COURT OF APPEAL REVERSES JUDGMENT IN FLUXO-CANE
LITIGATION
By Robert Wilson
The decision of the Court of Appeal in ED&F Man Commodity Advisers Limited v. Fluxo-Cane Overseas Limited (13 May 2009) illustrates some of the potential pitfalls for brokers in trying to balance compliance with directions of commodity exchanges, the need to maintain orderly markets and protection of credit limits and trading relations with their clients.
Man were among a number of parties who had acted as brokers for FCO on the New York International Commodities Exchange (ICE). ICE became concerned that FCO had acquired a high number of short positions in the Sugar No. 11 futures contract for delivery in March 2008, and on 14 January 2008 directed its Members to require an additional 20% "super margin" from FCO. On 16 January 2008, ICE directed Members to close out some of FCO's short positions by 23 January 2008 to reduce them to an acceptable level, with or without FCO's co-operation.
On 17 January 2008, Man made margin calls on FCO, which were not paid. On that same day, there was a meeting between FCO and ten brokers, including Man. The aim of the meeting was to discuss what action to take following ICE's directives and whether a co-ordinated approach could be taken to closing out FCO's short positions which would minimise FCO's exposure and the wider impact on the market.
It was agreed that a further meeting would be held the next day, 18 January 2008. However, before that meeting took place, Man liquidated positions they had placed for FCO's account. Man subsequently brought proceedings against FCO for about US$22m under their customer agreement. FCO responded by contending that Man's liquidation of their positions had been premature and had caused them substantial losses. FCO also argued that Man's action in closing out positions prior to the 18 January meeting was in breach of an oral agreement reached between FCO and all brokers at the meeting on 17 January.
Man applied to the High Court in London for summary judgment, asking the Court to rule that there no agreement was reached between FCO and the brokers on 17 January 2008. Man's application failed at first instance. In September 2008 the High Court held that there had been an interim binding contract under which Man and the other brokers had agreed not to take any individual action until a second meeting had taken place.
Man have now succeeded on appeal. The Court of Appeal rejected the first instance finding and held, based on a transcript of the 17 January meeting, that there was no consensus at that meeting on what action should be taken.
Nonetheless, the judgment at first instance decision remains a lesson on the risks of conducting open discussions with a view to possible variations or compromises of contractual rights. Such negotiations are typically conducted on an expressly without prejudice basis. This case demonstrates the wisdom of following that practice whenever appropriate, to avoid subsequent suggestions that contractual rights may have been waived or compromised in the course of unfinished discussions.
ENFORCEMENT OF "PAY FIRST, ARGUE LATER" CLAUSE
IN SALE CONTRACT
By Mark Morrison
The recent decision in Petroplus Marketing AG v Shell Trading International Ltd (14 May 2009) demonstrates again the willingness of the English courts strictly to enforce express terms of international sale of goods contracts.
The case arose from a contract made on 10 June 2008 by which Petroplus sold 29-32,000 MT of high sulphur fuel oil and 1-2,000 MT of light cycle oil to Shell, FOB Coryton. The contract contained the standard provisions that (1) the price of the oil would be set by reference to published market prices at and around the date of shipment; and (2) the price would be paid "without deduction, offset or counterclaim".
The cargo was shipped after the contractual shipment period, the market having risen between the end of the contractual shipment period and the shipment date. Petroplus invoiced Shell for the price of the cargo based on published prices at and around the shipment date. Shell insisted that they would only pay (and did pay) for the cargo as priced based on a shipment date within the contractual shipment period, contending that Petroplus bore responsibility for the cargo being shipped late.
Petroplus applied to the High Court for summary judgment for the difference between the amount of their invoice and the amount paid by Shell. Petroplus submitted that, even if Shell were right that Petroplus were responsible for the late shipment, the payment clause in the contract required Shell to pay "without deduction, offset or counterclaim", which essentially meant that Shell had to pay the invoice price and then pursue a claim against Petroplus if they considered they were entitled to partial repayment because of a breach of contract on the part of Petroplus.
Shell resisted Petroplus' summary judgment application, arguing that by demanding payment of a price calculated after the contractual shipment period Petroplus were seeking to benefit from their own breach of contract in shipping cargo late, and that in any event Petroplus' claim for the price and Shell's counterclaim for breach of contract were so closely connected that they ought to be heard together.
The High Court granted Petroplus' application for summary judgment. It was held that Shell's case, which was in substance a counterclaim, could not overcome the clear contractual provision that payment was to be made "without deduction, offset or counterclaim".
This decision, though not surprising, demonstrates that standard wording in sale contracts will be strictly enforced and should not be dismissed as surplusage. In particular, payment clause wording of the kind in issue in this case may have the effect of obliging a buyer to pay a seller's invoice in full notwithstanding that the buyer may have good and substantial claims against the seller arising from the seller's performance of the same contract. Most buyers will be able to do little about this, given the convention of incorporating such wording in international sale contracts, but they should at least be aware of the potential results.
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