DS-Rendite-Fonds Nr.106 VLCC Titan Glory GmbH & Co. Tankschiff KG and others v. Titan Maritime S.A. and others [2013] EWHC 3492

In this recent decision, the English Court repeated the principles that it will apply when asked to construe commercial contracts. The decision also serves as a rare example of an instance in which the test for rectification of a contract was met.

The background facts

Following the collapse of the market at the end of 2008 and beginning of 2009, the Charterers of a fleet of eight VLCCs found themselves in financial difficulty and fell behind on their hire payments. Following discussions with the Owners, the parties eventually signed a Charter Restructuring Agreement (“CRA”) in March 2010. Unfortunately, in January 2011 the parties fell into a dispute over the meaning and effect of certain clauses of the CRA, which then became the subject of litigation.

In the discussions leading up to the CRA, the Owners explained to the Charterers that they needed to receive USD 22,000/day per vessel in order to operate the vessels, as well as service the loans taken out to finance them. The CRA accordingly provided for hire to be paid monthly in advance at the higher of the Floor Rate (USD 22,000/day per vessel) and the Market Rate. This Market Rate for each month was to be calculated by taking 3.35% off the Clarkson Index for the previous month. In addition, a semi-annual adjustment exercise was to be undertaken in order to factor in that the actual market rate in a given month might vary significantly from the Clarkson Index for the previous month.

Unsurprisingly, it was not long before the Clarkson Index fell below the Floor Rate of USD 22,000/day. At the next semi-annual adjustment, the Charterers contended that “the average of the Market Rates for the previous period of 6 months” (for the purpose of the adjustment) was simply the average of 3.35% below the Clarkson Index rate for each month, even if this was less than USD 22,000/day. Owners contended that the daily rate input for each month for the purpose of the adjustment should be the higher of (i) USD 22,000/day and (ii) 3.35% below the Clarkson Index. At the trial, the Owners argued that the Charterers’ construction changed the agreement from one in which the parties agreed to track the Clarkson Index, subject to a floor of USD 22,000, into a simple agreement to track the Index.

Construction of the contract

Mr Justice Hamblen repeated the test for construction of commercial contracts. This is to consider what a reasonable person, having the background knowledge available to the contracting parties, would have understood themselves to be agreeing by using the language they used in their contract. He cited with approval BMA Special Opportunity Hub Fund Ltd v. African Minerals Finance Ltd [2013] EWCA Civ 419 (see Shipping E-Brief Autumn 2013) and repeated that there exists a principle of construction that commercial parties who agree a contract intend the words used to mean what they say. It is only where there are two possible constructions that a court is entitled to prefer the construction which is more consistent with “business common sense”.

The Judge held that whilst the Owners’ construction made far more commercial sense than the Charterers’ construction, he was unable to, and did not, accept that a reasonable person would have understood the words used to mean “Market Rate or Floor Rate as applicable” when they in fact only said “Market Rate”, in the semi-yearly adjustment clause (as the Owners contended). Thus, Mr Justice Hamblen concluded that the true construction of the CRA was as contended for by the Charterers. He therefore went on to consider the Owners’ claim for rectification of the CRA on the ground of common mistake.

Rectification

The law on recification of contracts on the grounds of common mistake was summarised in Chartbrook v. Persimmon by the House of Lords. The party seeking rectification must show that:

  1. The parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the document to be rectified;
  2. There was an outward expression of agreement;
  3. The intention continued at the time of the execution of the instrument sought to be rectified; and
  4. By mistake, the instrument did not reflect that common intention.

Applying the law to the facts of the case, Mr Justice Hamblen found that it was made clear to the Charterers at the outset, and acknowledged by them, that each Owner required sufficient income to meet its financial commitments. In fact, the Charterers’ first proposal, and the Owners’ subsequent counter proposal, made reference to a “Floor Rate” (referred to as such), below which the hire not deferred (and payable monthly) would never fall. By the time the parties met in December 2010, it was agreed that the Floor Rate would be USD 22,000/day. The point of difference between Owners and Charterers was whether the USD 22,000 per vessel per day would be paid to Owners directly, via a minimum monthly cash-flow, or indirectly (after the fact) as a guaranteed minimum average over 12 months. At the meeting in December 2010, it was agreed that the Floor Rate would be paid upfront, and that it was not subject to any downward adjustment. Mr Justice Hamblen thus found that there was an accord that was outwardly and objectively expressed. He also found on the facts that there was no evidence to suggest any change of mind on the part of the Charterers, still less any attempt to persuade the Owners to resile from what had been agreed. Yet, by mistake, the CRA did not reflect this common intention. In light of these findings, the Judge held that the Owners’ claim for rectification would succeed.

Comment

The case demonstrates that whilst the English Court is generally inclined to hold parties to the exact terms of their bargain, it remains pragmatic in its approach to commercial contracts and will, in the right circumstances, be willing to order that a contract should be rectified to reflect the true intention of the parties. It is also worthwhile to note that although the CRA contained an entire agreement clause, this did not prevent the Court from ordering rectification of the contract.