Negotiating damages — maritime-style

Guest blogpost from James M Turner QC, Quadrant Chambers

In Priyanka Shipping Ltd v Glory Bulk Carriers Pte Limited (“The Lory”) [2019] EWHC 2804 (Comm), David Edwards QC (sitting as a Judge of the Commercial Court) dismissed a common law claim for negotiating damages for the breach of a memorandum of agreement (MOA) for the sale of a ship.

The decision is one of the first to grapple with the recent Supreme Court decision in One Step (Support) Ltd v Morris-Garner [2018] UKSC 20, [2019] AC 649. In that case Lord Reed’s majority judgment issued a corrective to jurisprudence which, since the House of Lords’ decision in AG v Blake [2001] 1 AC 268, had seen the award of negotiating damages at common law “on a wider and less certain basis” than had been the case before Blake.

What are “negotiating damages”? Negotiating damages “represent such a sum of money as might reasonably have been demanded by [the claimant] from [the defendant] as a quid pro quo for [permitting the continuation of the breach of covenant or other invasion of right]”: see One Step at [4]). They are “assessed by reference to a hypothetical negotiation between the parties, for such amount as might reasonably have been demanded by the claimant for releasing the defendants from their obligations” (One Step at [25]).

Negotiating damages are commonly encountered in two situations: so-called user damages in tort; and damages awarded under Lord Cairns’ Act.

A claim for user damages arises where the defendant has used or invaded the claimant’s property without causing direct financial loss: an example commonly given is riding a horse without permission. The defendant, having taken something for nothing, is required to pay a reasonable fee for the use made of the claimant’s property.

As for Lord Cairns’ Act: historically, the Common Law Courts could only award damages for past breaches, i.e., where the cause of action was complete at the date the writ was issued. For the future, litigants had to look to the Courts of Equity for orders for specific performance and injunction etc. However, the latter had no power to award damages. That inconvenience was remedied by Lord Cairns’ Act 1858, section 2 of which (now s. 50 of the Senior Courts Act 1981) allowed the Courts of Equity to award damages as well as or instead of an injunction.

Damages may be awarded under Lord Cairns’ Act for past breaches, but are assessed on the same basis as damages at common law.

Damages in lieu of an injunction for future breaches, on the other hand, cannot be assessed on the same basis as damages at common law, as by definition such damages cannot be awarded at common law. Instead, negotiating damages may be awarded.

The Issue. As will be seen, the issue in The Lory was whether negotiating damages were available at common law for past breaches of the relevant term of the MOA.

The Facts. The Defendant Seller sold the Claimant Buyer its vessel on terms that included clause 19, by which the Buyer undertook that it would not trade the vessel and would sell it only for demolition. However, the Buyer traded the vessel. By the time of the trial, the vessel was completing discharge under her second fixture and was fixed for a third. The Seller claimed damages for or an injunction to restrain breach of clause 19 of the MOA (or both).

The Outcome. The Judge awarded an injunction restraining future trading of the vessel (expressly including the third fixture). Damages could in principle be claimed for the first and second fixtures, but – because they were now in the past – only at common law.

The Judge noted that, once the vessel had been sold and delivered, the Seller no longer had any proprietary interest in it, “no right or ability to use the Vessel to trade, and no right or ability to profit from the Vessel’s use … ”. Although the Seller was entitled to be placed in the position it would have been if the contract had not been breached, “it is not obvious how any further trading of the Vessel by the Buyer … could cause the Seller any loss.” [163].

It was “no doubt” for this reason that no conventional damages claim had been made, but only a claim for a hypothetical release fee. The “critical question”, so far as that claim was concerned, was whether the Seller could bring itself within [95(10)] of Lord Reed’s judgment in One Step and show that “ … the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset.” [189]

Lord Reed had made clear that “that such an approach is not available in the case of a breach of any contractual right, but only where:… the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed.The paragraph implicitly regards the relevant asset not as the contractual right itself but as something else, a valuable asset “created or protected by the right”.” [190]

The “valuable assets” that Lord Reed had in mind were essentially proprietary rights and analogous rights such as intellectual property and rights of confidence [193]. The Judge rejected the Seller’s submission that its right under clause 19 was within the same class [196]. The Judge regarded the right under clause 19 as more closely analogous to the non-compete obligation at issue in One Step, which Lord Reed did not consider fell within “the category of cases where negotiating damages were available as a measure of the Seller’s loss” [199].

The claim therefore failed. The Judge did, however, grant permission to appeal. We may not, therefore, have heard the last word on this topic.

James M. Turner QC appeared for the Buyers in this case on the instruction of Alex Andrews and Claire Don of Reed Smith.

Something for the New Year. INCOTERMS 2020 are coming.

INCOTERMS 2010 will be updated to INCOTERMS 2020 which comes into effect on 1 January 2020. The main changes are as follows.

Under FCA if the parties agree, the buyer, at its cost and risk, must instruct the carrier to issue to the seller a transport document (e.g. a bill of lading with an on-board notation) stating that the goods have been loaded, which the seller must then provide to the buyer.

Under CIP sellers will need to obtain cargo insurance cover which complies with Clauses (A) of the Institute Cargo Clauses (LMA / IUA) which, subject to certain exclusions, cover “all risks”, subject to the parties’ right to agree to a higher or lower level of cover.

DAT (Delivered at Terminal) now becomes DPU (Delivered at Place Unloaded).

FCA, DAP, DPU now allow the Seller to use its own transport rather than using a third party carrier.

Security obligations are made more prominent.

No implied term qualifying free standing demurrage provision in sale contract

 In Gunvor SA v CruGas Yemen Ltd [2018] EWHC 2061 (Comm) a term contract of sale was made for the sale of  gasoline by 12 monthly consignments cif Hodeidah. The buyer was named as CruGas Ltd but the claimant argued that the contract was made with CruGas Yemen Ltd, and that it had been unaware that within the relevant group there was a Cayman Islands company named CruGas Ltd. The claimant obtained performing vessels from a separate entity within its group of companies, Clearlake Shipping Pte Ltd (Clearlake), under a long-term contract of affreightment on an amended Asbatankvoy form. It claimed demurrage totalling $18m under the sale contract and claimed against CruGas Yemen Ltd and CruGas Ltd in the alternative. The defendants denied liability for demurrage on three grounds. First, the demurrage claims were time-barred by reason of a demurrage time bar provision in the COA. Second, a term should be implied into the sale contract that the claimant was required to prove the demurrage rates claimed were “in line with the market rate”. Third, the claimant had to prove that it paid the demurrage sums it claimed under the sale contract.

Phillips J first found that the contract had been made with CruGas Yemen Ltd, and then proceeded to reject all three of the buyer’s arguments. First, it was established in OK Petroleum AB v Vitol Energy SA [1995] 2 Lloyd’s Rep 160 that words of general incorporation in a sales contract concerning demurrage provisions in a separate charter did not bring in terms ancillary to the accrual of demurrage, such as time bars relating to the presentation of demurrage claims. Second, there was no justification for the implication of the term contended for, which was neither necessary for the business efficacy of the sale contract, nor would give effect to the obvious but unexpressed intentions of the parties at the time they contracted. In any event, expert evidence from a chartering expert, was that the demurrage rates were all consistent with the market, insofar as such a thing could be said. Third, the demurrage provision under the sale contract was free-standing and not an indemnity.

 

Remedies for delivery without production of the bill of lading

A case in the CA of some interest today. Imagine carriers or forwarding agents have delivered goods to a buyer without getting payment for them. No point in suing the buyer in 99% of such cases: and often carriers and forwarding agents will be men of straw too (remember in addition that P&I clubs won’t sub up for this sort of thing). But had you thought of suing the rich man behind the buyer who sweet-talked the forwarding agent or carrier into letting the goods go without payment? You hadn’t? It’s actually a classic case, in most situations, of inducing breach of contract: a point confirmed by the Court of Appeal in Michael Fielding Wolff v Trinity Logistics [2018] EWCA Civ 2765, upholding Sara Cockerill QC at first instance. Happy hunting.

Rotterdam Rules in Cameroon’s hat-trick of international trade conventions.

 

Just over a year ago on 11 October 2017 Cameroon ratified or acceded to three UNCITRAL Conventions.

  1. Cameroon ratified the Rotterdam Rules. There are now four states that have ratified. Sixteen more to go before the Convention comes into force. At the current rate we’ll be there in 2058.
  2. Cameroon acceded to the he United Nations Convention on Contracts for the International Sale of Goods (1980) (CISG) which comes into force for Cameroon on 1 November 2018.
  3. Cameron acceded to the United Nations Convention on the Use of Electronic Communications in International Contracts (2005) which came into force for Cameroon on 1 May 2018.

Carriers and bills of lading: an unexpected duty to arbitrate.

An important point for bill of lading holders arose a couple of days ago in the Commercial Court. Everyone knows that you have to watch your back when becoming the holder of a bill of lading, in case you end up with not only the right to sue the carrier but also the duty to foot the bill for an insolvent shipper’s liabilities.

Traditionally the teaching has been: you are safe unless you take or demand delivery of the goods or make a claim against the carrier. It follows that if you are pretty sure you never did any of those things but nevertheless receive a demand from the carrier, you can smugly respond “Nothing doing. Sue me if you dare.” So far so good. But what if you receive a demand for arbitration pursuant to an arbitration clause contained in the bill? Can you still say “See you in court”, or are you now bound to arbitrate the claim, with the risk of losing by default if you do nothing? This was the point that arose in Sea Master Shipping Inc v Arab Bank (Switzerland) Ltd [2018] EWHC 1902 (Comm), where Popplewell J preferred the latter answer.

A bank financed A, a seller of Argentine extracted toasted soya meal, who voyage-chartered a vessel to deliver it to Moroccan buyers. The transaction was a disaster for A, with the deal and a series of replacements falling through and the vessel sailing round North Africa and the Mediterranean, rather like Captain Hendrick’s Flying Dutchman, in search of someone somewhere to love the cargo. Big demurrage liabilities built up. The bank meanwhile acquiesced in the issue of a switch bill with a LMAA arbitration clause incorporated, naming it as consignee. A being (one assumes) insolvent, the owners claimed against the bank and claimed arbitration, alleging the bank was liable either as an original party to the switch bill, or as a transferee of it.

The arbitrators declined jurisdiction, on the basis that there was no evidence the bank had become liable on the bill under s.3 of COGSA 1992 and thus that the bank was not bound by the arbitration clause. However, on a s.67 application Popplewell J disagreed. The arbitration agreement was, he said, separate from the rights and liabilities under the bill itself: as soon as the bank fell to be treated as a party to the bill under s.2 of the Act, it was bound fully by any arbitration provision in it. It followed that the case had to be remitted to the arbitrators with a direction to continue with their hearing of the claim.

A result which, one suspects, will please neither banks nor traders, since it deprives both of the advantage of inertia: but there you are. At least carriers will be happy.

Of sales, bills of exchange and arbitration

Picken J today revisited an old chestnut in arbitration law. Suppose you sell goods or services and draw on the buyer for the price (yes, some people still do this), and have a standard arbitration clause referring to “all disputes arising out of or in connection with this Contract”. Does the arbitration clause cover a claim on the bill of exchange, as against one on the underlying contract of sale? Just this happened in Uttam Galva Steels Ltd v Gunvor Singapore Pte Ltd [2018] EWHC 1098 (Comm), where the buyer made a s.67 application challenging an LME arbitration tribunal that had said yes and had then given judgment against it on the bill. In fact the buyer had introduced the point out of time, so the point was a non-starter.  But even without that it would, said Picken J, have failed. On the basis of modern arbitration practice as evidenced in Fiona Trust v Privalov [2007] UKHL 40; [2007] 4 All E.R. 951 parties should not lightly be taken to have agreed to bifurcated dispute resolution according to whether the action was being brought on the bill or on the contract. Dicta in Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713, 731 and the Singapore decision in Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53 failed to convince him otherwise.

On balance it is suggested that his Lordship was right. It is true (as he admitted) that the result is that those who sell under bills of exchange may inadvertently give up the right they would otherwise have to summary judgment on the bill with few if any questions asked under the ‘pay now, sue later’ principle. But summary judgment is equally available under the underlying contract, and the fact that this may be precluded by an arbitration clause never seems to have unduly worried anyone.

If the claim is brought on the bill by an indorsee who is a holder in due course, then presumably the result will be different: the holder here can hardly be bound by any arbitration clause — as indeed was held in Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53, where the claimant was the indorsee of a promissory note. But this need not detain us.

Meanwhile, the sensible reaction for a commercial lawyer is a simple one: say what you want. Where payment is or may be made by a bill of exchange, it is hardly rocket science to draft the arbitration clause to as to embrace “all disputes arising out of or in connection with this Contract, including cases where the claim is brought under a bill of exchange or promissory note”, or (if you prefer) “all disputes arising out of or in connection with this Contract, save for cases where the claim is brought under a bill of exchange, promissory note or similar instrument”. You may do students of commercial law out of a bit of technical learning, but you sure will save your clients a good deal of heartache and very possibly money.

Opening a letter of credit on time. Condition or innominate term?

Is the buyer’s obligation to open a letter of credit by a specified time a condition or an innominate term? The tribunal in London Arbitration 12/18 found that it was an innominate term. The sale contract of 6 September had stipulated that a letter of credit be opened within two banking days from the dated of the contract. On 8 September no letter of credit had been opened and the sellers on 9 September terminated the contract and made arrangements to return the deposit. They claimed that the buyers had repudiated the contract by failing to open a letter of credit on time.

The tribunal held that a contractual requirement for the provision of a letter of credit did not always have to be read as a condition. Although the provision of a letter of credit would frequently be a condition precedent to performing obligations under a contract, for example to load a ship (Kronos Worldwide Ltd v Sempra Oil Trading SARL [2004] 1 Lloyd’s Rep 260), that was not to be equated with a condition of a contract. A term was only to be categorised as a condition if any assumed breach of it would deprive the innocent party of substantially the whole benefit of the contract.

In the present case, where the obligation to provide a letter of credit was related to the contract date and where the first shipment date was three or more weeks later, the tribunal was not able to conclude that the obligation should be treated as a condition rather than as an innominate term.

The breach by the buyers of the innominate term could not be regarded as depriving the sellers of substantially the whole benefit of the contract. Until a letter of credit would have been issued a few days later, it deprived them of security, but the substantial benefit of the contract was the sale and the profit the sellers anticipated making.

Accordingly, it was the sellers who had been in breach by terminating the contract on 9 September.

Demurrage claim against seller. Don’t blame your buyer if you don’t pay freight due under your charter.

 

London Arbitration 2/18 give us an interesting issue on causation arising out of two related contracts, a cfr sale contract, and the charterparty made by the seller. The cfr sale contract required buyers to pay charterparty freight to sellers as soon as possible after signing bills of lading; which they failed to do. The shipowners refused to release the ‘freight prepaid’ bill of lading until freight had been paid. The consequent delay resulted in the seller incurring a liability for demurrage at the discharge port under their charterparty. The tribunal held that the sellers were not entitled to an indemnity from the buyers in respect of their demurrage liability. Despite the provisions of the sale contract, the primary obligation to pay to the owners the charterparty freight remained with the sellers, as charterers of the vessel.  The sellers decided not to pay themselves the freight due to the owners and this broke any chain of causation there might have been between the buyers’ breach and the demurrage incurred by sellers under the charter. Alternatively, the sellers had failed to mitigate the damages to which the buyers’ breach exposed them and thereby incurred a liability for demurrage that could have been otherwise avoided.

Sale of goods — no need to prepare to collect something you know you won’t get

A textbook sale of goods decision today from Carr J in Vitol S.A. v Beta Renowable Group S.A. [2017] EWHC 1734 (Comm), which nevertheless has a few lessons for the rest of us. Beta, a Spanish real estate company that had branched out into the biofuels business, agreed to sell commodity traders Vitol 4,500 tonnes of cooking-oil-derived biodiesel fob Bilbao. Vitol had to have a vessel ready to lift it by midnight Friday 1 July and to nominate the relevant vessel by midnight Monday that week.

Things then went wrong. Communications from Beta culminating on Monday afternoon made it clear there wouldn’t be any biodiesel to lift. Vitol let the nomination time pass without doing anything, said on 7 July that they accepted Beta’s repudiation, and sued for loss of profit (including would-be hedging gains — more anon). Beta declined liability. They argued, with more hope than merit, that Vitol had not accepted their repudiation until much later, and had therefore remained bound to nominate a ship on Monday and take steps for delivery; not having done so, they were (said Beta) disabled from complaining of non-delivery.

Carr J held for Vitol, reasoning thus. First, while one could accept repudiation by mere omission, Vitol had not done so by failure to nominate, since this (non) act had not been unequivocal enough. They had therefore on principle remained bound to take steps to lift the oil. Nevertheless, given that it remained abundantly clear that there was nothing to collect, it would be ridiculous to require them to go to the trouble and expense of making idle preparations to collect it.

It followed that Beta were liable for substantial damages for non-delivery, whereupon a further nice point arose. Spurning traditional value less price as old hat, Vitol sought to claim their lost resale margin, plus in addition an alleged profit they would have made on buying in gasoil futures they had sold in order to hedge the transaction. Carr J was having none of it: there was no reason to allow actual resale profits in an ordinary commodity contract, and the futures were essentially a speculation on Vitol’s own account. So Vitol had to be content with market value damages.

Three points for commodity lawyers and others.

(1) It’s good to have confirmation that to enforce a contract you have generally to show merely that you would have been ready willing and able to satisfy any conditions on your right to performance, but for the other side’s repudiation: you don’t have actually to do an entirely futile act where that would serve no purpose.

(2) Damages: courts remain wary in straightforward commodity cases of departing from the time-honoured  value test in ss.50-51 of the Sale of Goods Act.

(3) Vitol will have been kicking themselves for not making it clear, when not nominating a ship, that they were specifically accepting Beta’s repudiation. One email, of negligible cost, would very likely have saved the cost of having the whole matter taken to the High Court. Solicitors for buyers and sellers, verb. sap.