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May 2019
hilldickinson.com/commodities
Sanctions and illegality – Iranian Offshore Engineering and Construction Company -v- Dean
Pages 6-7x
Seizure of cargo and the Sugar Charter Party force majeure clause
Pages 10-11ge x
Default interest rates – Cargill -v- Uttam Galva
Pages 8-9e x
A commodities update
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Trade Advantage
Mistaken identity and SWIFT justice: identifying the issuer of a letter of creditYuchai Dongte Special Purpose Automobile Co Ltd -v- Suisse Credit Capital (2009) Ltd [2018] EWHC 2580
This case involved a number of knotty issues in the context of documentary credits, including the admissibility of extrinsic evidence to identify the issuing bank, the exclusion of liability to make payment, and the reliance upon estoppel by convention.
Welcome to the season edition of Hill Dickinson’s title here newsletter, which we hope you will find of interest.
Kind regards,
Name Here Partner, Sector [email protected]
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Welcome
ContentsLetters of credit – Yuchai Dongte
Liquidated damages – Triple Point -v- PTT
Sanctions and illegality – IOEC -v- Dean
Default interest rates – Cargill -v- Uttam
Seizure of cargo and the Sugar Charter Party force majeure clause
Applying for a stay on jurisdiction grounds – Vinmar
Serious irregularity – Fleetwood Wanderers
Team News
1-3
4-5
6-7
8-9
10-11
13-14
14-15
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BackgroundThe claimant was a manufacturing company based in China. The defendant was a company which provided financial services in support of trade and was a member of the SWIFT network.
The claimant claimed payment of US$3 million from the defendant pursuant to a letter of credit, which the claimant alleged was issued by the defendant on 10 March 2014, and which incorporated the UCP 600.
Also featuring in the letter of credit transaction with which the Court was concerned was Suisse Bank Offshore Ltd (SBOL), an entity within the Suisse Bank Group that was unrelated to the defendant.
The defendant denied that it was the issuing bank and argued that payment under the letter of credit was to be made by SBOL.
On 10 March 2014, the defendant sent a SWIFT MT700 form containing the letter of credit to the Rural Commercial Bank of Zhangjiagang. The relevant SWIFT fields provided that the credit was ‘available with’ SBOL by ‘negotiation’.
On 11 March 2014, the Rural Commercial Bank of Zhangjiagang forwarded the letter of credit to the claimant. On the covering form, it specified that the ‘issuer’ was the defendant.
By documentary remittance dated 18 March 2014, Bank of China presented documents under the letter of credit to SBOL.
On 19 March 2014, Bank of China sent a MT999 form to the defendant. The MT999 form said that documents had been ‘negotiated’ the previous day, that the terms were complied with, and claiming payment for US$3 million. The defendant responded with a message, including a disclaimer, stating:
‘... according to Field 78 of our MT700 ... we have relayed your SWIFT MT999 message to applicant bank: [SBOL (Comoros)] (the issuer) and will revert to you once we received their respond ... no our (SB2LTGB2L) responsibility for payment under this credit.’Thereafter correspondence ensued in which the representative of Suisse Bank Group stated it would waive apparent discrepancies of documents presented
under the letter of credit and accept payment. Also, SBOL underwent a sale of shares and was re-named Asia Capital Development Bank.
On 12 November 2014, Bank of China wrote to the defendant asking it to relay to SBOL a message demanding payment under the letter of credit.
On 4 December 2014, the defendant wrote to Bank of China saying that it was unable to relay its message to (what it called) the issuer, SBOL, because it had no contact relation with it, and advising that SBOL had been sold and changed its name.
The claimant asserted that the defendant was the issuer of the letter of credit and was liable to make payment of US$3 million under it.
The defendant denied that it issued the letter of credit, contending that the issuing bank was in fact SBOL. Alternatively, the terms of the credit were such that the normal liability of an issuing bank in the UCP 600 were excluded. The defendant further asserted that, given the events, the claimant was estopped by convention from claiming that the defendant issued the letter of credit.
The issuesThe court had to decide:
(1) whether the defendant was, on the true construction of the letter of credit, the issuing bank;
(2) if the defendant was the issuing bank, whether its liability to make payment was excluded on the true construction of the letter of credit; and
(3) whether there was an estoppel by convention to the effect that the defendant was not the issuing bank.
As to the first issue, the court held that there was a question as to the appropriate role to be played by extrinsic evidence. The claimant had submitted that the letter of credit had to be construed within the ‘four corners’ of the credit and the UCP 600, which was incorporated by reference. The defendant had contended that, despite their special nature, documentary credits should be construed in accordance with the ordinary rules of contractual construction, including as to the admission of extrinsic evidence, where appropriate.
Welcome to the latest edition of Trade Advantage.
The cover article focusses on the Yuchai Dongte judgment, which considers the importance of banking practice and evidence within the context of letters of credit.
The letter of credit as we know it today, almost always incorporates the latest version of the UCP and is communicated worldwide by means of the SWIFT financial messaging system. The ICC oversaw the creation of the UCP in 1933. SWIFT was founded in 1973. The origin of letters of credit is much earlier. By the 12th century the Knights Templar were utilizing letters of credit. Pilgrims would visit a Templar house in their home country, depositing their deeds and valuables. The Templars would then give them a letter describing their holdings, and, while traveling, the pilgrims could present the letter to other Templars along the way to ‘withdraw’ funds from their accounts.
Nowadays letters of credit are advised by way of electronic data exchange as we move towards blockchain technology and an increasingly ‘paperless’ commercial culture.
As commerce drives change, so too the law develops, and we look forward to keeping you updated on relevant legal developments.
Best wishes, Andrew Buchmann, Partner
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In the court’s view, extrinsic evidence could be relevant to a letter of credit. A letter of credit was not akin to a negotiable or quasi-negotiable document. However, where the issue was who the parties to the contract were, and one party had, effectively, via the use of a particular form, indicated that it was the issuer, there was a need for caution about the extrinsic evidence that one should look at. There was a need to be satisfied that the relevant material went to the question of the identification of the parties to the contract; and a further need to be satisfied that that material was known, or at the least, available to both parties.
The court held that the matters relied on by the defendant in support of its construction of the contract did not constitute the type of extrinsic facts which fell properly to be considered under the heading of contractual construction. In any event, the matters relied on by the defendant did not show that the issuer of the credit was not, as appeared from the use of the SWIFT MT700 format, the defendant, but was instead SBOL.
Accordingly, it was determined that the defendant was indeed the issuer of the credit.
As to the second issue, and despite the defendant’s contentions, the court held that there was no question of exclusion of the terms of the UCP. The question was what those terms, as incorporated, meant, and, in particular, whether certain fields in the MT700 form were inconsistent with the indication that the defendant was the issuer, and, if so, whether they were sufficiently clear to negate that indication.
In the court’s view, the fields which were relied on by the defendant as negativing the conclusion that would be drawn from the use of the MT700 form were not inconsistent with the defendant being the issuing bank. On the contrary, they were wholly consistent with that being the position. The defendant had submitted that the documents presented under the letter of credit were discrepant, and although there had been
a waiver by SBOL there was no waiver by the defendant. That submission would be rejected. SBOL, as nominated bank, had actual, apparent or ostensible authority to waive the discrepancies, and such waiver bound the defendant. Accordingly, the waiver by SBOL of the discrepancies in the documents bound the defendant, who thereby became liable to pay if the nominated bank, that is, SBOL, did not.
As to the third issue dealing with estoppel by convention, the defendant had to show an assumption as to the identity of the issuer that was made by the defendant and which could be seen to have been shared by the claimant from correspondence that ‘crossed the line’, and which materially influenced the defendant. In other words, what had to be shown was that the claimant must have known that the defendant understood, or believed, that it was not the issuer, and that the defendant acted in reliance on that belief. However, the defendant had not established that there was an shared assumption that was relied upon. That was sufficient to dispose of the plea of estoppel.
Accordingly, judgment was given in favour of the claimant.
Noteworthy points In reaching its decision on the first issue, that is, the identity of the issuer of the letter of credit, the court considered the use of the SWIFT system and its common standards and forms in providing secure financial messaging around the world. It recognised that SWIFT is accepted and understood internationally by specialists in the trade finance departments of financial institutions, as well as by exporter/sellers.
In this case, the court placed considerable weight on the use and format of the SWIFT MT700 form and the fields comprising that standard form.
Particularly, the court put great stock in the fact that the parties’ experts both agreed that the SWIFT MT700 format was appropriate for the issuance of letter of credit and not simply for
advising another party’s letter of credit (it was agreed that the appropriate form of message to be used for advising a letter of credit was form MT710). In short, the MT700 form was designed to be used by the issuer of the credit.
Once the court was convinced that the MT700 form connoted that the sender was the issuer, in this case, the defendant, it expressed a need for caution in allowing consideration of extrinsic evidence and subsequent conduct of the parties that contradicted this, and was not persuaded in this case that it should do so.
This judgment also acts a reminder (and warning) that the waiver by a nominated bank of the discrepancies in the documents can bind the issuer, who thereby becomes liable to pay under the letter of credit if the nominated bank does not.
In addressing the estoppel by convention issue, the court returned to the importance of the parties’ use of the SWIFT MT700 form, stating that the evidence before it was that the defendant’s objective conduct in sending the MT700 message would be understood by a reasonable observer as indicating that the defendant was the issuer. It would not convey that the defendant did not regard itself as issuer of the letter of credit. Against that, the court was satisfied that there was no extrinsic evidence to contradict this and establish that there was a shared assumption by the parties that was relied upon.
ConclusionThis case demonstrates the court’s willingness to place substantial importance on accepted, international banking practice in examining the true construction of the contract in relation to letter of credit.
Andrew Buchmann [email protected]
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Many sales contracts have liquidated damages clauses specifically designed to compensate one party for another’s delay in performance of its contractual obligations. These are distinct from clauses which liquidate damages upon termination of a contract.
It has generally been considered that liquidated damages clauses for delay are effective up to termination of the contract but thereafter only general damages are available. A recent Court of Appeal decision has given further guidance on this issue.
The factsAn American software company, Triple Point Technology (TPT), contracted with a Thai commodities trader, PTT Public Co (PTT) to design and provide a trading software platform.
These were the key terms in the contract:
TPT was to perform in accordance with a project plan
(i) Phase I of the plan was to be completed within 460 days
(ii) In the event of delay TPT would ‘be liable to pay the penalty at the rate of 0.1%... of undelivered work per day of delay from the due date for delivery up to the date PTT accepts such work’ (Art. 5)
(iii) TPT was to perform the contract with all reasonable skill, care, diligence and efficiency (Art. 12(1))
(iv) TPT was liable for any damage PTT suffered as a consequence of its breach of contract (Art. 12(3))
(v) TPT’s ‘total liability’ was limited to the contract price received by TPT (USD1.038 million), unless the damage was caused by fraud, negligence, gross negligence or wilful misconduct on the part of TPT (Art. 12(3))
(vi) Payments by PTT were to be in accordance with milestones specified within the contract (Art. 18)
TPT completed Phase I of the project 149 days late. The work for Phase I was invoiced and paid for.
TPT sent further invoices in accordance with calendar dates set out in the project plan but PTT refused to pay them because the delivery milestones had not been met and thus payment had not fallen due. TPT refused to proceed with the project and PTT terminated, holding TPT in repudiatory breach.
TPT sued for payment of the unpaid invoices amounting to almost USD5 million. PTT counterclaimed for liquidated damages for delay under Article 5 and general damages as a consequence of TPT’s breach (largely for the cost of obtaining alternative software).
Mrs Justice Jefford in the High Court decided in August 2017 that payment was conditional upon meeting the contractual milestones and so no payments were due to TPT.
The judge found that delays in performance were caused by TPT’s negligent management of the project, entitling PTT to terminate. She awarded (i) general damages for
Liquidated damages post contractual terminationTriple Point Technology Inc -v- PTT Public Co Ltd [2019] EWCA Civ 230
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the costs of procuring an alternative system exceeding USD11 million but then capped those damages at the contractual limit of liability of USD1.038 million and (ii) liquidated damages for delays in delivery of the software for the entire period of delay up to completion of the project by the second software provider (i.e. post termination) of USD3.46 million which were not subject to the cap in Article 12.
TPT appealed and PTT cross-appealed against the decision that its general damages claim was subject to a cap. Amongst TPT’s other arguments, it asserted that even if liquidated damages were due, they could only be awarded in respect of delayed work provided by TPT and accepted by PTT - the clause could not apply after termination of the contract.
The appealOn 5 March 2019 the Court of Appeal handed down its judgment. The Court rejected TPT’s arguments regarding PTT’s liability to pay its fees.
On the quantum of PTT’s counterclaim, the Court did however allow the appeal.
First, the Court found that the damages calculated by reference to the liquidated damages clause were proportionate to the legitimate interest of the innocent party and could not be construed as a penalty. You may recall from previous bulletins of ours that this is now the test for the validity of a liquidated damages clause (such a clause no longer needs to be a reasonable pre-estimate of the likely loss a party will suffer).
Indeed, the Court found the liquidated damages were modest in comparison with PTT’s actual financial consequences of the delay (costing them more than USD18 million).
Liquidated damages post terminationSecondly, the Court considered, by reference to the relevant case law, the scope in time of a liquidated damages clause where a substitute supplier steps in.
The Court thought there were three options:
(i) the clause did not apply at all;
(ii) the clause applied only until termination of the first contract; or
(iii) the clause applied until the supplier completed the project.
Lord Justice Jackson said, quite logically, that such a determination depends upon the specific wording of the liquidated damages clause.
In this case, he considered the clause did not apply where the delayed works were not performed by TPT and approved by PTT so the liquidated damages could not extend beyond TPT’s phase I performance delays as no further services were delivered by TPT thereafter.
Limit on liabilityThirdly, the limitation clause referred to ‘total liability’ thus encompassing all types of damages, not just those referred to in Article 12 itself, so including liquidated damages for delay.
To break the contractual limit of liability PTT had to identify a freestanding tort of negligence. The Court of Appeal did not accept PTT’s argument that ‘negligence’ in the context of the limitation clause meant a breach of a contractual duty of care. There needed to be something more, such as a contractor causing personal injury through carelessness of work.
The Court of Appeal therefore limited PTT’s total damages to USD1.038 million.
Commentary How far a liquidated damages clause for delay will apply post termination of a contract will depend on the clause’s precise wording. That will not come as a surprise to many of you! But it does mean that the distinction between liquidated damages for delay pre termination and general damages post termination might not be the standard rule going forward if the clause is appropriately worded, in spite of misgivings by Jackson LJ in this case. So in the event of delayed performance, any liquidated damages clause will have to be carefully examined to see if it could apply in the event of substituted performance.
When drafting a contract, you may wish to ensure the precise terms of a liquidated damages clause enable recovery even where, in the event of termination for breach of contract, the counterparty is no longer performing the contract. It is not uncommon for an innocent party to cancel a contract and seek performance elsewhere in the event of extensive delay where a deadline for performance is a condition of the contract. Attention should also be paid to limitation clauses to ensure that they do not nullify the benefits of a liquidated damages clause as proved to be the case in this dispute.
This case serves to highlight the risks and costs of remedying performance where something goes wrong and a tribunal or court holds the parties to the damages and limitation of liability clauses contained in the contract. Great care is required when negotiating these types of clauses.
Amy Walmsley [email protected]
Paul Taylor [email protected]
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There are a number of different ways in which a contract may involve illegality: the contract may be prohibited by statute; it may be entered into for an illegal purpose; or an unlawful act may be committed in the course of its performance. In such situations, illegality can provide a defence to claims arising in relation to the contract. The maxim goes: no court will assist a man who founds his cause of action upon an immoral or illegal act. The rationale is that it would be contrary to the public interest to enforce a claim if to do so would harm the integrity of the legal system or public policy. Hardly anyone would disagree with the court in the 1725 case of Everet -v- Williams that dismissed an action between two highwaymen who sought an account of the division of their ill-gained profits.
This can have extraterritorial application such that the English courts may not enforce a contractual obligation where performance is forbidden by the law of the place where it is to be performed. In Ralli Brothers -v- Compañia Naviera Sota Y Azna the court refused to enforce an obligation to pay freight in excess of 875 pesetas per ton where the obligation in question was to be performed in Spain and under Spanish law the payment of freight above 875 pesetas per ton was illegal. The application of precise rules of illegality has produced injustices over the years. The difficulties arise from the unclear boundaries of the ‘unruly horse’ of public policy combined with
the particularly fact sensitive nature of each case. Seeking to address the problem, the Supreme Court in Patel -v- Mirza adopted a flexible ‘range of factors’ approach to the doctrine of illegality, replacing the previous rule-based approach.
This article reviews the new test laid down in Patel and its recent application in Iranian Offshore.
Patel -v- Mirza and the ‘range of factors’ approachA Supreme Court majority in Patel identified three considerations which should be addressed when deciding what impact illegality should have on a claim:
1. The underlying purpose of the law that has been transgressed and whether denial of the claim would enhance that purpose.
2. Whether denial of the claim would render other relevant public policies less effective.
3. The need for proportionality and the danger of overkill.
The Supreme Court held that a variety of factors may be considered within this framework. The Court considered that it is not possible to prescribe a definitive list of the factors, as the possibilities are infinite, but highlighted the following:
• the seriousness of the illegality;
• whether the illegality was intended;
• the centrality of the illegality to the contract or its performance;
• the degree of participation by the claimant in the illegal act;
• the seriousness for the claimant of a potential denial of enforcement of its claim;
• whether denying enforcement will ensure that the claimant does not profit from the illegality; and
• whether denying enforcement will avoid inconsistency in the law.
Iranian Offshore Engineering and Construction Company -v- Dean Investment Holdings SA and orsIranian Offshore Engineering and Construction Company (‘IOEC’), an Iranian company, claimed that Dean and eight other defendants had perpetrated the misappropriation of US$ 87 million after IOEC paid that sum as the price of an oil rig but did not acquire same. IOEC sought equitable compensation.
Mr Justice Butcher in the Commercial Court ruled that the alleged fraud had been committed.
As a last line of defence, three of the defendants argued that IOEC should not be granted relief as the contract for the sale of the rig breached sanctions laws, specifically EU Regulation EU/267/2012 (the ‘Regulation’). The defendants contended that the Regulation was engaged in three ways:
Illegality and the ‘range of factors’ testIn Iranian Offshore Engineering and Construction Company -v- Dean Investment Holdings SA and ors [2019] EWHC 472 (Comm) the Court considered the law relating to illegality as recast in Patel -v- Mirza [2017] AC 467.
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1. At the date when the contract was entered into, Article 8 and Annex VI of the Regulation together had the effect of prohibiting the sale of oil rigs to Iranian entities.
2. At the date when the contract was entered into, IOEC were listed in Annex IX, and Article 23 prohibited transactions with persons or entities therein listed.
3. Article 38 prohibits the enforcement of claims affected by the measures in the Regulation if made by persons listed in Annex IX.
Butcher J found that the transaction had been structured in such a way as to circumvent sanctions. However, applying the test in Patel, he rejected the defendants’ contention that IOEC’s claim should be denied on illegality grounds. He considered the following factors important:
• IOEC’s claim was restitutionary; it was not to obtain the rig.
• The contract would not have been in breach of the Regulation at the date of issue of the claim form as by then Article 8 had been deleted from the Regulation and IOEC had been removed from Annex IX.
• The fraud by the defendants was not connected to the circumvention of sanctions.
• The purpose of the sanctions was not to prevent the recovery of money obtained by fraud.
• Denial of IOEC’s claim would not enhance the purpose of the sanctions.
• Conversely, denial of the claim would harm the public policy of deterring fraud.
• Denial of the claim would result in the defendants getting away with defrauded money in the amount of US$ 73.6 million and therefore would be a disproportionate response to any illegality.
• Article 38 of the Regulation is not engaged because IOEC’s claim arises from the fraud perpetrated by the defendants, and not from the sale contract having become unenforceable because of the sanctions.
CommentThe moral weighing-up of competing wrongs required by the range of factors test and duly carried out by Butcher J in IOEC -v- Dean, is an exercise which Lord Sumption, one of three dissenting judges in Patel who rejected the range of factors test, cautioned against. Concerned about legal uncertainty, Lord Sumption said, ‘[a]n evaluative test dependent on the perceived relevance and relative weight to be accorded in each individual case to a large number of incommensurate factors leaves a great deal to a judge’s visceral reaction to particular facts… it is an inescapable truth that some judges are more censorious than others’.
It will be interesting to see whether the flexibility of the range of factors test proves helpful or unhelpful. One useful indication to be found in Patel -v- Mirza, is that the courts will now normally permit the recovery of any money transferred under a contract which is unenforceable because of illegality. Indeed, that provides a sense test for the outcome in IOEC -v- Dean. Aside from that, the doctrine of illegality is no more predictable than it ever was.
Miranda Hearn [email protected]
Edwin Cheyney [email protected]
Footnote: IOEC (being an Iranian company) was not subject to the Regulation as it applied within the territory of the EU and/or to EU operators only. However, it was Butcher J’s view that illegality and public policy considerations were in play by virtue of the fact that IOEC would have been in breach of the Regulation had it been an EU national and also because IOEC’s actions were effectively abetting breaches of the Regulation to entities to which it did apply.
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IntroductionMost contracts include a default interest rate clause. In this case the High Court considered an application made by Cargill International Trading Pte (Cargill) for summary judgment on its claim for the contracted rate of interest, and the arguments in defence which Uttam Galva Steels Limited (Uttam) submitted as to why the contracted rate should not apply.
Factual BackgroundCargill and Uttam entered into two Advance Payment and Steel Supply Agreements (APSAs) under which Cargill made advance payments to Uttam in respect of future deliveries by Uttam of steel products to Cargill. Uttam was obliged to repay Cargill either by delivering products to Cargill or a repayment in cash. Between February and July 2015 Cargill made advance payments to Uttam, amounting to US$61.8million. In the event, Uttam ultimately failed to repay Cargill.
Cargill successfully applied for summary judgment against Uttam in June 2018. Teare J ordered that judgment be entered in favour of Cargill for the full amount of the advanced payments. At the hearing there was not enough time for the parties to address the issues of pre-judgment and post-judgment interest. Teare J ordered for the issue of interest to be heard at a later date. Uttam applied for permission to appeal but was refused.
In advance of the further hearing ordered by Teare J, Cargill applied for summary judgment that it was entitled to ‘default compensation’ pursuant to clause 8.12 of the APSA agreements or, in the alternative, pre- and post-judgment interest, at a rate proposed by Cargill. Clause 8.12 provided for ‘default compensation’ at a rate of one month LIBOR plus 12%, to be paid by Uttam, if it failed to pay the contract amounts when due, from the due date up to the date of actual payment (both before and after judgment).
Uttam did not dispute that the APSA agreements made provision for ‘default compensation’; however, it raised several points by way of defence. Notably, none of the points discussed in this article was raised in Uttam’s defence for the main claim. It was only in a late application made shortly before the further hearing that Uttam applied to amend the defence to include these additional points.
Cargill refused to consent to the amendments and opposed the Court granting permission. Uttam accepted that permission should only be given if there was a real prospect of success, the same test as on summary judgment.
In these circumstances, at the hearing of 28 February 2019, Mr Justice Bryan decided that the best use of the Court’s time was to hear Cargill’s application for summary judgment, including the arguments advanced by Uttam on which it sought permission to amend
Default interest clauses: LIBOR plus 12% enforced by Commercial CourtCargill International Trading Pte Ltd -v- Uttam Galva Steels Limited
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its defence. Mr Justice Bryan concluded that if this was an appropriate case for summary judgment then it followed that it would not be an appropriate case to allow the amendments. The Court therefore dealt with the summary judgment application and application to amend in one expedient process.
Legal IssuesMr Justice Bryan reviewed the previous authorities and the applicable principle that pursuant to CPR 24, summary judgment may only be granted where (1) the defendant has no real prospect of defending the claim and (2) there is no other compelling reason for trial.
Cargill submitted that Uttam had no real prospect of success on any of the points raised in defence. The Court then considered each of these points in detail:
1. Was the default compensation interest rate specified in clause 8.12 arguably a penalty and therefore unenforceable?
At the outset, Uttam argued that the default compensation provided for under clause 8.12 was a penalty and was therefore unenforceable.
Mr Justice Bryan referred to the leading case of Cavendish Square Holding BV -v- Makdessi, in which the Supreme Court stated: ‘The correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract’.Obviously, Cargill had a legitimate interest in ensuring that Uttam repaid the money Cargill had advanced. In considering the evidence before the Court, Mr Justice Bryan held that the rate prescribed under clause 8.12 was the commercial norm for Indian companies comparable to Uttam and, as the Indian steel industry was experiencing difficulties, companies like Uttam were a greater credit risk.
Mr Justice Bryan went on to observe that:
A. a higher rate being payable by a default party, post a default, was entirely reasonable and commercial;
B. the rate prescribed under clause 8.12, when compared and contrasted with the rates examined in a number of leading cases where allegedly
penal interest was considered by the courts, was neither exorbitant nor unconscionable, and was, on the contrary, entirely commercially justified.
The Court therefore concluded that the rate was not a penalty.
2. Was clause 8.12 a valid term of the APSA agreements?
Uttam’s next point of defence was that clause 8.12 was an onerous term not expressly brought to Uttam’s attention and was therefore not validly incorporated into the APSA agreements. Mr Justice Bryan commented that, ‘the suggestion that Uttam did not read and was not aware of the contents of clause 8.12 is surprising and lacking in credibility... not only are the contracts signed but they are stamped and signed on every page.’The usual position in relation to this point taken by Uttam is that where an agreement is in writing and signed, the parties will ordinarily be bound by those terms whether or not they have actually read them. This is particularly the case in situations where the agreement has been fiercely negotiated by sophisticated parties, which was apparently the case here. There are exclusions where parties will not be bound by unusual or onerous terms but this is usually in cases which involve consumers, undue pressure, unsigned contracts and/or standard form contracts that have not been negotiated between the parties (commonly referred to as the ‘ticket cases’). None of these circumstances applied to the APSA agreements. Mr Justice Bryan held that, in any event, clause 8.12 was neither an unusual nor an onerous term and on established principles Uttam were bound by the terms of the contract they had signed, whether they chose to read it or not.
3. Indian law and illegality
Uttam’s final point raised in defence was that payment clause 8.12 was unlawful under Indian law. Mr Justice Bryan held that APSA agreements are expressly governed by English law and whether they are illegal or not under Indian law is irrelevant. Nevertheless, the Court considered whether the clause was unlawful as a matter of Indian law by relying on the expert evidence put forward by the parties. Uttam’s expert
evidence did not refer to any Indian court judgment or rule of construction in support, and made no attempt to grapple with the language of the piece of Indian law being replied upon. It was therefore unsurprising that Mr Justice Bryan concluded he was unable to place any weight on Uttam’s expert opinion and preferred Cargill’s expert evidence. When the Court itself considered the Indian law relied upon, it found there was nothing in the wording to support Uttam’s argument.
ConclusionThe Court held that none of the points Uttam had raised in defence to the claim for interest had any real prospect of success and that there was no other compelling reason for trial. Cargill was entitled to interest claimed under clause 8.12
CommentaryKey points this case highlights:
In considering Uttam’s first purported defence, the Court held that a default interest provision was not by itself penal in nature and, in this specific case, the rate agreed by the parties was neither onerous nor exorbitant but was rather perfectly reasonable and commercial under the circumstances.
In relation to Uttam’s second purported defence, this case highlights the importance of operational discipline and good ‘housekeeping’ when managing high-value contracts. The Court expressly referenced the fact that Uttam had signed every page of the contract - this is good practice and acts to demonstrate, should there be any disputes, that all clauses were seen by both parties.
This case shows the importance, when obtaining local lawyer expert evidence, that that lawyer refers to relevant cases and examples in support of their opinions.
Interestingly, the Court did not award indemnity costs to Cargill but held that Uttam’s behaviour formed part of the ‘rough and tumble of commercial litigation’.
Charlie Fraser [email protected]
Sumeet Malhotra [email protected]
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The clause
Clause 28 of the Sugar Charter Party states:
‘Strikes and force majeure
In the event that whilst at or off the loading place or discharging place the loading and/or discharging of the vessel is prevented or delayed by any of the following occurrences: strikes, riots, civil commotions, lockouts of men, accidents and/or breakdowns on railways, stoppages on railway and/or river and/or canal by ice or frost, mechanical breakdowns at mechanical loading plants, government interferences, vessel being inoperative or rendered inoperative due to the terms and conditions of employment of the offices and crew, time so lost shall not count as laytime or time on demurrage or detention.’
The question to be determined by the Court was whether the seizure of the cargo by the customs authorities at the discharge port fell within the meaning of ‘government interferences’ with the result that time does not count during the delays.
The owners argued that the seizure was not covered by clause 28. They distinguished between:
(i) a government entity interfering in a manner that is unanticipated, officious and beyond the control of the parties; and
(ii) the expected and routine application of pre-existing legislation to the cargo and cargo documents.
In the owners’ view the seizure was a ‘run-of-the-mill event’ falling under (ii) and therefore did not amount to a government interference under clause 28.
The judge’s decision
The Commercial Court judge disagreed with the owners. Points made by the judge include:
• Seizure is a significant exercise of executive power and cannot be regarded as ‘ordinary’.
• However the distinction drawn by the owners between (i) and (ii) above is not one which the wording of the clause requires.
• The owners’ analysis that in order for a government interference to be covered by clause 28 it has to be a government interference ‘in a force majeure sense’ should be rejected. The term ‘force majeure’ which appears in the heading of the clause is simply a label for a list, and the list that appears within the clause includes a mixture of matters.
• The owners were not assisted by the fact that seizure may be expected following the submission of false documents. The judge said it was not the submission of the false documents which caused the delay. The government authority’s decision to seize was the cause of the delay.
The judge decided that the seizure amounted to a government interference under clause 28 and that therefore time did not count against the charterers. The judge emphasised that the decision was made on a highly fact-specific basis: ‘The answer is concerned only with the seizure of a cargo and with that seizure by a customs authority that is a State revenue authority acting in a sovereign capacity’, he said.
Conclusion
More often than not, parties incorporate standard form clauses from an industry or company template without amending them. Ideally, however, bespoke ‘force majeure’ clauses should be drafted and agreed, specifying whatever events the parties wish to have covered.
In doing so, parties should be conscious of the specific risks, both human and natural, involved in the particular trades and in the countries within which they operate, and ensure that the clause is drafted suitably.
Rosie Goncare ([email protected]) and Tony Swinnerton ([email protected]) in the London Shipping team acted for the owners.
Conor O’Brien [email protected]
Darren Wall [email protected]
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BackgroundIn Vinmar a dispute arose out of a contract for the purchase of chemicals (the Contract) agreed between the parties. Following the commencement of proceedings in Singapore by PTT, Vinmar applied for a stay of proceedings on the grounds that the Contract incorporated an exclusive jurisdiction clause (EJC) conferring jurisdiction on the High Court in London. PTT resisted the application on two alternative bases:
(i) the ECJ was not incorporated into the Contract; and
(ii) Vinmar did not have a genuine defence.
The assistant registrar at first instance found that the Contract contained the jurisdiction clause relied on by Vinmar but held that there was strong cause to refuse a stay on the basis that the applicant did not have a bona fide defence to PTT’s claim. In doing so, he relied primarily upon the Court of Appeal’s decision in The Jian He [1999] 3 SLR(R) 432.
The Jian He concerned a claim arising out of a bill of lading containing an EJC conferring jurisdiction on the maritime courts of specified Chinese cities. In that case, goods shipped under the relevant bill of lading were
not delivered to the consignee but to a third party upon production of a forged bill of lading, leading the court to conclude that the defendant shipowners could have no defence to the claim and so their application for a stay of proceedings should be rejected. The court held that the lack of a genuine defence constituted strong cause to refuse an application to stay proceedings, as, in such circumstances, there was effectively no dispute in existence and the applicant could not be said to have any genuine desire for proceedings to be pursued in a foreign court but was merely seeking a procedural advantage.
Applying for a stay on jurisdiction grounds: Singapore Court of Appeal grants stay notwithstanding applicant’s apparent lack of a genuine defenceIn Vinmar Overseas (Singapore) Pte Ltd –v- PTT International Trading Pte Ltd [2018] SGCA 65 the Singapore court departed from a 20-year-long line of authority.
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13
Turning back to the case at hand, Vinmar appealed the first instance decision first to the Singapore High Court and then to the Singapore Court of Appeal.
The decision of the Court of AppealThe Court of Appeal overturned the decisions of the lower courts and granted Vinmar’s request for a stay of proceedings, clarifying that although the overarching test remained that of whether there was a ‘strong cause’ to refuse a stay, the merits of the applicant’s case in the substantive dispute were irrelevant in any assessment of whether such strong cause existed. In doing so, the Court departed from its previous decision in The Jian He and a long line of authorities which followed it.
The Court of Appeal articulated a number of reasons why The Jian He should be departed from:
• The starting point must always be that an EJC reflects an agreement to bring all disputes, regardless of their merits, within an agreed forum. The rule in The Jian He infringes on the parties’ freedom to contract; dismissing an EJC application for lack of a meritorious defence does not give effect to the parties’ agreement.
• The rule in The Jian He generates uncertainty for commercial parties engaged in international trade, as whether a dispute fails to be decided in the agreed forum will turn on a determination by a foreign court of the merits, which may well turn on contested issues of law and fact. It negates the management of ‘venue risk’ achieved by the inclusion of an EJC - the risk that a party may be required to initiate or defend proceedings in an unfavourable forum - and but for which many agreements may not conclude in the first place. This was contrary to policy.
• The rule in The Jian He has led parties to expend significant costs at the interlocutory stage of proceedings and has delayed the resolution of
disputes, with parties engaging in expensive steps such as translating documents and proving foreign law in order to demonstrate a genuine defence or the absence of one. This has typically resulted in multiple appeals, which further increase costs and delay; in this regard the Court noted that the current appeal was being heard almost two and a half years after commencement of the initial action. This was also contrary to policy.
• Departing from the rule in The Jian He would promote coherence and consistency in the law, aligning the law governing EJC applications with the position governing applications for anti-suit injunctions and applications to stay court proceedings on the basis of forum non conveniens or in favour of arbitration, where no inquiry into the merits of a defence takes place.
• The doctrinal basis for The Jian He rule was flawed. Where there was no bona fide defence it did not follow that there was no dispute to be determined; the fact that it could easily be determined which party was at fault did not mean that no dispute existed. Furthermore, the absence of a genuine defence did not necessarily equate to an absence of a genuine desire for trial in the agreed forum; there were many reasons why an applicant for a stay may desire trial in the agreed forum even if it has no prospect of succeeding, e.g. the rules regarding interest on judgment sums or costs may be more favourable.
The Singapore Court of Appeal confirmed that the grounds on which a stay may be refused are:
• Abuse of process. The Court stressed that the threshold for abusive conduct was very high and would only be relevant in exceptional cases. The Court offered, as an example, the case where the applicant had started a media campaign in the agreed forum to malign the plaintiff, thus undermining the prospects of a fair trial in that jurisdiction.
• Denial of justice: This ground may be made out, for example, if the agreed court had been dissolved by the time the dispute arose or was unavailable because war had since broken out in the jurisdiction. In very exceptional cases, where trial would be so overwhelmingly difficult or inconvenient that a stay would effectively deny the claimant a remedy, this ground may also be relevant. However, notorious delay or other inefficiencies in the contractual forum would not suffice in this regard, as such factors would have been foreseeable by the parties when entering into the agreement.
CommentaryThe Court of Appeal left open the question as to whether the merits of the defence should be considered in EJC applications concerning bills of lading and other standard form contracts. The Court considered that consistency in the law may justify the adoption of a uniform approach but at the same time noted that the central principle of party autonomy underpinning its decision did not apply where the plaintiff had no say in the choice of jurisdiction clause. In weighing the competing considerations, the Court expressed a ‘tentative preference’ for a consistent approach across contractual forms.
The Court’s judgment is to be welcomed as giving fuller recognition to party autonomy and promoting consistency and certainty in the law. Parties will no longer be able to rely on the absence of a bona fide defence as justification for overruling an agreed EJC, at least not in freely negotiated contracts. It is likely that the Singapore court will apply the principles underpinning this decision to bills of lading and other standard form contracts. However, with this judgment likely to deter many a party from commencing proceedings outside of the forum stipulated in such standard forms, it may be some time before the Singapore court is granted the opportunity to comment further.
Dan Emery [email protected]
14
In Fleetwood Wanderers Limited -v- AFC Fylde Limited, the claimant challenged the award of an arbitrator appointed under the Football Association (FA) rules.
During the currency of a contract between a player and Fylde, Fleetwood engaged the player. Fylde alleged that the player had committed a repudiatory breach of his contract and that Fleetwood was liable in common law liability for wrongfully procuring that breach.
Fylde amended its claim in the arbitration so as to add a claim for compensation based on Article 17 of the Regulations on the Status and Transfer of Players (RSTP) issued by FIFA [the Fédération Internationale de Football Association], of which the FA was a member association. Article 17 provides that if a professional player is required to pay compensation, the player and his new club are jointly and severally liable. Article 17 assumed particular significance in the arbitration because the common law claim for procuring the breach of contract failed.
Under the FA rules, the two clubs were required to ‘play and/or administer football in conformity with’ the FA rules ‘and…the statutes
and regulations of FIFA and UEFA [Union of European Football Associations] in force from time to time’. FIFA had issued the RSTP. The RSTP included a number of provisions which were mandatory in that they must be included without modification in the member association’s (in this case, the FA’s) regulations. The RSTP also contained provisions which were discretionary in that member associations were required to consider the inclusion of certain principles including Article 17.2 but were not bound to include them in their own regulations.
The question for the arbitrator was whether Article 17.2 had been adopted by the FA and incorporated into its rules. One might think (and the judge seems to have thought) that had the FA adopted Article 17.2, there would be a clear statement to that effect.
The arbitrator found that the FA rules incorporated the RSTP in full, including Article 17 and made an award in favour of Fylde.
After publication of the award, solicitors acting for the FA disclosed to the parties the existence of correspondence between the arbitrator and the judicial services manager at the FA in which the arbitrator had sought comments on the very point that he had to decide, namely, whether Article 17 had been adopted and incorporated into the FA rules.
The court held that this conduct amounted to a failure by the arbitrator to comply with his duty under section 33(1) of the Arbitration Act 1996 to act fairly and to give the parties an opportunity to deal with any issue that may be relied upon by him as a basis of his findings. The judge said that by making relevant enquiries and eliciting information from the FA without at least sharing that information with the parties and giving them an opportunity to make representations, the arbitrator committed a breach of his duties under section 33 which amounted to an irregularity or irregularities within the meaning of section 68(2) of the Arbitration Act 1996.
Under section 68(2), the irregularity is only regarded as a ‘serious irregularity’ if it has caused or will cause substantial injustice to the parties. In this case, the judge had little hesitation in finding that it had.
Where there is shown to be serious irregularity, the court may remit, set aside or declare an award to be of no effect. In this case, influenced by the arbitrator’s ‘anxiety to achieve the correct outcome, as he perceived it’, the court reached for the yellow, not the red card and decided to remit the award to the arbitrator for him to reconsider whether Article 17 applied.
Edwin Cheyney [email protected]
Katia Tsidemidi [email protected]
Serious irregularity: High court judge shows referee the yellow card Successful challenges to arbitration awards on the ground of serious irregularity are rare. According to the Commercial Court Users’ Group: Meeting Report of March 2018, there was only one in 2015 and none in 2016 and 2017. So any report of a successful challenge is bound to contain lessons for arbitrators.
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Team news
Upcoming events
Bethan BradleyBethan Bradley has joined the firm on 1 May 2019 as a partner in the shipping team. She has a mixed shipping and commodities practice with specialist knowledge of energy trading and a geographic focus on Asia. Bethan commented: ‘I am delighted to join Hill Dickinson, particularly given their wealth of experience in commodities and international trade, which is an excellent platform for me to help develop the practice in Asia, South Korea in particular.’
John McNeillyJohn McNeilly has joined the commodities team as a senior associate. John has over seven years’ experience of commodity and maritime matters at law firms in London and Singapore. During that time he has also worked on secondment at a commodity trading house and a P&I Club.
TRADE ADVANTAGE MAY 2019
New joiners
LISW Hill Dickinson commodities seminar 11 September 2019, LondonOnce again Hill Dickinson will be hosting the commodities session during London International Shipping Week. It will be a half day 11 September 2019. (https://londoninternationalshippingweek.com/event/hill-dickinson-commodities-seminar-2/). More details soon.
GAFTA annual dinner 12 June 2019, LondonHill Dickinson is sponsoring the pre-dinner drinks at the GAFTA annual dinner on 12 June at the Intercontinental, Park Lane (https://www.gafta.com/events/London-Dinner-2019-12-Jun-2019-London-UK/62299). We look forward to seeing lots of clients and friends there!
Tough mudderConor O’Brien, Georgina Benson and Saskia Scharnowski completed the Tough Mudder 5k Urban event in London’s Finsbury Park on 12 April 2019 as part of a Hill Dickinson team. They say: ‘Tough Mudder was a lot of fun and a great way to get to know people from other Hill Dickinson business groups.’ Would you or your team like to join us for an endurance challenge? Please contact Georgina/Conor/Saskia if you’re interested.
ICDR Y&I conference 20 June 2019, New York
Miranda Hearn will be speaking about sanctions at the International Centre for Dispute Resolution Young & International conference on “The impact of global politics on international arbitration” on 20 June in New York.
FOSFA Advanced Course 23-28 June 2019, Surrey
Darren Wall will be speaking at the FOSFA Advanced Course in Royal Holloway, Surrey’ on 27 June 2019. (https://www.fosfa.org/content/uploads/2019/03/Advanced-Course-Information.pdf).
The information and any commentary contained in this newsletter are for general purposes only and do not con-stitute 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 Liverpool, Manchester, London, Leeds, Piraeus, Singapore, Monaco and Hong Kong. Collectively the firms have more than 850 people including 175 partners and legal directors.
For further information about our services, please contact any member of our dedicated commodities team.
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TRADE ADVANTAGE MAY 2019
Key contacts
Jeff Isaacs Partner and Head of Commodities +44 (0)20 7280 9125 [email protected]
Edwin Cheyney Partner +44 (0)20 7280 9133 [email protected]
Fred Konynenburg Partner +44 (0)20 7280 9250 [email protected]
Paul Taylor Partner +44 (0)20 7280 9261 [email protected]
Andrew Buchmann Partner +44 (0)20 7280 9283 [email protected]
Darren Wall Partner +44 (0)20 7280 9265 [email protected]
Kamal Mukhi Legal Director +44 (0)20 7280 9258 [email protected]
Claire Messer Partner +44 (0)20 7280 9129 [email protected]
Toby Miller Senior Associate +44 (0)20 7280 9126 [email protected]
Shanna Ghose Partner (Singapore) +65 6576 4726 [email protected]
Saskia Scharnowski Associate +44 (0)20 7280 9126 [email protected]
Sumeet Malhotra Partner (Singapore) +65 6576 4747 [email protected]
Miranda Hearn Senior Associate +44 (0)20 7280 9136 [email protected]
Jean-Francois Van Hollebeke Senior Associate +44 (0)20 7280 9279 [email protected]
Amy Walmsley Trainee Solicitor +30 210 428 4770 [email protected]
Elaine CarterAssociate +44 (0)20 7280 9320 [email protected]
Conor O’Brien Associate +44 (0)20 7280 9349 conor.o’[email protected]
Charlie Fraser Trainee Solicitor +44 (0)20 7280 9198 [email protected]
Georgina Benson Paralegal +44 (0)20 7280 9151 [email protected]
Katia Tsidemidi Paralegal +44 (0)20 7280 9140 [email protected]
John McNeilly Senior Associate +44 (0)20 7280 9141 [email protected]
Singapore
London
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Dan Emery Associate +65 6576 4727 [email protected]
Christina Whitehead Associate +65 6576 4734 [email protected]
