty can obtain substitute contractual performance (an “available market”), damages will prima facie be assessed by the difference between: (1) the contract price; and (2) the cost of obtaining a substitute from that market at the time of non-performance.2 In the sale of goods context, it is codified in ss 50(3) and 51(3) of the Sale of Goods Act 1979 (“SGA”).
There were two prevailing theories. The first treats the market substitute rule as an aspect of mitigation. According to this theory, the rule reflects the expectation that the innocent party should normally obtain substitute performance from the available market at the breach date, and its loss is assessed on the hypothesis that it did.3 The second theory posits that the market substitute rule is a sui generis rule of legal causation which prescribes an “abstract” method of assessing damages in order to maximise commercial certainty and achieve “approximate justice” in most cases.4 Judges, on occasion, have (apparently) vacillated between both explanations and endorsed elements of each.5
The Supreme Court in Sharp v Viterra
6 has now clarified matters, favouring the first theory. Addressing a provision in a GAFTA form contract replicating the operation of SGA, s.50(3), Lord Hamblen confirmed that the market substitute rule involved an application of the mitigation doctrine, which tracked what a reasonable person in the claimant’s position
* Barrister, Five Paper.
1. Cf, eg Koch Marine Inc v D'Amica Societa di Navigazione ARL (The Elena d’Amico)
[1980] 1 Lloyd's Rep 75, 87–89, with Bunge SA v Nidera BV [2015] UKSC 43; [2015] 2 Lloyd's Rep 469; [2015] Bus LR 987, [14–17], [79], and Stanford International Bank Ltd v HSBC Bank Plc [2022] UKSC 34; [2023] AC 761, [43] (Lord Leggatt, concurring). Similarly, contrast A Dyson and A Kramer, “There is no ‘breach date rule’: mitigation, difference in value and date of assessment” (2014) 130 LQR 259, 266–271 with MG Bridge, “Markets and damages in sale of goods cases” (2016) 132 LQR 405, 409–411 and K Barnett, “Substitutive damages and mitigation in contract law” (2016) 28 SAcLJ 795, 802–804.
2. The Elena d’Amico
[1980] 1 Lloyd's Rep 75, 87.
3. Stanford [2022] UKSC 34, [43].
4. Bridge (2016) 132 LQR 405, 412.
5. Eg, Bunge [2015] UKSC 43; [2015] 2 Lloyd's Rep 469, [77–81]; Glory Wealth Shipping Pte Ltd v Korea Line Corp (The Wren) [2011] EWHC 1819 (Comm); [2011] 2 Lloyd's Rep 370, [18].
6. Sharp Corp Ltd v Viterra BV [2024] UKSC 14; [2024] 1 Lloyd's Rep 568; [2024] Bus LR 871, [100–122].
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