Relevance of hedging to damages claims under physical
contracts
By Martina Kelly
In its recent decision in Glencore Energy UK Limited v Transworld Oil Limited (3 February 2010), the High Court in London considered circumstances where a FOB contract was said to remain open for performance despite product not being delivered within the contractual delivery window.
In March 2008, Transworld sold a cargo of Nigerian crude oil to Glencore, FOB Ukpokiti Marine Terminal. In accordance with the contract, Glencore narrowed the delivery window to 26-28 March 2008 and declared 27 March - 2 April 2008 as the contractual pricing period. The price was to be determined by the average price of Brent crude in that period.
Glencore's nominated vessel arrived at the loading terminal on 28 March 2008, but, soon afterwards, following the kidnapping of crew from a tug attending the vessel, the vessel was directed to sail away. Following the release of the kidnapped tug crew, but after the contractual delivery window, the vessel returned to the terminal to load. However, tugs were unavailable because of security concerns.
Transworld informed Glencore that it would not be possible to load the cargo and advised Glencore to "take whatever steps they deem appropriate in the circumstances". Notwithstanding this, Glencore asked Transworld to deliver the cargo. Transworld declined to do so, arguing that the contract had ended.
Glencore successfully claimed damages from Transworld for breach of contract. The Court held that the evidence pointed to the parties having agreed that the contract would continue on the same terms, including with the declared pricing period, save for the postponement of the delivery window. The Court analysed this as a mutual affirmation of the contract, and found that the parties had merely varied the contract to allow for later shipment.
Another factor that influenced the Court's decision that the contract remained alive was that Glencore had not closed out hedging arrangements which it had entered into to reduce its exposure on the physical purchase.
The Court awarded Glencore damages assessed by reference to the difference between the contract price and the value of the oil on the date when it should have been delivered to Glencore. The Court held that this was the true measure of Glencore's loss, and rejected submissions that damages should be assessed by reference to the difference between the contract price and the date of Transworld's repudiation of the contract or the date when Glencore accepted Transworld's repudiation as bringing the contract to an end.
Possibly of most interest is that the Court reduced the amount of Glencore's damages to take account of gains under Glencore's related hedging contracts. Glencore argued that their hedging arrangements were entirely independent transactions and should not be considered when analysing their losses under the physical contract. However, the Court found that Glencore's hedging arrangements could not properly be viewed as disconnected from the physical purchase, and that Glencore had reduced their losses under the physical contract when they eventually closed out the hedging positions.
The question whether losses or gains under hedging arrangements should be taken into account when assessing damages for breach of the physical contracts to which the hedging relates has been debated for many years, and the English courts have, with some exceptions, tended to decline taking hedging contracts into account in such circumstances. The decision in Glencore v Transworld indicates that the English courts may be moving towards a broader approach in this area of the law. If that is correct, it would represent a significant shift in how damages under trading contracts are assessed.
Court of Appeal reverses High Court decision on
admissibility of without prejudice exchanges
By Edward Millais
The August 2009 edition of this bulletin reported the decision of the English High Court in Oceanbulk Shipping Trading SA v TMT Asia Limited on 29 July 2009. The High Court held that evidence of "without prejudice" exchanges between parties during settlement negotiations could be relied upon in a dispute concerning the interpretation of the resulting settlement agreement.
The High Court's decision was overturned in a judgment of the Court of Appeal on 15 February 2010.
As a general rule, without prejudice communications are not admissible as evidence under English law. One exception to this rule is that without prejudice communications are admissible if the dispute concerns whether those communications resulted in a settlement agreement. The High Court in Oceanbulk held that without prejudice communications could also be admitted as evidence in a dispute over the interpretation of a settlement agreement, because there was no good reason to distinguish between evidence of the existence of a settlement and evidence of the terms of a settlement, and it was in the interests of justice to admit without prejudice communications if it assisted the Court to interpret the parties' intentions.
The Court of Appeal rejected this reasoning by a majority of two to one. The majority held that there is usually a clear distinction between disputes about whether an agreement was reached and disputes over contractual interpretation, and that cases concerning contractual interpretation were difficult enough without allowing the admission of more evidence in the form of pre-contractual, without prejudice communications.
On the issue of policy, the majority of the Court of Appeal held that the public interest in protecting without prejudice communications from disclosure, so as to encourage settlement discussions wherever possible, was not defeated merely because it might be useful on occasion to examine such communications to assist with contractual interpretation. The Court of Appeal held that, in these circumstances at least, the principle of upholding the inadmissibility of without prejudice communications should take precedence.
In his dissenting judgment, Ward LJ defended the judgment of the High Court, preferring the view that the interests of justice in the Court reaching a correct decision on issues of what parties have agreed in their contracts should prevail over the public policy of protecting without prejudice communications from disclosure.
The importance of this issue, and the fact that the Court of Appeal's judgment was not unanimous suggests that this may not be the last word. Whether or not this case proceeds to the House of Lords, the issue of the inadmissibility of without prejudice communications is unlikely to have been settled by the Court of Appeal in this case.
However, as was observed in the August edition of this bulletin, the principal advantage of negotiating on a without prejudice basis is that communications should not come to the attention of a judge or arbitrator if negotiations fail. That principle remains unaffected by the Oceanbulk case.
HFW Metals Bulletin
Next month will see the launch of HFW's new Metals Bulletin, with a welcome article by Mel Wilde of Metalloyd Limited, the Chairman of the International Steel Trade Association. The bulletin will be published quarterly and will report and analyse recent cases and developments in metals trading.
Enquiries about issues arising from metals trading should be directed to Andrew Ridings, Partner or Brian Perrott, Partner, or your usual contact at HFW.
Conferences & Events
Coaltrans China
Beijing, China
(12-13 April 2010)Paul Aston, Chris Quennell, Richard Wilmot and
Calvin Ho
Argus Biomass Trading Conference
Brussels, Belgium
(15 April 2010)
Chris Swart and Rory Gogarty
Lloyds Maritime Academy: International Bills of Lading
Seminar
Bonhill House, London EC2
(17-19 May 2010)
Damian Honey
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