Marine Trade SA v Pioneer Freight Futures Company Ltd BVI
| Jurisdiction | England & Wales |
| Judgment Date | 29 October 2009 |
| Neutral Citation | [2009] EWHC 2656 (Comm) |
| Docket Number | Case No: 2009 FOLIO 368 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 29 October 2009 |
[2009] EWHC 2656 (Comm)
The Honourable Mr Justice Flaux
Case No: 2009 FOLIO 368
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr A. Baker QC and Mr M. Jarvis (instructed by Mills & Co) for the Claimant
Mr M. Tselentis QC and Mr M. Ashcroft (instructed by Holman Fenwick Willan) for the First Defendant
Hearing dates: 20 to 23 October 2009
The Hon. Mr Justice Flaux:
Introduction and factual background
This case arises out of the dramatic fall in the freight market in the fourth quarter of 2008. The Claimant (to which I will refer as “Marine Trade”) and the First Defendant (to which I will refer as “Pioneer”) entered 14 Forward Freight Agreements (“FFAs”) between May 2007 and September 2008. The 2007 Terms of the Forward Freight Agreement Brokers Association (“FFABA”) operated so as to constitute between the parties as of 16 April 2008 a Master Agreement on the terms of the 1992 International Swap Dealers Association (Multi-Currency-Cross Border) Master Agreement (“the Master Agreement”) as supplemented and amended by clause 9 of the FFABA 2007 Terms, under which each of the FFAs was and is a Transaction.
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.
Because of the dramatic downturn in the freight market in the fourth quarter of 2008, there was a significant difference between the Contract Rates fixed under the FFAs at a time when the market was more buoyant and the Settlement Rates fixed by reference to Baltic Exchange indices. In consequence, each of the FFAs between these parties has been substantially “in the money” for whichever party is “the Seller” under the particular FFA. This is not an isolated phenomenon. Across the FFA market, the size of the settlements falling due in the fourth quarter of 2008 and the first few months of 2009 was of such magnitude that a number of participants in the market have suffered cash flow difficulties, often because they have been defaulted upon by counterparties.
The Settlement Sums for the January 2009 Contract Month were as follows:
(1) US$7,085,981.85 under the FFAs for which Marine Trade was the Seller;
(2) US$12,116,223.67 under the FFAs for which Pioneer was the Seller;
Accordingly, subject to the issues which currently fall for decision and, specifically, the entitlement of Pioneer to net off the sums payable to it against the sums payable by it, there was a potential net balance in favour of Pioneer of $5,030,242.50. The present dispute arose as follows. By the end of January 2009, Marine Trade had taken the view that Pioneer was affected by an Event of Default within the meaning of the Master Agreement, so that, on the construction of the Master Agreement for which Marine Trade contends, Pioneer was not entitled to set off the sums payable to it by Marine Trade against the sums payable by it to Marine Trade. In those circumstances, Marine Trade invoiced Pioneer by invoices dated 30 January 2009 for the Settlement Sum of US$7,085,981.85.
Pioneer on the other hand invoiced Marine Trade by an invoice dated 1 February 2009 for the net balance of just over US$5 million. The Settlement Date for any payment by either party was 6 February 2009. When Marine Trade did not settle the net balance on that date, on 9 February 2009 Pioneer served a Notice under Section 5(a)(i) of the Master Agreement i.e. a Notice of failure to pay which would constitute an Event of Default by Marine Trade. Marine Trade feared that this would lead to Pioneer serving a Notice under Section 6(a) of the Master Agreement, designating an Early Termination Date, the effect of which in simple terms would be a crystallisation of a liability on each party to pay all unpaid sums under the FFAs to whichever party was in the money. In the state of the market as it then was, this would have meant that a very substantial sum was payable by Marine Trade to Pioneer by way of wash out of all the contracts.
In an attempt to prevent Pioneer from serving such a Notice, Marine Trade sought an interim injunction from the Commercial Court on 11 February 2009, ostensibly to preserve the status quo pending an expedited trial of the dispute between the parties. The application for an injunction was refused by Field J, essentially on the grounds of the potentially disastrous effect such an injunction could have on Pioneer's cash flow. In circumstances which will require more detailed analysis hereafter, Marine Trade then paid the net balance of just over US$5 million under protest on 13 February 2009.
On 17 February 2009, Marine Trade served its own Notice on Pioneer under section 5(a)(i) of the Master Agreement in respect of Pioneer's failure to pay the Settlement Sum of US$7,085,981.85. That sum remains outstanding and unpaid by Pioneer. In these proceedings, Marine Trade claims that sum from Pioneer. The trial of the dispute was originally due to take place on 29 June 2009, but that date was vacated and the trial was re-fixed for 19 October 2009, pursuant to a Consent Order of Andrew Smith J, under which Pioneer undertook not to send any further Section 5 Notices or any Section 6 Notice prior to the conclusion of the first instance hearing. At the end of the trial and after I had indicated my firm view that the first instance hearing would not conclude until I had delivered judgment, which I was going to reserve, the undertaking was extended until after judgment or further Order.
The Amended Particulars of Claim also include claims against Pioneer under other FFAs between it and the Second Defendant (Armada) which were assigned to Marine Trade by Armada. Those claims are stayed following the appointment of Judicial Managers over Armada in Singapore earlier this year. Nothing more need be said about those claims.
The terms of the contracts
The provisions of the FFABA 2007 Terms relevant to the current dispute are as follows:
5. Settlement Dates:
The last Baltic Exchange Index publication day of each Contract Month.
7. Settlement Sum:
The “Settlement Sum” is the difference between the Contract Rate and the Settlement Rate multiplied by the Quantity by Contract Month. 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.
Payment of the Settlement Sum shall be made telegraphically, in full, in United States dollars. The costs incurred in effecting payment shall be for the account of the payer. Payment may only be effected directly between the parties. The Settlement Sum shall be paid without any deduction or set-off except as permitted pursuant to the Master Agreement or otherwise as agreed by the Buyer and the Seller in writing.
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:
(a) Section 2(c)(ii) shall not apply so that a net amount due will be determined in respect of all amounts payable on the same date in the same currency in respect of two or more Transactions;
The terms of the Master Agreement which are relevant for present purposes are as follows:
“ 1. Interpretation
(a) Definitions.The terms defined in Section 14 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement.
(b) Inconsistency.In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction.
(c) Single Agreement. All Transactions are entered into in reliance on the fact that this “Master” Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions.
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.
(ii) Payments under this Agreement will be made on the due date for value on...
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