UK: HFW Commodities Bulletin - March 2010

Last Updated: 14 April 2010

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

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.