Court orders buyer to pay million damages for terminating a contract

A new Supreme Court judgment provides clarification of a situation that frequently occurs in the Danish business community: the question of when you are entitled to extricate yourself from a contract.

The judgment concerns a dispute that arose in connection with a contract for the delivery of biodiesel which a Danish supplier and a German buyer concluded in November 2000. The Danish supplier was to produce 2,000 tons of biodiesel at a price of EUR 128 per ton in the period until the end of 2002.

On 16 July 2011, the buyer ended the contract with effect from 31 January 2002. He referred to a best price clause in the contract which the buyer believed had not been fulfilled by the supplier.

Best price clauses typically imply that if a buyer can prove that he is, without using a special agreement, able to procure an identical product at a price which is lower than the one fixed in the contract, the supplier is obliged to deliver the product at such lower price.

The best price clause was used as an argument in the case before the Maritime and Commercial Court in Copenhagen. The argument was not repeated in the Supreme Court case.

On 15 September 2001, the contract was finally ended by the buyer - 13 months before the expiry of the contract. The reason was that the Danish supplier had not yet begun the production of biodiesel in February 2001 as promised orally and that the buyer had not yet received any assurance of when the production would begin.

The supplier sued the buyer claiming damages for wrongful termination. The buyer pleaded dismissal of the claim and submitted that the supplier had been in breach of contract due to late delivery.

According to the terms of the contract between the parties, it was clear that the Danish supplier was not to deliver biodiesel until the date when its production plant was ready, and all production tests had been conducted.

The date of delivery had been subject to extensive negotiations as the parties had disagreed a lot on this point when they entered into the contract. The supplier ended up signing the contract with a flexible start date.

The Supreme Court: There was no breach

On these grounds, the Supreme Court held that delivery was not late and that there was no breach. The supplier was not in breach of contract by not yet having delivered in February 2001 due to the agreed flexibility in delivery. The extensive negotiations and the agreed flexibility in the date of delivery also meant that the contract could not be terminated for failure of basic assumptions. Also, the Supreme Court stated that the buyer should have given notice of non-conformity with the contract at an earlier stage when the production had not begun in February 2001.

Besides late delivery, the buyer submitted that the quality of the biodiesel did not meet the agreed standard. However, the Supreme Court held that the buyer had not proven that the biodiesel was of a poorer quality than agreed.

Moreover, the supplier had not set aside its duty to mitigate damages.

The Supreme Court concluded that the German buyer had broken the contract with respect to 28,000 tons of biodiesel and was to pay damages to the Danish supplier of EUR 2,700,000.

IUNO's opinion

The Supreme Court judgment shows that a hasty decision to terminate a contract may result in a large claim for damages.

Whether a breach is material depends on the percentage or temporal deviation, regardless of whether it is a defect or a delay. A decrease in value by at least 5-10 per cent of the price or a delay by at least 7-14 days may constitute a material breach depending on the situation. In general sales between businessmen, any delay is, however, essential.

The Supreme Court judgment also emphasises that it is important to give notice of non-conformity in reasonable time and that in long-term contracts, including agreements with suppliers, it is customary to incorporate a degree of flexibility in the contract.

If a contracting party wants to maintain the right to terminate the contract for material breach, it is necessary to agree on the standard of quality of the product and the date of delivery.

[Supreme Court judgment rendered on 22 May 2013]