In a decision dated 16 December 2015, the English High Court considered whether there was sufficient clarity in an agreement allowing for delayed payment of gasoil.

The facts and arbitration history

The (Claimant) Seller sold gasoil to the (Defendant) Buyer on an ex-works basis with delivery into the Buyer’s trucks at Porto Romano, Albania.

The Buyer wanted to purchase an asset of the Albanian national oil company and, in order to facilitate the purchase, the Seller agreed a different financing regime with the Buyer. Under the regime, 50% of the price was payable in advance and 50% within 90 days of delivery. There was a US$5 million credit limit on the facility and the Buyer provided the Seller with a second priority mortgage over some of its real property as security.

In practice, this arrangement meant that the Buyer obtained twice the value of cargo that it actually paid for. The facility was used 11 times between 21 January 2013 and 25 February 2013, when the US$5m limit was reached.

The Seller’s structured trade finance manager had agreed the facility with the Buyer and reminded them of the repayment deadline before it expired but the Buyer failed to pay within the 90 day period. The Buyer admitted that sums were due, and promised to make the repayments but only a few were ever made.

The Seller’s lawyers wrote to the Buyer on 24 July 2013 and demanded US$4.4m. The Buyer responded to the Seller directly and admitted to US$3.5m of the debt. After further exchanges, the Buyer’s Head of Finance confirmed the Seller’s calculations and in an email dated 31 July 2013, admitted that the remaining US$800,000 was due and outstanding. However, no repayments were made.

Four issues were raised in defence and dismissed by the Court:

  1. The Court disagreed with the Buyer’s submission that the amounts and the due date were subject to discussion, and that there was a degree of flexibility on repayment, as submitted by the Buyer. The Court considered that the sale contract and deferred payment agreement were clear, and the Buyer had not particularised their allegation of flexibility
  2. The Buyer also argued that, contrary to the principle of cooperation and flexibility agreed between the parties, the Seller had refused to engage in good faith discussions. However, no such principle of cooperation and flexibility was found to have been agreed. The Court also rejected the suggestion that flexibility should be implied into the agreement (the written terms being silent on the issue) and held that the Seller had in any event engaged the Buyer into discussions on a number of occasions
  3. The Buyer disputed the significance of the admission in the email of 31 July, and argued that the Head of Finance did not have authority to make such an admission. The Court rejected these arguments finding that the relevant individual would likely have had actual or apparent authority to make the admission. They also rejected the suggestion that the admission was not significant
  4. Finally, the Buyer did not plead a positive case, but put the Seller to proof on the quantum of their claim. Again, the Court dismissed the Buyer’s defence, and found in favour of the Seller 

Accordingly, judgment was given to the Buyer in the full amount of their claim.

Comment

In the current difficult market, this judgment does serve as a reminder of the potential difficulties when extended and vague credit terms are afforded without formality on the terms being agreed.