The “Bunga Melati 5” [2015] SGHC 190

The Singapore High Court’s recent decision in The “Bunga Melati 5” examines the law of agency and the role and position of intermediate vendors and brokers in the context of contracts for the sale and purchase of bunkers.

Allen & Gledhill Partners Ang Cheng Hock, SC, Yap Yin Soon, Tan Xeauwei and Ramesh Kumar represented the successful defendant.

Key facts

The plaintiff, Equatorial Marine Fuel Management Services Pte Ltd (“EMF”), is a marine fuel supplier in the business of procuring, selling and supplying bunkers to ocean-going vessels.

The defendant, MISC Berhad (“MISC”), is one of the largest ship-owners in the world.

Market Asia Link Sdn Bhd (“MAL”) was a bunker trader and one of the registered vendors on MISC’s panel of bunker suppliers. The dispute concerned a number of bunker contracts entered into in 2008 between MAL and MISC on the one hand and MAL and EMF on the other which comprised fixed price and spot contracts for the sale and delivery of bunkers to MISC’s vessels. MISC purchased the bunkers from MAL who in turn procured the supplies from various physical suppliers including EMF through bunker broking companies such as Compass Marine Fuels Ltd (“Compass Marine”) and OceanConnect UK Ltd. At all material times, EMF did not deal with MISC.

Between 3 July 2008 and 18 September 2008, MAL entered into two fixed price contracts and one spot contract (the “Disputed Contracts”) with EMF through the brokers. From these contracts, MAL supplied a substantial amount of bunkers to MISC’s vessels pursuant to MAL’s contracts with MISC. The bunkers were delivered to MISC’s vessels by EMF. EMF’s claim concerned 22 deliveries of bunkers to MISC vessels for which it was owed a balance sum of US$21,703,059.39. Having failed to receive payment, EMF made a claim against MISC and subsequently commenced legal action against MISC for the unpaid sum plus contractual interest and costs.

The issues considered

MISC’s position was that it was not liable for the unpaid sum because it was not a party to the Disputed Contracts, and that EMF must look instead to MAL (the contractual counterparty) for payment. EMF based its claim against MISC on agency, contending that MAL was at all material times acting as MISC’s agent when it entered into the Disputed Contracts with EMF through the brokers. Alternatively, EMF relied on the principle of agency by estoppel and contended that MISC was estopped from denying MAL’s authority to act as its agent.

Accordingly, the law relating to actual authority, apparent or ostensible authority and agency by estoppel was considered by the court against the backdrop of bunker transactions where the sale chain involved intermediate sellers and buyers and brokers. Local as well as English authorities and academic opinion were reviewed.

Judgment

MAL had no actual authority to enter into the Disputed Contracts on MISC’s behalf

The court affirmed the principle that actual authority is a consensual agreement between the parties that can arise expressly or implied from the words and conduct of the parties. It can arise even if the parties do not recognise it themselves or disclaim it. The existence and scope of an agent’s actual authority must be determined by ordinary contractual principles and can be gleaned from the arrangement between the purported agent and principal. Given that actual authority is the subject of an agreement made solely between a principal and an agent, evidence showing how third parties had viewed the relationship between a principal and a purported agent will not be persuasive in showing that the purported agent had actual authority.

Being unable to produce direct evidence of actual authority, EMF invited the court to infer that actual authority was conferred by MISC on MAL to contract on its behalf or that it should be implied on the basis that MISC had knowledge that MAL would represent itself as MISC’s broker when MAL proceeded to procure the bunkers. EMF sought to rely on a number of allegations which focused on MISC’s approval of MAL as a registered bunker vendor, the manner in which the bunker contracts were awarded to MAL, the manner in which the bunker contracts were performed and the underlying relationship between MISC and MAL. However, the court was not persuaded by EMF’s arguments and found that the evidence did not support EMF’s case that MISC had ever intended to confer authority on MAL to act as its agent for procuring bunkers. In particular, the court acknowledged that although MAL was awarded a substantial amount of bunker contracts and that these contracts were shown ultimately to be unprofitable to MAL, the contracts which were awarded to MAL through MISC’s tender process were on the basis that MAL had submitted the lowest bids. As the court stated: “That these contracts were unprofitable to MAL merely reinforces the possibility that they were a bargain from MISC’s point of view”. Having found that MISC was making payments to MAL for the bunkers supplied by MAL under its bunker contracts with MISC, the court also recognised that it made no sense for MISC to also allow MAL to then purchase bunkers from third parties on its behalf: “[h]aving put itself in the position of getting cheap oil from MAL, it would have been completely inconsistent for MISC to have granted MAL authority to act as its broker to make more expensive contracts as agent on its behalf.”

MAL had no apparent authority to enter into the Disputed Contracts on MISC’s behalf

The court then considered the issue of apparent authority and approved the principles laid down by the English Court in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480. The requirement that there must be a representation by a person or persons who had actual authority to manage the business of the principal that the agent had authority, that the contractor was induced by such representation to enter into the contract and that the principal had capacity under its constitution to enter or delegate authority to an agent to enter into such contracts was affirmed by the court.

The court also stated that it would be fatal to a claim based on apparent authority if the contractor was put on inquiry and failed to make the necessary inquiries about the purported agent’s authority. The law therefore imposed a requirement that the inducement and reliance of a contractor must be reasonable.

EMF’s case hinged on an allegation that a representation was made during a telephone conversation in 2006 by an unidentified employee in MISC’s Bunker Unit to EMF’s broker, Compass Marine, that MAL had authority to contract on MISC’s behalf.

However, EMF’s contention failed at the first hurdle. After EMF’s witnesses were subjected to intensive cross-examination by MISC’s counsel, the evidence given was reviewed by the court and it agreed with MISC and rejected the evidence of EMF’s witnesses. The court found that no such representation was made as alleged by EMF (and Compass Marine).

MISC was not estopped from denying that MAL was authorised to act as its agent

The court noted that agency by estoppel is wider in scope than apparent authority in that it could arise where no representation as conventionally defined is made by the principal. The court cited two examples. The first is where the principal makes no manifestation of authority but, by conduct, intentionally or carelessly causes the belief that the agent is authorised. The second is where the principal, having notice of such belief and that it might induce others to change their positon, did not take reasonable steps to notify those others of the fact. The principle is wide enough to estop a principal from denying a purported agent’s authority simply by virtue of its silence (rather than any positive representation that the agent had authority), an argument which was very much part of EMF’s case.

Insofar as silence is concerned, the court stated that a purported principal will only be estopped from denying an agent’s authority if it was silent in circumstances under which it had a duty to speak to correct an erroneous impression created by the purported agent. However, the general duty to speak would arise only where there was a pre-existing relationship or dealings between the purported principal and the person claiming under the contract. Otherwise, as the court explained, it will place an onerous obligation on would-be principals to broadcast to the world which entities are or are not its authorised agents.

On the evidence, the court found that MISC did not owe a duty to EMF to speak as MISC had not communicated or dealt with EMF prior to EMF presenting its claim, MISC did not receive EMF’s bunker invoices nor did MISC pay such invoices. The court also found that MISC was not aware that MAL had made representations to EMF that it was MISC’s agent. As there was no legal or other relationship between MISC and EMF leading to a situation in which MISC’s silence would have encouraged EMF to treat MAL as MISC’s agent and act accordingly, the court held that an estoppel against MISC did not arise.

The court added that EMF could not in any case have reasonably relied on the alleged “representation” by silence. In this regard, the court found that as EMF had knowledge that MAL was making payments directly to EMF in respect of EMF’s bunker invoices, EMF would have been put on inquiry as to MAL’s role in the sale transactions as it is not the practice of agents or brokers to make payments for the bunkers on behalf of their principals.

Practical impact

The Singapore High Court’s decision is a timely and important reminder that contracting parties should always be alert to the identity of their counterparties, and should not hastily assume that a particular counterparty is the agent of some other principal. In such cases, a party alleging the existence of a contractual relationship will often seek to rely on the say so of one of more persons and the veracity of such assertions will have to be tested against the contemporaneous documents. If the dispute is brought before the courts, parties may face a lengthy and costly process especially if the issues can only be properly ventilated and tested at trial.

Accordingly, to minimise the risk of creating unintended contractual relationships and potential litigation, a number of points from the judgment should be noted.

Where contracts involving intermediate sellers or buyers or brokers or agents are concerned, persons involved in negotiating and making them or otherwise having authority to manage the company’s business should be vigilant and careful when explaining to other parties the role of and relationship with the intermediaries to avoid creating doubt as to the exact nature of the said relationship.

As stated in the judgment, a party’s silence could also in itself give rise to an estoppel precluding that party from denying the existence of an agency relationship. Accordingly, rather than remain silent, where a purported principal is aware of parties operating under a mistaken belief that they contracted or could contract or deal with the purported principal through an agent, it would be prudent for the purported principal to notify such parties that no such agency arrangement exists. This is particularly important when a pre-existing relationship or dealings exist between the purported principal and the person claiming under the contract.

With regard to actual authority, the arrangement between the purported agent and principal will be the critical factor in ascertaining whether an agency relationship exists. Accordingly, particular attention should be given to the drafting of the terms of the contract (if any) and the course of dealings so as not to leave any doubt as to the intended relationship to be created, whether or not it should be one of principal and agent.

Finally, when a party is seeking to enter into a contract with another through an agent, it pays to take steps to verify the agent’s authority directly with the purported principal, and such steps should be documented, whenever possible.