Bernhard Schulte Shipmanagement (Bermuda) Ltd Partnership v BP Shipping Ltd
| Jurisdiction | England & Wales |
| Judge | THE HON MR JUSTICE BLAIR,Mr Justice Blair |
| Judgment Date | 29 January 2009 |
| Neutral Citation | [2009] EWHC 111 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 29 January 2009 |
[2009] EWHC 111 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
The Hon Mr Justice Blair
Mr Lionel Persey QC (instructed by Ince & Co) for the Claimant
Mr Dominic Kendrick QC (instructed by Clyde & Co LLP) for the Defendant
Hearing dates: 19 th and 20 th January 2009
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
………………………..
Mr Justice Blair:
This case raises a short point of construction on the termination provisions in a crew management agreement, or to be precise six such agreements as amended by various side letters. These were entered into over a period of some twelve years between the claimant ship management company and the defendant company, BP Shipping Ltd (“BPS”) which is the shipping arm of the BP oil and gas group. The question is whether on termination the claimant is entitled to half of the annual US dollar and sterling fees to which it was entitled under the agreements, that is US$750,000 and £553,773, or whether (as the defendant submits) it is only entitled to half of the monthly payment in respect of such fees, that is US$62,500 and £46,147.75.
There are two well recognised types of crew manager contracts in the shipping trade: “lumpsum” or “cost plus fees”. Under a lump sum contract, the ship owner pays the crew manager a fixed amount for all services. The Manager will know within relatively narrow confines what his own office overheads are. The extent of his profit (or loss) depends largely upon the fluctuating expenses he will have to pay for matters such as sourcing, flying out, employing and repatriating the officers and crew. The Owner has the advantage of knowing that his crew expenses are fixed, but takes the risk that he may be overpaying for crew expenses and also takes the risk that the Manager may be tempted to let crew standards drop to save expenditure. By contrast, under a 'costs plus fee' contract, the Manager's remuneration is confined to a fixed fee. The Owner takes the risk of higher than anticipated expenses throughout the duration of the contract.
Under the current standard form contracts in this industry, the crew management contract will have a set duration. If there is a premature termination on the occurrence of certain events, e.g. loss or sale of the vessel, the forms provide for the Manager to receive compensation measured by the month: the Manager gets the lump sum paid for an agreed number or fraction of month(s) under a lump sum contract. On a 'costs plus fee' arrangement, the Manager gets the fee element measured by the month(s), or fraction thereof. The current BIMCO 'costs plus fee' form provides that after the initial period of crew management, the contract may swing into an open ended duration, subject to termination by two months' notice. If termination occurs by this method, no compensation is paid. This reflects the fact that the Manager will have been paid for his own set-up expenses in the initial duration. I am grateful to Mr Dominic Kendrick QC, counsel for BP, for this explanation, which I do not think is controversial. That said, I agree with Mr Persey QC for AMLP that the standard forms are of limited assistance, since the particular arrangements between the parties were or became bespoke in nature.
The facts
So far as the present proceedings are concerned, the facts as I find them are as follows. The claimant is a Bermuda based body which for most of the period relevant for present purposes was called Atlantic Maritime Limited Partnership, and I shall call the claimant “AMLP” in this judgment. AMLP managed BP vessels over a twenty year period running from 1987 under a number of contracts and extensions made by side letter. Payroll and corporate functions were dealt with by AMLP in Bermuda, whilst accounting and personnel management functions were dealt with in the Isle of Man by an associated company, Dorchester Maritime Ltd (“DML”). Though managed by AMLP, the structure was that officers were employed by BP Maritime Services Ltd. Ratings were all employed by AMLP. It is clear that the relationship between AMLP, DML and BP was very close at least at the operational level.
Historically, BP had selected its own officers. However, by the 1990s, to stay competitive with other owners, it could not continue to subject its officers to the British tax regime. Crew management contracts with an off-shore manager like the claimant (which is based in Bermuda) were best from a tax planning viewpoint, and these were duly put in place. The first such agreement was dated 1 July 1994 in respect of BP's then bulk oil fleet. Over the next year or so, it entered into another five such agreements in respect of BP's liquid natural gas (LNG) carriers as well. All of the agreements are in materially identical terms, and for the purposes of this claim, I will refer to the first one.
In 1994, the numbers of ships in BP's fleet were in the words of one of its witnesses, at something of a nadir. AMLP was at this time the sole manning agent for BP, and it provided officers and ratings for all seventeen of BP's then vessels. The contracts in question were lump sum contracts. For each vessel, a monthly lump sum was set out in two figures, pounds sterling for payments to officers, and US dollars for payments to ratings and all other expenses. The lump sums were all inclusive—they covered the cost of providing the crew and all ancillary services, together with AMLP's administration costs, overheads and profit. The parties later referred to this as a “closed lump sum” basis of remuneration. The contract had an open ended period, subject to BP giving six months' notice. In this event, clause 5.9(c) provided that compensation equal to one half of the applicable monthly lump sum payment prevailing at the date of termination was payable in relation to the vessel or vessels concerned. I shall set out the contractual provisions later, but, to make sense of what comes later, note that they would have produced a substantial sum by way of compensation. On its part, AMLP had the right to “resign” on giving not less than three month's notice. No compensation was payable in that event.
By 2000, there were twenty three vessels under management, and BP had started ordering ships in significant numbers. The company had become concerned that it was paying AMLP too much under the lump sum arrangement. In consequence, adjustments to the contractual regime were implemented by a 2000 side letter. A side letter was used so as not to disturb the tax position. Under it, the crew management arrangements moved to a “costs plus fee” basis, or as AMLP and some of the documentation puts it, from a “closed” lump sum system, inclusive of fees, to an “open” lump sum system. Apart from three fixed price elements—namely AMLP's profit, its indirect staff costs and its own office overheads—AMLP's expenses and costs were auditable by BP. There was still a monthly lump sum, but it was now in effect an estimate, being subject to adjustment upwards or downwards depending upon the audit results. BP therefore took the risk of these costs exceeding predictions, though the evidence was that in practice from a fairly early stage AMLP's figures were accepted. The 2000 side letter stated that the revised arrangements were to continue for four years, but without overriding the rights of termination in the 1994 contract.
By a second side letter dated 1 April 2003, further refinements were made to the fee structure. Fees were no longer to be broken down into three elements and were now due at the annual rate of US$1,500,000 and £1,000,000 per year to be paid monthly in advance in 12 equal instalments. The sterling element was subject to annual adjustment in accordance with changes to the UK Retail Prices Index (clause 4). The fee element was based upon AMLP providing crew management for between 25 and 32 vessels. The 2003 side letter stated that the revised arrangements were to continue for three years, again without overriding the rights of termination in the 1994 contract, so that they came to an end on 31 March 2006.
This brings me to the 2006 renegotiation of the arrangements, and in this respect I have heard oral evidence from four witnesses. These were as follows. For AMLP, Mr Jens Alers who was General Manager at the time based in Bermuda, and Mr Michael Pridham who was DML's Finance Director based in the Isle of Man. For BP Shipping Ltd, I heard from Mr Andrew Cassels who was in charge of the manning of the fleet, and Mr Timothy Reading, who is manager of the BP Shipping Legal Team. There was little difference between these very experienced commercial people, and I unhesitatingly accept their evidence (whilst noting that in relation to parts of the negotiations in 2006 there was a perhaps understandable tendency towards after the event justification of their positions).
The agreement that the parties reached in 2006 was incorporated in a third (and last) side letter. Discussions and negotiations between them were conducted primarily between Mr Alers for AMLP and Mr Cassels for BP starting in February 2006. The structure in relation to fees and lump sums remained the same (Mr Alers did not get the full increase in fee levels he was looking for), as did the fleet size (which remained at 25–32 vessels). The duration was to be the same as under the previous side letter, namely three years. On 23 May, Mr Alers sent Mr Cassels an amended version of the 2003 side letter to reflect the changes that had been agreed. On 24 May,...
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