Garnac Grain Company Inc. v H. M. F. Faure & Fairclough Ltd

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Reid,Lord Morris of Borth-y-Gest,Lord Pearce,Lord Wilberforce,Lord Pearson
Judgment Date26 April 1967
Judgment citation (vLex)[1967] UKHL J0426-4
Date26 April 1967

[1967] UKHL J0426-4

House of Lords

Lord Reid

Lord Morris of Borth-y-Gest

Lord Pearce

Lord Wilberforce

Lord Pearson

Garnac Grain Company Incorported
and
H. M. F. Faure & Fairclough, Limited and Others
Bunge Corporation
and
H. M. F. Faure & Fairclough, Limited

Upon Report from the Appellate Committee, to whom was referred the Cause Garnac Grain Company Incorporated against H. M. F. Faure & Fairclough Limited and others, that the Committee had heard Counsel, as well on Monday the 13th, Tuesday the 14th, Wednesday the 15th, Thursday the 16th, Monday the 20th, Tuesday the 21st, Wednesday the 22d, Thursday the 23d, Monday the 27th and Tuesday the 28th, days of February last, as on Wednesday the 1st day of March last, upon the Petition and Appeal of Garnac Grain Company Incorporated, whose registered office is situate at 1 Whitehall Street, New York 4, in the United States of America, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 30th of June 1965, so far as therein stated to be appealed against, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order, so far as aforesaid, might be reversed, varied or altered, and that the Petitioners might have the relief prayed for in the Appeal or such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the case of H. M. F. Faure & Fairclough Limited and Bunge Corporation, lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:

It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 30th day of June 1965, in part complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondents one set of Respondents' Costs, that is to say the Respondents' Costs in respect of the said Appeal up to, but not exceeding, the Costs that would have been incurred if the Respondents had jointly employed the same Agents, one leading Counsel, and two junior Counsel: And it is also further Ordered, That the Appellants do pay, or cause to be paid, the amount of such Costs as to one half thereof to the Respondents H. M. F. Faure & Fairclough Limited, and as to one half thereof to the Respondents Bunge Corporation, the amount of such Costs to be certified by the Clerk of the Parliaments.

Lord Reid

My Lords,

1

I have read the speech of my noble and learned friend, Lord Pearson. I agree with it and have nothing to add. I shall therefore move that the appeal be dismissed.

Lord Morris of Borth-y-Gest

My Lords,

2

I have had the advantage of reading the speech prepared by my noble and learned friend. Lord Pearson. I am in agreement with it and I would dismiss the appeal.

Lord Pearce

My Lords,

3

I have had the advantage of reading the speech of my noble and learned friend, Lord Pearson with which I entirely agree. I would therefore dismiss the appeal.

Lord Wilberforce

My Lords,

4

I concur.

Lord Pearson

My Lords,

5

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. In 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.

6

The Appellants are an American corporation, named Garnac Grain Company Incorporated, who will be referred to as "Garnac". The Respondents are an English company named H. M. F. Faure & Fairclough, Limited, who will be referred to as "Faure", and an American corporation, named Bunge Incorporated, who will be referred to as "Bunge". Two other American corporations come into the story, one being Allied Crude Vegetable Oil Refining Corporation, who will be referred to as "Allied", and the other (playing only a minor part) being Gersony Strauss Company Incorporated, who will be referred to as "Gersony".

7

The litigation arose from the financial collapse of Allied, which occurred on the 18th 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.

8

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) Limited, 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.

9

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 connection with loans of money to Allied.

10

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.

11

The contract sued on was one of four contracts made on the 15th 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 15,000 long tons of prime steam lard complying with Unilever specifications for shipment in December, 1963, or January, 1964, at a price C.I.F. 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 Clause 14 of Contract Form 34 but for the fact that in these contracts (at any rate in Contract C) Clause 14 was struck out. If Clause 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...

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