Garnac Grain Co Inc v H M F Faure & Fairclough and Bunge Corporation

[1967] 2 All ER 353

---

(Decision by: Lord Pearson)

Between: Garnac Grain Co Inc
And: H M F Faure & Fairclough and Bunge Corporation

Court:

Judges: Lord Reid
Lord Morris of Borth-y-Gest
Lord Pearce
Lord Wilberforce

Lord Pearson

Subject References:
Agent
Creation of agency
Agency for entering into contract
Circle of contracts made on same day whereby A sold goods and subsequently re-bought the goods from another purchaser further down the chain of buyers
Transactions designed by A for financial reasons
Written contracts enforceable according to their tenor
Whether buyer who re-sold to A acted in his purchase from a previous buyer as agent for A as undisclosed principal
Contracts genuine, not shams
Contract
Breach
Damages
Date at which damages assessed
Sale of goods cif
Election by buyers to accept seller's repudiation on 24 January
Failure of sellers, if contract had continued, to send shipping documents, which would have reached buyers on 4 February
Damages, difference between value and contract price, assessed at 4 February
Contract
Repudiation
Election whether to accept repudiation
Write issued claiming declaration that contract valid and claiming damages for its breach
Writ not served
Whether election to accept repudiation

Case References:
Frost v Knight - [1861-73] All ER Rep 221; (1872), LR 7 Exch 111; 41 LJEx 78; 26 LT 77; 17 Digest (Repl) 108, 224
Heyman v Darwins Ltd - [1942] 1 All ER 337; [1942] AC 356; 111 LJKB 241; 166 LT 306; 2 Digest (Repl) 492, 435
Hochster v De la Tour - [1843-60] All ER Rep 12; (1853), 2 E & B 678; 22 LJQB 455; 22 LTOS 171; 118 ER 922; 17 Digest (Repl) 103, 174
Lamb (W T) & Sons v Goring Brick Co Ltd - [1931] All ER Rep 314; [1932] 1 KB 710; 101 LJKB 214; 146 LT 318; 39 Digest (Repl) 643, 1513
Megevand, Re, Ex p Delhasse - (1878) 7 ChD 511; 47 LJBcy 65; 38 LT 106; 36 Digest (Repl) 444, 151
Melachrino v Nicholl and Knight - [1918-19] All ER Rep 857; [1920] 1 KB 693; 89 LJKB 906; 122 LT 545; 17 Digest (Repl) 110, 242
Nash v Dix - (1898) 78 LT 445; 35 Digest (Repl) 50, 452
Pole v Leask - (1860), 28 Beav 562; [1861-73] All ER Rep 535, on appeal, HL; (1863), 33 LJCh 155; 8 LT 645; 1 Digest (Repl) 310, 1
Rabone v Williams - (1785) 7 Term Rep 360, n; 101 ER 1020; 1 Digest (Repl) 666, 2333
Roper v Johnson - (1873) LR 8 CP 167; 42 LJCP 65; 28 LT 296; 17 Digest (Repl) 110, 238

Hearing date: 13, 14, 15, 16, 20, 21, 22, 23, 27, 28 February, 1 March 1967
Judgment date: 26 April 1967

---

Decision by:
Lord Pearson

My Lords, there are only two questions to be dealt with, one relating to an alleged agency of a contracting party for an undisclosed principal, and the other relating to the assessment of damages for breach of the contract. In view of the length and complexity of the case counsel were requested to confine their arguments in the first instance to these two questions, postponing any argument on other questions raised in the appeal. A similar course had been taken in the Court of Appeal ([1965] 3 All ER 273, [1966] 1 QB 650 at p 658). On consequence of your lordships' conclusion on the agency question, the other questions became immaterial and were not argued or considered, and they will be referred to only so far as may be necessary for the purpose of explaining the course of the proceedings.

The appellants are an American corporation, named Garnac Grain Co Inc, who will be referred to as "Garnac". The respondents are an English company named H M F Faure & Fairclough who will be referred to as "Faure", and an American corporation, named Bunge Inc, who will be referred to as "Bunge". Two other American corporations come into the story, one being Allied Crude Vegetable Oil Refining Corpn, who will be referred to as "Allied", and the other (playing only a minor part) being Gersony Strauss Co Inc, who will be referred to as "Gersony". The litigation arose from the financial collapse of Allied, which occurred on 18 November 1963, and caused very heavy losses to the merchants (including Garnac, Faure and Bunge) who had been dealing with and making loans to Allied.

Allied had carried on business at Bayonne, New Jersey, as suppliers in a very large way of vegetable oils and animal fats. They would buy oils and fats often in comparatively small quantities, from the producers in the interior of the United States; they would accumulate stocks of these commodities in tanks owned by two warehousing companies in Bayonne; and they would sell the stocks in large consignments to merchants, primarily for export to consumers overseas. The consumers included Unilever (Raw Materials) belonging to the Unilever group of companies and having depots or wharves at Bromborough (on the Mersey) and Purfleet (on the Thames) and making large purchases of the commodities from time to time. Other consumers were governmental agencies in developing countries in Asia and Africa. The business was attractive to the merchants, and they were willing to fall in with suggestions from Allied as to the transactions to be undertaken and the modes of carrying them out. In particular Allied, who needed finance for buying and collecting the stocks, were able to insist that the merchants, if they were to have the business, must make loans to Allied. The merchants made their loans normally on the security of "revolving" warehouse receipts for specified quantities of the commodities and in anticipation of participating in impending or projected transactions in the commodities. The transactions were so large that the merchants would not wish to be "long" of the commodities, and so a sale by Allied to the merchants and a re-sale by the merchants to the consumers would be negotiated concurrently and a "string" of purchases and sales would be arranged. In the simplest form a string would contain only three parties-Allied as first sellers, the merchants as buyers and re-sellers and the consumers as last buyers; but Allied operated in complicated and devious ways and might arrange to have more than three parties in a string.

A difficult situation would arise if the hoped-for transaction fell through, the negotiations with the consumers being unsuccessful. In such a situation Faure, if they were the merchants concerned, would expect to participate in a later transaction and might enter into a strange pair of contracts with Allied of a circular or "back-to-back" character. Allied would agree to sell a quantity of the commodity to Faure at a stated price, and Faure would agree to sell a like quantity of the same commodity to Allied (or sometimes nominally to a subsidiary company of Allied) at a higher price, which was usually $2 per ton higher. This circular or back-to-back transaction would give to Faure a remuneration for making their loan, in addition to the interest charged for it, and was considered by Faure to have further advantages as a step on the way to participation in a later transaction of a normal commercial kind and as tying the loan to trading. Faure were used to entering into pairs of contracts of this character with Allied, but Garnac had no experience or knowledge of them. There was evidence that Bunge also entered into such pairs of contracts with Allied, but apparently not in connexion with loans of money to Allied. The merchants dealing with Allied were making good profits and were not incurring any serious risks so long as Allied remained solvent and able to fulfil their contracts. Even if Allied became insolvent, the merchants would still be protected (except against falls in the market price) by their warehouse receipts so long as these were covered by actual stocks of the commodities in the warehouses.

The contract sued on was one of four contracts made on 15 July 1963, which will be referred to as contracts A, B, C and D. The parties were Allied, Gersony, Garnac and Faure. Each contract was for the sale of fifteen thousand long tons of prime steam lard complying with Unilever specifications for shipment in December, 1963, or January, 1964, at a price cif Bromborough/Purfleet and on the conditions of contract form 34 of the London Oil and Tallow Trades Association. Contract A was for sale by Allied to Gersony at a price of $191 per ton. Contract B was for sale by Gersony to Garnac at a price of $193 per ton. Contract C was for sale by Garnac to Faure at $195 per ton, and this was the contract sued on. Contract D was for sale by Faure to Allied at $197 per ton. Thus Allied were both first sellers and last buyers in this string of contracts, and the four contracts would have formed a "circle" under cl 14 of contract form 34, but for the fact that in these contracts (at any rate in contract C) cl 14 was struck out. If cl 14 had been retained as a clause of the contract, only price differences would have been payable and as between buyers and sellers in the circle the non-delivery of documents by each seller to his buyer would not have been considered a breach of contract. That is subject to the question, which has not been discussed and on which I express no opinion, whether the insolvency of Allied would have affected the operation of cl 14. Without cl 14, there would still be an expectation that the parties would be content with payment of differences, but, subject to the questions raised in the action, either party to any of these four contracts would be entitled to require literal performance of the contract by delivery of documents and payments of the price.

In the event things went wrong and the parties' expectations were disappointed. Allied had their financial collapse on 18 November, 1963, before the time for shipment (December/January) under the four contracts of 15 July 1963. Allied were insolvent and unable to perform their contracts: they could not deliver documents in respect of lard under contract A and they could not take up and pay for documents in respect of lard under contract D. The merchants who had been lending money to Allied suffered heavy losses. They had believed themselves to be secured, but in fact they had no security because the stocks which ought to have been in the warehouses covering the revolving warehouse receipts were not there. Faure were in grave difficulties and came under the control of their creditor banks. Gersony went into liquidation. Garnac and Bunge were affected to some extent, but less severely. There remained outstanding, subject to the questions raised in the action, the rights and obligations under contract C. Faure were entitled to have the documents delivered to them by Garnac under contract C, and in default of such delivery to claim damages for non-delivery. Owing to the insolvency of Allied and Gersony, Garnac could not obtain shipping documents from Gersony, and so were unable to effect delivery to Faure. The market price at all material times was above the contract price, because the withdrawal of Allied as a large collector and supplier of lard caused a scarcity and a consequent rise in the price.

There is therefore a claim by Faure as the buyers under contract C, or by Bunge who are assignees of Faure, against Garnac for a very large sum of damages for non-delivery of the shipping documents under contract C. Prima facie the claim is well-founded because the contract was not fulfilled. This claim was made by way of counterclaim in the action, which had been commenced by Garnac. Garnac's defence to it was that contract C was unenforceable against them, and had been or should be rescinded, on either or both of two grounds:

(i)

that Garnac were induced to enter into the contract by fraudulent misrepresentations made by Allied and by Faure, to the effect that the transaction, of 15 July 1963, was a normal commercial transaction, and that Faure were re-selling to Unilever and were not re-selling to Allied.

(ii)

that Faure in making the contract acted as agents for Allied as undisclosed principals, that Garnac were induced to enter into the contract by fraudulent misrepresentations made by Allied, and that the fraud of the undisclosed principals rendered the contract unenforceable by the agents.

It was conceded at the hearing in the Court of Appeal ([1965] 3 All ER 273, [1966] 1 QB at p 658) that Bunge as assignees of Faure could not in any better position than Faure.

At the trial before Megaw J Garnac failed on the first ground, because the judge held that Faure had not made any fraudulent misrepresentation, but Garnac succeeded on the second ground. The judge decided that Faure in making contract C acted as agents for Allied as undisclosed principals, that Garnac was induced to enter into the contract by fraudulent misrepresentations made by Allied, and that the fraud of the undisclosed principals rendered the contract unenforceable by the agents. Accordingly, he gave judgment in favour of Garnac on this issue.

I will deal separately at a later stage with the question as to the assessment of damages.

Faure and Bunge appealed to the Court of Appeal ([1965] 3 All ER 273, [1966] 1 QB at p 658). Garnac did not challenge the judge's finding that Faure did not make any fraudulent misrepresentation, and Garnac relied solely on the second ground. The Court of Appeal ([1965] 3 All ER 273, [1966] 1 QB at p 658)(4) concentrated on the issue of agency, because, if it were decided that there was no agency, Faure and Bunge would succeed with their counterclaim and would not need to establish their other contentions. Their principal other contentions were that Allied had not made fraudulent misrepresentations or had not thereby induced Garnac to enter into the contract, and that Garnac had affirmed the contract. The Court of Appeal ([1965] 3 All ER 273, [1966] 1 QB at p 658) decided that there was no agency and gave judgment accordingly in favour of Faure and Bunge on their counterclaim for damages for breach of contract C.

Were the Court of Appeal ([1965] 3 All ER 273, [1966] 1 QB at p 658) right in deciding that there was no agency?

The law to be applied is the law relating to the creation of an agency relationship. The cases cited included Rabone v Williams; Pole v Leask; Re Megevand, Ex p Delhasse; Nash v Dix, and W T Lamb & Sons v Goring Brick Co Ltd. These cases illustrate the operation of the principles involved, but do not afford any very clear description of them. Accordingly, reference was made to textbooks, especially Bowstead On Agency (15th Edn) ch. 1, arts. 2 and 3, the American Restatement title Agency (2nd Edn) Topic 1, para 1, and Williston On Contract (3rd Edn) vol. 2, para 274. There was not in the argument any dispute as to the law, and I think that so much as is required for the purposes of the present case can be shortly stated. The relationship of principal and agent can only be established by the consent of the principal and the agent. They will be held to have consented if they have agreed to what amounts in law to such a relationship, even if they do not recognise it themselves and even if they have professed to disclaim it, as in Re Megevand, Ex p Delhasse. The consent must, however, have been given by each of them, either expressly or by implication from their words and conduct. Primarily one looks to what they said and did at the time of the alleged creation of the agency. Earlier words and conduct may afford evidence of a course of dealing in existence at that time and may be taken into account more generally as historical background. Later words and conduct may have some bearing, though likely to be less important. As to the content of the relationship, the question to be asked is: "what is it that the supposed agent is alleged to have done on behalf of the supposed principal?" In this case Faure is alleged to have entered into contract C on behalf of Allied. That would mean that the rights acquired and obligations assumed by Faure as a party to the contract, though enforceable by and against Faure because they contracted in their own name without disclosing agency, would belong to Allied and would be enforceable by and against Allied, and moreover there would be other incidents of agency, such as a duty of Faure to account and their right to be indemnified. Does the evidence show that Allied and Faure consented to the creation of such a relationship?

With the assistance of counsel your lordships carried out a long investigation of the evidence. This was inevitable, as numerous documents and a large amount of oral evidence had to be taken into account and carefully considered. [His Lordship reviewed the main points which emerged from the investigation, and continued:] There remains the fact, which is not without importance, that on the face of the contract Faure were agreeing to buy from Garnac and agreeing to sell to Allied, and were therefore acting as principals and not as agents for Allied. These were not fictitious contracts. They created contractual rights and obligations. It was, indeed, unlikely, when the contracts were made, that the goods would even have to be shipped, but that was a possibility, and in the situation which has arisen Faure (and Bunge as their assignees) have a valid claim against Garnac for damages for the failure to ship the goods. In my view the decision of the Court of Appeal ([1965] 3 All ER 273, [1966] 1 QB at p 658) that there was no agency is correct.

The other issue relates to the assessment of the damages payable by Garnac for their breach of contract in failing to ship the goods and deliver the documents.

On this issue as to damages three points were argued on behalf of Garnac.

1. First, it was contended that no assessment could properly be made on the basis of the difference between the contract price and the market price on 4 February 1964 (or any other date that might be material), because there was then no market in the United Kingdom for fifteen thousand tons of lard for immediate delivery, and the evidence did not reveal any other basis for assessing damages. There was evidence that at all material times (towards the end of January and early in February, 1964), one could not buy that quantity for immediate delivery in the United Kingdom. There was, however, evidence that one could buy smaller quantities-up to two thousand tons at a time-in the USA for delivery to ports for shipment to the United Kingdom; and there was a market price, given by one witness as 242·50 dollars and by another witness as 243·60 dollars per ton, for such purchases on 4 February 1964. If one wished to buy fifteen thousand tons at those prices one would have to do so over a period. According to one witness, if one were able to buy fifteen thousand tons of lard at one time, one would have to pay a higher price. There was thus some evidence on which Megaw J could find that there was a market price and that it was 242·50 dollars per ton on 4 February. No argument to the effect that there was no market price proved was presented at the trial of the action. No such point was included in the "respondents' notice" given by Garnac to the Court of Appeal ([1965] 3 All ER 273, [1966] 1 QB at p 658). It may have been raised in the Court of Appeal ([1965] 3 All ER 273, [1966] 1 QB at p 658), but it is not mentioned in the judgments. In these circumstances I do not think that the finding of fact of Megaw J on this point can be successfully challenged.

2. Secondly, it was argued that, if the date of failure to deliver documents was the proper date for ascertaining the difference between the contract price and the market price, the date taken should have been 3 February rather than 4 February 1964. The evidence, given by Mr Fornani, the Vice-President of Bunge, was this:

"Q.:

When in the ordinary course of events would documents posted in New York on Jan. 31 reach London?

"A.:

I would say, from our experience, they would reach here on the 4th.

"Q.:

That was a Tuesday?

"A.:

Yes. It might be sooner. I would say three days would be frequent, but four days certainly."

I think it is clear that Megaw J was entitled to find on that evidence that the date of the breach of contract was 4 February being the latest date on which the shipping documents might be expected to arrive.

3. Thirdly, it was argued that on the facts of this case the proper date for ascertaining the difference between the contract price and the market price was not 4 February but 24 January 1964, because that was the date on which Garnac's refusal to perform contract C was (as Garnac allege) accepted by Bunge as a repudiation of the contract.

Only a few documents are relevant to this point. On 17 January 1964, Garnac's solicitors wrote letters to faure and Bunge, saying that Garnac, as a result of their investigations, were entitled to rescind and thereby did rescind the contract.

On 24 January 1964, Bunge issued a writ against Garnac, claiming:

"1.

A declaration that [the contract] the benefit of which has been assigned to the plaintiffs is valid and subsisting.

"2.

Damages for breach of such contract."

Also on 24 January 1964, Bunge's solicitors wrote a letter to Garnac's solicitors, in which they said:

"Your letter gives no grounds for your clients' claim to rescind the contract nor does it explain why this claim should be put forward at this late stage ... In these circumstances, we do no more than put on record that our clients regard this claim as inherently unmeritorious and improbable and reserve all their rights."

The writ was not served, and was not mentioned in the letter. The first question that arises is one of construction. It is argued that by the issue of the writ, claiming damages as well as the declaration, Bunge were accepting Garnac's refusal to perform the contracts as a repudiation of it and were claiming damages for the wrongful repudiation. As a matter of construction I am unable to accept this argument. It would mean that Bunge were by this writ electing to treat the contract as terminated-that they were rescinding it (Heyman v Darwins Ltd ([1942] 1 All ER 337 at pp 340 (Lord Simon), 350 (Lord Wright), [1942] AC 356 at pp 361, 379), per Viscount Simon LC and per Lord Wright). It seems to me that the writ, primarily claiming a declaration that the contract is valid and subsisting, must mean that Bunge are treating the contract as remaining in force and are refusing to treat it as terminated.

If it be assumed, however, that as a matter of construction the claims on the writ are capable of meaning that Bunge elected to treat Garnac's refusal to perform the contract as a repudiation of it, two further questions arise.

(i)

Could the issue of the writ, without service of it, constitute an election? The answer seems to me not clear and I am expressing no opinion.

(ii)

If Bunge did on 24 January by the mere issue of the writ elect to treat Garnac's refusal to perform the contract as a repudiation of it, so that the contract was rescinded by Bunge on 24 January does that alter the date for ascertaining the difference between the contract price and the market price? If the contract continued, the proper date for that purpose would be 4 February. If the contract was rescinded by Bunge on 24 January would that become the proper date? Both on principle and on authority the answer is "No". If the contract had been duly carried out by Garnac, Bunge would have had the goods (to be exact, shipping documents covering the goods) on 4 February. By Garnac's breach of contract Bunge have been deprived of the market value which the goods would have had on 4 February and the measure of damages is the difference between that value and the contract price which they would have had to pay. That is the principle. It is subject to a qualification, that if the buyer had a reasonable opportunity of mitigating the damage by buying the goods at a lower price at an earlier date (after the acceptance of repudiation but before the contract date for performance), a reduction of the damages may be appropriate. Both the principle and the qualification are stated in a series of cases: Hockster v de la Tour ([1843-60] All ER Rep 12 at pp 14, 15); Frost v Knight ([1861-73] All ER Rep 221 at p 224, (1872), LR 7 Exch 111 at p 113); Roper v Johnson ((1873), LR 8 CP 167); Melachrino v Nickoll and Knight ([1918-19] All ER Rep 857, [1920] 1 KB 693). The qualification does not assist Garnac here. There was no proof that Bunge or Faure had any reasonable opportunity of buying fifteen thousand tons of lard between 24 January and 4 February at a lower price than $242.50 per ton.

In my opinion, the appeal fails on the issue as to the assessment of damages as well as on the issue as to agency and should be dismissed.

I think that the appeal should be dismissed with costs, but only one set of respondents' costs should be payable by the appellants.

There is another appeal, which may be described as a precautionary appeal, by Bunge against Faure, asking that, if Garnac should succeed in the main appeal and the judgment in favour of Bunge against Garnac should be set aside, the alternative judgment in favour of Bunge against Faure for damages for breach of warranty should be restored. Counsel agreed that, if the main appeal were dismissed, this other appeal should be dismissed with no order as to costs. I think that that should now be done.

Appeals dismissed.