bentleys’ bulletin october...
TRANSCRIPT
IN THIS ISSUE• When is a sale of goods not a sale
of goods: the “RES COGITANS” in the Court of Appeal
• Bunge SA v Nidera BV in the Supreme Court: compensatory principle upheld
• Marine Insurance: the dangers of pre-contractual non-disclosure and reforms under the Insurance Act 2015
• Damages for repudiation of a voyage charter: one voyage or more?
• Storage charges anduncollected cargo
BENTLEYS’ BULLETINOctober 2015
Page Two
WHEN IS A SALE OF GOODS NOT A SALE OF GOODS: THE “RES COGITANS” IN THE COURT OF APPEAL
The fi nancial collapse of the OWB bunker supply group has caused huge problems for the shipping community. We looked at one example (the “RES COGITANS”) in the last edition of this Bulletin. There, the High Court was considering the problem that the purchaser of bunkers from OWB could end up paying for them twice, once to OWB and once to the physical supplier of the bunkers.
The judgment of Mr Justice Males (who largely upheld the fi ndings of an earlier arbitration) had turned that possibility into at least theoretical reality. Unsurprisingly the case went to the Court of Appeal and they have recently delivered judgment in “RES COGITANS” [2015] EWCA Civ 1058.
It is worth summarising the background. The owner purchased bunkers from OWB. This was on terms that payment was delayed, OWB retained ownership of the bunkers until that payment, but immediately on delivery the owners had the right to consume the bunkers.
OWB were fi nanced by their bank ING. This was on terms that if they went into liquidation ING stepped into their shoes to collect the debts due to OWB. So far as this article is concerned, reference is just made to OWB but it is worth remembering that it is ING (and the various liquidators involved) who are pulling the strings from one side of the dispute.
As would be expected, OWB looked for a local supplier of the bunkers and made their own contract for this with Rosneft. That also had similar terms to the “head” contract as regards delayed payment and retention of title. Rosneft duly supplied the bunkers. OWB fi led for bankruptcy before they paid for them.
The result is this; both OWB and Rosneft wanted the owners to pay them. Rosneft are not a formal party to the action but have made their views known and have done so in writing to the court. They say that under their contractual terms they remain owners of the bunkers.
As reported in the earlier Bulletin, the owners’ arguments to get around this are complex. It involves the intricacies of the Sale of Goods Act 1979 (“SOGA”). The reasoning was that the bunker supply contract was one covered by SOGA. OWB’s claim against them was for the price as defi ned by the Act. For that price to become due ownership in the goods had to be transferred.
Owners argued that this could not happen because Rosneft were not going to give up their title to the goods to OWB. OWB could not, therefore, transfer title to the owners and so were not entitled to the price.
Males, J. clearly had sympathy but was having none of it. SOGA did not apply. The owners had to pay the price to OWB by way of a debt. Whether or not they then also had to pay Rosneft was just one of those unpleasant commercial risks, although as a matter of English law they would not have to. To avoid simply repeating a quote from the last Bulletin, here is one from the original arbitration Award. Males, J. expressly approved this:
“Stripped of all unnecessary detail, the deal between the parties was that OWB would ensure delivery of the bunkers, the use of which would be immediately available to the Owners, who would pay for them according to OWB’s invoice.
Such an agreement does quite obviously resemble in some respects a contract of sale, but its terms and their performance do not to any extent rely on property or title or their transfer.”
What was the Court of Appeal to make of it all? The starting point is that this appeal is confi ned purely to the question of whether the contract was a sale as defi ned in SOGA. There are many other points fl oating out there but it will have to be seen what emerges before the courts in the future.
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October 2015 Issue
Page Three
The central area of debate revolved around the ever fl uctuating guidelines from the courts as to the extent judges are entitled to manipulate the express words used in contracts to refl ect the true commercial intentions of the parties. The Supreme Court have:
“…cautioned against making too free a use of business common sense and commercial context in order to give a contract a meaning that its language cannot properly bear.”
If that is correct, the owners’ starting position appeared to have some force. The express wording of the contract is couched in terms that undoubtedly bear an uncanny resemblance to a sale of goods. It is not then too great a leap of logic to assume that the legislature intended just such an arrangement to be subject to SOGA.
The court’s reasoning to the contrary is, however, quite compelling. As Moore-Bick, L.J. says:
“Just as it is no part of the court’s function to remake the parties’ contracts in the guise of interpretation, so it is no part…to shoehorn their contract into a category to which it does not properly belong in order to impose on them consequences which they did not intend.”
He, therefore, needed to answer the question “What have the parties undertaken to do”. The transfer of ownership in the goods is central to that.
Moore-Bick, L.J. was not persuaded by the owner that what they were paying for was actual ownership of the bunkers. What they were paying OWB for was to be supplied with bunkers with a contractual right to use them immediately without having to pay anything until a future date. In this case when the time for payment arrived the bunkers had already disappeared in smoke having been consumed.
The owners’ way around this was to say that once payment was made it should be possible to go back to the time of delivery and say that, even though this was after the event, ownership could be deemed to have passed at that time. It is clear that the Court of Appeal found this an artifi cial argument.
Having got exactly what they bargained for it followed that when the future date arrived OWB had to be paid. It did not matter that neither the owner nor, indeed, OWB had got to the point where they actually owned the bunkers in any part of that process.
Longmore, L.J. in giving a much shorter concurring judgement clearly anticipated that this could cause confusion. He set out the key sections from SOGA defi ning a sale of goods and the right to payment of the price. But he then cautions that just because a contract could in commercial terms be described as a sale of goods it doesn’t automatically follow that SOGA applies. As he says:
“The delivery of bunkers with a license to consume them is just such a contract. Once the bunkers were delivered, the owners incurred an obligation to pay and were not released from that obligation by the fact that OWB were unable to (and did not) transfer title before they were consumed.”
Following this judgment, the uncertainty remains for owners and charterers who have purchased bunkers from OWB and are likely to face demands from both OWB and physical suppliers. In the meantime, owners who want to bring themselves within the protection of SOGA are going to have to be very careful about the terms of their bunker purchases. That is likely to mean a wholesale change of approach. In reality many owners, although they are diligent in stamping receipts with wordings recommended by their P&I or Defence Clubs can have no detailed knowledge of the terms they are contracting on or the complex chain of companies and banks who are involved in the background to obtaining their bunkers.
Having got exactly what they bargained for it followed that when the future date arrived OWB had to be paid. It did not matter that neither the owner nor, indeed, OWB had got to the point where they actually owned the bunkers in any part of that process.
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October 2015 Issue
BUNGE SA V NIDERA BV IN THE SUPREME COURT: COMPENSATORY PRINCIPLE UPHELD
Bunge SA v Nidera BV [2015] UKSC43 is a Supreme Court decision marking the end of a series of appeals from a GAFTA arbitration award, and which has taken a possibly surprising turn. The appeals to the GAFTA Board of Appeal, the High Court and the Court of Appeal all concerned themselves with two issues: the meaning of the GAFTA Prohibition Clause and the application of the GAFTA Default Clause.
The sale contract in question was for 25,000mt (10% more or less in buyers’ option) Russian milling wheat FOB Novorossyisk for shipment in August 2010. The contract incorporated the standard form GAFTA 49. On 5 August the Russian government imposed a temporary prohibition on the export of milling wheat between 15 August and December 2010. On 9 August 2010 sellers declared that the contract was cancelled pursuant to the Prohibition Clause (clause 13 of GAFTA 49, which conferred a right to cancel in the case of a prohibition of export). Buyers accepted sellers’ conduct as a repudiation of the contract on 11 August 2010 and by reference to the measure of damages set out in the Default Clause claimed the diff erence between the contract and market price as at that date. As a matter of fact, the export ban continued throughout the delivery period and shipment would not have been possible.
The GAFTA Board of Appeal held that export embargoes of this kind are often modifi ed or withdrawn soon after their introduction and that it was impossible to say, as at the date when sellers cancelled, that shipment would necessarily be prevented. The sellers’ cancellation was therefore premature and a repudiation. Buyers were awarded substantial damages in accordance with the Default Clause. The High Court (Hamblen, J.) agreed with this conclusion. The Court of Appeal then dismissed an appeal, on the damages question upholding the application of the Default Clause because it was clearly worded, based on recognised principles and provided commercial certainty. The sellers then appealed to the Supreme Court.
In the Supreme Court, the sole issue was the eff ect of the Default Clause: whether the buyers were entitled to recover damages by reference to the diff erence between the contract price and the market price at the date of termination. Buyers relied upon clause 20 of GAFTA 49 (the Default Clause), which provided for damages to be “based on” the diff erence between contract and market price. Buyers contended that this clause set an automatic
measure of damages regardless of whether loss was actually suff ered. Because the export ban remained in force throughout the shipment period sellers argued buyers had suff ered no loss.
Lords Sumption, Neuberger, Mance, Clarke and Toulson, J.S.C. allowed the sellers’ appeal, awarding nominal damages of US$5.
Their Lordships commenced by reminding all that the fundamental principle of the common law of damages is the compensatory principle. In a sale contract where there is an available market, this is ordinarily achieved by comparing the contract and market prices as at the contractual date of delivery.
In considering this, the principle in the “GOLDEN VICTORY” applies in the case of a one-off sale contract. Supervening events meaning that neither the original contract (had it continued) nor the notional substitute contract at the market price would ever have been performed render the concept of “crystallising” the assessment of damages at that date and market price unhelpful.
In this case, the supervening event would have reduced the value of performance even if the contract had not been wrongfully terminated and whatever the relevant market price. To determine the value of the contractual performance which has been lost by the repudiation, one should consider what would have happened if the repudiation had not occurred. The lost contract and its hypothetical substitute were subject to automatic cancellation unless the Russian Government ban was lifted, and the extent to which the buyers were worse off by loss of the original contract could not be measured by a simple comparison of the contract price with the price of a hypothetical substitute contract.
Continued On Page Five
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October 2015 Issue
To determine the value of the contractual performance which has been lost by the repudiation, one should consider what would have happened if the repudiation had not occurred.
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Page Five
Against that background, clause 20 did not exclude subsequent events from consideration. Clauses such as these are not necessarily complete codes for the assessment of damages. They are commonly intended to avoid disputes, either by prescribing a fi xed measure of loss or a mechanical formula, instead of the more nuanced and fact-sensitive approach of the common law. However, in the absence of clear words, damages clauses should not be assumed to operate arbitrarily, producing a result unrelated to anything that the parties might reasonably have expected to approximate to the true loss. The clause was not drafted widely enough to deal with the eff ect of subsequent events which would have resulted in the original contract not being performed in any event.
The conclusion that the “GOLDEN VICTORY” compensatory principle is not restricted to contracts where payments are in installments appears correct as a matter of law. Of course, the present decision results in uncertainty because instead of an ‘automatic’ measure of damages the outcome will now be more fact-specifi c. However, the predominance of the compensatory principle and the need to establish a genuine loss should give rise to fairer results. In the present case, the buyers had not suff ered a loss, but the decisions below granted them substantial damages of US$3m. The Supreme Court in this judgment took time to justify the “GOLDEN VICTORY” and stated that criticism or doubt of that decision was unjustifi ed. What is now beyond doubt is that the paramount emphasis on the compensatory principle when assessing damages will remain at the forefront of English law.
Of course, if parties wish to avoid fact-sensitive disputes in the interests of commercial certainty, it remains possible to agree clauses providing for an automatic measure of damages on the happening of certain events, but it is evident that very clear wording is required. The fact that the GAFTA provision in question did not achieve this may provoke a certain degree of surprise on this occasion.
October 2015 Issue
Damages clauses should not be assumed to operate arbitrarily, producing a result unrelated to anything that the parties might reasonably have expected to approximate to the true loss.
“”What is now beyond doubt is that the paramount emphasis on the compensatory principle when assessing damages will remain at the forefront of English law.
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MARINE INSURANCE: THE DANGERS OF PRE-CONTRACTUAL NON-DISCLOSURE AND REFORMS UNDER THE INSURANCE ACT 2015
The recent English High Court decision of Involnert Management Inc v Aprilgrange Ltd & Others [2015] EWHC 2225 (Comm), has attracted signifi cant attention in the superyacht industry. It is an interesting discussion of the current law relevant to material non-disclosure by an assured when taking out marine insurance, and it also looks forward to the reforms in this area brought in by the Insurance Act 2015.
A detailed article can be found on our website. Please click here to access it.
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October 2015 Issue
The case is an appeal from an arbitration in which the charterers contested the assessment of damages after they were found to have repudiated a charterparty (Bentleys represented the charterers at this appeal stage). After the repudiation the ship sailed towards South America. The owner considered this the most promising area in which to fi nd substitute business.
The ship arrived at Uruguay on 2 February 2011, but was not fi xed until 24 February 2011. Her next voyage was to Rotterdam. This substitute fi xture was completed on 12 April 2011.
If the original charter had been performed, the voyage would have completed on 17 March 2011. The ship would then, it was accepted by the arbitrators, have carried a cargo from the Baltic to the United States, following by a further fi xture from the United States to Europe. The freight rates for the trade between Europe and the United States were higher than those available in South America.
When claiming damages, the owner did not confi ne this to the difference in profi t between the originally contracted voyage and the substitute fi xture. They also added into the mix the two additional fi xtures they could have made had the original contract been performed.
As Males, J. himself points out, however, the classic measure of damages in these circumstances is the amount of freight which the ship would have earned under
the charter, minus the expenses which would have been incurred in earning it and the ship’s actual earnings during the period which would have been occupied in performing the originally contracted voyage charter. Smith v M’Guire (1858) 3 H&N 554 acts as the basis of over 150 years’ precedent on the point.
The charterers, therefore, had argued that damages should be assessed by reference to the ship’s actual and hypothetical earnings up to the date when the contract voyage would have ended, but no further. For them, it had to be wrong in law to consider the position all the way up to the time when the substitute fi xture terminated.
The tribunal rejected the charterers’ reasoning and were supported in this at appeal. Having set out the usual measure of loss Males, J. referred to the “fundamental principle” that the innocent party is to be placed in the same fi nancial position as if the contract had been performed. As such, these were appropriate facts rendering it necessary to depart from the usual measure.
In this case, Males, J. felt the owner had suffered a different kind of loss in addition to the lost profi t on the fi xture itself. For him, there was no reason why additional damages should not then be recoverable.
The reasoning is subtle. It would be accepted by all that performance of the contract voyage would have enabled the owner to earn freight under that voyage charter. Where the judgment goes further is
to then take into account that performance would also have positioned the vessel in Europe without delay, ready to take advantage of the higher freights available in the North Atlantic market. It was held by the judge that the owner should be compensated for this as representing a different “kind of loss” from loss of profi t on the contract voyage.
Given that no owner in previous reported cases has claimed losses extending beyond the end of the contract voyage, this decision could have signifi cant repercussions for the future. Very often it is diffi cult for the owner to prove what the ship’s future employment would have been. It should not, therefore, be assumed that additional damages beyond loss of profi t on the charter voyage will always be recoverable. In this case though it made a signifi cant difference. Damages awarded in accordance with the usual measure would have been around US$500,000. The tribunal awarded US$1.2m.
DAMAGES FOR REPUDIATION OF A VOYAGE CHARTER: ONE VOYAGE OR MORE?
It will be interesting to see how big a role the “MTM HONG KONG” [2015] EWHC 2505 (Comm) comes to have in the English law of damages. For some it represents new and innovative thinking, for others it is a fl ight of fancy. The judge, Mr Justice Males, took a more measured view. He was at pains to point out that his legal reasoning rested on the very particular facts and circumstances of the case.
Having set out the usual measure of loss Males, J. referred to the “fundamental principle” that the innocent party is to be placed in the same fi nancial position as if the contract had been performed. As such, these were appropriate facts rendering it necessary to depart from the usual measure.
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STORAGE CHARGES AND UNCOLLECTED CARGO
In the “BAO YUE” [2015] EWHC 2288 (Comm) bill of lading holders pursued a claim against shipowners alleging conversion of a cargo of iron ore carried from Bandar Abbas to Tianjin. Conversion in English law is understood to describe the act of dealing with property in such a way as wrongfully to deprive someone of its use and possession.
The issue arose as follows: the claimant was the shipper of the cargo under a bill of lading issued “to order”. The bill of lading incorporated the following charterparty clause:
“… In case original Bs/L would not be ready upon vessel’s arrival at discharge port, Owners allow to discharge cargo upon arrival to custom bonded warehouse area against Charterer’s single LOI with Owners P&I Club wording signed by Chrs. Release cargo against original bill of lading. In the event cargo being kept in the warehouse in lieu of waiting for OBL to arrive at the discharge port, the expense of warehouse and all relevant costs to be for Chrts’ account…”
The cargo was sold under a FOB sale contract between the claimant and a Chinese company called Teda. Disputes arose under this contract and the claimant alleged that Teda owed it US$500,000. This dispute was not resolved by the time the vessel sailed from Bandar Abbas and the claimant refused to release the bill of lading to Teda.
When the vessel arrived at Tianjin, no bill of lading was presented so the cargo was discharged into a warehouse against letters of indemnity provided by the charterer to the defendant shipowner who then undertook contractual responsibility to the warehouse owner for storage charges. Under the storage contract, the warehouse was entitled to a lien over the cargo if storage charges were not paid.
The claimant did not wish to take delivery of the cargo and had no facilities at Tianjin to do so. It kept pressing Teda for payment, while exploring the possibility of fi nding a new buyer for the cargo. Negotiations with Teda broke down and no new buyer was found. The claimant did not attempt to take delivery of the cargo, and at trial the cargo remained in the warehouse. By that time the storage charges exceeded the cargo’s value.
Whilst the claimant accepted that the defendant shipowner had been entitled to discharge the cargo into storage, it contended that the way in which it had been done resulted in conversion of the cargo: fi rstly, without the claimant’s authority a lien for storage charges had been created in favour of the warehouse company; and, secondly, the warehouse company and the ship’s agent had denied the claimant access to the cargo. The defendant denied conversion and argued that the claimant was responsible for the storage charges.
Males, J. dismissed the claim. Whilst he held that goods can certainly be converted by a person who creates a lien over them without the authority of their owner, this was not the case here. An owner of goods who authorises a bailee to deliver goods into storage must be taken to authorise the creation of a lien where that is a reasonable and foreseeable incident of the storage contract which the bailee is authorised to conclude.
On the facts, it was the claimant’s responsibility as party to the bill of lading contract to take delivery of the cargo at Tianjin. In breach of contract, it had failed to do so. The claimant had expressly authorised the storage of the cargo because of the charterparty clause incorporated into the bill of lading, and in any event, impliedly as a result of the well-established general law of bailment in this situation. The creation of a lien was a reasonable and foreseeable incident of the storage contract which the defendant was authorised to conclude.
On the second point, the court acknowledged that denial of access could constitute conversion if it amounts to a deliberate encroachment on the rights of the goods owner so as to exclude him from use and possession of the goods. In this case, though, the claimant at all times had been looking for a new buyer for the cargo, indicating that they did not feel excluded from use and possession
of the cargo. Furthermore, the claimant had never presented the bill of lading and sought to take delivery, so its access to the cargo was never tested. The cargo remained in the warehouse and had not been misappropriated.
The claimant was also found liable to reimburse the defendant shipowner for reasonable storage charges as and when paid. The court also held that the shipowner was entitled to an order for delivery up of the bill of lading enabling the cargo to be sold to cover the storage charges.
The reasoning in this case must be correct. A shipowner, as a bailee of cargo, is certainly under a duty to its owners not to convert it, but in this case, there was a clear right to discharge the cargo into storage if no bill of lading was delivered. In reality no warehouse company would agree to store cargo on terms which did not include a lien, otherwise it would be left with an unsecured claim against a bill of lading holder who had already breached its obligations by failing to take delivery.
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October 2015 Issue
An owner of goods who authorises a bailee to deliver goods into storage must be taken to authorise the creation of a lien where that is a reasonable and foreseeable incident of the storage contract which the bailee is authorised to conclude.
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