Armagas Ltd v Mundogas SA (The Ocean Frost)

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Keith of Kinkel,Lord Brandon of Oakbrook,Lord Templeman,Lord Griffiths,Lord Oliver of Aylmerton
Judgment Date22 May 1986
Judgment citation (vLex)[1986] UKHL J0522-2
Date22 May 1986

[1986] UKHL J0522-2

House of Lords

Lord Keith of Kinkel

Lord Brandon of Oakbrook

Lord Templeman

Lord Griffiths

Lord Oliver of Aylmerton

Armagas Limited
Mundogas S.A.
Lord Keith of Kinkel

My Lords,


The respondents ("Mundogas") are a Panamanian corporation having as its shareholders three very substantial and important commercial groups in different countries. Their business activities comprise trading in liquid petroleum gas (L.P.G.) and chemicals, shipowning and the chartering of ships. In 1979 the International Gas Corporation of Oslo were owners of an L.P.G. carrying ship, the M.T. Havfrost, later renamed Ocean Frost ("the vessel"). On 24 October 1979 they let the vessel on time charter to Mundogas for a period of 12 months. The charterparty contained an option for Mundogas to purchase the vessel for delivery at the end of the charterparty period at the price of U.S.$5,200,000, the option to be exercised at the latest on 6 June 1980. A formal contract of sale, also dated 24 October 1979, was drawn up and signed on behalf of International Gas and of Mundogas. A Danish firm of shipbrokers called World Marine Chartering A.S., one of the partners in which was a Mr. Jon Tony Johannesen, acted as agents in connection with this transaction. The signatory on behalf of Mundogas was Mr. Harald Magelssen, their vice-president (transportation) and chartering manager.


Early in 1980 it appeared to Mundogas that there were prospects of selling the vessel at a profit over the option price, and negotiations were initiated with a number of parties, but nothing came of these. In May 1980 Mr. Johannesen interested the principals of a Danish shipowning concern called the Armada group in a possible purchase. These principals were Mr. Torben Gunnar Jensen and Mr. Jorgen Poulsen Dannesboe. These gentlemen informed Mr. Johannesen that they would not be prepared to purchase the vessel unless at the same time Mundogas agreed to charter it back for a period of three years at an appropriate rate of hire. What happened next, according to the findings of fact arrived at by the Court of Appeal [1985] 3 W.L.R. 640; 1 Lloyd's Rep. 1, which differed in certain respects from those of the trial judge, Staughton J., [1985] 1 Lloyd's Rep. 1 but are not challenged by the appellants, was that Mr. Johannesen and Mr. Magelssen entered into a fraudulent conspiracy to bring a spurious three year charterparty into existence and to deceive Mr. Jensen and Mr. Dannesboe into believing that the charter was genuine, so as to induce them to agree to the purchase of the vessel. Mr. Magelssen had authority from Mundogas to agree to a straightforward sale of the vessel. He had no authority to agree to a three year charter back of the vessel, and was well aware that it would be impossible for him to obtain such authority. Mr. Johannesen arranged with Mr. Jensen and Mr. Dannesboe that the transaction was to be with a company to be incorporated by the latter in which Mr. Johannesen's firm, World Marine, was to have a 49 per cent, interest. Mr. Johannesen offered Mr. Magelssen "a piece of the ship," and later transferred to him a one third share in World Marine's interest. In pursuance of the conspiracy Mr. Johannesen falsely represented to Mr. Jensen and Mr. Dannesboe that Mr. Magelssen had actual authority to agree not only to the sale of the vessel but also to its charter back by Mundogas for three years. They were told that he had no general authority from Mundogas to enter into such a transaction, but that he had sought and obtained specific authority for it. The transaction was not one which Mr. Jensen and Mr. Dannesboe believed to be within the usual authority of an employee in Mr. Magelssen's position.


In the result, a contract of sale was entered into dated 30 May 1980 under which Mundogas agreed to sell the vessel to a company to be named by the Armada group for the sum of U.S.$5,750,000. Delivery was to take place not earlier than 1 February and not later than 15 March 1981, in order to allow for the expiry of Mundogas's current charter with International Gas. The contract was signed by Mr. Johannesen on behalf of Mundogas, he having obtained telex authority to do so, and by Mr. Dannesboe on behalf of the purchaser. Shortly afterwards the appellant company Armagas Ltd. was incorporated by the Armada group and nominated as purchaser of the vessel. On 19 June 1980, in Copenhagen, Mr. Magelssen signed, purportedly on behalf of Mundogas, a charterparty dated 30 May 1980 whereby Armagas agreed to let the vessel to Mundogas for a period of 36 months, with delivery not before 1 February 1981, the rate of hire to be "as agreed." The charterparty was signed by Mr. Dannesboe on behalf of Armagas. At the same time Mr. Magelssen and Mr. Dannesboe signed an addendum to the charterparty agreeing that the rate of hire was to be a minimum of U.S.$350,000 per month and that the owners were to have an option exerciseable not later than 10 January 1981 of cancelling the charterparty. The reason for the option to cancel was that it had been agreed orally between Mr. Jensen and Mr. Johannesen that if Armagas could find a buyer for the vessel at $6.5 million or more, on or before 10 January 1981, the vessel would be sold, the charterparty cancelled and the profit divided equally between the Armada group, World Marine and Mundogas. It was further agreed that the three year charterparty was to be kept strictly private and confidential, not only in the ordinary sense, i.e. that outsiders were not to be allowed to learn of its terms, but also to the extent that its existence was to be kept a secret from the chartering and operations department of Mundogas.


At this time a rate of hire of $350,000 per month was a reasonable one having regard to the state of the market. Mr. Magelssen and Mr. Johannesen believed, mistakenly as it turned out, that the market would continue to be buoyant, and that they would be able to arrange with Mundogas a series of 12 month charters covering the period of the spurious three year charter party at monthly rates of hire not less than $350,000. This was essential to the success of their scheme. So in November 1980 they drew up a 12 month charter by Armagas to Mundogas at the monthly rate of $365,000 commencing when the vessel passed to Armagas early in 1981. This document, dated 28 November 1980, was signed by Mr. Johannesen on behalf of Mundogas, and he asked Mr. Jensen to sign it on behalf of Armagas, representing that it was required for the internal purposes of Mundogas. Mr. Jensen was willing to do so only if at the same time an addendum was made to the three year charterparty reducing its period to two years, and produced the text of such an addendum. There followed a period when Mundogas was pressing Mr. Johannesen to obtain the signature of Armagas to the 12 month charter and Mr. Jensen was pressing him to obtain Mundogas' signature to the addendum. Neither was in the event ever signed. In April 1981 the vessel completed her service under the charter by International Gas, and became the property of Armagas. She remained however in the service of Mundogas, as the latter believed, under the twelve month charter, and as Armagas believed, under the three year charterparty. The managers and master of the vessel were each provided with a copy of the 12 month charter unsigned by Armagas, Mr. Jensen and Mr. Dannesboe having been persuaded by Mr. Johannesen to do this on the ground that the three year charter had to be kept secret.


The fraudulent scheme blew up in April 1982. The freight market had fallen to such an extent that a rate of $350,000 per month was out of the question. There was no possibility of Mr. Johanssen being able to keep the ball in the air by negotiating with Mundogas a rate of at least that amount for the following 12 months. Furthermore, by this time Mr. Magelssen had left the employment of Mundogas. On 2 March Mundogas gave Mr. Johannssen notice of redelivery of the vessel on 2 April 1982, and on 8 April they tendered redelivery to Armagas. The latter refused to accept it, founding on the spurious three year charterparty. Mundogas disclaimed all knowledge of that charterparty, and asserted that they were redelivering in terms of the 12 month charter.


My Lords, the foregoing represents the minimum statement of the facts of the case necessary to enable the legal issues which arise to be examined. The judgment of Robert Goff L.J. in the Court of Appeal [1985] 1 Lloyd's Rep. 1, 49-64 contains a most impressive analysis of all the material evidence leading to detailed findings of facts to which reference may be made.


In June 1982 Armagas commenced proceedings against Mundogas claiming damages for breach of the three year charter partys, by wrongfully repudiating it. It was alleged that Mr. Magelssen had actual authority to bind Mundogas to that charterparty. In the course of the trial before Staughton J., and in the light of the way in which the evidence was developing, Armagas amended its pleadings so as to claim alternatively damages in tort for Mr. Magelssen's deceit in falsely representing that he had authority to enter into the three year charterparty, Mundogas being alleged to be vicariously liable for that deceit. Mundogas contended that if it was bound by the three year charter it was entitled to bring the contract to an end by reason of alleged bribery of Mr. Magelssen by Armagas, and counter-claimed for damages. The basis of this claim was the offer by Mr. Johanssen to Mr. Magelssen of "a piece of the ship", to which Mr. Jensen and Mr. Dannesboe were said to be party. Staughton J. held that Mr. Magelssen had no actual or ostensible authority from Mundogas to conclude the charterparty, but he went on to hold that he had ostensible authority from Mundogas to communicate the latter's approval of...

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