This case is important for shipowners and marine fuel suppliers entering into bunker supply contracts as it highlights the need for contracting parties to clearly identify their counterparties. Taking such steps will eliminate costly assumptions that could give rise to unintended contractual relationships and the risk of litigation.
The recent Singapore High Court decision of Equatorial Marine Fuel Management Services v MISC Berhad1 concerned whether the defendant, a substantial shipowner and operator, had to pay the plaintiff, a marine fuel supplier, for bunkers supplied to the defendant’s ship. The US$21 million dollar question hinged on what role a company called Market Asia Link Sdn Bhd (MAL) played and whether it was acting as the defendant’s agent.
The dispute emerged in 2008 after Equatorial Marine Fuel Management Services (EMF) had supplied MISC Berhad (MISC) with US$21 million worth of bunkers to its vessels through brokers. EMF proceeded to initiate legal action against MISC after it chose not to pay for the bunkers.
The role MAL played in the facilitation of the bunker supply contracts was crucial in determining liability. EMF claimed it was clear from the evidence that MAL was acting as MISC’s agent when it entered into the contracts and therefore MISC was liable as principal for payment. Conversely, MISC claimed it was not liable for payment because MAL was not its agent and MISC was not a party to the bunker contracts. EML must therefore look to MAL, its contractual counterparty, for payment.
The key issue for consideration was whether MISC had granted actual authority to MAL to act as its agent in respect of the contracts.
Did MAL have actual authority to enter into the contracts on MISC’s behalf?
EMF invited the court to infer that actual authority had been granted by MISC to MAL to go into the market and purchase bunkers on its behalf. EMF attempted to persuade the court that MISC had approved MAL as its registered bunker supplier on the basis that:
- If a proper assessment of MAL’s suitability had been made by MISC, it is unlikely the MAL’s application would have been granted.
- MAL lacked both capital and experience in the supply of bunkers.
- It was “incredible” that MAL had risen to become the major bunker supplier to MISC having had no prior experience or track record as a bunker supplier.
- The bunker contracts were unprofitable for MAL.
MISC countered that:
- The approval of MAL’s application to supply bunkers, even if insufficiently considered and improperly granted by MISC, was no basis for the inference that MISC granted authority to MAL to act as an agent.
- There was nothing untoward about the number of contracts that MISC had awarded to MAL given that MAL was the lowest bidder on most occasions. Where a lower bidder was received, the contract was awarded to the other bidding party.
- The fact that the contracts were unprofitable to MAL reinforced the possibility that they were a bargain for MISC and explained why MAL became a major bunker supplier to MISC.
The court preferred MISC’s arguments and decided that the evidence did not support an inference that MISC authorised MAL to act as its agent. The court noted that since MISC had put itself in the position of getting cheap oil from MAL, it would have been inconsistent with that objective for MISC to have granted MAL authority to act as its broker with authority to make more expensive contracts on its behalf. Consequently, EMF’s claim was dismissed.
This decision is important as it illuminates the dangers that emerge when contracting parties are not certain of the identity of their counterparties. It highlights that it is dangerous to make assumptions that one party is acting as another’s agent.
Where contractual negotiations involving counterparties are concerned, due diligence should be exercised so as to make clear beyond doubt who are the parties to that contract. Intermediate sellers, buyers, brokers and agents should always be identified to avoid unintended contractual relationships and the associated risk of litigation.