Trade advantage newsletter - April 2014

a commodities update April 2014 Trafigura Beheer BV -v- Navigazione Montanari SpA [2014]: transhipment of cargo by pirates during voyage and ‘in-transit loss’ After part of their cargo of premium motor oil had been transhipped during the vessel’s capture by pirates off Cotonou and Lagos, charterers looked to recover their loss from shipowners under the charterparty’s ‘in-transit loss’ (ITL) clause. The charterparty, as evidenced by a recap, was on the Beepeevoy 3 form and incorporated amended Trafigura Chartering Clauses. Clause 4 of the Trafigura Chartering Clauses, as amended in the recap, was an “In-transit loss clause” (the “ITL Clause”): “In addition to any other rights which Charterers may have, Owners will be responsible for the full amount of any in-transit loss if in-transit loss exceeds 0.5% and Charterers shall have the right to claim an amount equal to the FOB port of loading value of such lost cargo plus freight and insurance due with respect thereto. In-transit loss is defined as the difference between net vessel volumes after loading at the loading port and before unloading at the discharge port.” Also of relevance to the dispute were Clauses 46 and 52 of the Beepeevoy 3 form, the first of which incorporated the Hague Visby Rules exceptions, and the second was a Clause Paramount. The court was asked to consider: (1) was the transhipped oil (the transferred cargo) an ITL or ‘lost cargo’ for the purposes of the charterparty’s ITL Clause; and (2) if so, did the ITL clause impose strict liability on the shipowners for that transferred cargo such that shipowners could not rely on the Hague Visby Rules exceptions referred to at clause 46? Before looking at the issues in detail, the judge considered the commercial context, in particular the allocation of risk between the shipowners and the charterers. He concluded that it would be unusual if the ITL clause made shipowners strictly liable for cargo loss. He noted the effect of a similar claim made under the Bill of Lading, rather than the charterparty, and for which trade advantage April 2014 a commodities update In-transit loss continued on page 2 >>> hilldickinson.com/commodities 2 Welcome Welcome to the latest edition of Hill Dickinson’s trade advantage newsletter. This edition looks back at interesting cases over the last six months. If you wish to discuss the content of the articles or any other matter connected with the trade, please contact any of our team. Kind regards Andrew Meads >>> continued from page 1 the shipowners would benefit from the Hague Rules exceptions under the Clause Paramount. He highlighted a number of further anomalies if charterers’ case were preferred: for example, shipowners would be strictly liable for loss of cargo but not for damaged cargo. In this context, the judge turned to the two issues. Issue one: nature of the loss Charterers referred to the fact that there was a difference between the net vessel volume after loading and the net vessel volume before unloading at the discharge port - which they argued meant that the loss was an ITL under the terms of the ITL clause. Shipowners’ defence included the argument that the ITL clause did not apply to cargo which had been discharged prior to the vessel’s arrival at the discharge port. The judge considered the wording of the ITL clause so as to give it its natural business sense: ‘That which businessmen, in the course of their ordinary dealings, would give to the document.’ He accepted that shortage claims in the oil trade were frequent and yet complex to measure, and that the normal practice was to include a contractual term with a cut off point above which shipowners could not simply argue that the differential was incidental to carriage. His conclusion was that an ITL is a loss which is incidental to the carriage of oil products and certainly not a term which could be extended to include losses arising because of the action of pirates. The judge declined to define an ITL in other circumstances, considering that it was sufficiently clear for this dispute that it did not cover piracy activity. Issue two: strict liability For these purposes, the judge proceeded on the basis that he was wrong on the first issue i.e. the transferred cargo was covered by the ITL clause. Nevertheless, noting again the commercial context, he still rejected charterers’ arguments. He was swayed notably by the reference at clause 46 (the Hague Visby Rules exceptions) to the words ‘in respect of any claim made’, and he found no good reason to limit ‘any claim’ so that it would exclude claims under the ITL clause. Accordingly, if shipowners were liable for an ITL, they would be entitled to rely on the Hague Visby Rules exceptions referred to at clause 46. Jean-François Van Hollebeke jean-francois.vanhollebeke@hilldickinson.com Claire Messer claire.messer@hilldickinson.com a commodities update April 2014 3 Glencore Energy UK Ltd -v- Cirrus Oil Services Ltd [2014]: binding contracts for the sale of oil This was a claim by claimant sellers for damages from the defendant buyers for repudiation of a contract for the sale of Ebok crude oil. Arguments included whether there was a binding contract and the appropriate measure of damages. Was there a binding contract? The court was asked to consider whether sellers and buyers had concluded a binding contract. In reaching his decision the judge noted the principles set out in the Supreme Court’s decision in RTS Flexible Systems Ltd -v- Molkerei Alois Muller GmbH &Co [2010]: ‘...Whether there is a binding contract between the parties and, if so, upon what terms depends opon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend the agreement of such terms to be a pre-condition to a concluded and legally binding agreement.’ Reference was also made to the principles cited by the Court of Appeal in Pagnan SpA -v- Feed Products Ltd [1987], including: ‘… there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later ... If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty.’ The judge then turned to the evidence before him, notably an email of 3 April referred to as the sellers’ ‘firm offer’, a ‘good news’ email in response from the buyers on 4 April and detailed background on the history of the parties’/their representatives’ previous relationship. The judge had no hesitation in concluding that acceptance of the ‘firm offer’ email could result in a binding contract. The email described itself as a ‘firm offer’ and it included all the main terms necessary for a concluded contract. It further included general trading terms and conditions (the 2007 BP General Terms and Conditions for CFR sales). Similarly, the judge had no doubt in finding that the buyers’ ‘good news’ email equated to an acceptance of that ‘firm offer’. Buyers had replied before the offer’s deadline to note that their sub-buyers agreed to the cargo and buyers would revert on the ‘fine tuning’ of the contract terms so that the contracts were back to back. Despite that fine tuning, the judge found that the obvious conclusion of the email was that buyers accepted the main terms set out in sellers’ ‘firm offer’. It was clear from all the evidence that the parties intended to conclude a binding contract. He rejected any suggestion that the reference to fine tuning meant that buyers’ acceptance was subject to final agreement with their sub-buyers: ‘There could be no going back on the main terms which, in a spot contract of this kind, were clearly and sufficiently set out and agreed.’ The judge was similarly dismissive of buyers’ arguments that there was no binding contract because buyers were not fully identified in the ‘firm offer’. The judge held ‘… the parties are "masters of their contractual fate" if they are capable of being identified, even if the identity is not clearly spelt out’. It did not matter therefore that sellers’ ‘firm offer’ referred to buyers as ‘Cirrus… (Full trading name)’. He considered the identity of buyers to be sufficiently clear in the context of the parties’ discussions and exchanges, and their previous transactions. The level of damages Sellers sought the difference between the contract price and the market price at the time when the Ebok crude oil ought to have been delivered. The judge thus had to determine the price that would be paid by a ‘willing buyer to a willing seller’ for this cargo for delivery in Ghana during the contractual delivery period. He commented that ‘… it is accepted that the best evidence of market value is constituted by arm’s length deals actually made in the market. The last transaction effected effectively sets the benchmark’. But this exercise was particularly complex due to the lack of publicly available figures for deals in Ebok crude oil, a relatively new field. The judge reviewed the evidence adduced by the parties and their experts, and ‘doing the best [he] can’ he estimated an appropriate market price. Buyers were liable to sellers for the difference between that figure and the contract price. Clause 32.1 of the BP General Terms and Conditions The contract incorporated the 2007 BP General Terms and Conditions for CFR Sales, of which clause 32.1 provides: ‘… in no event [...] shall either party be liable to the other […] in respect of any indirect or consequential losses or expenses, […] whether or not foreseeable.’ 4 Buyers argued that this clause thereby excluded all liability for loss of anticipated profits, regardless of whether they were indirect or consequential losses or expenses. They further argued that the sellers’ claim for the difference between the contract price and the market price (as per s50 of the Sale of Goods Act 1979) included a profit element, particularly where sellers had not even taken delivery of the cargo from their suppliers or been held liable to their suppliers. The judge dismissed buyers’ arguments: ‘The contract price/market price differential is not a computation of lost profit. Lost profit is the difference between the total net cost to the seller of acquiring the goods and bringing them to market on the one hand and the net sale price that would have been achieved on the other.’ The effect of the Sale of Goods Act 1979 (ss50(2)-(3)) is ‘… to compensate the seller for the loss of the bargain with the buyer by computing how much worse off the seller would be, if at the time of the breach, he had sold the goods to a substitute buyer. The measure constitutes both a ceiling and a floor to the loss claim on the assumption that the seller had gone out into the market and sold at the date of breach. Movement in the market thereafter is then excluded from the calculation on the basis that any change in the figures affected thereby is the result of the seller’s own decision to play the market’ Accordingly, clause 32.1 of the BP Terms did not exclude the loss claimed by sellers. Jean-François Van Hollebeke jean-francois.vanhollebeke@hilldickinson.com Claire Messer claire.messer@hilldickinson.com The “SEACROWN”: Galaxy Energy International Ltd -v- Murco Petroleum Ltd [2013] Following late delivery of a cargo of fuel oil, the claimant buyers and the defendant sellers were in dispute as to the contractual terms agreed, the appropriate sanction for late delivery (demurrage versus damages) and the correct assessment of the market value. On 4 January, the broker acting for the sellers, Murco, communicated with the buyers, Galaxy, about a cargo of fuel oil being offered by Murco. In a telephone conversation of the same day, a FOB sale of 35,000 mt of fuel oil was agreed for ‘delivery fob milford 15-17 Jan ’ otherwise ‘as previous deal’. In a subsequent confirmation email sent by the sellers direct to the buyers, the sellers added to the delivery provision: ‘Plus such extension to that period as is required by the seller to effect or complete delivery.’ The buyers responded that they would revert with comments ‘in due time’. On 6 January the buyers nominated a vessel (the “SEACROWN”) and took all the operational steps in order to perform the contract: attendance of agents at load-port, loading instructions to the vessel and documentary instructions to the sellers. Then, on 11 January, the buyers informed the sellers that the additional delivery wording was not accepted. On 13 January, however, the vessel arrived at load-port and tendered NOR. However, she berthed only on 20 January and she sailed on completion of loading on 21 January. The buyers claimed from the sellers damages for late delivery. The sellers rejected that claim arguing that the contract had included a term extending delivery, alternatively that as matter of construction the buyers were only entitled to demurrage. The sellers also disputed the level of damages claimed. The commercial court held that the buyers’ claim for damages succeeded. However, on the calculation of the damages, the sellers’ approach was preferred. The contract formation The sellers sought to argue that the buyers accepted by conduct (i.e. the buyers taking the operational steps to perform the contract) their offer for an extension of the delivery period made in the message of 4 January. On the facts, the court rejected the sellers’ contention for three reasons: (1) in previous dealings between the parties, the sellers had each time tried to include a reference to an extension of delivery period which was in turn rejected by the buyers; (2) the buyers had made clear that they would revert with their comments on the sellers’ amendments; and (3) it was revealed in disclosure that on 12 January the sellers had internally accepted the buyers’ rejection of the extension of delivery period, albeit that this was not communicated to the buyers. The court therefore found that the parties reached agreement during the conversation with the broker on 4 January and that the buyers’ conduct was consistent with this agreement. The contract came into existence at that time, alternatively on 11 January, and it did not include the additional provision on extension of delivery. Demurrage versus damages The sellers then sought to argue that the provision for delivery operated as a laycan, not a shipment period, so that the only sanction for late delivery was demurrage rather than damages. The court rejected these submissions. The sellers’ suggestion that the delivery period was a range within which the buyers had to present the vessel was not accepted. Further, the particular clause set out in the sellers’ general a commodities update April 2014 5 conditions, which clause would have applied in situations where a narrowing of the delivery period was required, was of no assistance to the sellers in the present situation. The buyers were therefore entitled to claim damages, being the difference between the market price on the last contractual date for delivery and the market price on the actual date of delivery. Damages: market value The market value of fuel oil on the respective dates was heavily debated. The parties, supported by their respective experts, agreed on relevant Platt’s quotation for this exercise. However, they adopted opposite views as to whether the market price on a given day was to be determined by reference to Platt’s quotation for that particular day (as argued by the buyers) or by reference to a spread of dates around the day (as maintained by the sellers). The sellers’ view prevailed: the court concluded that a spread of prices is closer to the market value for real deals on the day than the single day’s Platt’s figure. In reaching that decision, the court took into account various factors, notably that Platt’s is not in itself a market and that, as the experts agreed, it is usual for prices in oil deals to be based on a spread of Platt’s days. Jean-François Van Hollebeke jean-francois.vanhollebeke@ hilldickinson.com Claire Messer claire.messer@hilldickinson.com Proton Energy Group SA -v- Orlen Lietuva [2013]: binding contracts in the oil industry This case concerned a dispute over whether a contract had been formed during oil trading and the legal consequences of the oil cargo failing to meet its contractual specification. On 14 June 2012, the claimant sellers Proton sent an email with a ‘firm offer’ to sell 25,000 metric tons - plus or minus 10% at sellers’ option - of a crude oil blend (the Cargo). The offer stated that all other contractual terms were subject to Proton’s standard CIF contract, but that terms not indicated would be mutually agreed after negotiation. The Cargo’s specification was attached to the offer. On the same day, the defendant buyers Orlen replied: ‘confirmed ’. Proton voyage chartered a vessel to carry the cargo from Couronne, France to Orlen’s terminal at Butinge, Lithuania. Orlen accepted the vessel and the two parties also agreed to a delivery window of 10 to 15 July. On 20 June, Proton sent a draft written contract to Orlen, which resulted in further email exchanges and a revised draft being sent on 27 June. However following a misunderstanding about meetings, Orlen sent a letter to Proton purporting to terminate the negotiations on 29 June. Proton claimed that Orlen was in repudiatory breach for failing to open a letter of credit or to take delivery of the Cargo. Furthermore, testing of the loaded Cargo showed that it was materially different from its contractual specification. In light of the Supreme Court’s decision in RTS Flexible Systems Ltd -v- Molkerei Alois Muller GmbH & Co [2010], the first question for the court was whether on 14 June the parties had agreed on all the terms that they objectively regarded as essential for the formation of legally binding relations between them. The court found that on the factual evidence both parties regarded themselves as committed to the contract, albeit that some details were still to be agreed. In the court’s view: ‘This was a classic spot deal where the speed of the market requires that the parties agree the main terms and leave the details, some of which may be important, to be discussed and agreed later… overall, the picture is clear. The language is that of commitment .’ The court refused to imply a term requiring Orlen to be satisfied as to the origin and tax status of the Cargo before it could be bound to the contract. A term could only be implied if it was necessary for the contract to work and there was no such necessity in this case. Therefore the court concluded that a contract had been formed on 14 June. Orlen argued that even if there was a contract, it was entitled to reject the Cargo for misdescription and misrepresentation. Neither argument succeeded. Notably on the issue of misdescription, the court concluded that the specification did not form part of a sale by description. The key to description was identity. In principle, description and quality were different concepts - although the distinction between the two may sometimes be blurred and they may overlap where, for example, a word of description identified the quality of the product. However, the two concepts were sufficiently distinct in the present case: ‘The contract document starts by confirming a sale of Oil Blend. Clause 3 headed "Product", describes it as "Oil Blend … CN 2710". That is the description of the product. Clause 4 headed ‘Quality"-, sets out the details of the SGS Report of the analysis at the loadport. That is the quality of the product.' The court’s perception of the contractual document was consistent with the commercial reality that test results at the end of a voyage might differ from those at the outset. If the continued on page 6 >>> 6 specification had been a sale by description, Proton would have had to comply with it in every respect as a condition of the deal. The parties were always free to make quality a condition of the deal but, unlike description, it was not implied by statute. The court also held that if Orlen had accepted the cargo, it would have been able to claim any losses arising from the failure to meet the specification. Such a claim would have been ‘risk free’, but rejecting the cargo was ‘bold and risky’. Finally, although Proton succeeded in its claim against Orlen for repudiatory breach of contract, its damages were reduced by the difference in value between the product promised to Orlen and that which would have been delivered. Avnish Shah avnish.shah@hilldickinson.com Claire Messer claire.messer@hilldickinson.com OMV Supply and Trading AG -v- Kazmunaygaz Trading AG (formerly Vector Energy AG) [2014]: import duties This case concerned the extent to which a CIF seller was, under the terms of the relevant contract, liable for the duties on the import of biodiesel into Romania. Facts The buyer, OMV, appealed against a decision limiting the amount it could recover from the seller, Vector, under a CIF sale contract for biodiesel. The contract contained a term that the diesel should be of Canadian origin. The price clause in the contract provided: ‘All fees such as but not limited to customs duties and penalties incurred by non EU origin… will be deducted from invoice value. Buyer will notify seller of such fees and send supporting documents latest by the first business day after vessel’s completion of discharge and seller will issue the final invoice within five business days from such notification.’ Based on the certificate of origin provided by sellers, buyers made a declaration to Romanian customs that the diesel was of Canadian origin. The diesel was cleared on that basis. Buyers notified sellers that they had paid import duties of US$58,910.79. Sellers issued an invoice for US$862,695.43 being the price of the diesel less US$58,910.79. Two years later, OLAF was investigating the origin of the diesel. OLAF reported to the Romanian customs that it was in fact of US origin. Goods of US origin attracted anti-dumping and countervailing duties of US$1,029,811.19. Customs sought payment of the duties plus interest and penalties. Buyers paid the amounts and sought to recover them from sellers under the contract. Legal arguments Sellers argued that to recover customs duties, buyers would have had to have notified sellers of such fees and sent supporting documents by the first business day after the completion of discharge. Buyers submitted that the clause made it clear that all customs and duties for non EU cargo were to be paid by sellers. Buyers claimed that they were entitled to recover the full amount of the duties i.e. US$1,029,811.19. They argued that sellers’ liability was not limited because the clause referred to a deduction from the invoice price. A deduction in this context which produces a negative figure signified that sellers must pay the excess. Judgment The court held that the parties could not have agreed that buyers’ entitlement to recover fees was dependent on them having notified sellers of the fees and provided supporting documents no later than the first business day after completion of discharge. The combination of a very short time limit and a drastic consequence in the event of non-compliance lacked any commercial sense. The parties had not used language making it clear that timely compliance was a condition precedent to liability. The court held that a construction that left no room for the correction of an error, particularly an error consistent with a certificate of origin provided by sellers, would make little commercial sense. On the issue of the excess, the court held that buyers were entitled to recover the amount of fees which were to be deducted from the price. They were entitled to recover US$862,695.43. They were not entitled to recover any more. The court rejected buyers’ argument that sellers were to pay the fees however much they were even if they exceeded the price. If the parties had intended that, they should have used a commodities update April 2014 7 clear language to that effect. In a contract of sale, the price is what the buyer pays the seller and to require the reverse would need very clear wording. Kate Docton kate.docton@hilldickinson.com Andrew Lee andrew.lee@hilldickinson.com PGF II SA -v- OMFS Company 1 Limited [2013]: costs sanctions when mediation requests are ignored This case raised the question regarding the costs implications for a party which, when invited to participate in ADR (e.g. mediation), declines to respond to the invitation in any way. The facts underlying the dispute are not relevant, but briefly concern a claim for breach of repair covenants in a lease of a commercial building. The claimant made two Part 36 settlement offers which were not accepted. It then sent the defendant a detailed invitation to mediate the dispute, to which the defendant did not respond. Instead the defendant sent its own Part 36 offer to the claimant. The claimant sent a further invitation to mediate, but again did not receive any response from the defendant. Shortly before trial, the claimant accepted the defendant’s Part 36 offer. Under the Civil Procedure Rules, where a Part 36 offer is accepted belatedly (e.g. after the usual 21 day period for which a Part 36 offer is open for acceptance), ordinarily a claimant would be liable for the defendant’s costs for the period from the date of expiry of the offer (the relevant period) to the date on which the claimant accepted the offer. In this particular case, the judge at first instance deprived the defendant of its costs for this relevant period. It held that the defendant’s silence in relation to the claimant’s invitation to participate in ADR amounted to a refusal to engage in ADR. The court considered that this refusal was unreasonable in accordance with the Halsey guidelines (stemming from Halsey -v- Milton Keynes General NHS Trust (2004)). Those guidelines indicated various factors that were likely to be relevant to the issue of whether a party’s refusal to engage was unreasonable, including the nature of the dispute, the merits of the case, the extent to which other settlement methods had been attempted, whether the costs of the ADR would be disproportionately high, whether any delay in setting up and attending the ADR would have been prejudicial and whether the ADR had any reasonable prospect of success. The defendant appealed. The Court of Appeal reached a similar conclusion, rejecting the appeal. It went a step further than the judge at first instance by also deciding that the defendant’s silence in the face of two requests to mediate was itself sufficiently unreasonable to warrant a costs sanction without the need for a detailed point by point analysis of the Halsey guidelines to determine whether the deemed refusal was unreasonable. The Court of Appeal stated: ‘… that silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless whether an outright refusal, or a refusal to engage in the type of ADR requested, or to do so at the time requested, might have been justified by the identification of reasonable grounds.’ The Court of Appeal recognised that there may be rare cases where the general rule above would not apply, where for example, ADR was so obviously inappropriate that to characterise silence as unreasonable would be ‘pure formalism’, or where the failure to respond was a mistake. However, the onus of successfully explaining this would lie on the recipient of the invitation. The Court of Appeal further held that there were sound practical and policy reasons for extending the principles contained in the Halsey case. Firstly, an investigation of alleged reasons for refusing to mediate posed forensic difficulties if the reasons were advanced for the first time at a costs hearing months or even years after the invitation to mediate, particularly in relation to the question as to whether those reasons were genuine. Secondly, a failure to provide reasons for a refusal was destructive of the real objective of encouraging parties to consider and discuss ADR. Any difficulties or reasonable objection to a particular ADR proposal should be discussed, so that the parties could narrow their differences before asking the court to determine those issues which were irreconcilable. That occurred routinely in relation to expert issues and there was no reason why the same should not apply to ADR in order to save valuable court time in the case management process, which extends to the encouragement of ADR and not just the giving of directions for trial. This second reason was not only practically useful but it also served the policy of proportionality since it might lead to alternative directions and a saving of time and resources for the parties and the court. Although the finding above was sufficient for the Court of Appeal to impose a costs sanction, it also upheld the first instance judge’s decision regarding whether there was a refusal by the defendant to engage in ADR and whether that refusal was unreasonable. The court held that it would be perverse not to regard silence in the face of repeated requests as anything other than a refusal, especially because the first invitation to mediate was couched in such detailed and reasonable terms 8 that it could not reasonably have been regarded as mere tactics. As to whether the refusal was unreasonable, the court also commented that Part 36 offers did not usually represent the parties’ respective bottom lines and that there was therefore no unbridgeable gap between two parties’ Part 36 offers which could not be overcome through mediation. Finally, the Court of Appeal held that a finding of unreasonable conduct through a refusal to mediate did not automatically result in a costs penalty. However, judges had a wide discretion regarding how far to depart from the cost consequences of Part 36 and this included depriving the defendant of the whole of its costs during the relevant period for seriously unreasonable conduct. In principle, judges could go even further and order the otherwise successful party to pay all or part of the unsuccessful party’s costs, but this should only be reserved for the most serious failures to engage with ADR, for example, where the court encouraged the parties to do so and had been ignored. This case demonstrates the importance of engaging with a serious invitation to participate in ADR, even if there are reasons which might justify a refusal. Avnish Shah avnish.shah@hilldickinson.com The “ATLANTIC CONFIDENCE”: Kairos Shipping Ltd & Anr -v- Enka & Co LLC & Ors [2014]: limitation funds The Court of Appeal has overturned the Commercial Court’s decision and confirmed that a London Limitation Fund may be constituted by way of a Guarantee (including where appropriate a P&I Club LoU). Following the sinking of their vessel, the MV “ATLANTIC CONFIDENCE”, shipowners wished to limit their liability to cargo and other interests by reference to the vessel’s tonnage and the limits set out in the 1976 Limitation Convention. In order to do so, they looked to establish a Limitation Fund. A key issue was whether that fund could be set up by way of a Club Letter of Guarantee (or Letter of Undertaking), rather than a cash payment into court. The Commercial Court judge had noted that Club LoUs were generally acceptable security, yet he found himself constrained by the wording of statutory legislation which he interpreted to mean the moneys must be paid into court. But he did show some sympathy for shipowners and their club , accepting that legislation on this subject would benefit from review, and he gave permission to appeal against his finding as ‘there is likely to be more than one view of the matter’. It was little surprise therefore that the case came before the Court of Appeal. The Court of Appeal approached the matter starting with the construction of Article 11.2 of the 1976 Limitation Convention. That article, headed ‘Constitution of the fund’, states: ‘A fund may be constituted, either by depositing the sum, or by producing a guarantee acceptable under the legislation of the State Party where the fund is constituted and considered to be adequate by the court or other competent body.’ The appeal judges considered Article 11.2 ‘in its proper context.’ They further noted that the interpretation of international conventions required a ‘broad, purposive approach’. Particular reference was made to The CMA Djakarta, citing ‘… the duty of a court is to ascertain the ordinary meaning of the words used, not just in their context but also in the light of the evident object and purpose of the convention’. Against this background, the Court of Appeal considered that the express words ‘either… or’ as used in Article 11.2 clearly indicated a choice between a cash deposit and a guarantee, and that this choice fell to the party constituting the fund. Once that conclusion was reached, the judge’s other reasoning at first instance was similarly difficult to follow. For example, on the subject of the UK’s civil procedure rules, the Court of Appeal noted that although reference was made specifically to the constitution of a limitation fund by way of a payment into court, there was no provision barring against other means such as a guarantee. Claire Messer claire.messer@hilldickinson.com a commodities update April 2014 9 The “ATHENA” [2013]*: Revisiting the ‘net loss of time’ Clause 15 of NYPE 48 In January 2010, after discharge of the cargo on board the MV “ATHENA” was refused by the local authorities in Tartous, Syria, the charterers instructed the master to sail to Benghazi, Libya. However, the master, in accordance with the shipowners’ instructions, stopped in international waters outside Libya. Despite charterers’ protest and instructions to the contrary, the vessel continued to drift in international waters for 10.9 days until the voyage to Benghazi was resumed. The charterers sought to deduct this period of time from the hire pursuant to an amended clause 15 in a NYPE 48 time charterparty which read: ‘That in the event of the loss of time from… default of master …or by any other cause preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost... and the cost of any extra fuel consumed in consequence thereof, and all extra expenses shall be deducted from hire’ [words underlined were typed additions to the printed form]. The matter went before an LMAA tribunal, which held that, had the vessel proceeded directly to Benghazi, it would not have berthed any earlier than it did. Nevertheless, the tribunal went on to hold that there had been an immediate loss of time by default of the master within clause 15, so that the vessel was off-hire for the 10.9 day period. The shipowners appealed and the court, at first instance, allowed the appeal. The court found that, under the off-hire clause, the charterers had to show that there was a ‘net loss of time to the chartered service’ - that is, to the entirety of the service to be performed under the charter. On the tribunal’s findings, there had been no net loss of time in that sense. The Court of Appeal overturned the lower court’s decision, holding that the construction which shipowners had argued for was: (i) inconsistent with the conventional approach of clause 15; (ii) inconsistent with the authorities; and (iii) impractical in the sense that it could lead to a court having to undertake ‘the most intricate and speculative enquiries’ as to the course which events would have taken if full working of the vessel had not been prevented. As the Court of Appeal noted, the relevant section of the Time Charters 6th Edition, to which the judge referred in the first instance decision, may have been a source of the misunderstanding, as it does indeed refer to the loss of time as the ‘time by which the progress of charter service has been delayed’. The Court of Appeal considered that what the authors must have meant by ‘charter service’ was the service immediately required of the vessel. The Court of Appeal indeed held that the ‘full working of the vessel’ in clause 15 refers to her ability to do that which she is immediately required to do. ‘Immediately’ means what it says: the clause concentrates on the period during which full working of the vessel is prevented. Whether the same time would have been lost for other reasons at another stage of the chartered service - in this case the delay in berthing at Benghazi - is irrelevant to a claim under this clause. The ‘time thereby lost’ thus means the time lost during the period of inefficiency by reason of the vessel’s inability to perform the service immediately required of her, and it is impermissible to have regard to events occurring after the end of the off-hire event. This decision represents a welcome clarification of the proper understanding of a net loss of time clause as opposed to a period off-hire clause. It also brings certainty in that, from a commercial perspective, the calculation of the time lost can be made as it arises and be deducted from the next payment of hire, and, from a legal perspective, in that this decision follows the established line of authority of, notably, the “BERGE SUND” and the “PYTHIA”. *Minerva Navigation Inc -v- Oceana Shipping AG; Oceana Shipping AG -v- Transatlantica Commodities SA (2013) Jean-François Van Hollebeke jean-francois.vanhollebeke@ hilldickinson.com Gordon Campbell gordon.campbell@hilldickinson.com Cottonex Anstalt -v- Patriot Spinning Mills Ltd [2013]: International Cotton Association rules The court’s judgment deals with a number of issues, including procedural points and a re-cap of recent judicial decisions dealing with the interpretation of contracts on the basis of business common sense. This summary focuses on the dispute as to whether the entire by-laws and rules of the International Cotton Association (ICA) Rules and, in particular, the invoicing back rules, were incorporated into a sale contract between the parties, or if only the ICA arbitration by-laws were incorporated. 10 Facts The parties concluded a contract for the sale and purchase of cotton, which included the following clause (of which the last sentence is of particular importance): ‘Claims and controversial matters that may occur in connection with the execution of the following contract are to be solved by the representatives of the buyer and seller having full power to act. All disputes relating to this contract will be resolved through arbitration in accordance with the Bylaws of the International Cotton Association Limited. This agreement incorporates the Bylaws which set out The Association’s Arbitration Procedure.’ The contract was not performed. Both parties contended the other was in breach, but Patriot contended that irrespective of the breach, it was entitled to payment from Cottonex on the basis of an invoicing back clause, which it argued had been incorporated into the contract. Cottonex denied that the clause was incorporated. This dispute was referred to arbitration and the tribunal ruled in favour of Patriot, finding that the invoicing back clause was incorporated into the contract. Cottonex appealed against the award. Legal arguments It is not disputed by either party that the tribunal’s reasoning was flawed in one respect, i.e. that the tribunal’s starting position should have been to refer to the incorporating language in the contract: ‘This agreement incorporates the bylaws which set out the association’s arbitration procedure.’ This was not the approach adopted by the tribunal. Instead, the tribunal had considered the language of the ICA by-laws and rules themselves as a starting position, which is wrong in law. Notwithstanding the above error, Patriot maintained in the appeal that ICA’s entire bylaws and rules were incorporated into the contract because: (i) The reference to ‘bylaws’ in the sentence ‘This agreement incorporates the bylaws which set out the association’s arbitration procedure’ is shorthand for the bylaws and rules as a whole. (ii) It makes business common sense to read the reference to ‘bylaws’ as incorporating the bylaws and rules as a whole because: a. the parties were submitting to the jurisdiction of ICA arbitrators who are used to applying the ICA substantive provisions. It would be odd if the parties intended the arbitrators not to apply the rules they are used to; and b. the contract would be thin and missing several key elements, such as sampling provisions, if the word ‘bylaws’ were restricted to arbitration bylaws and did not include substantive provisions. Judgment The court found that the entire ICA bylaws and rules, which include the invoicing back procedure, were not incorporated into the contract because: (i) The incorporating provision only refers to bylaws which set out the ICA’s arbitration procedure. (ii) The incorporating words appear in an arbitration clause. It would be unusual to incorporate governing substantive obligations as part of an arbitration clause. (iii) Patriot’s arguments on the basis of business common sense were not sufficiently strong to prefer its interpretation because: a. although it makes sense to have a tribunal apply its own substantive rules, the parties may want to involve ICA arbitrators for their experience of the cotton trade; and b. although the contract would have more content if all the ICA by-laws and rules were incorporated; the contract is workable without them. Shanna Ghose shanna.ghose@hilldickinson.com The “LADYTRAMP”: ED&F Man Sugar Ltd -v- Unicargo Transportgesellschaft GmbH & Anr [2013]: laytime exception ‘mechanical breakdown’ The Court of Appeal applied a strict interpretation to a laytime exclusion in this appeal by charterers against owners’ claim for demurrage. The vessel was chartered on the Sugar Charter Party 1999 form, on terms which provided for the carriage of bulk sugar from ‘1-2 safe berth(s), 1 safe port (intention Santos) but not south of Paranagua…’. The charterparty also included the Sugar Charter Party’s standard laytime exclusion clause, as follows: ‘In the event that whilst at or off the loading place or discharging place the loading and/or discharging of the vessel is prevented by any of the following occurrences: ... mechanical breakdowns at mechanical loading plants … time so lost shall not count as laytime …’ Upon concluding the fixture, charterers nominated Paranagua as the load port, but prior to the vessel’s arrival, a fire broke out at the terminal where charterers had intended to load and a commodities update April 2014 11 destroyed the conveyor-belt system linking the terminal to the warehouse where the sugar was stored. The vessel eventually loaded from a different terminal and owners claimed demurrage for the period during which loading was delayed. In the ensuing arbitral proceedings, charterers argued (amongst other things) that the destruction of the conveyor belt by fire constituted a ‘mechanical breakdown’ within the meaning of the laytime exclusion clause and that the resulting delay in loading should therefore be excluded from demurrage. The Court of Appeal - upholding the decision of the arbitrators and the Commercial Court - did not agree. It was not enough that, as a result of the fire, the machinery no longer worked. Citing the earlier case of The “THANASSIS A”, the Court of Appeal held that, for there to have been a ‘mechanical breakdown’ within the meaning of the clause, the breakdown must be ‘mechanical, in the sense that it is the mechanism of the mechanical loading plant which ceases to function, or malfunctions, and causes the prevention of or delay to loading.’ There must, in short, be ‘an inherent mechanical problem, as distinct from a wider or external cause’. (This was not to say, however, that an external cause could never be relevant, if such external cause were to bring about a mechanical breakdown. Conversely, the court suggested that the position might have been different if there had been evidence that it was a mechanical breakdown which had caused the fire). The Court of Appeal’s decision – like that of the Commercial Court before it – reflects the very strict approach which English courts take towards exclusion clauses in general. Accordingly, if you wish to limit or exclude your liability in particular circumstances, the time to do so is when the contract is drafted, and the way to do so is to use very clear language indeed. Avnish Shah avnish.shah@hilldickinson.com Gordon Campbell gordon.campbell@hilldickinson.com Stop press Is your supplier a member of a secret cartel and are you being overcharged? Anti-trust victims have a right to damages if they can prove they have lost out as a result. There were two reminders on 2 April of what this means. The European Commission has just imposed fines of over €30 million on four European steel abrasive producers and €302 million on makers of underground and submarine cables. In the first case all but one admitted to being part of a cartel, but agreed to settle the case against them in return for reduced fines. They were accused of illegal price-fixing, and market and customer sharing, meaning customers paid more than they should have. The law allows anyone who has bought products from the cartel members (users or traders) to seek damages for any losses they have suffered as a result of the illegal cartel (in settlement cases only causation and loss having to be proved as liability is already admitted). In most jurisdictions, traders also face the problem of the ‘passing-on’ defence, meaning they cannot recover insofar as they have passed on the extra costs to their customers. Any user or trader who is a victim of a cartel enjoys the same rights whatever the product. English courts are becoming increasingly familiar with cartel damages actions, but in other EU states they can be more difficult. An EU directive will shortly be introduced to facilitate such actions across the whole EU, including collective actions by consumers or other groups of buyers affected. Philip Wareham philip.wareham@hilldickinson.com a commodities update April 2014 The information and any commentary contained in this newsletter are for general purposes only and do not constitute legal or any other type of professional advice. We do not accept and, to the extent permitted by law, exclude liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this newsletter. Whilst every effort has been made when producing this newsletter, no liability is accepted for any error or omission. If you have a particular query or issue, we would strongly advise you to contact a member of the commodities team, who will be happy to provide specific advice, rather than relying on the information or comments in this newsletter. About Hill Dickinson The Hill Dickinson Group offers a comprehensive range of legal services from offices in London, Piraeus, Singapore, Monaco, Hong Kong, Liverpool, Manchester and Sheffield. Collectively the firms have more than 1350 people including 175 partners. hilldickinson.com/commodities London Piraeus Singapore Monaco Hong Kong Liverpool Manchester Sheffield ® a commodities update April 2014 Andrew Meads - Partner +44 (0)20 7280 9201 andrew.meads@hilldickinson.com David Lucas - Partner +44 (0)20 7280 9208 david.lucas@hilldickinson.com Fred Konynenburg - Partner +44 (0)20 7280 9250 fred.konynenburg@hilldickinson.com Jeff Isaacs - Partner +44 (0)20 7280 9125 jeff.isaacs@hilldickinson.com Kamal Mukhi - Legal Director +44 (0)20 7280 9258 kamal.mukhi@hilldickinson.com Mark Evans - Partner +44 (0)20 7280 9213 mark.evans@hilldickinson.com Paul Taylor - Partner +44 (0)20 7280 9261 paul.taylor@hilldickinson.com Stuart Armstrong - Partner +44 (0)20 7280 9121 stuart.armstrong@hilldickinson.com Susan Leonard - Legal Director +44 (0)20 7280 9275 susan.leonard@hilldickinson.com Andrew Lee - Partner +65 6576 4722 andrew.lee@hilldickinson.com London Office Singapore Office For further details please contact: Claire Messer Associate +44 (0)20 7280 9129 claire.messer@hilldickinson.com