Dampskibsselskabet Norden A/S v Andre & Cie SA
| Jurisdiction | England & Wales |
| Judge | Mr Justice TOULSON: |
| Judgment Date | 30 January 2003 |
| Neutral Citation | [2003] EWHC 84 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2001 Folio No 1239 |
| Date | 30 January 2003 |
[2003] EWHC 84 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Toulson
Case No: 2001 Folio No 1239
Mr Jeffrey GRUDER QC (instructed by Holmes Hardingham) for the Claimants
Mr Stephen MALES QC (instructed by Thomas Cooper & Stibbard) for the Defendants
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 he treated as authentic.
Introduction
A forward freight swap agreement (FFA) is a form of derivative. Essentially it is a bet whether the market freight rate for a certain type of voyage or a certain period of time over a designated route or combination of routes will be higher or lower than the price struck as the basis of the bet. There is therefore a fixed price and a floating price, the former determined by agreement and the latter by an agreed mechanism based on the market. The winning party receives the difference between the rate of the fixed price and the rate of the floating price for the relevant voyage or contract period multiplied by the agreed contract quantity. The party who bets on the market rising is termed the buyer and the party who bets on it falling is termed the seller. It will be appreciated that these are terms of convenience and do not reflect the legal nature of the agreement.
The market in FFA's began about 10 years ago. In recent years it has expanded rapidly, but it is still small compared with other derivative markets. Whereas the oil forward and futures market is several times the size of the physical market, the FFA market is about a tenth of the size of the physical market. In March 2001 there were four major brokers in the market.
Like other derivatives, FFA's may be used for various purposes —pure speculation, arbitrage or hedging.
The claimant, Norden, is an old and highly respected Danish shipping company. In recent times it has controlled a fleet numbering usually between 50 and 60 bulk carriers (which it mainly charters in) and about 15 tankers (which it mainly owns).
Norden's use of FFA's was explained by Mr Carsten Mortensen, who is a senior vice-president of the company with overall responsibility for all its dry cargo business, physical or derivative. Since 1997, when he joined the company, it has participated in the freight derivatives market, but never as a pure form of speculation. On occasions it has engaged in arbitraging, but its primary use of FFA's has been either as a hedge against loss on a particular physical fixture or more generally (and more often) as a means of adjusting and controlling its risks on its overall portfolio. At any given time Norden will have chartered in vessels for X days and secured fixtures for Y days. X is likely to be greater than Y, but it could be less. Suppose that X is 1,000 days and Y is 500 days. Norden's "cargo cover" is therefore 50%. Depending on how Norden perceives that the market is likely to move, it might want to use the forward freight market to "sell" freight. If it sold 365 days, this would give it a cargo cover of 86.5%.
In 2000 Norden was involved in operating Cape Size bulk carriers and Handymax bulk carriers, but it had not been involved in the market for Panamax bulk carriers. Mr Mortensen wanted Norden to become involved in the Panamax sector, because he thought that in the long run it would be profitable, although he expected Norden to suffer a loss in the short term. In October 2000 the opportunity came of chartering in a Panamax bulk carrier called the "Talisman" for a minimum period of 16 months at a net rate of US$ 11,100 per day. Mr Mortensen decided to do so if he could limit Norden's potential loss by a suitable FFA for 12 months from 1 January 2001. This he arranged through brokers, Clarksons, with the defendant, Andre. With the FFA in place, he concluded the fixture of the "Talisman". The FFA was therefore specifically intended by Mr Mortensen to be a hedge against Norden's exposure under the "Talisman" charter party.
The contract contained the following material terms:-
) The contract route was to be the average of four routes (Transatlantic Round Timecharter. Continent to US Gulf to Fareast Timecharter Transpacific Round Timecharter and Fareast to Nopac to Continent Timecharter) of the Baltic Panamax Index (BPI), known for short as the 4 BPI TC routes.
) The fixed rate was to be US$10,675 per day.
) The contract quantity was to be 365 days.
) The contract period was to be from 1 January to 31 December 2001.
) Settlement dates were to be the last day of each month.
) The floating rate was to be determined monthly as the average of the rates for the 4 BPI TC routes published by the Baltic exchange during each month (with further provisions for determining the floating rate if for any reason the Baltic exchange could not provide any rate required).
) The settlement sum was to be the difference between the fixed rate and the floating rate multiplied by the contract quantity. If the settlement rate was greater than the fixed rate, the seller was to pay the buyer the settlement sum; and vice versa if the settlement rate was less than the fixed rate.
) Payment of the settlement sum was to be made within 5 days after the settlement date.
) Each party gave a continuing warranty to the other that it was solvent and in good standing.
Andre's breach and the ensuing litigation
At the time when the FFA was concluded Andre was a well-regarded company.
In January and February 2001 the floating rate was higher than the fixed rate, and at the end of each month Norden duly paid the difference to Andre.
On 9 March 2001 Andre published a press release, stating that it no longer had normal access to credit lines because of action taken by its bankers and that its usual trading activities were paralysed. On the same day it applied to the Tribunal d'Arrondissement in Lausanne for court protection against its creditors pursuant to the court's insolvency jurisdiction. The court appointed a chartered accountant as Andre's legal administrator for an initial period of two months.
This news travelled quickly round the market. On 16 March 2001 Mr Mortensen sent an email to a contact at Andre, Mr Aiherto Molasehi, saying:
"We have learned from press reports that, much to our concern, Andre have filed Chapter II proceedings before the Courts in Switzerland, are shutting many of their operations, and that 43 banks have stopped all credit lines to your organisation. Given our present commercial relationship, we would much appreciate it if you could urgently advise by return whether the above mentioned information is correct or not."
The email was not answered, but Norden's P&I Association obtained confirmation from Andre by telephone that the press reports were correct. Mr Mortensen decided to terminate the FFA. He explained his reasoning in his witness statement as follows:
"I could not be certain of what the market would do over 2001, but I knew that in all likelihood a payment would be due to Andre for March 2001. This raised the risk that whilst we paid when required to do so under the terms of the FFA, they would not do likewise. This danger was compounded by the fact that, as I have explained, the FFA was designed to hedge the market risk in respect of' the "Talisman" fixture. If we continued to make payments to Andre under the FFA, it would be similar to paying premiums to an insolvent insurer. In addition to Norden's losses under the "Talisman" charter resulting from a decline of the market, we would also have to bear the cost of the one-sided performance of the FFA."
On 19 March 2001 Norden gave notice to Andre that it treated the contract as terminated by reason of Andre being in breach of its warranties that it was solvent and in good standing.
Subsequently, on a date which is not precisely clear, Mr Molaschi of Andre talked to somebody on behalf of Norden (either Norden's lawyers or its P&I Association) about a possible compromise agreement.
Mr (Giorgio Martini is a director of a firm of brokers, Ifchor, and is responsible for its FFA division. Ifchor, among others, used to act for Andre. On 29 March 2001 Mr Martini received a message from Mr Molaschi that he believed that the administrator would be willing to treat all the monthly settlements under the FFA for the remainder of the year as inter-linked and would therefore be willing to have one settlement at the end of the year. Mr Molaschi suggested that if Norden found this idea acceptable it should approach Andre with a view to drawing up an addendum to the FFA for approval by the administrator.
Mr Martini passed the message to Clarksons, who passed it to Mr Mortensen.
Mr Mortensen consulted Mr Jeremy Miles of Norden's P&I Association, telling him that "we are in money on the deal altogether and so would like to maintain the deal without being out of pocket". The reference to being "in money on the deal" is explained by the fact that the FFA market for the rest of the year had fallen below the fixed price of the Norden/Andre FFA.
On 30 March 2001 Mr Miles on behalf of Norden told Mr Molaschi that Norden was prepared to renegotiate the contract on the basis suggested by Mr Molaschi, if the administrator would address the question of security to guarantee Andre's performance. On the same day Mr Molaschi told Mr Miles that the Swiss court was not prepared to sanction the renegotiation of the agreement on the basis Proposed by Mr Molaschi and that Andre would he sending an invoice to Norden for the March settlement figure. Mr Miles...
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