Anticipatory breach and sale of blended cargo.

 

A victory for IISTL Member, Simon Rainey QC, leading counsel for the seller in Mena Energy DMCC v Hascol Petroleum Ltd. [2017] EWHC 262 (Comm). Disputes arose out of two sales, one of fuel oil, the other of gasoil, to an importer in Pakistan. The first shipment was of fuel oil  with a maximum  viscosity of 125 centistokes. The shipment required blending on the voyage to reduce its viscosity. On arrival at Karachi import was not permitted following sampling of the vessel’s tanks which showed that the cargo had a viscosity of 192.92 centistokes. The parties then agreed by telephone that the vessel would return to Fujairah where the cargo would be reloaded following further blending and would then return to Karachi. The buyer claimed that no final settlement had been reached but that the parties had merely agreed that if the vessel returned to Karachi by 26 November the existing bills of lading would continue to be used for calculating the price, but if it did not return by then the parties would revert to their rights under the original contract. The vessel returned to Karachi on 30 November and the buyer claimed damages for delay. The court held that the telephone agreement constituted a final settlement of all claims and counterclaims up to that point and that the seller merely undertook to use its best endeavours to ensure the vessel’s return to Karachi by 26 November. Even if the buyers were correct, the evidence showed that the cargo was in fact on spec at the time of the initial arrival at Karachi. The spot samples were drawn before any recirculation of the cargo had taken place. Running samples were more accurate than spot samples and hatch samples more accurate than samples drawn through the vessel’s closed sampling system.

 

With the second shipment, the buyers were obliged to open a letter of credit by 3 December and had failed to so. The previous day the sellers, seeing that it was clear that the buyers would fail to open the credit on time, cancelled the charterparty they had concluded for shipment. The court held that the obligation to open the credit did not depend on the existence of a charterparty, and that after 3 December, the buyer’s anticipatory breach became an actual breach for which the sellers were entitled to claim damages. In any event, the opening of a credit was a condition precedent to the seller’s obligation to supply the goods and there could be no question of the seller being in breach for failing to deliver cargo in circumstances where no letter of credit had been opened.

Shipbuilding options – worth the paper they’re written on?

Shipbuilding contracts often contain an element of “buy one, get a special offer on another”. In other words, an order for one vessel may well give the buyer an option on one or more further ships to be built at a later date. Unfortunately option provisions of this kind, can be of doubtful value, as Teekay Tankers found to its cost this week. As part of an order for four vessels from Korean builders STX, the parties included a clause aimed at giving an option on a further dozen vessels as follows:

“The Delivery Dates for each [of the] Optional Vessels shall be mutually agreed upon at the time of [Teekay’s] declaration of the relevant option … but [STX] will make best efforts to have a delivery within 2016 for each [of the] First Optional Vessels, within 2017 for each [of the] Second Optional Vessels and within 2017 for each [of the] Third Optional Vessels.”

STX went into Korean-style Chapter 11 bankruptcy, failed to build the original four ships and unsurprisingly repudiated the extra options. For the purpose of establishing its rights in the Korean administration (since recognised in England under the Model Law on Cross-border Insolvency), Teekay with the court’s permission got an arbitration award in respect of the original vessels, and in Teekay Tankers Ltd v STX Offshore & Shipbuilding Co Ltd [2017] EWHC 253 (Comm) sued for damages for the repudiation of the options. It failed in the latter.  Although it was clear that both parties had intended the option provision to have legal effect, and also that the courts disliked striking down a clause for uncertainty, this was simply too vague, since there was no way of establishing what criteria were to apply if Teekay gave notice to exercise the options and the parties could not agree dates. Cutting through a lot of verbiage, the conclusion appears to be simply this: to be sure of being able to enforce options of this kind, there is little alternative to providing for some kind of arbitration or third-party decision to be binding in the absence of some other agreement. Unpalatable, to be sure, especially to the yards, which need to maintain flexibility: but there seems little choice in the matter.

 

 

Trustees, beneficiaries and purchasers — good news all round

Good news from the Supreme Court last week for commerce: in particular, those purchasing assets from trustees. In Akers v Samba Financial Group [2017] UKSC 6 ASa Saudi businessman, held shares on trust for a company, SICLA: he disposed of the shares to Samba in satisfaction of a debt. Assuming Samba were in good faith, you might have thought there was no problem: they would take free of the trust. But SICLA was insolvent: and the liquidator sought an end-run round the rule of equity’s darling by invoking s.127 of the Insolvency Act 1986. This prohibits disposition of the assets of an insolvent company (including beneficial interests in trust property), and allows their claw-back, with only a judicial discretion to protect the alienee and no general good-faith purchaser protection. The Supremes refused to allow this attempted circumvention. Dispositions within s.127 implied dispositions by the company, not dispositions of the company’s (equitable) property by a trustee purporting to vest it in a third party. Result: purchasers, provided they are in good faith and without notice, can happily thumb their noses at alleged trust beneficiaries, even insolvent ones. Quite right too.

But there was also good news for beneficiaries. In the present case the trust was a Cayman trust; however, the shares, being shares in Saudi companies registered in Saudi Arabia, were situated in Saudi Arabia. Now, Saudi law doesn’t accept the existence of trusts. Nevertheless their Lordships made it clear that under the Hague Convention embodied in the Recognition of Trusts Act 1987, the English courts would recognise the trust (although under Art.11(d) of the Convention the question whether a purchaser of the shares took free of it would fall to be decided by the lex situs, Saudi law). We all thought that was probably the case anyway; but it’s nice to have confirmation of one’s prejudices, especially if (as here) they are sensible ones.

Standby letters of credit: fraud allegation repelled.

Robust common sense from the Court of Appeal today in Petrosaudi Oil Services Ltd v Novo Banco SA & Others [2017] EWCA Civ 9 on standby letters of credit, where  Christopher Clarke LJ satisfactorily took legal technicality in his stride to make sure the right side won.
PDVSA, a Venezuelan state oil company, signed up Petrosaudi to do some drilling work: Petrosaudi sensibly insisted on PDVSA providing a standby letter of credit from Novo Banco to cover sums which Petrosaudi certified PDVSA were “obligated” to pay them. The drilling contract stated that payments were due 30 days after being invoiced, with a “pay now, argue later” term applying in the absence of a notice within ten days that the sums stated due were disputed. A cool $129 million was invoiced to PDVSA. After 30 days it had been neither paid nor disputed, and Petrosaudi claimed from Novo Banco. At this point PDVSA intervened. They said, correctly, that the bill was disputed; that certain provisions of Venezuelan law (which admittedly applied to the contract) invalidated the “pay now, argue later” clause, and also provided, for good measure, official approval was required before any bill could be paid; and all these facts had been known to TB, the executive of Petrosaudi who certified that PDVSA was obligated to pay the $129 million. PDVSA persuaded HHJ Waksman that for that reason TB’s calling in the SLC for a sum he knew couldn’t be sued for was fraud, which meant payment from the bank wasn’t due and could be enjoined. Petrosaudi appealed. The Court of Appeal agreed with Petrosaudi: a debt could perfectly well exist (and hence be called something the debtor was obligated to pay) even if it wasn’t exigible in court yet. It followed that TB had been perfectly entitled, since he thought PDVSA’s challenge to the amount payable was baseless, to say that PDVSA was obligated to pay the full sum.

In our view, quite rightly so. One reason you demand a performance bond (which is essentially what a SLC is) rather than a simple bank guarantee of a co-contractor’s obligations is precisely to assure yourself of cash-flow by shutting out snivelling arguments that the principal debt is disputed or not payable yet, or payable subject to a set-off, or whatever. A worrying feature of the first instance decision in Petrosaudi was precisely that it dangerously extended fraud and left the beneficiary with the prospect of an undeserved hole amounting to well over $100 million in its balance sheet: not a prospect that even Petrosaudi would view with equanimity.

Claims against shipowners by physical bunker suppliers. News from Malaysia.

A familiar claim, this time in Malaysia, by Vitol, the physical bunker supplier, in respect of bunkers supplied to a vessel by OW Bunkers. Vitol sent the shipowners a notice stipulating that it had exercised a lien over the bunkers, and that it should pay the supplier and not OWB. The vessel was later arrested in Malaysia and in Vitol’s  application to amend its pleadings the Kuala Lumpur High Court in Vitol Asia PTE LTD v The Owners of the Ship or Vessel Malik Al Ashtar considered the following issues.

  1. Was OWB contracting on behalf of the owners when it entered into the contract with the Vitol for the sale of the bunkers? The court found that there was no no document conferring actual authority on OWB to contract on behalf of the defendants, nor were there any representations by the shipowners that OWB had actual or apparent authority to enter into any agreements on its behalf.
  1. Were the shipowners liable in conversion? No. The court adopted the views of Males J in The Res Cogitans [2015] EWHC 2022  that despite a clause such as cl. 11.2, there would be no claim for conversion against the shipowner as the physical supplier had consented to the use of the bunkers by the vessel. Here, Vitol knew that OWB was a trader and not an end user and that it would sub-contract with shipowners to whom the bunkers would be delivered.
  1. Was there a claim in unjust enrichment? No, Vitol’s sales order confirmation and tax invoice evidenced its intention to contract directly with OWB only, and it should look solely to OWB for payment under its contract with it.
  1. Was there a direct contract whereby the shipowners would be jointly liable pursuant to Clause L4 of OWB’s general trading terms? No. There was no evidence that the shipowners had agreed to be bound by Vitol’s terms when they entered into a direct contract for supply of the bunkers with OWB. Nor had they agreed or authorised OWB to be bound by the Vitol’s terms when OWB contracted with Vitol for the supply of those bunkers. The Canadian decision in Canpotex Shipping Services Ltd v Marine Petrobulk [2015] FC 1108 on which Vitol relied did not reflect the English position and was not binding on the Malaysian courts.
  1. Was there a lien over the vessel or the bunkers? No. There was no contract between Vitol and the shipowners so no contractual lien could arise. If there were such a lien, it would give no right to payment as against the shipowner but would only give a right to retain possession of the bunkers until payment by OWB. There was no maritime lien in respect of the supply of bunkers under either English or Malaysian law.

Upcoming in the Supreme Court

Among the all-too-numerous public law cases slated for hearing in the Supreme Court this coming term, three solid commercial appeals beckon. IPCO (Nigeria) Ltd v Nigeria National Petroleum Corp [2015] EWCA Civ 1144 is about arbitration and security for costs (hearing 2 Feb).  Wood v Capita Insurance [2015] EWCA Civ 839 (7 Feb) is yet another case on interpretation of contracts to add to the burgeoning jurisprudence which almost every  judge faced with an interpretation issue now feels constrained to mention in his judgment. And, for financial law buffs, there is Taurus Petroleum Ltd v SOMO [2015] EWCA Civ 835 (21/22 March) on the situs of a L/C debt (and an incidental question of who the creditor is). Happy days.

Bulk Carriage: Package limit or no package limit: That is the question.

The decision of the Commercial Court (Sir Jeremy Cooke sitting as a Judge of the High Court) in The Aqasia [2016] EWHC 2514 (Comm); [2016] 2 Lloyd’s Rep. 510 (noted swiftly in this blog; a picture of the vessel in question appears here) has clarified an issue that has been at the heart of cargo claim negotiations for decades, namely whether a carrier of a bulk cargo is entitled to limit his liability under the Hague Rules. Article IV Rule 5 of the Hague Rules provides that: Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with goods in an amount exceeding £100 per package or unit”.

Whilst there had hitherto been no English authority directly on point the Commercial Court adopted the approach that has been followed by courts in Commonwealth countries and by textbook commentators and held that the words “package or unit” could not be applied to bulk cargo as they were intended to refer solely to physical packages or other units such as cars. It should be appreciated in this connection that the Hague Rules were adopted in the 1920s at a time when bulk ships were not common. Consequently, it appears that a carrier of a bulk cargo may have no right to package limitation under the Hague Rules.

By the time that the Hague-Visby Rules were adopted at the end of the 1960s, bulk shipments had become common and it was recognised that the Hague Rules wording was no longer fit for purpose. Consequently, Article IV Rule 5 (a) of the Hague-Visby Rules provided that a bulk carrier could limit his liability to “666.67 units of account per package or unit or 2 units of account per kilo of gross weight of the goods lost or damaged, whichever is the higher”. The highlighted words were intended to provide a bulk carrier with limitation rights (i.e. based on weight) that were not available under the Hague Rules.

It should also be appreciated that the version of the Hague Rules that the USA adopted in its Carriage of Goods Act 1936 is also worded differently and provides that a carrier may limit his liability to”$500 per package…or in the case of goods not shipped in packages, per customary freight unit…” The phrase “customary freight unit” has been construed to refer to the unit of measurement that is customarily used to calculate the freight for that particular type of carriage (e.g. so much per ton or US Barrel etc) and not to a physical unit.

Therefore, it is important for a bulk carrier (particularly in high value claims) to determine which version of the Rules is applicable in any particular case. This is also important when the Rules are adopted by means of a Paramount Clause since there are many different types of Paramount Clauses some of which refer to the Hague Rules, some to US COGSA 1936 and some to the Hague-Visby Rules. A reference to the “Vague Rules” could be expensive!

OW Bunkers — picking up the pieces

The result of the OW Bunkers litigation in the UK Supreme Court, PST Energy 7 Shipping LLC v OW Bunker Malta Ltd [2016] UKSC 23; [2016] A.C. 1034 (noted here in this blog) is that shipowners having taken bunkers from bankrupt suppliers OW may still potentially face the prospect of being made to pay twice — once to OW because they supplied them, and once to the original sellers to OW because at the relevant time they still owned them. The argument that the original sellers somehow gave up their rights by consenting to onsale by OW is attractive but not cast-iron. The important issue now, however, is how to avoid a similar debacle in the future. Steamship Mutual have advised a change in the terms of contracts. They say: “We recommend Owners review their existing contract wordings to make clear that should their direct counterpart become insolvent, in the bunker supply context or otherwise, that payment to the party down the chain (e.g. the physical supplier) shall be permitted and discharge the debt to the insolvent party.”

With respect, we have some doubts as to whether this will necessarily work. Such an arrangement might well fall foul of the anti-deprivation principle in English insolvency law, which says that where there is an accrued debt owed to an insolvent, any provision depriving the insolvent of the right to collect that debt in the event of subsequent insolvency is presumptively ineffective: see the summary by Lord Collins in Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38, [2012] 1 A.C. 383 at [100].

A more effective strategy might be an acknowledgment in the contract of sale that in so far as the bunkers sold are not at the time of delivery owned by the seller, then any right of action is held on trust for the actual owner. Such a provision, not being triggered on insolvency, seems to us more likely to survive scrutiny. But only time will tell.

The meaning of “consequential damages” – as always, it depends on the context

Further evidence that English courts are taking a thoroughly pragmatic line with commercial exemption clauses comes from Sir Jeremy Cooke’s decision a few days ago in the shipbuilding case of Star Polaris LLC v HHIC-PHIL Inc [2016] EWHC 2941 (Comm). A new-built vessel still under guarantee suffered engine failure, found to be partly due to construction defects which were the yard’s responsibility. In the light of this finding the yard’s liability for the cost of rectification was not in issue, this being expressly allowed under the terms of its builder’s guarantee. What was disputed was a further claim by the buyers for a residual diminution in value of the vessel allegedly caused by the construction problems. The building was under the venerable SAJ form, which had it been left unaltered would under Art.IX have answered the question unequivocally in the yard’s favour (“The guarantee contained as hereinabove … replaces and excludes any other liability, guarantee, warranty and/or condition imposed or implied by the law …”). But, for reasons unclear, this clause did not appear. The yard, therefore, was thrown back on another provision in Art.IX, excluding liability for “consequential or special losses, damages or expenses”. The yard said that the alleged diminution in value was clearly consequential on the damage directly suffered and was therefore still excluded.

The buyers riposted with a mention of a number of other cases in a non-shipbuilding context, which had construed references to consequential losses as covering merely damages not immediately foreseeable and thus outside the first limb of Hadley v Baxendale (1854) 9 Ex 341. Since in the present case diminution in value had been eminently foreseeable (their argument went), it followed that there was no objection to the present claim.

The arbitrators were not impressed, and neither was the judge. Even with the stripped-down version of the SAJ that the parties had chosen to use, and even accepting the potential applicability of the contra proferentem rule in the context of commercial contracts, the context of the contract made it clear that the guarantee provision was intended to provide a complete code for the determination of the parties’ rights and liabilities, and thus that any further liabilities were to be excluded. And quite rightly too, in our respectful submission. The intention evident in a contract as a whole, rather than any minute interpretation of the words the parties chose to include or exclude, still less any mechanical exercise in substitution of words, ought to govern where interpretation is in issue.

Of Default Gas and Freedom of Contract

It’s a good day for freedom of contract as Christopher Clarke LJ handed down his judgment for Scottish Power UK Plc v BP Exploration Operating Company Ltd & Ors [2016] EWCA Civ 1043 in favour of the respondents.

The appellants, Scottish Power – the buyers of natural gas under four, almost identical long term gas sales agreements – argued they should be allowed to recover damages for a contractual breach (the underdelivery of gas) under the general law. This was in spite of a compensation mechanism within their agreements which limited the remedy for such a breach to the delivery of the entitled quantity of gas at a discounted rate (“Default Gas”), and which expressly excluded the buyer’s right to seek compensation for such a breach through any other means.

During the initial case, in considering the commercial purpose of the compensation clause in the contracts, Leggatt J thought it improbable that the parties intended a situation where the buyer would automatically receive a quantity of Default Gas as compensation for the undelivered gas and yet still be permitted to seek another remedy for the failure to deliver the very same quantity of gas that already been compensated for. Christopher Clarke LJ was in agreement and further argued, quite sensibly, that the wording of the compensation regime was clear enough that the court was obliged to give effect to it, even though it deprived Scottish Power of a right it would have otherwise had under the law.

This case (along with the recent Transocean v Providence) is rather refreshing given how one of the very cornerstones of English contract law – freedom of contract (a rather sensible and practical doctrine which provides a good deal of certainty and thus is beloved by businesses everywhere) – has been placed under some scrutiny recently.

One hopes for more cases like Scottish Power v BP on the horizon but we’ll have to wait and see.