Moral: if in doubt, get your own bank account

A straightforward tort case from the Privy Council a week ago, with an equally straightforward message for financial operators, was reported today: Royal Bank of Scotland International Ltd v JP SPC 4 [2022] UKPC 18.

In 2009 Cayman Islands operators JPSPC4 (JP for short) set up an investment fund to make specialised loans to UK lawyers. It employed as “loan originator / manager” a Manx company known as SIOM, owned by two gentlemen called Timothy Schools and David Kennedy. SIOM had a Manx account with the RBS in Douglas. Simplified, the scheme was that loan funds would be fed to SIOM’s account, to be held on trust for JP; SIOM would then disburse them to borrowers and receive repayments on JPSPC4’s behalf. Unfortunately the plan was a disaster. Of something over £110 million transferred to SIOM, the majority allegedly ended up in the hands of Messrs Schools and Kennedy (both of whom are currently on trial for fraud).

JP went into liquidation in 2012. In the present proceedings it sued RBS in Douglas for negligence, alleging that it had known SIOM held the funds on trust, and had missed obvious signs that withdrawals from its account amounted to a breach of that trust. RBS applied for a strike-out. The Manx courts granted it, and JP appealed.

The Privy Council had no hesitation in dismissing the appeal, and rightly so. As it pointed out, the holder of the account at RBS was not JP but SIOM; and while a bank might owe its customer a Quincecare duty (see Barclays Bank plc v Quincecare [1992] 4 All ER 363), there was no respectable indication that any such duty extended to third parties, and certainly not to trust beneficiaries. Furthermore, it made the obvious point that the liability of third parties for assisting in a breach of trust (which was essentially what was alleged against RBS) was under Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 based on proof of dishonesty, which was not alleged here; incautious suggestions to the contrary from Peter Gibson J in Baden v Société Générale [1983] 1 WLR 509, 610-611 were specifically said to be heterodox. There being no other plausible reason to accept a liability in tort here, it followed that the claim had been rightly struck out.

Two comments are in order.

First, financial services companies should now be advised to get their own bank accounts rather than operate through the accounts of nominees. Had JP disbursed funds from an account in its name, perhaps having given drawing rights to SIOM, none of these problems would have arisen.

Secondly, JP could have got a remedy in the present case. There is no doubt that SIOM would have had standing to bring a Quincecare claim against the bank (see Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50; [2020] AC 1189), and that JP could have claimed against it for breach of trust, put it into liquidation and got the liquidators to pursue RBS. Why it didn’t we don’t know; it may simply be that it viewed such a proceeding as unduly cumbersome and expensive. If so, it seems to have made a pretty costly mistake. Such are the risks of litigation.

A classic problem returns – bills of lading, charterparties and the terms of the contract of carriage

As any shipping lawyer will tell you, the law is not at its tidiest when a bill of lading ends up in the hands of a voyage charterer. Yesterday’s decision in Unicredit AG v Euronav NV [2022] EWHC 957 (Comm) adds a further chapter to the saga, which may be more tendentious than it looks.

The case arose out of the insolvency and suspected fraud of Indian oil trader GP (Gulf Petrochem FZC, now a restructured GP Global, not to be confused with oil major Gulf Oil). BP chartered the 150,000-ton Suezmax Sienna from her owners Euronav and agreed to sell her cargo to GP. GP financed the deal through Unicredit, under an arrangement whereby Gulf agreed to pledge and assign to Unicredit all rights in cargoes and rights arising under bills of lading, and agreed that it would resell the cargo to buyers who would pay Unicredit direct.

A bill of lading was issued by Euronav to BP. On the sale, Unicredit paid BP on GP’s behalf; but instead of the bill of lading being endorsed to GP, the charter itself was novated, BP dropping out and being supplanted by GP. BP retained the bill of lading, still made out in its favour.

In April 2020, GP sweet-talked Unicredit into condoning a series of STS transfers of the cargo to what seem to have been connected entities, despite the fact that the bill of lading was still in the hands of BP. The sub-buyers never paid Unicredit; at the same time GP showed worrying signs of financial strain. Unicredit now realised that something had gone badly wrong with the deal, with their security and with GP as a whole. It swiftly got BP to endorse the bill of lading to it and tried to salvage the situation by suing Euronav for delivering the cargo without its production.

The claim was unsuccessful. And rightly so. On the evidence it was clear that Unicredit had actually condoned the STS transfers in the knowledge that the bill of lading would not available, and therefore had only itself to blame. With this we have no argument.

But the claim also failed for another reason, which we are less sure about: namely, that the bill of lading in fact never governed the liabilities of Euronav in any case. The reason was this. When the bill was issued to BP, it was uncontroversial that it did not form the contract between the parties, since there was also a charter in force between BP and Euronav, and as between the two the charter prevailed (see Rodocanachi v Milburn (1887) 18 Q.B.D. 67). True, at the time of the STS transfers there was no longer a charter between BP and Euronav because GP had been substituted for BP. But this (it was said) made no difference. Although the bill of lading would have been the governing document had BP endorsed it to GP (Leduc v Ward (1888) 20 Q.B.D. 475), this did not apply where there had been no such transfer. In the present case there was no reason to infer that at that time the document’s status in BP’s hands had been intended to change from that of mere receipt to full contractual document; it therefore remained in the former category.

With respect, it is not entirely clear why this should be the case. For one thing, if a carrier issues a bill of lading to a charterer, arguably the reason why the bill of lading does not form the contract between the parties is simply that one has to choose between two inconsistent contracts, and that the obvious choice is the charter. If so, once the charter drops away as between those parties, there is no reason not to go back to the bill of lading. This seems, if one may say so, rather more convincing than the idea that the carrier is implicitly agreeing that the bill of lading gains contractual force if, and only if, endorsed by the charterer to someone else so as to cause a new contract to spring up. (In this connection it is worth remembering that it is equally possible for a bill of lading that once did have contractual force to cease to have it as a result of transfer to a charterer – see for instance The Dunelmia [1970] 1 Q.B. 289 – despite the fact that in such a case there can be no question of any new contract springing up.)

Put another way, it seems odd that entirely different results should follow according to whether a charterer transfers the bill of lading and retains the charter, or transfers the charter and retains the bill of lading.

There is also a practical point. Suppose that in the Unicredit case the unpaid party had not been Unicredit, but BP. BP might have thought that they were safe in allowing the charter to be novated in favour of GP provided they kept hold of the bill of lading and with it the assurance that the cargo could not reach GP’s hands without their consent. One suspects they would have been somewhat surprised to be told in such a case that the bill of lading was, and remained, of no effect despite the fact that they were no longer charterers of the vessel.

There clearly won’t be an appeal in this case, given the consent of Unicredit to what would otherwise have been a misdelivery. But the bill of lading point will no doubt give academics and others plenty to speculate about in the next editions of Scrutton, Aikens and other works. We await the results with interest.

Commercial contracts, wasted expenditure and lost profits

Anyone drafting a commercial contract these days will invariably add, somewhere, some kind of exemption clause. Unfortunately the drafter is frequently in a hurry, aware that there are a limited number of billable hours he can plausibly attribute to a mere drafting exercise; and as often as not the clause will be lifted from some precedent in the firm’s files, without too much thought about what it might actually mean in real life.

One suspects that this is essentially what had happened in Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440. But whatever the history, the result was an expensive trip to the Court of Appeal because something like £80 million turned on the issue of the understanding of relatively few words.

To simplify, IBM agreed in 2014 to install a computer system for an insurance company, CISGIL, for a price of about £50 million. The contract contained a term which, while allowing a list of specific types of claim characterised as “direct loss” in the event of breach, contained a general disclaimer (Clause 23.3) as follows:

“[N]either party shall be liable to the other or any third party for any Losses arising under and/or in connection with this Agreement (whether in contract, tort (including negligence), breach of statutory or otherwise) which are indirect or consequential Losses, or for loss of profit, revenue, savings (including anticipated savings), data …, goodwill, reputation (in all cases whether direct or indirect) even if such Losses were foreseeable and notwithstanding that a party had been advised of the possibility that such Losses were in the contemplation of the other party or any third party”

There was also a damages cap of roughly £80 million.

Delays occurred; things went wrong; CIGSIL declined to pay a stage invoice tendered by IBM; and the contract came to an end. Each side blamed the other for the debacle. The judge (see [2021] EWHC 347 (TCC)) and the Court of Appeal both held that it had been IBM who had wrongfully repudiated the contract; with the tedious details of this we are not concerned.

At this point, however, the issue of damages arose. Seeing difficulties in claiming for its consequential loss of profits because of Clause 23.3, CIGSIL chose to quantify its claim instead by reference to its wasted expenditure, a figure eventually quantified by O’Farrell J at about £122 million. IBM at this point said that this was an exercise in pettifogging: whatever label CIGSIL chose to put on its claim, it was at bottom trying to claim for its loss of profits, which was precisely what Clause 23.3 prevented it doing.

O’Farrell J (see [2021] EWHC 347 (TCC) at [680]-[686] sided with IBM. CIGSIL was, she said, claiming for its loss of bargain; the measure of that loss of bargain was “the savings, revenues and profits that would have been achieved had the IT solution been successfully implemented.” And while CIGSIL was entitled to frame its claim as one for wasted expenditure if it so wished, that simply represented a different method of quantifying the loss of its bargain; it did not “change the characteristics of the losses for which compensation is sought”. It followed that the claim was inadmissible.

This certainly looked like a robust approach. It also chimed in neatly with modern academic analysis of expectation and reliance damages. At bottom both seek, in different ways, to put a claimant in the position he would be in had the contract been kept; either by showing the gains he would have made but now won’t, or by showing that an investment is now wasted that otherwise wouldn’t have been.

Nevertheless the Court of Appeal was having none of it. On a proper reading of Clause 23.3, the intention was indeed to exclude claims based on profits foregone, but to leave intact claims based on wasted expense. Even if both were similar animals on deep analysis, wasted expenditure did not fall within the meaning of loss of profit or revenue; from which it followed that in the absence of a specific reference to wasted expense, this remained recoverable.

Despite the seductive, apparently no-nonsense approach of O’Farrell J, we think the Court of Appeal got it right. When dealing with the interpretation of exception clauses, the fundamental issue is not any question of academic argument or analysis, but simply what reasonable businesspeople would have made of the words used. And a non-lawyer would undoubtedly say that money wasted was not the same thing as future gain foregone. Furthermore, as the Court pointed out, they would also have seen that there could be good reason to allow the former on the basis that it was likely to be relatively quantifiable and predictable, but to exclude the latter as likely to be open-ended and unquantifiable.

This case is thus good news for business certainty. Nevertheless, those drafting commercial contracts would do well not only to read it but to draft their contracts even more carefully. If those in the position of IBM do not like a result under which they remain liable for seven-figure sums in wasted expenditure, they can always exclude such claims expressly. They should also perhaps take the trouble to add that any such limit applies also to cases of repudiation, since even despite Soteriou, as a result of the decision in Kudos Catering (UK) v Manchester Central Convention Complex [2013] EWCA Civ 38, there remains a possibility that some clauses may be construed as being limited to mere defective performance and not applying to actual repudiation.

If a client complains about the number of billable hours devoted to such issues of drafting, a solicitor can always murmur in his ear that the investment is probably a good one. The Court of Appeal is an expensive place to end up in, however interesting its judgments may be to other practitioners and law professors, and no sensible businessman should want to go there if he can possibly help it.

Limitation — not everyone who operates a vessel is an operator

At least one P&I Club will, one suspects, be feeling rather rueful after this morning’s Court of Appeal decision in Splitt Chartering APS v Saga Shipholding Norway [2021] EWCA Civ 1880.

The Norwegian Mibau group undertook an operation for Costain, involving the transport and deposit of vast amounts of rock in the sea under Shakespeare Cliff near Folkestone. Getting the rock to the correct place involved towing a loaded dumb barge from Norway and anchoring it where the rock was to be placed. The barge was owned by one Mibau company, Splitt; for internal accounting reasons it was chartered to another such company, Stema AS, which also owned the rock. On arrival the barge was anchored, with a crew put on board employed by a third Mibau company, Stema UK. That crew took orders from, and acted on the instructions of, Stema AS.

Despite ominous weather forecasts, Stema UK’s crew assumed the barge could be safely left unmanned at anchor. They were seriously wrong. She dragged her anchor in a storm and sliced an underwater cable which proved costly to repair. The question arose whether, in a suit by the cable owners, Stema UK could limit its liability. Although clearly not an owner or charterer of the barge under Art.1(2) of the LLMC 1976, it argued that because of its de facto control at the relevant time it had been either a manager or an operator. The cable owners argued that it was neither.

Teare J held Stema UK entitled to limit. (See [2020] EWHC 1294 (Admty), noted in this blog here.) True, because it had lacked executive authority, being under the orders of Stema AS, it could not have been a manager. But it, or rather its employees, had undoubtedly been in physical control of, and had operated the machinery aboard, the vessel; and this meant that it counted as her operator within Art.1(2).

This was a commercially sensible result. It meant that the ability to limit stood to be fairly generously granted to any entity in physical control of a vessel; it also had the extra advantage that corporate groups would not be unduly prejudiced merely because for organisational reasons they chose to parcel out the functions of ownership and physical manipulation to different group entities.

Unfortunately it did not find favour with the Court of Appeal. Phillips LJ, giving the only judgment, took the view that just as an employee would not be an operator in his own right since he acted only on someone else’s orders, an entity physically operating a vessel as the catspaw of another entity was in the same position. It followed that because of its lack of authority to act on its own initiative without contacting Stema AS, Stema UK was liable in full since it was outside the charmed circle of those entitled to limit.

For what it is worth, with the greatest of respect this blog is inclined to prefer the reasoning in the judgment below. We see it as not only commercially rational but also more certain, in that making the status of operator dependent on an estimation of the amount of discretion allowed to an entity seems to encourage some hair-splitting arguments.

But no matter. As Phillips LJ pointed out, the effect of the Court of Appeal’s decision can easily be avoided by making sure that the people physically in charge of a vessel are seconded to, or otherwise technically employed by, the company with the serious decision-making power. No doubt, indeed, as this is being written P&I club lawyers will be sharpening their pencils with a view to drafting the necessary advice to members, and possibly even changes to the rules so as to back up that advice. As ever, a little discreet bureaucratic tinkering can pay big dividends.

Sale of goods and summary judgment for the price: common sense rules.

Sale of goods law can at times be a bit esoteric. When it is, the difficulty can lie in making sure it accords with common sense as practised by businesspeople. Martin Spencer J managed just that today in dismissing what is best described as a pettifogging defence which counsel (absolutely properly, given his duty to his client) had raised to what looked like a straightforward claim for payment for building materials.

In Readie Construction v Geo Quarries [2021] EWHC 3030 (QB) Geo agreed to supply something over £600,000-worth of aggregate to builders Readie for a warehouse project in Bedfordshire. After most of the deliveries had been made and paid for, it turned out that something seemed to have gone badly wrong. Following heavy rain, the aggregate that had been used to form the base of the warehouse had melted into some sort of unprepossessing slush. Readie told Geo to stop deliveries and refused to accept or pay for the final batch, saying that Geo must have supplied the wrong substance. Geo invoiced Readie for the balance of the price and sought summary judgment, invoking the following Clause 4.1 from the sale contract:

The Customer shall make payment in full without any deduction or withholding whatsoever on any account by the end of the calendar month following the month in which the relevant invoice is dated. If payment is not received in full when due the Customer shall pay interest on the unpaid amount at a rate per annum which is 8% and above Bank of England base lending rate from time to time and the Customer shall pay to, or reimburse the Company on demand, on a full indemnity basis, all costs and liabilities incurred by the Company in relation to the suing for, or recovering, any sums due including, without limitation the costs of any proceedings in relation to a contract between the Company and a Customer incurred in or suffered by any default or delay by the Customer in performing any of its obligations. Payment shall only be made to the bank account nominated in writing by the Company on the invoice. Time of payment is of the essence.” (Our emphasis)

Straightforward, you might have thought? Not necessarily. Readie’s first argument was that the clause didn’t protect a seller who delivered the wrong goods, rather than goods that were correct but bad: after all, if it did, they said, it would mean that a seller who delivered nothing at all, or something obviously irrelevant such as sand, would still have the right to be paid after submitting its invoice. This point Martin Spencer J adroitly — and we on the blog think rightly — got rid of by saying that the right to be paid would be implicitly conditional on a bona fide purported delivery.

The next argument was that Clause 4.1 ousted counterclaims and set-offs but not Readie’s would-be right to abatement of the price. There was authority that some clauses would indeed be interpreted that way. But his Lordship remained unconvinced that this one was of that type: it was comprehensive in its terms, and there was no reason not to interpret it in an accordingly wide way, as requiring the buyer to pay in full, no questions asked, and argue the toss later. This again seems, if we may say so, highly sensible. Hardly any businesspeople know the difference between a set-off and a right to abatement; indeed, one suspects the proportion of practising lawyers is also embarrassingly low. However attractive it might seem to a law professor with time on their hands, one should not lightly assume a clause is meant to invoke a technical legal distinction which lawyers and laypeople alike are largely unfamiliar with.

Lastly, it being accepted that because of a retention of title clause s.49(1) of the Sale of Goods Act 1979 did not give Geo a right to the price on the basis that property had passed, Readie argued that s.49(2), allowing a claim for payment on a day certain irrespective of delivery, did not apply either. The right to payment, they said, was dependent on delivery, or at least purported delivery: how could payment then be due “irrespective of delivery”? The answer, again we suggest correct, was that “irrespective of delivery” means simply “not fixed at the time of delivery”, thus ousting the presumption of cash on delivery reflected in s.28.

To this latter question there might have been an easier answer, save for a curious concession on Geo’s part that they could not succeed in a claim for the price unless they were within either s.49(1) or s.49(2). Since The Res Cogitans [2016] AC 1034 it has been clear that freedom of contract exists as to the time and circumstances when payment becomes due, whether or not either limb of s.49 is satisfied. It must have been at least arguable that Clause 4.1 simply provided its own solution and needed to be applied in its own terms without any reference to s.49 at all. Another note, perhaps, for your for the file on the minutiae of bringing claims for summary judgment for goods supplied.

Nineteen years on — the Prestige saga, continued

Nearly twenty years after the VLCC Prestige broke up and sank off the Galician coast, spreading filth far and wide, Spain and France remain locked in battle with the vessel’s P&I club Steamship Mutual. Put briefly, they want to make Steamship pay out gazillions on the basis of judgments they have obtained locally on the basis of insurance direct action statutes. Steamship, by contrast, refers to the Prestige’s P&I entry, and says that both states are bound by “pay to be paid” clauses and in any case have to arbitrate their claims in London rather than suing in their own courts.

The background to the latest round, The Prestige (Nos 3 and 4) [2021] EWCA Civ 1589, is that Steamship, having got a declaratory arbitration award in its favour substantiating the duty to arbitrate, which it has transmuted into a judgment under s.66 of the Arbitration Act 1996, now wants to take the battle to the enemy. It wants (a) to commence another arbitration claiming damages for breach of the original arbitration agreement, reckoned by the damages and costs represented by the court proceedings in France and Spain; (b) damages for those states’ failure to abide by the declaratory award; and (c) damages for failure to abide by the s.66 judgment. Spain and France resist service out on the basis that they are entitled to state immunity, and that the claims based on the award and the judgment must in any case fail.

The High Court held, in two different proceedings (see here and here), that sovereign immunity did not apply; that claims (a) and (b) succeeded; and that claim (c) failed because of the effect of the insurance provisions in what is now Articles 10-16 of Brussels I Recast (this being, of course, a pre-Brexit affair). Both sides appealed, and the appeals were consolidated.

On sovereign immunity the Court of Appeal have now sustained the judgment of non-applicability and as a result allowed claim (a) to go ahead. They have equally upheld the first instance judgment against Steamship on claim (c): although in name a claim under a judgment this is, it says, still in substance a claim by an insurer against its insured which, under what is now Art.14 of Brussels I Recast, can only be brought in the domicile of the latter. On claim (b), however, it has held (contrary to an earlier suggestion in this blognostra culpa, we can’t be right every time) that while the jurisdiction rules of the Brussels regime do not stand in the way, the claim is bound to fail. The award being merely declaratory, there can be no duty to perform it because there is nothing to perform, and hence no liability for disregarding it.

The arbitration will now therefore go ahead. Assuming it leads to an award in Steamship’s favour, Steamship will then no doubt seek New York Convention enforcement and/or get a s.66 judgment which they will oppose to any attempt by France and Spain to get judgment here, and doubtless also try to weaponise in order to get their Spanish and French costs back. (Meanwhile they may rather regret not having asked in the original arbitration proceedings for a positive order not to sue in France or Spain, rather than a mere declaration: but that’s another story.)

There’s little to add at this stage. But there is one useful further confirmation: s.9 of the State Immunity Act, removing state immunity in the case of a written agreement to arbitrate, applies not only to a direct contractual obligation to arbitrate, but also to an indirect duty to do so Yusuf-Cepnioglu-style. Useful to know.

Will France and Spain now come quietly, thus putting an end to this saga (which has already appeared in this blog here, here, here, here and here)? It’s possible, but We’re not betting. We have a sneaking suspicion that the events of November 2002 may well continue to help lawyers pay their children’s school fees for some little time yet.

Dock brief

In July last year we noted the holding of Teare J that Holyhead Marina came within the dock-owner’s right to limit liability under s.191 of the Merchant Shipping Act 1995. The issue arose because the Marina faced multiple claims from yacht owners following devastation wrought by Storm Emma in 2018.

We approved then, and are happy to say that the Court of Appeal does now. Today in Holyhead Marina v Farrer [2021] EWCA Civ 1585 it confirmed Teare J’s conclusion that while not a dock, the Marina was a landing place, jetty or stage (which are included in the definition of places entitled to limit), and that there was no reason whatever to limit the entitlement to purely commercial port facilities. ‘Nuff said. Marina owners can breathe a sigh of relief, while hull insurers no doubt will mull putting up rates yet again on yachts to mark the loss of another source of subrogation rights.

When is a bill of lading not a bill of lading?

If something looks like a duck, but doesn’t swim like a duck or quack like a duck, then there’s a fair chance it may not actually be a duck. A salutary decision last Friday from Singapore made just this point about bills of lading. You can’t simply assume that a piece of paper headed “Bill of Lading” and embodying the kind of wording you’re used to seeing in a bill of lading is anything of the sort if the circumstances show that the parties had no intention to treat it as one.

The Luna [2021] SGCA 84 arose out of the OW Bunkers debacle, the gift that goes on giving to commercial lawyers with school fees to pay. In brief, Phillips was in the the business of acquiring and blending fuel oil in Singapore, and then supplying it to bunkering companies that would ship it out in barges to ocean-going vessels in need of a stem. One of those companies was the Singapore branch of OW. Phillips sold barge-loads of bunkers to OW on fob terms, with ownership passing to OW when the oil went on board the barge, payment due in 30 days and – significantly – not so much as a smell of any retention of title in Phillips.

When OW collapsed in 2014 owing Phillips big money, Phillips, having given credit to the uncreditworthy, looked around for someone else to sue. Their gaze lighted on the barge-owner carriers. For each barge-load, the latter had issued a soi-disant bill of lading to Phillips’s order with the discharge port designated rather charmingly as “Bunkers for ocean going vessels or so near as the vessel can safely get, always afloat”. The modus operandi, however, had been somewhat at odds with everyday bill of lading practice. The bunkers had in normal cases been physically stemmed within a day or so; OW (while solvent) had paid Phillips after 30 days against a certificate of quantity and a commercial invoice; and the bill of lading had remained at all times with Phillips, and no question had ever arisen of any need to present it to the carriers to get hold of the goods it supposedly covered.

On OW’s insolvency Phillips totted up the bunkers sold by it to OW and not paid for, took the relevant bills of lading out of its safe, and on the basis of those documents formally demanded delivery of the oil from the issuing carriers. When this was not forthcoming (as Phillips knew perfectly well it would not be) Phillips sued the carriers for breach of contract, conversion and reversionary injury, and arrested the barges concerned.

Reversing the judge, the Singapore Court of Appeal dismissed the claim. The issue was whether these apparent bills of lading had been intended to take effect as such, or for that matter to have any contractual force at all. Whatever the position as regards the matters that could be regarded when it came to interpretation of a contract, on this wider issue all the underlying facts were in account. Here the practice of all parties concerned, including the acceptance that at no time had there been any question of the carriers demanding production of the bills before delivering a stem to a vessel, indicated a negative answer.

Having decided that there could be no claim under the terms of the so-called bills of lading, the court then went on to say – citing the writings of a certain IISTL member – there could equally be no claim for conversion or reversionary injury.

This must be correct. Further, given the tendency of businesses to issue documents without being entirely sure of their nature or import, the result in this case needs noting carefully by commercial lawyers throughout the common law world.

A note of caution may also be in order, however, as regards carriers. You must still be careful what documents you do issue. True, the carrier in The Luna escaped liability because all parties accepted that the so-called bill of lading didn’t mean what it seemed to say (indeed, it doesn’t seem to have meant very much at all). But imagine that a bill of lading issued in these circumstances which ends up in the hands of a bank or other financier who is not aware of the circumstances and who in all innocence lends against it. The betting there must be that, as against the financier, the carrier issuing it would take the risk of being taken at its word. And this could be a very expensive risk, particularly since the chances of it being covered by any normal P&I club are pretty remote. Carriers, you have been warned.

Reflective loss — some unfinished business

Life in lugubrious legal lockdown was briefly relieved when last year the Supreme Court in Sevilleja v Marex Financial Ltd [2021] A.C. 39 pruned back the luxuriant growth of the reflective loss rule. To remind you, the reflective loss rule is the principle that you cannot sue X for damages in so far as (i) you are a shareholder in Y Ltd; (ii) Y Ltd could itself have sued X; and (iii) the loss you seek to have made good simply reflects the depreciation in your shareholding due to the damage wrongfully caused by X to Y. Marex had the effect of limiting this restrictive rule rule to claims by shareholders, and scotching the heresy that it extended more generally to any case where X was guilty of a wrong against Y which incidentally cased loss to some third party Z (the claimant in that case being not a shareholder but a mere creditor).

By common consent, Marex left a fair number of loose ends to be tidied up later. In a Cayman appeal today, Primeo Fund v Bank of Bermuda & Ors [2021] UKPC 22, the Privy Council neatly knotted one such, namely that of timing. Granted that a shareholder in Y Ltd cannot sue X for loss reflecting the diminution in his holding in Y Ltd, what is the relevant time: is it when the cause of action arises, or when the claimant sues?

Simplifying as far as possible, Primeo was the Cayman Islands investment arm of the Bank of Austria. In the 1990s it appointed as custodians and investment advisers a couple of companies connected with the Bank of Bermuda, R1 and R2. It was then unlucky enough to be introduced to BLMIS LLC, in effect a unit trust operated by the redoubtable Ponzi fraudster Bernie Madoff. Large sums of money were entrusted by Primeo to BLMIS, most of which (it was found) were immediately appropriated by Mr Madoff and his pals.

In 2007 Primeo’s investment was restructured: its interests in BLMIS were transferred to a separate corporate vehicle, Herald Fund SPC, and in exchange Primeo got shares in Herald. At the same time R1 and R2 agreed to function as custodians and investment advisers to Herald.

Just before Christmas 2008 the Madoff house of cards collapsed, and with it BLMIS. As part of the ensuing litigation, Primeo – itself by then in liquidation – sued R1 and R2 for failing in the years before 2007 to alert it to indications that Mr Madoff was an obvious crook, and thus causing it to entrust more money to him and not to withdraw what it had while the going was good. One defence was reflective loss. R1 and R2 argued that, in so far as Herald could have sued them for loss caused to it (on the basis that they had negligently allowed it to take over assets from Primeo which it was now clear had been of very doubtful value all along), and that because as a result of events in 2007 Primeo’s loss now fell to be reckoned by the diminution of the value of its holding in Herald, the case fell squarely within the reflective loss rule.

The Cayman courts agreed, but the Privy Council was having none of it. It rightly pointed out that since Marex it had been clear that reflective loss was a rule of substantive law, rather than one of damages or title to sue. If so, it followed that the relevant time for seeing whether it applied was the time of the wrong for which compensation was sought. In Primeo, at that time there could have been no question of reflective loss: it was simply a case of allegedly bad advice leading to direct investment in a fraudulent scheme. It was at that moment that Primeo’s rights had crystallised, and nothing that happened later could take them away. It followed that the case was outside the reflective loss principle entirely.

In deciding as it did, the Privy Council had to deal with one awkward decision of the Court of Appeal, Nectrus Ltd v UCP Plc [2021] EWCA Civ 57. In that case, essentially a mirror image of Primeo, a claimant had as a result of allegedly negligent advice invested in securities through a wholly-owned subsidiary. Since the subsidiary could also have sued the adviser, the claim was fairly and squarely within the principle. However, by the time the action was brought the claimant had divested itself of the subsidiary and its holding; and the Court of Appeal had held that this removed the reflective loss bar. However, the Privy Council rightly held that such reasoning could not stand scrutiny, and that Nectrus had been wrongly decided on the point.

It may be that this open discountenancing of Nectrus as wrongly decided will be taken as an express statement that English courts should no longer follow Nectrus, something which since 2016 has been possible in the Privy Council: see Lord Neuberger in Willers v Joyce (No 2) [2018] A.C. 843 at [21]. This blog certainly hopes so. It would be very unfortunate were a judge at first instance to feel constrained to follow Nectrus on the basis that this bound him, whereas a mere decision of the Privy Council (which is not technically an English court) did not. But only time, and the inclination of litigants to put their money where their mouth is, will tell.

Liquidated damages and the ticking clock

Time to get back to the drawing-board, perhaps, if you’re a construction contractor. Suppose you you agree to do work and include this liquidated damages term:

“If CONTRACTOR fails to deliver work within the time specified and the delay has not been introduced by EMPLOYER, CONTRACTOR shall 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 EMPLOYER accepts such work. …”

Things drag on: there’s some work you never actually do at all, and in the end the employer terminates the contract. Can the employer claim liquidated damages for the period between the due date and termination, on the basis that the meter started ticking when you should have finished the work and only ground to a halt when he walked away and put an end to the whole arrangement? Or is he limited to proving his loss in the ordinary fashion, on the argument that if work is never accepted (ex hypothesi the case where it was never done in the first place), the clause makes no sense and therefore has to fall away?

In Triple Point Technology, Inc v PTT Public Co Ltd [2021] UKSC 2 the Supremes, reversing the Court of Appeal, chose the former solution. It was, it said, more commercial that once the meter had begun to tick the accrued rights to payment that arose de die in diem as a result should be preserved, and would not be liable to disappear in a puff of legal smoke if at some time in the future it became clear that the work would never be done. Furthermore, said the court, the opposite answer would create a perverse incentive: assuming the liquidated damages clause was more profitable to the employer that his right to damages, it might be in the interests of the contractor not to tender performance at all.

This is arguably right, though not incontrovertibly so (one could equally well contend that if the parties had intended that the clause should apply in the case of non-performance it would not have been difficult for them to say “up to the date EMPLOYER accepts such work, or the Contract is terminated by EMPLOYER, whichever shall be the sooner”.) But for future contracts this does not matter to much, since the ball is in the court of contract draftsmen.

Nevertheless, one thing might be worth contemplating for contractors. Having shied away from creating a perverse incentive in the contractor to drag his feet, the UKSC has arguably created an equal and opposite one in the employer. What if, after relations have de facto broken down without the work being done, such that there is now no practical chance of their completion and acceptance, the employer smugly writes to the contractor saying he continues to hold the contract open? True, the courts would no doubt find a way to prevent the clock potentially ticking on until the last trump (see MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789, noted here in this blog). But a couple of months or so of foot-dragging at 0.1% per day would be distinctly profitable if they led to a windfall claim for 6.1% of the relevant price with no questions asked. Indeed a lawyer who didn’t raise this possibility with his clients might face some awkward questions later.

There is, however, a possible straightforward answer. There is much to be said for contractors arguing for the insertion of a bespoke provision applying whenever a right to terminate had arisen in the employer, allowing the contractor to put him to his election and in the absence of an election to terminate to put an end to the running of liquidated damages for delay.

Two other issues arose in the case about the drafting of the damages limitation clause. But these turned very much on the interpretation of the wording used, and are of little general interest. Meanwhile, however, if they don’t like the result in PTT lawyers are on notice to get out their word-processors and go over their precedents.