In AS Klaveness Chartering v Pioneer Freight Futures Co., Ltd, Pioneer Metals Co., Ltd [2009] EWHC 3386 (Comm), the High Court considered a claim by AS Klaveness Chartering (“Klaveness”) for sums said to be due under a series of forward freight contracts entered into between it and Pioneer Freight Futures (“PFF”) which were guaranteed by Pioneer Metals Ltd (“PM”).
Background facts
In December 2008, the parties entered into discussions to enter into a novation agreement pursuant to which Klaveness would take over certain swap positions of PFF involving a third party – Duferco Shipping SA (“Duferco”) – in respect of which PFF was significantly in the money. The parties did this because although Klaveness owed PFF an amount in respect of the December 2008, PFF was significantly out of the money under various forward freight agreement governed by the 1992 ISDA Master Agreement (Multi Currency – Cross Border) (the “ISDA Master Agreement”) entered into with Klaveness and would owe much larger sums to Klaveness in January 2009 and beyond. During the negotiations, it was agreed that the December 2008 payment owed by Klaveness to PFF would be “washed out”.
Notwithstanding that the commercial negotiations were continuing between the parties as to the Duferco novation, on 30 December 2008, PFF invoiced Klaveness for the December 2008 unpaid amount and, on 6 January 2009, issued cure notices when this amount was unpaid. Klaveness did not pay the invoiced December 2008 payment on the basis that the parties had agreed the December wash out under the soon to be finalised novation agreement.
Following receipt of the invoice for the December 2008 payment, a telephone conversation took place on 30 December between Mr. Richter (Klaveness’ trading manager) and Mr. Chen (in charge of PFF’s back office operations).
The ruling
In relation to such telephone conversation, Mr. Justice Christopher Clarke stated as follows:
“19 In paragraph 20 of his second statement Mr. Chen accepts that it was agreed that the novation would include the December Settlement Sum but says that he cannot remember expressly agreeing that the settlement for December would not take place pending the conclusion of the novation. He says that it was his understanding that:
“We were both working on the novation deals and that if the deal was concluded the December payment would be netted off as part of the deal. It would therefore be fair to say that it was implicitly agreed that I would not chase for the December payment whilst these discussions were ongoing”.
20 I am quite satisfied that there was an explicit discussion about the December payment. The whole reason for Mr. Richter’s call was to deal with the invoice which had, unexpectedly, demanded payment of the December Settlement Sums; it is most unlikely that Mr. Richter and Mr. Chen did not talk in terms about the December Settlement. I am also satisfied that the agreement was that the Settlement for December would not take place pending the conclusion of the novation agreement.
21 I reach that conclusion for two reasons. Firstly, having seen him, I regard Mr. Richter as an honest and reliable witness and as someone not prepared to say anything he could not really support. Secondly, the basis of the proposed deal, which Mr. Chen was confirming was “still on” was that if the novation took place the December Settlement Sums would not be payable. If the December Settlement was to be payable the deal would, as Mr. Chen knew, either go off or, at any rate, would have to be renegotiated. In those circumstances the likelihood is that the agreement was that, pending the novation, the December Settlement would not take place since that is (a) what Klaveness would require; and (b) the result that the novation deal was intended to secure. It seems to me unlikely that matters were left on the basis that the December Settlement was to be due but PFF would not chase it.
22 There was sufficient consideration for this agreement in Klaveness’ continued preparedness to continue negotiating the proposed novation deal and the keeping open of that deal which would be of considerable benefit for PFF.
23 PFF would contend that, if there was such an agreement it amounts to an amendment, modification or waiver of the Master Agreement and must, in order to be effective be in writing: see section 9(b). I do not accept this. It seems to me that the agreement made during the conversation on 30th December may properly be regarded as a contract collateral to the Master Agreement. It was not an agreement which had any continuing effect in relation to the Master Agreement. It was a one off arrangement for a temporary suspension of the December Settlement (emphasis added). There is authority that a contract which is collateral to a contract which is required to be in writing does not itself have to be in writing. Angell v Duke (1875) L.R. 10 QB 174; City of Westminster Properties v Mudd [1959] Ch 129; Record v Bell [1991] 1 WLR 853; Chitty on Contracts , (30th ed., 2008), paragraphs 12-103 and 22-036.
25 In the light of that agreement it is necessary to consider when the December Settlement would become payable, assuming that there was no novation as envisaged (as turned out to be the case). The parties did not reach any express agreement on this question. But it seems to me that it was their obvious intention that, if the novation agreement was not to be made, PFF would be entitled to give Klaveness… reasonable notice, which could be quite short, to make payment of the December Settlement Sums. It cannot have been their intention that Klaveness… should be in immediate default in respect of the December Settlement without any notice once some undefined point had arisen at which it could be said that the negotiations for the novation had gone off (a matter capable of much dispute). No hardship would be involved in requiring such a notice nor would such a notice conflict with the basic understanding that the December Settlement would not be payable whilst the contract of novation was in negotiation. If PFF gave such a notice it would be signifying that it did not intend to go ahead with the deal proposed which assumed that the December contracts were novated.
26 If that conclusion is too bold a result to reach by a process of implication it seems to me that the same result may be achieved by application of the principles of equitable forbearance. The effect of what was discussed and agreed on 30th December was that PFF unequivocally represented that the normal operation of the FFA contracts in respect of December, including in particular the obligation to make payment, was to be suspended and that it was not going to require payment of the December Settlement Sums in accordance with the Master Agreement and the FFA contracts. Klaveness relied on that representation by not paying PFF’s invoice in respect of the December Settlement. If that non payment is to be relied on as an Event of Default or a Potential Event of Default, Klaveness will have acted to its detriment. It would be inequitable to allow PFF now to resile from its representation. PFF was entitled to bring its forbearance to an end on reasonable notice; but it never did so. It is no matter that the Master Agreement required any amendment or modification to be in writing. It is not necessary that any forbearance to enforce should be in writing in order for equitable principles to apply: MSAS Global Logistics v Power Packaging Inc. [2003] EWHC 1393 (Ch).”
Following receipt of the cure notices on 6 January 2009 (which was the date after the December 2008 payment would have otherwise been due from Klaveness to PFF), an email exchange took place between Mr. Richter and Mr. Chen in which Mr. Chen apologised for the “mistake”. As to whether the cure notices were effective, Mr. Justice Christopher Clarke stated as follows:
“32 I am quite satisfied that the notices of 6th January were not effective. Even if the December Settlement Sums were due on 5th January (which they were not: see paras 20ff above) the effect of Mr. Chen’s e-mail of 13th January was to represent to Klaveness that the cure notices were a mistake and were not therefore to be taken as having their apparent effect. If X tells Y that a notice that he has previously sent is a mistake then, in the absence of any indication to the contrary, he must be regarded as not seeking to rely on a notice which he has proclaimed to be an error. Klaveness relied on that representation by not paying the December Settlement Sum or taking any step to clarify the position and, if necessary, altering the terms of the negotiations about novation. It is not open to PFF to resile from it now.”
The novation agreement was still not agreed by the January 2009 payment date and it was then PFF’s turn to make payment to Klaveness which was not paid. There were various emails and telephone discussions between the parties during the period of 28 January to 5 February 2009 seeking to agree the sums due from PFF to Klaveness and to make clear that Klaveness was not prepared to forgo what was due to in respect of the January 2009 payments in circumstances where the Duferco novation agreements had not been signed. After finding that it was agreed between Mr. Richter and Mr. Chen in a telephone conversation on 5 February 2009 that the January 2009 payment was to be paid by PFFz to Klaveness less a deduction for the December 2008 payment due from Klaveness to PFF, Mr. Justice Christopher Clarke stated:
“55 That agreement was, in my judgment, an agreement in writing for the purposes of Clause 8(b) of the FFA contracts (“shall be paid without any deduction or set off except as permitted pursuant to the Master Agreement or otherwise as agreed by the Buyer and the Seller in writing”) since the relevant terms were contained in the e-mail of 3rd February. The acceptance of the offer was not required to be in writing: see by analogy Zambia Steel & Buildings Supplies Ltd. v James Clark & Eaton Ltd. [1986] 2 Lloyd’s Rep. 225 where it was held that a quotation incorporating an arbitration clause on its back could constitute an “agreement in writing to refer disputes to arbitration” within the meaning of the Arbitration Act 1975 even though the assent to the quotation was oral.
56 If that be incorrect it seems to me that the agreement made on 5th February may properly be regard as a collateral contract and effective as such: see the authorities cited at para 23 above (emphasis added). In any event the content of the conversation on 5th February together with the request for a revised invoice, its dispatch and acceptance without demur, coupled with the absence of any claim that Klaveness should be paying the December amounts constituted a clear representation that PFF accepted that Klaveness had a right to set off whatever Clause 8(b) of the FFA contracts said. Klaveness relied on that by not paying and by proceeding on the basis that PFF was satisfied with the setting off arrangement. PFF cannot be allowed to resile from its representation in circumstances where Klaveness can no longer pay the December Settlement Sum prior to 6th February. Such a payment, if it had been made, would have meant that, on the assumption that the December Settlement Sums were due, there was no longer any Potential Event of Default.”
PFF cited, as the reason for it’s nonpayment of the net payment due, Klaveness’ default in making the December 2009 payment. Klaveness then issued cure notices in respect of the January 2009 net payment due and ultimately designated an early termination date following non payment by PFF. On this point, Mr. Justice Christopher Clarke held as follows:
“65 PFF claims that no sum is due upon the following basis. Clause 2(a) of the Master Agreement makes it a condition precedent of any obligation to pay under section 2(a)(i) that no Event of Default or Potential Event of Default has occurred. The December instalment of $702,997.31 was due on 5th January 2009. A cure notice in respect of Klaveness dated 6th January was served on 9th January 2009. Nothing happened to invalidate that notice, as a result of which there was an Event of Default in respect of Klaveness from 15th January onwards. Accordingly PFF was from that date under no obligation to make payment and, in particular, under no obligation to make a payment in respect of January which would otherwise have become due on 6th February. As I have already held, the cure notices of 6th January were, in the light of Mr. Chen’s e-mail of 13th January, ineffective.
66 PFF further contends that, even if the cure notice was invalid there was at all material times and in any event before 6th February a Potential Event of Default constituted by the non payment of the December Sum due from Klaveness which, with the giving of a valid cure notice and the expiry of 3 London Business Days thereafter would constitute an Event of Default. For that reason there was from 5th January 2009, when the December sums became due, a Potential Event of Default in respect of Klaveness.
67 I disagree. For the reasons that I have given I am satisfied that on 30th December an agreement was reached that the Settlement Sums for December 2008 would not be payable by Klaveness…pending conclusion of the novation agreement. That agreement was supported by consideration since it was made on the footing that Klaveness would continue to negotiate the proposed contract of Novation despite the fact that no such contract had been signed by 23rd December. It was also in the circumstances of benefit to PFF that such payment would not be made since such a payment would be inconsistent with the proposed novation, which was of potential value to PFF.
68 Alternatively PFF was not, in equity, entitled to resile from its representation that the December payment was to be suspended.
69 In order for the December Settlement Sums to become due it was necessary for PFF, either as a matter of contract or in order to terminate its forbearance, to give notice to Klaveness that payment was required. But it never did so. Even if all that PFF said was that it would not chase for the December amounts that would be enough to preclude it from contending that non payment still amounted to a Potential Event of Default or that it was entitled to serve a cure notice. It could not, in equity, at one and the same time represent that it would not seek payment and rely on provisions of the contracts (Cure notice, Event of Default, Early Termination Date) which are only applicable upon the footing that the payment in question is due.
70 In any event before 6th February the parties agreed that the two December Sums should be set off against the January sums such that by 6th February there was no amount due from Klaveness which could form the basis of a cure notice leading to a Notice of Default. That renders it unnecessary to decide whether there is a Potential Event of Default if there is a non payment which would only constitute an Event of Default if three things happened, namely (i) a cure notice was given and (ii) 3 London Business Days expired and (iii) no payment was made on any of those days.”
Points of interest
The case is interesting since the High Court held that an oral agreement between the parties was binding, even though it amended the terms of Section 9(b) of the ISDA Master Agreement which requires amendments to be in writing and was willing to enforce a collateral oral contract. Note also that the High Court allowed the parties to agree the set-off of sums due from different calendar months under a collateral oral agreement notwithstanding the Section 9(b) ISDA Master Agreement requirement for amendments to be in writing.
It is doubtful that any oral agreement between commercial parties to the ISDA Master Agreement will automatically be considered a valid amendment and this decision should be interpreted in light of its specific factual matrix. Nevertheless, it is a reminder that parties should be very careful in oral discussions with counterparties and make clear that any amendments need to be in writing to vary the ISDA Master Agreement terms and to be otherwise legally effective between the parties.
