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DIFC Court of Appeal clarifies its approach to mitigation of loss and damage to reputation in key ruling

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Middle East, United Kingdom

In IDBI Bank Limited v (1) Amira C Foods International DMCC (2) A K Global Business Fze and Mr Karan A Chanana [2019] DIFC CA 014, the Dubai International Financial Centre (DIFC) Court of Appeal has affirmed that the DIFC Damages and Remedies Law (No 7 of 2005) (the "DIFC Damages Law") will be applied consistently with  English common law authorities that settled the rules around mitigation of loss and damage to commercial reputation.

Facts
The case concerned an appeal against a judgment awarded by the DIFC Court of First Instance. In brief, Amira C Foods International DMCC ("Amira") entered into a contract with a third party, Kuwait Flour, to supply them with 30,000 metric tons ("MT") of rice at a price of USD $1,398 per MT. The rice was to be purchased by Amira from a supplier, AK Global, at an average price of USD $1,287.50 per MT. In order to finance this, IDBI Bank (the "Bank") entered into a Facility Agreement with Amira to provide a rolling credit facility, under which they provided a letter to Amira irrevocably undertaking to pay AK Global the amount due in respect of each shipment once payment was received from Kuwait Flour.

In early February 2018, in reliance on the undertaking, AK Global made a shipment of rice to Kuwait Flour. Kuwait Flour made the payment in respect of that shipment to the Bank and the Bank notified Amira that funds had been received. Amira instructed the bank to pay the funds to AK Global. However, due to a misunderstanding at the Bank, the Bank failed to pay AK Global. As a result of the delay in payment, AK Global ceased loading further shipments for consignment to Kuwait Flour. Eventually, after delivering half of the 30,000 MT contracted for, AK Global informed Amira that as a result of the Bank's failure to honour its irrevocable undertaking, it would no longer supply consignments of rice for Amira.

Amira hastily sought to agree a contract with a separate rice supplier in order to mitigate its losses. It eventually managed to reach agreement with a different supplier in May 2018, albeit at the higher price of USD $1,389 per MT. As a result, it re-negotiated a higher sale price of $1,549 per MT with Kuwait Flour.

Claim
Amira issued proceedings against the bank in conjunction with A K Global for the payment of USD $4.1m, being the amount due to be paid to A K Global, along with various other heads of claim including, in particular:

  • A claim for USD $2,287,636 which represented the increased cost to Amira of purchasing the rice from alternative suppliers (the "Reduced Margin Cost Claim"); and
  • A claim for USD $23m representing compensation for damage to Amira's commercial reputation which it alleged to be caused by the Bank's failure to observe its irrevocable undertaking (the "Reputational Damage Claim").

DIFC Court of First Instance Judgment
At the Court of First Instance, the Bank argued that, in fact, the breach of the irrevocable undertaking had provided a net benefit to Amira as it had been able to sell the rice to Kuwait Flour at an increased price (USD $1,398 under the old contract, versus USD $1,549 under the new contract).  The judge was unconvinced by this reasoning and confirmed that Articles 9 and 10 of the DIFC Damages Law were consistent with settled principles of English common law. The eventual sale price of the rice was irrelevant, and that whilst this was not a claim in respect of non-delivery of goods, the same principle should apply, namely whether "the consequence of the Bank’s breach was that Amira had to go into the marketplace to obtain the rice which AK Global declined to supply and suffered loss by reason of the difference in the price which it had to pay in the marketplace."

Amira's Reputational Damage Claim was sought, among other things, on the basis of a significant drop in their parent company's share price between February and October 2018. The Court considered that the "share price could be affected by many extraneous factors entirely unrelated to the Bank’s breach" and dismissed the argument, stating that, under Article 11(1) of the DIFC Damages Law, "reasonable certainty" was necessary to establish loss and that in the circumstances there was no such certainty. The Court was further unconvinced by witness evidence that suggested that one of Amira's client relationships had "probably" been lost as a result of the Bank's breach. The Court was, however, satisfied that Amira should be awarded damages and that that common law cases and Article 11(3) of the DIFC Damages Law conferred on the Court the discretion to assess damages where there was uncertainty. Given "the unsatisfactory state of the evidence", the Court concluded that the assessment of damages should be restrained, although it still awarded Amira USD $10m for damage to reputation.

DIFC Court of Appeal Judgment
The Bank appealed the judgment. In so doing, it submitted that, in respect of the Reduced Margin Cost Claim, the Bank's breach actually led to a benefit to Amira in that it was able to agree a higher price with Kuwait Flour once the contract with AK Global fell through. The Bank relied on the case of British Westinghouse v Underground Railways and the question of whether or not to take into account the subsequent transaction.

The Bank claimed that the case of Williams v Agius supported the proposition that "the time at which the action giving rise to the benefit is taken is critical" and that, as the new, better contract with Kuwait Flour followed the breach, the benefit accruing to Amira from the increased price necessarily had to be taken into account when quantifying damages. As such, there was a benefit obtained by Amira which arose "out of the consequences of [the Bank's] breach" which should act to reduce the total damages payable. The Bank also submitted that, in respect of the Reputational Damage Claim, given the weak evidence offered by Amira as to reputational harm suffered, the Judge had not awarded a sum which was "modest and undertaken with restraint" in accordance with the principle established in the English case of Rollin v Steward and which reflected the weakness of that evidence.

In its submissions, Amira sought to reject the Bank's argument in respect of the Reputational Damage Claim on the basis of Article 40(2) of the DIFC Damages Law, which allows the Court discretion to award a party "up to three times the actual damages where it appears to the Court that the defendant’s conduct producing actual damages was deliberate and particularly egregious or offensive."

In respect of the claim for Reduced Margin Cost, the Court of Appeal examined the extent to which the actions taken by Amira to mitigate their loss gave rise to a benefit to them that should be taken into account in assessing damages. The Court considered that reliance on Williams v Agius missed the point of the very authority on which it was relying. If the Bank wanted the action giving rise to the benefit to be taken into account in the reduction of damages it needed to establish a causal link between its breach and the action, namely the conclusion of the new contract with Kuwait Flour, such that one could be said to arise from the other. Further, although the Bank cited English common law sources in their submissions, the Court confirmed that it was also necessary to have regard to the DIFC Damages Law and that:

"on the issue which is central to this Ground of Appeal the authorities speak with one voice and, consistently with the DIFC Damages Law, stipulate that before any benefit is brought to account in the reduction of damages, it must be causally connected to the breach of which the claimant complains, or action taken in mitigation of the consequences of the breach."

Ultimately, the Court concluded that there was no causal connection between the breach and the benefit conferred to Amira, and that accordingly "the difference between the price which would have been paid to AK Global for that rice, and the price that was in fact paid to [the alternative supplier] is the amount required to put Amira in the position in which it would have been but for the Bank’s breach. That amount is the appropriate measure of Amira’s loss, as the Judge found." As such, the eventual price paid by Kuwait Four was irrelevant, and the Bank's appeal on the Reduced Margin Cost claim was dismissed.

In respect of the Reputational Damages Claim, the DIFC Court of Appeal was more critical of the approach taken by the Court of First Instance.

The Court confirmed that the common law authorities sufficiently governed the award of general damages for damage to reputation following the dishonour of a customer's credit by a bank. In doing so, it rejected Amira's reliance on Article 40(2) of the DIFC Damages Law to apply a wider scope for the award of damages. Whilst the Court accepted that the Article 40's scope to award multiple damages ran counter to common law, no consideration needed to be given to Article 40 since no question of the award of multiple damages arose in this case. Instead, the Court based its decision on principles in established English case law that damages for wrongful dishonour of a customer's credit by a bank should be "not nominal, nor excessive, but reasonable and temperate." The Court observed that this was consistent with Article 11 of the DIFC Damages Law, which provides that compensation can only be awarded for loss "that is established with a reasonable degree of certainty."

It was plain to the Court that, in light of the unpersuasive witness evidence and unconvincing financial modelling supplied by Amira, no such reasonable certainty had been proven in this case, and that therefore it was appropriate for the Court to exercise its discretion. Amira had not provided sufficiently "tangible and cogent evidence of the extent of that damage" to justify an award of damages which was higher than a "modest or temperate" award. The Court made no finding on the evidence that as a matter of fact, Amira had suffered USD $23m diminished profit as a result of the breach or indeed even USD $10m. Instead, the Court assessed the appropriate level of damages to be $500,000, and allowed the appeal accordingly.

Summary
The case illustrates the manner in which the DIFC Courts approach questions of mitigation of loss and reputational damage arising from breach of contract under the DIFC Damages Law by reference to settled principles of common law. In so doing, it acknowledges that there can be tensions between the two approaches whilst still affirming the continuing applicability of the common law principles. However, in affirming the first instance judgment on the question of the Bank's breach, the Court of Appeal judgment provides a further helpful indication to companies operating on the basis of a rolling credit facility, particularly during the present climate, that the continued policy is to rigorously enforce performance bonds and equivalent instruments and that the Courts will continue to apply established principles of common law to claims for costs arising from mitigation and reputational damage suffered as a result of a breach of contract.

However, it will be interesting to see how the DIFC Court will deal with future tension between the common law (including English case law) and DIFC legislation, including the question of applying Article 40 to the assessment of damages.

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Dispute Resolution