Britannia Bulk Plc ((in Liquidation)) v Pioneer Navigation Ltd

Hearing dates: 1 st and 2 nd March 2011

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.

The Honourable Mr Justice Flaux :

Introduction

This judgment relates to a dispute as to the correct construction of the 1992 Master Agreement of the International Swap Dealers Association, now the International Swaps and Derivatives Association ("ISDA") which concerns the financial consequences of Automatic Early Termination of a series of forward freight agreements ("FFAs") between the parties following the insolvency of the claimant Britannia Bulk. On 11 November 2010 Paul Walker J ordered that the so-called "nil loss" issue raised in the pleadings in 2009 Folio 1331 be tried as a preliminary issue and on 17 December 2010, David Steel J ordered that the same issue raised in 2009 Folio 1087 should be tried at the same time. I heard that trial in both actions on 1 and 2 March 2011.

The terms of the contracts

In order to understand the "nil loss" issue, it is necessary to set out in some detail the relevant contractual provisions. Each of the FFAs in issue incorporated the 2007 Terms of the Forward Freight Agreement Brokers Association ("the FFABA 2007 Terms"). Those Terms incorporated by reference the ISDA 1992 Master Agreement ("the Master Agreement"). An FFA on the FFABA 2007 Terms is a cash-settled contract for differences referenced to the Index rate or rates published by the Baltic Exchange as selected by the parties. A "Settlement Sum" is calculated for each FFA and each Contract Month from the "Contract Rate" agreed between the parties, the "Settlement Rate" for that Contract Month derived from the Baltic Exchange indices, and the number of days in the Month.

Clauses 7 and 8 of the FFABA 2007 Terms set out the payment terms for each contract month:

7 Settlement Sum

If the Settlement Rate is higher than the Contract Rate, the Seller shall pay the Buyer the Settlement Sum. If the Settlement Rate is lower than the Contract Rate, the Buyer shall pay the Seller the Settlement Sum.

8 Payment Procedure and Obligations

Payment of the Settlement Sum is due on the later of two (2) London business days after presentation of payee's invoice (with complete payment instructions) or five (5) London business days after the Settlement Date and for this purpose a "London business day" means a day (other than a Saturday or Sunday) on which commercial banks are open for business in London). The Settlement Sum will be deemed "paid" when it has been received into the bank account designated by the payee.

Clause 9 of the FFABA 2007 Terms then incorporates the Master Agreement with specific amendments, as follows:

9. ISDA Master Agreement:

This clause 9 applies only if either:

(i) this Confirmation does not already constitute a Confirmation under an existing master agreement entered into by the parties to this Confirmation; or

(ii) the parties agree, either by virtue of clause 20 or otherwise, that the terms of the Master Agreement that is constituted by this clause are to replace any such existing master agreement.

This Confirmation constitutes and incorporates by reference the provisions of the 1992 ISDA® Master Agreement (Multicurrency —Cross Border) (without Schedule) as if they were fully set out in this Confirmation and with only the following specific modifications and elections:

….

(e) for the purposes of payments on Early Termination, Loss will apply and the Second Method will apply;

(f) Automatic Early Termination will apply to both parties…

As will be seen later, the reference to "Second Method" and to "Loss" was to one of two payment methods and to one of two payment measures set out in the Master Agreement. As to the obligation to make payments during the period when a FFA was extant (i.e. before any Automatic Early Termination), Section 2 of the Mater Agreement set out certain General Conditions to which the payment regime in clauses 7 and 8 of the 2007 FFABA Terms was obviously subject:

2. Obligations

(a) General Conditions.

(i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.

…..

(iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement.

Section 5 of the Master Agreement sets out various Events of Default and Termination Events. These cases are concerned with so-called "Bankruptcy Events of Default" which trigger Automatic Early Termination:

5. Events of Default and Termination Events

(a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party:-

(vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:

(6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all of its assets…

Section 6 then deals with early termination in these terms:

6. Early Termination

(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).

(e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off.

(i) Events of Default. If the Early Termination Date results from an Event of Default:-

(1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party.

(2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement.

(3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.

(4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a...