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.

Recap term in sale contract prevails over printed incorporated terms.

Septo Trading Inc v Tintrade Ltd (The Nounou) [2021] EWCA Civ 718 (18 May 2021) involved a dispute under an international sale contract of fuel oil as to the effect of a quality certificate issued by an independent inspector at the load port  and whether it was intended to be conclusive evidence of the quality of the consignment.

The recap email of confirmation of the sale said that the certificate would be binding on the parties in the absence of fraud or manifest error, but it also provided for the BP 2007 General Terms and Conditions for FOB Sales (“the BP Terms”) to apply “where not in conflict with the above”. Those terms say that the quality certificate will be conclusive and binding “for invoicing purposes”, but without prejudice to the buyer’s right to bring a quality claim. The quality certificate issued by the independent inspector certified that the fuel oil was in accordance with the contractual specification at the load port.

Teare J, [2020] EWHC 1795 (Comm), found as a fact that it was not and held that the BP Terms qualified the Recap term. Had this stood alone, it would have excluded the buyer’s quality claim, but there was no conflict between Recap term and the BP terms which could be read together so as to give effect to both of them. The buyer’s claim succeeded and damages of US $3,058,801 were assessed.

The Court of Appeal, for whom Males LJ gave the leading judgment, have now overruled Teare J and found that there was inconsistency between the two sets of terms and that the Recap term prevailed. Applying the approach adopted by the Court of Appeal in Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565, the starting point was the meaning of the Recap term and a provisional view of its meaning needed to be formed, without taking account of the term which is alleged to be inconsistent. The Recap term provided that the quality certificate issued by the mutually acceptable independent inspector is binding on the parties, so that (assuming always that the certificate shows the product to be on-spec) the buyer cannot thereafter bring a claim on the ground that the quality of the product is not in accordance with the contract. Nobody would think, reading the Recap term, that the word “binding” meant “binding for invoicing purposes”.

Next the BP terms had to be considered and Section 1.2 provides that the quality certificate is to be “conclusive and binding on both parties for invoicing purposes” and that the buyer is obliged to make payment in full, but that this is “without prejudice to the rights of either party to make any claim pursuant to Section 26”, that is to say a claim that the product is not in accordance with the specification. This conflicted with the Recap term and the two provisions cannot fairly and sensibly be read together. The printed term did not merely qualify or supplement the Recap term, but rather deprived it of all practical effect.

Similarly, section 1.3 of the BP Terms which provided for a fundamentally different testing regime from that set out in the Recap term was held to have no application. The Recap provided for the independent inspector’s certificate of quality to be binding, with the parties free to agree (as they did) what instructions should be given to the inspector which will lead to the issue of that binding certificate. Section 1.3 undermined this regime by insisting that if the parties agree that the certificate of quality should be based on shore tank samples, it is nevertheless a condition of the contract that the seller must provide the same quality of product at the vessel’s permanent hose connection as set out in the certificate of quality.

No strikeout for Bangladeshi ship scrapping claim: but don’t hold your breath

As we mentioned on this blog last August, these days you have to be careful who you sell an old ship to. In Begum v Maran [2021] EWCA Civ 326 MUK, the English managers of a Liberian ship fit only for scrap, helped arrange her sale to a buyer who paid fairly handsomely. That buyer proceeded (entirely foreseeably) to have her scrapped by a thoroughly dodgy outfit called Zuma in a dangerous and environmentally irresponsible way on a Bangladeshi beach. A worker engaged in stripping the hulk fell to his death. Prospects of recovery from Zuma being low, if for no other reason because of a local one-year statute of limitations during the running of which nothing had been done, his widow sued MUK as of right in England because of its domicile here, alleging negligence. Jay J decided that it was arguable that MUK had owed the man a duty of care, and that the local limitations law might be circumvented, and refused a strikeout. MUK appealed.

The Court of Appeal yesterday allowed the case to go ahead, though only very grudgingly and on a more limited basis than Jay J. The Court was particularly sceptical on the limitation point. Under Rome II, applicable to the claim as it predated Brexit (and still applicable to post-Brexit claims in its domesticated form), the law governing the claim – including on the subject of limitation – was Bangladeshi. This immediately defeated the claimant unless she could escape it. The judge had regarded as possibly plausible a contention that Art.7 of Rome II allowed her to invoke English law because her husband’s death had resulted from environmental damage caused by an event here – namely, MTM’s arrangements for sale of the ship. But this was dismissed on appeal as unarguable: rightly so, since this simply wasn’t an environmental case in the first place. But the court did see it as arguable – just – that the limitation period was so short that an English court might disapply it on public policy grounds under Art.26 of Rome II, and ordered a preliminary issue on the point.

On the substantive points, the widow argued either that MUK had owed her husband a duty of care on the principle of Donoghue v Stevenson [1932] AC 562, or that MUK’s sale of the vessel when it should have known that it was likely to be dangerously demolished had created an immediate danger to her husband’s life and thus engendered a duty in respect of the bad practices of his employers Zuma.

Giving the lead judgment, Coulson J was very sceptical on the first point. This wasn’t, he said, a case of a disposal of a dangerous thing, but rather the furnishing of an opportunity for a third party to be negligent in respect of a thing not inherently perilous. Whether this could give rise to a duty his Lordship thought very doubtful indeed – but still not quite implausible enough to justify an immediate strikeout. Our view is that the doubts were fully justified. We normally expect employers to look after their employees; to put a duty on third parties to police the behaviour of contractors they engaged in that respect is to say the least drastic. Should I really have to scrutinise or supervise the employment practices of the builder I employ to extend my house in case one of his workers is hurt? It seems doubtful.

On the second point, the difficulty (a considerable one) was the general rule that people were not generally made responsible for the wrongs of others, however foreseeable. But, said Coulson J, there were possible exceptions where the danger in question had been created by a defendant. And while it seemed unlikely that this would apply here, the law was not absolutely clear and the prospect of persuading a sceptical judge to recognise a duty of care wasn’t dismal enough to deny the widow the chance to argue the toss. Her prospects might be slim, but she was entitled to chance her arm.

This case will possibly be hailed in the liberal media as an advance in the campaign to make big business in Britain take responsibility for the activities of its dodgier partners abroad. But commercial lawyers know better than to engage in chicken-counting. Remember, the claimant here only avoided a strikeout by the skin of her teeth. Her chances of recovering much over and above a nuisance value or reputation-saving settlement remain, it seems fair to say, pretty slim.

Oh, and one more thing. The ability to sue a UK-domiciled company here as of right disappeared with Brussels I Recast in a puff of celebratory Brexit firework smoke at 2300 hours on 31 December last. It follows that, barring swift adherence by the UK to the Lugano convention (increasingly unlikely by all the indications), any future claimant basing their complaint on events in a far-off land with no ostensible connection to England will now also face the prospect of a forum non conveniens application. This may well have an appreciable chance of success. There is, after all, no immediately apparent reason why the English courts should act as the policemen of work practices worldwide, hoewever much sympathy we may feel for a claimant personally.

In short, the boardrooms of corporate Britain, and even more those of their liability insurers, may well see some sighs of relief, if not discreet socially-distant celebrations, in the next few days.

Got a claim against a subsidiary but would like to go against the parent? We have some bad news.

You have an important ongoing contract with X, a subsidiary of a major foreign conglomerate Y. Then Y re-organises its business in a way that doesn’t involve you. X tells you it is regretfully going to break its contract. Obviously you can sue X; but can you sue Y as well? The result of this morning’s deision of the Court of Appeal in Kawasaki Kisen Kaisha Ltd v James Kemball Ltd [2021] EWCA Civ 33 is that in practice, in the vast majority of cases the answer is No.

Shipping lawyers will know the background. KKK a couple of years ago completed a reorganisation of its business; the container side was merged down into ONE, a joint venture with a couple of ex-competitors. Before the reorganisation, ancillary trucking etc in Europe had been organised by a sub-subsidiary of KKK called K-Euro, which had signed up the claimant JKL to do the haulage. This arrangement was now redundant, and K-Euro told JKL it would not be performing further.

JKL seems to have had a clear breach claim against K-Euro, but was not satisfied with it. History and legal confidentiality do not relate why, but there may have been doubts about K-Euro’s long-term solvency and/or a troublesome limitation of liability clause in the JKL – K-Euro contract. Be that as it may, JKL sued KKK for inducing a breach of contract, and sought to serve out in Japan. Teare J allowed this (see [2019] EWHC 3422 (Comm)); but the Court of Appeal disagreed, on the basis that on the evidence the claim had no realistic prospect of success..

The difficulty was twofold. First, despite the existence of a relationship of corporate control, and indeed substantial overlapping directorships, as between KKK and K-Euro, there was no element of persuasion or inducement by the former of the latter. KKK had not induced or persuaded K-Euro to break any contract. Instead, it had been a matter not so much of persuasion as practical compulsion: KKK had reorganised its business wholesale, with the inevitable (and admittedly entirely foreseen) result that K-Euro was forced to break the old arrangement. That, said the Court of Appeal, was something different. Furthermore, inducement of breach of contract required the defendant in some sense to have aimed his actions against the claimant. But here KKK had in no sense aimed its act at JKL, as might have been the case had it told K-Euro directly to appoint another haulier in its stead: instead, the loss to JKL had been, as it were, mere collateral damage.

This seems right. True, the suggested distinction between persuasion and compulsion needs to be taken with some care: if I threaten never to deal with X again unless X breaks his contract with you, I remain liable under Lumley v Gye (1853) 2 E & B 216, and pointing out that I bullied X rather than gently cajoling him will do me no good at all. Perhaps it is better expressed as the difference between the defendant who at least in some way desires the breach of contract, if only as a means to an end, and is liable, and the defendant who knows the result will be a breach but is otherwise indifferent, who is not. But the precise drawing of the line can be left to another day.

What we are left with is what we said at the beginning. If you contract with a subsidiary company, your chances of visiting the consequences of a breach of contract by the latter on its parent concern are low. As, at least in the view of this blog, they should be. If you contract with one entity, then generally it is to that entity that you should look if something goes wrong: to give you a cause of action against some other part of the corporate pyramid, you should need to show something fairly egregious – like a deliberate subornation of breach. Nothing short of that will, or should, do.

Rescinding A Charterparty or Not! That is the Question SK Shipping Europe plc v. Capital VLCC 3 Corp and another (C Challenger) [2020] EWHC 3448 (Comm)

The charterers entered into a charterparty contract with the owners of the C Challenger in February 2017 for a period of two years. The charterparty contained a term warranting fuel consumption and speed. Following problems with a turbocharger, the charterers alleged inter alia that the owners had misrepresented the vessel’s performance capabilities. The charterers raised the issue concerning potential misrepresentation on the part of the owner of the capabilities of the chartered vessel during a meeting in London on 21 March 2017. It was not until 19 October 2017 that the charterers purported to rescind for misrepresentation or to terminate for repudiatory breach. During the period of March- September 2017, the charterers continued to use the vessel (by fixing occasionally sub-fixtures); deduct periodically from hire and reserve their rights. The following day, the owners purported to terminate on the basis that the charterers’ message was itself a renunciation.

Was there a misrepresentation on the part of the owners?

Under common law, for the charterers to be able to rescind the contract (i.e. set the charterparty aside) it is essential that they demonstrate that the owners made an inaccurate representation with regard to the capabilities of the chartered vessel in terms of speed and consumption. The main argument put forward by the charterers was that the details of the vessel’s consumption circulated to the market by the owners constituted a representation of fact (and this representation was substantially inaccurate). Foxton, J, rather appropriately, held that an owner by offering a continuing speed and consumption warranty in a charterparty could not be assumed to make an implicit representation as to the vessel’s current or recent performance. This certainly makes sense given that the warranty in question did not require the owners to act or refrain from acting in a certain way. The so-called “speed and consumption” warranty in the contract simply related to a particular state of affairs and was only concerned with the allocation of responsibility for certain costs in relation thereto.   

However, this was not the end of the matter! The charters also argued that in a letter sent by the owners, historical speed and consumption data provided which was not reasonably consistent with the average performance of the vessel over its last three voyages and therefore untrue. Foxton, J, found that the owners did not have reason to believe that the statement based on the three recent voyages was true and accordingly this amounted material misrepresentation. However, he also found that this would not have given the charterers the right to rescind the contract as there was no inducement. This was the case because if the same warranty had been offered, but no representation made as to the vessel’s performance, the charterparty would have been concluded on the same terms.

The effect of ‘reserving rights’

It is rather common for most parties in shipping practice to add a ‘reservation of rights’ statement to the end of messages in pre-action correspondence. Usually, such a statement has the effect of preventing subsequent conduct of an innocent party constituting an election. The trial judge found that the charterers were aware at the latest in July 2017 that the fuel consumption of the chartered vessel was misdescribed by the owners. Whilst the charterers sent messages to the owners that they wished to reserve their rights emerging from the misconduct of the owners, they went ahead to fix a voyage with a sub-charterer expecting the owners to execute this voyage. Foxton, J, on that basis, held that such actions of the charterers were incompatible with an attempt to reserve rights to set it aside the charterparty ab initio for misrepresentation of which they had complained. Put differently, the judgment illustrates that in a case where the innocent party demands substantial contractual performance from the other, this is unlikely to be prevented from being treated as an “affirmation” simply because the innocent party earlier attempted to reserve its rights.

Was the owner in repudiatory breach?

The judge accepted that the owner was in breach of the charterparty i) by refusing to accept the legitimacy of the Charterer’s refusal to pay hire or make deductions from hire and ii) by sending messages demanding payment of hire, wrongly asserting that the Charterer was in breach. The terms breached were deemed to be innominate terms. However, it was held that the breaches complained of, taken cumulatively, had not deprived the charterers of substantially the whole benefit which they were intended to obtain under the charterparty for the payment of hire, or “go to the root” of the charterparty. As a result, the charterers had not been entitled to terminate the charterparty and their communication to that effect was itself a renunciation, entitling the owners to damages representing the loss it suffered by reason.              

The facts of the case provided a great opportunity to the trial judge to construe and apply several key principles of contract law (note that in the judgment there is also an obiter discussion on the application of s. 2(2) of the Misrepresentation Act 1967). Perhaps the most significant contribution of the case to the development of the contract law is the trial judge’s observation on the effect of reserving rights in this context. As noted, the previous authorities have not provided any extensive consideration to this matter. It is now emphasised clearly that a reservation of rights will often have the effect of preventing subsequent conduct from constituting an election to keep the contract alive, but this is not an inevitable rule. One might say in this context “actions might speak louder than words”. So in any case whether a statement reserving the rights of an innocent party has the desired impact will depend on the actions of the innocent party!

Upstream gas sales: of capacities and counterfactuals

Lack of unambiguous drafting in a gas sales contract landed three hydrocarbon giants in the Court of Appeal today; it also raised a nice point about damages and counterfactuals.

In British Gas v Shell UK [2020] EWCA Civ 2349, Shell and Esso agreed to supply, and BG to buy on a take-or-pay basis, a minimum daily quantity of gas (appearing in the forest of acronyms typical of hydrocarbon contracts as a TRDQ, or Total Reservoir Daily Quantity). The sellers controlled a couple of reservoirs which, together with others, were connected to the well-known Bacton terminal in Norfolk. As might be expected, gas from all the connected reservoirs was commingled before it came on shore, and the owners of the various reservoirs, including the sellers, had a practice of “borrowing” gas from one another to meet variations in demand. In order to protect BG’s interests, the sellers in addition undertook under Clause 6.4 of the contract to “provide and maintain a capacity (herein referred to as the ‘Delivery Capacity’) to deliver Natural Gas from the Reservoirs” amounting to 130% of the relevant daily quantity. If the capacity was reduced, then the sellers had a right to reduce the TRDQ proportionately.

As capacity in the North Sea ran down, the sellers’ capacity to supply from their own reservoirs dipped below the magic figure of 130%, though if you took into account their capacity to borrow gas the capacity remained adequate. BG saw an opportunity to sue the sellers. It argued that (1) “capacity” meant capacity from the sellers’ own reservoirs, excluding borrowed gas; and (2) had the sellers reduced the TRDQ to 100/130 of the reduced capacity, it would have bought in all excess requirements more cheaply elsewhere.

The Court of Appeal held for BG on (1): capacity on an ordinary interpretation meant capacity from the sellers’ own resources, not third parties’, so that the sellers were in breach. On damages, however, it held that BG had suffered no loss. The sellers had had a right, but no duty, to reduce the TRDQ in line with the total capacity; they had not done so; and the fact that they might have avoided being in breach of the 130% stipulation had they done so was beside the point.

The decision in (1) seems right as a matter of interpretation, and also sensible: apart from anything else, capacity clauses exist to assure certainty of supply, and would be somewhat devalued if they took into account possible arrangements that the seller might enter into with third parties.

The damages point is an awkward one, as is always the case with the fiendish counterfactual question “what would have happened if the defendant hadn’t been in breach?” It turns, it is suggested, on a proper interpretation of the sellers’ contractual obligation. Was it (i) to maintain a capacity to supply amounting to at least 130/100 of the TRDQ, or (ii) to set a TRDQ amounting at most to 100/130 of its capacity to supply (not quite the same thing)? Given the provision that there was a right but no duty to reduce the TRDQ in line with capacity, the latter answer seems correct. If so it follows, at least in the view of this blog, that BG’s claim against the sellers for substantial damages was rightly rejected as a claim for failing to do what they had not been bound to do in the first place.

Just one more thing. Before you file this case away as a useful piece of ammunition on the damages point, remember that in every case of this sort, the answer – and often many millions of dollars – is likely to turn on a careful reading of the underlying contract. A decision on one particular piece of wording may well not be a reliable guide to another.

Farm-Out Agreements and JOAs: a Joined-Up Approach to Construction

OVERVIEW

Apache North Sea Ltd v Euroil Exploration Ltd [2020] EWCA Civ 1397

In what circumstances will one contract be construed by reference to another? In the energy sector, the issue will often be an important one, given the prevalence of suites of contracts dealing with different aspects or layers of involvement or activity. The general rule is that “A document executed contemporaneously with, or shortly after, the primary document to be construed may be relied upon as an aid to construction, if it forms part of the same transaction as the primary document”: see Lewison, Interpretation of Contracts, 6th Edn, section 3.03. But this relates to different contracts which are “in truth one transaction” or “as it is called in modern jargon, a ‘composite transaction’” (Lewison). But what if the transactions are different ones, involving the same but also additional parties, but are related transactions?

Apache v Euroil: Summary and Take-Away Points

The Court of Appeal’s decision in Apache North Sea Ltd v Euroil Exploration Ltd [2020] EWCA Civ 1397 addressed this question in the context of a Farm-Out Agreement (the FOA) between Apache as and Euroil for the sale and purchase of minority interests in respect of a UK Continental Shelf production licence relating to the Val d’Isere block and for Apache’s participation in the associated Val d’Isere Joint Operating Agreement (the JOA) as Operator.

The Court of Appeal (as the Commercial Court before it) held that, on the terms of the specific contracts in issue, it was wrong in principle to treat the FOA and the JOA “as entirely separate contracts with Apache wearing different hats in each” and that would “not reflect the true nature of the parties’ dealings at the time” [39]. The contracts were to be construed together, and “in their proper context as a cohesive whole” [42]. 

While the Court stressed that it was dealing with the contracts before it and emphasised that it was not setting a “general precedent” for all FOAs and JOAs [70], the decision is significant in demonstrating a realistic approach to construing contracts which are meant to work together. As the Court stated, “Farm-out agreements do not typically exist in a vacuum. Where there is more than one owner, the parties will regulate their relationship in relation to that asset under a joint operating agreement. Farm-out agreements need to take account of and interact appropriately with those joint operating agreements to avoid inconsistencies and minimise the prospect of dispute.” [2]

The arguments in Apache v Euroil in the Court of Appeal

The issue arose out of the incurring of drilling costs by Apache in relation to an exploration “Earn-In Well”, using a drilling rig on a long-term lease. The rate for the drilling rig as incurred by Apache was one which was significantly above market rates at the time of drilling. 

Apache sought payment of the drilling costs in full from Euroil in full under the FOA. In the very detailed terms of the FOA drafted, as was common ground and as the Court accepted, by “sophisticated parties represented by experienced lawyers” provision was made for the “Val d’Isere Earn-In Costs” which Euroil agreed to bear: “twenty six point twenty five percent (26.25%) of the total costs (other than the Back Costs) in relation to the Val D’Isere Earn-In Well, whensoever incurred, and in respect of all works undertaken pursuant to the Well Programme in connection with the Val D’Isere Earn-In Well”. 

Euroil contended that the recovery was necessarily capped at market rates and relied upon the combination of the payment provisions in the FOA (requiring it to pay all Earn-In Costs “upon receipt of an invoice from [Apache] … in accordance with the relevant JOA within the applicable time periods as set out in the relevant JOA”), read together with provisions in the JOA to which both Apache (as Operator) and Euroil (and another) were parties. Euroil relied upon the usual ‘no gain no loss to the Operator” provision in the JOA and the detailed accounting procedure in the JOA which was used to be used for billing under the FOA, which had no billing procedure of its own. As part of that billing procedure, the cost of equipment leased by the Operator “not exceed rates currently prevailing for like…equipment”.

Apache responded that:

i.    the FOA and the JOA were entirely different contracts with different mechanisms and purposes and separate parties;
ii.    The FOA was a bilateral sale contract with a price agreed which the purchaser is liable to pay. The JOA on the other hand was a multilateral joint venture contract with a joint venturers’ account. 
iii.    Apache wore different hats at different times, depending on which contract is being considered.
iv.    To hold otherwise, would be impermissibly to incorporate a joint venture accounting convention in a multilateral joint operating agreement into a bilateral farm-out sale and purchase agreement so as to reduce the price there agreed;
v.    That would be “a significant development for the oil and gas industry, given that joint operating agreements are attached routinely to farm-out agreements by way of appendix”. 

The decision in the Court of Appeal

The Court of Appeal rejected Apache’s arguments and held that the recovery of the drilling costs was capped at market rates given the provisions of the JOA. This was essentially for three reasons identified in the judgment of Carr L.J.

First, the artificiality of trying to construe the FOA as if it stood alone and without reference to the JOA. As the Court stated, this was “an ex post facto theoretical argument that does not reflect the true nature of the parties’ dealings at the time” [39] in circumstances where, by the time that the FOA was executed, the terms of the JOA, including the Accounting Procedure, had been negotiated and by the terms of the FOA they were to be deemed to be in full force and effect before and after completion of the FOA. The two contracts were “part of a package” and fell to be read together. As the Court said at the outset, FOAs do not exist in a vacuum and necessarily need to take account of and interact appropriately with those joint operating agreements to avoid inconsistencies and minimise the prospect of dispute.

Secondly, and building on that, not only was the JOA part of the “Agreement” which made up the FOA (because the JOA was attached by way of schedule to the FOA), but the FOA also contained what the Court described as a “plethora of references throughout the FOA to compliance with the provisions of the JOA” which showed that they were intended to interact with each other. 

Thirdly, the argument that the FOA was an entirely separate and self-contained agreement could not sit with the parties’ express agreement for issuing AFEs, invoicing and payment under the FOA “in accordance with the relevant JOA”. The critical factor was that all billing under the FOA was to be done using the JOA accounting procedure and therefore invoicing Euroil for the Earn-In costs was subject, without qualification, to the JOA accounting procedure and the principles set out in it, in particular the ‘fair and equitable’ principle, reflected in market rates, and the ‘no gain no loss’ principle. 

Discussion

In one sense, it is difficult to see how the Court could have reached any other conclusion given the express inter-linking of the JOA into the FOA and the use of the JOA provisions for the accounting procedure. Looking at the language of the FOA in isolation, the Court found that Apache’s argument had at least an “initial attraction”. But the decisive factor was the fact that the proper construction of Euroil’s payment obligation fell to be determined on the basis of the text of both the FOA and the JOA, and sense made of each taken together. 

The realistic approach of construing multiple contracts used in the energy sector is a continuing one. There are different routes by which the approach can be deployed, for example by treating the other contract or contracts as part of the factual matrix in which the subject contract was made and against which it must be construed, even if not part of the same transaction and even if not directly inter-related (as they were in Apache v Euroil). 

The earlier decision of Teesside Gas Transportation v Cats North Sea Ltd [2020] EWCA Civ 503 illustrates this in perhaps an extreme form. In that case, the terms of a cost sharing formula in a Capacity Reservation and Transportation Agreement dated 1990 and relevant to the usage of the pipeline were construed in the light of the concepts found in the later Transportation & Processing Agreements with third party shippers (“TPAs”) were concluded by the CATS Parties and with which it was to be assumed the CRTA was to work in the future. A “separate contracts” / “subsequent contract” argument was rejected by the Court on the basis that “the concepts used in those later contracts (such as “Daily Reserved Capacity Rate”) were within the contemplation of the parties in 1990 even if the names given to them and the detailed terms of the TPAs were not” (per Males LJ at [84]).

Coda: “Precedence Clauses”: any use?

As so often, reliance was placed on a conflicts or inconsistencies precedence clause in the FOA (“If there is any conflict between the provisions [the FOA and the JOA], the provisions of this Agreement shall prevail”). Apache argued that this established that the FOA ‘trumped’ the JOA. Again, as equally so often, the Court emphasised that such clause was only of any utility in the case of true conflict, which would usually not arise once the terms had been construed together and for which, in Carr L.J’s words, it had to be shown that “one clause in one document emasculates another clause in another document”. [36]

Intransigent defendants: Prestige 4.0

Most parties who lose English court cases or arbitrations give in (relatively) gracefully. In the long and ongoing Prestige saga, however (already well documented in this blog: see here, here, here, and here), the French and Spanish governments have chosen to fight tooth and nail, something that is always apt to give rise to interesting legal points. Last Friday’s episode before Butcher J (SS Mutual v Spain [2020] EWHC 1920 (Comm)) was no exception, though in the event nothing particularly novel in the way of law emerged.

To recap, nearly twenty years ago the laden tanker Prestige sank off northern Spain, grievously polluting the French and Spanish coasts. Steamship Mutual, the vessel’s P&I Club, accepted that it might be potentially liable to direct suit up to the CLC limit, but pointed out that its cover was governed by English law, contained a “pay to be paid” clause and required arbitration in London. Nothing daunted, the French and Spanish governments came in as parties civiles when the owners and master were prosecuted in Spain, and claimed their full losses. The Club meanwhile protected its position by obtaining declaratory arbitration awards in England against both governments that all claims against it had to be arbitrated here; for good measure it then successfully transmuted these awards into High Court judgments under s.66 of the 1996 Arbitration Act (see The Prestige (No 2) [2013] EWHC 3188 (Comm). These decisions the French and Spanish governments blithely ignored, however; instead they took proceedings in Spain to execute the judgments they had obtained there.

In the present litigation, the Club’s claim (slightly simplified) was against both governments for damages for continuing the Spanish proceedings, based either on breach of the arbitration agreement, or in the alternative on failure to act in accordance with the s.66 judgments. The object, unsurprisingly, was to establish an equal and opposite liability to meet any claim asserted by the governments under their judgments in the Spanish proceedings.

The Club sought service out on the French and Spanish governments: the latter resisted, arguing that they were entitled to state immunity, and that in any case the court had no jurisdiction.

On the state immunity point, the Club succeeded in defeating the governments’ arguments. The proceedings for breach of the arbitration agreement were covered by the exception in s.9 of the State Immunity Act 1978 as actions “related to” an arbitration agreement binding on the governments. Importantly, Butcher J regarded it as unimportant that the proceedings did not relate to the substantive matter agreed to be arbitrated, and that the governments might be bound not by direct agreement but only in equity on the basis that they were third parties asserting rights arising from a contract containing an arbitration clause.

The proceedings on the judgments, by contrast, were not “related to” the arbitration agreement under s.9: understandably so, since they were based on failure to give effect to a judgment, the connection to arbitration being merely a background issue. But no matter: they were covered by another exception, that in s.3(1)(a), on the basis that the breach alleged – suing in the teeth of an English judgment that they had no right to do so – was undoubtedly a “commercial transaction” as defined by that section.

The judge declined to decide on a further argument now moot: namely, whether suing abroad in breach of an English arbitration agreement was a breach of a contractual obligation to be performed in England within the exception contained in s.3(1)(b) of the 1978 Act. But the betting, in the view of this blog, must be that that exception would have been inapplicable: there is a big and entirely logical difference between a duty not to do something other than in England, and an obligation actually to do (or omit to do) something in England, which is what s.3(1)(b) requires.

State immunity disposed of, did the court have jurisdiction over these two governments? Here the holding was yes, but only partly. The claim based on the s.66 judgments was, it was held, subject not only to the Brussels I Recast Regulation but to its very restrictive insurance provisions dealing with claims against injured parties (even, note, where the claims were being brought, as some were in the case of Spain, under rights of subrogation). Since the governments of France and Spain were ex hypothesi not domiciled in England, but in their respective realms, there could be no jurisdiction against them.

On the other hand, the claims based on the obligations stemming from the arbitration award were, it was held, within the arbitration exception to Brussels I, and thus outside it and subject to the national rules in CPR, PD6B. The only serious question, given that the arbitration gateway under PD6B 3.1(10) or the “contract governed by English law” gateway under PD6B 3.1(6)(c) pretty clearly applied, was whether there was a serious issue to be tried as to liability in damages. Here Butcher J had no doubt that there was, even if the governments were not directly party to the agreements and the awards had been technically merely declaratory of the Club’s rights. It followed that service out should be allowed in respect of the award claims.

Further than this his Lordship did not go, for the very good reason that he had no need to. But in our view the better position is that indeed there would in principle be liability under the award claims. If, as is now clear, an injunction is available on equitable grounds to prevent suit in the teeth of an arbitration clause by a third party despite the lack of any direct agreement by the latter, there seems no reason why there should not also be an ability to an award of damages, if only under Lord Cairns’s Act (now the Senior Courts Act 1981, s.50). Further, there seems no reason why there should not be a an implied obligation not to ignore even a declaratory award by suing in circumstances where it has declared suit barred.

For final answers to these questions we shall have to await another decision. Such a decision might even indeed come in the present proceedings, if the intransigence of the French and Spanish governments continues.

One other point to note. The UK may be finally extricating itself from the toils of the EU at the end of this year. But that won’t mark the end of this saga. Nor indeed will it mark the end of the Brussels regime on jurisdiction, since the smart money is on Brussels I being replaced with the Lugano Convention, which is in fairly similar terms. You can’t throw away your EU law notes quite yet.