Oceanbulk Shipping and Trading SA v TMT Asia Ltd and Others
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE ANDREW SMITH,Mr Justice Andrew Smith |
| Judgment Date | 29 July 2009 |
| Neutral Citation | [2009] EWHC 1946 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 29 July 2009 |
| Docket Number | Case No: 2008–1061 |
[2009] EWHC 1946 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Mr Justice Andrew Smith
Case No: 2008–1061
Alistair Schaff QC and James Willan (instructed by Hill Dickinson LLP) for the Claimant
Bernard Eder QC and James Leabeater (instructed by Ince & Co) for the Defendants
Hearing dates: 23 and 24 July 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.
………………………..
This litigation is between the parties to a written agreement dated 20 June 2008 (the “Settlement Agreement”), and this hearing is about whether the defendants (who are various companies in a group and to whom I refer without distinction as “TMT”) are entitled to rely upon and adduce evidence of exchanges between the parties before it was concluded. TMT say that they are entitled to do so because the exchanges are relevant to the proper interpretation of the Settlement Agreement and to their contention that the damages claimed by the claimants (to whom I refer as “Oceanbulk”) are too remote to be recoverable, and they give rise to an estoppel against Oceanbulk. Oceanbulk assert that evidence of them is not admissible because they were conducted “without prejudice”, that is to say they took place when there was a potentially litigious dispute for the purpose of settling it. TMT say that, in so far as this is so, in the circumstances of this case justice nevertheless requires that evidence of them should be admitted.
This issue comes before the court because Oceanbulk are applying to strike out a part of TMT's pleading based upon the controversial exchanges, oppose a proposed amendment to the pleading whereby TMT would introduce the allegation of estoppel and seek a declaration that “evidence of the negotiations conducted 'without prejudice' … is inadmissible, absent mutual waiver”.
The background to this litigation need not be explained in great detail. It comprises two actions and both concern freight forward agreements (or freight forward swap agreements) – I shall refer to them as “FFAs”—made between Oceanbulk and TMT: one action is about FFAs that remained open until various dates in 2008, the 2008 FFAs; that other is about the 2009 FFAs, which remain open until a date in 2009. The FFAs incorporate standard industry terms, the details of which are not relevant for present purposes. In essence the parties speculate against movements in the freight market, and the party who is the “seller” under a FFA makes a profit if the market drops below the contract rate, and the “buyer” makes a profit if the market rises. Under some of the FFAs Oceanbulk are the seller, carrying the contract rate upon the speculation, and TMT are the buyer carrying the market rate; and in others the roles are reversed.
The FFAs between the parties provide for monthly cash settlements of the net amounts due between them based on a comparison between the contract rates and the market rate then prevailing. If a party defaults upon payment of a monthly settlement, the other party is entitled to give notice to terminate all outstanding FFAs.
Sometimes a party to a FFA takes an “opposite position” against another market participant and thereby has some protection against market movements in respect of open freight contracts that he has bought or sold. The expression “sleeved” is used to describe some trading in FFAs. Mr. Alistair Schaff QC, who represented Oceanbulk, explained that:
““Sleeving” is an arrangement by which one party (party B) will, at the request of another party (party A), enter into a specific FFA trade with a third party (party C) and party B will then replicate that position back-to-back with party A. The usual reasons for such an arrangement are that (i) party C would not be willing to trade with party A (e.g. because of perceived counterparty risk) and/or (ii) party A does not wish to reveal to the market that he is seeking that position, e.g. because he is concerned that he will move the market. However, once the contracts have been concluded then (absent e.g. an agency arrangement), the two contracts are independent and each party acts as a principal: the contracts do not necessarily remain 'coupled'.”
I can accept Mr. Schaff's description for present purposes although I make no finding about what the expression means: that might be an issue at the trial.
Oceanbank plead that of the 63 FFAs that they concluded with TMT in 2008 only 11 were “sleeved” in the sense explained by Mr Schaff, but Oceanbulk's position under a further 43 FFAs was protected by “opposite positions” with other counterparties. TMT are not in a position to accept or to refute this.
On 2 June 2008, when the freight market was high, Oceanbulk presented TMT with an invoice for US$40,524,271.64, being the amount due in respect of the monthly settlement for May 2008. TMT did not pay it. There were discussions between the parties (to which I shall refer in more detail) about the outstanding amount, and they resulted in the Settlement Agreement. In outline, the Settlement Agreement (i) suspended accrued and future payment obligations under the FFAs; (ii) made provision for monthly payments of US$12.5 million to Oceanbulk in respect of TMT's exposure under the FFAs; and (iii) required the TMT companies by 30 June 2008 to transfer to Oceanbulk or their nominee about 9.5 million shares in Star Bulk Carriers Corp. Clause 5 of the Settlement Agreement provided as follows:
“In respect of FFA open contracts between TMT Interests and [Oceanbulk] for 2008, the parties shall crystallise within the ten trading days following 26 th June 2008, as between them, fifty per cent of those FFA's at the average of the ten days' closing prices for the relevant Baltic Indices from 26 th June 2008 and will cooperate to close out the balance of 50 per cent of the open FFA's for 2008 against the market on the best terms achievable by 15 th August 2008.”
Oceanbulk complain in these proceedings that TMT did not comply with the Settlement Agreement in that they delayed in transferring the shares, defaulted in paying the monthly instalments and, most relevantly for present purposes, did not take steps to “close out” FFAs. From about July 2008 there was a dramatic fall in the market, and as a result, whereas Oceanbulk claim that if the FFA's had been closed out in mid-August 2008 they would have “locked in” a profit of some US$47 million, in fact the FFAs have been exposed to falling freight rates in the last quarter of 2008, so that they would owe TMT about US$86 million under the open FFAs.
The parties dispute the meaning of clause 5, and in particular the words “co-operate to close out … against the market”. TMT say that they mean that:
“(1) [TMT] would (if Oceanbulk so requested) assist Oceanbulk to agree fixed figures payable by Oceanbulk to counterparties to close out Oceanbulk's Opposite Market Positions;
(2) Oceanbulk would then close out Oceanbulk's Opposite Market Positions;
(3) Thereafter the FFAs between Oceanbulk and [TMT] would be crystallised at rates to be agreed.”
Oceanbulk say that the words are concerned only with the parties closing out their bilateral positions under the FFAs and nothing to do with Oceanbulk's positions as against third parties.
The reason that TMT wish to rely upon the negotiations leading to the Settlement Agreement can best be shown by setting out this passage of the Re-amended Defence and Counterclaim:
“(i) In the negotiations leading to the signing to the Settlement Agreement Mr. Pappas of Oceanbulk represented to Mr. Nobu Su of the Defendants that the swap agreements Oceanbulk had entered into with the Defendants were “sleeved” transactions and it was in reliance upon that representation that the Defendants agreed to clause 5 of the Settlement Agreement: by that representation both parties understood that in respect of each swap agreement Oceanbulk held with the Defendants, Oceanbulk held an opposite position with other participants in the FFA market (“Oceanbulk's Opposite Market Positions”) – in particular, Cargill – so that the liabilities the Defendants had to Oceanbulk under the 2008 FFAs were equal in amount to liabilities Oceanbulk had to counterparties on equivalent swap agreements;
(ii) The words “co-operate to close out… against the market” arose out of the parties' negotiations leading up to the Settlement Agreement and in particular in the light of Mr. Pappas's representation that his swap agreements with [TMT] were “sleeved”…”.
Thus, while Mr. Bernard Eder QC, who represented TMT, made clear that TMT argue that their construction in any case gives the words of clause 5 their natural meaning, TMT also contend that the parties' understanding articulated in exchanges before the Settlement Agreement provides important contractual context that informs its interpretation. I was referred to Chartbrook Ltd v Persimmon Homes Ltd, [2009] 3 WLR 267 in which Lord Hoffmann said (at para 42) of the “exclusionary rule” preventing evidence of negotiations from being admitted in evidence:
“The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purpose: for example, to establish a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it”.
Oceanbulk, while reserving their right to invoke the...
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