Oceanbulk Shipping and Trading SA v TMT Asia Ltd and Others
| Jurisdiction | England & Wales |
| Judge | LORD CLARKE,Lord Rodger,Lord Walker,Lord Brown,Lord Mance,Sir John Dyson,LORD PHILLIPS |
| Judgment Date | 27 October 2010 |
| Neutral Citation | [2010] UKSC 44 |
| Date | 27 October 2010 |
| Court | Supreme Court |
and others
[2010] UKSC 44
Lord Phillips, President
Lord Rodger
Lord Walker
Lord Brown
Lord Mance
Lord Clarke
Sir John Dyson SCJ
Appellant
Jonathan Crow QC
James Leabeater
(Instructed by Ince & Co)
Respondent
Alistair Schaff QC
James Willan
(Instructed by Berwin Leighton Paisner LLP)
LORD CLARKE (with whom Lord Rodger, Lord Walker, Lord Brown, Lord Mance and Sir John Dyson agree)
Introduction
This appeal raises a question as to the scope of the exceptions to the principle that statements made in the course of without prejudice negotiations are not admissible in evidence ("the without prejudice rule"). Specifically, the question is whether facts which (a) are communicated between the parties in the course of without prejudice negotiations and (b) would, but for the without prejudice rule, be admissible as part of the factual matrix or surrounding circumstances as an aid to construction of an agreement which results from the negotiations, should be admissible by way of exception to the without prejudice rule.
The dispute between the parties relates to a series of forward freight agreements ("FFAs") and is set against the background of the extraordinary volatility of the freight markets in 2008. Capesize bulk carriers are large vessels, so called because they were historically too large to pass through the Suez Canal. The Baltic Exchange index of daily rates of time charter hire for such vessels fell from about US$200,000 per day in May 2008 to US$3,000 per day in December 2008. Each FFA was a swap agreement which consisted of a bet on whether the settlement rate (being the average of the published rates, as stated in the relevant index, for each index publication day in the relevant settlement month) would, on specified future settlement dates, be higher or lower than the contract rate as defined in the FFA.
Under each FFA the seller bet that the market rate on the settlement dates would be lower than the contract rate and the buyer bet that it would be higher. If it was higher on a given settlement day, the seller was obliged to pay the difference between the two rates multiplied by the contract period, which was usually the number of days in the month. If it was lower the buyer was obliged to pay the seller the appropriate amount. The relevant FFAs had settlement days at the end of one or more months within the period May to December 2008. At the end of each month all settlement sums due under all the FFAs were to be netted off and payment made by the indebted party under the net position to the other party. (I use the word "bet" because it was used by the parties in the agreed statement of facts and issues and because it appears to me to be accurate, but in doing so I do not intend to suggest that the FFAs were unenforceable or that FFAs are not a commonly used method of hedging against market fluctuations.)
All the FFAs were on the same underlying terms. As at the end of May 2008 the appellants, whom I will together call "TMT", were short against the market and, as a result of the netting off process, owed the respondent ("Oceanbulk") more than US$40m for that month and were likely to owe a further US$30m for the following month. If Oceanbulk had terminated the FFAs on the basis of an event of default, TMT would have been potentially liable for some US$300 to 400m by way of liquidated damages.
TMT failed to pay the May 2008 instalment when it fell due and sought time for payment. The parties entered into settlement negotiations which were expressed to be "without prejudice". They were between the parties' representatives and solicitors. The negotiations were partly in writing but included two lengthy meetings on 19 and 20 June 2008 which were attended both by the parties' representatives and their solicitors. The parties entered into a written settlement agreement dated 20 June, in which they agreed (among other things): (a) to crystallise 50 per cent of each of the FFAs for 2008 based on the difference between the contract rate and the average of the ten day closing prices for the relevant Baltic indices from 26 June 2008; and (b) to co-operate to close out the 50 per cent balance of the open 2008 FFAs against the market on the best terms achievable by 15 August 2008.
There is no issue between the parties as to the existence or terms of the settlement agreement. It is common ground that all the terms of the agreement between them are accurately recorded in the written settlement agreement. For that reason neither party seeks rectification of it. There is however a dispute between the parties as to the true construction of one of the terms of the agreement. The issue which divides the parties in this appeal is whether it is permissible to refer to anything written or said in the course of the without prejudice negotiations as an aid to the interpretation of the agreement.
The issues
Construction of the settlement agreement
Oceanbulk's claim is based on the alleged breach by TMT of clause 5 of the agreement, which provides 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 June 2008, as between them, 50 per cent of those FFAs at the average of the ten days' closing prices for the relevant Baltic Indices from 26 June 2008 and will co-operate to close out the balance of 50 per cent of the open FFAs for 2008 against the market on the best terms achievable by 15 August 2008."
The parties crystallised 50 per cent of the contracts within ten days following 26 June. There is accordingly no dispute about that part of the clause. However, Oceanbulk says that TMT is in breach of the second part of the clause ("the co-operation term") on the basis that, so it is said, TMT did not "co-operate to close out the balance of 50 per cent of the open FFAs for 2008 against the market on the best terms achievable by 15 August". By way of damages Oceanbulk claims the difference between the sums it says would have been owed by TMT had the FFAs been closed out by 15 August, when the market was still in Oceanbulk's favour, and the amount that is said to be due to TMT under the FFAs as a result of those positions having remained open. The loss arises (in part at least) out of the dramatic fall in the market to which I have referred.
Oceanbulk's case is that, on the true construction of the co-operation term, the parties' obligation was to close out the open FFAs bilaterally, that is as between Oceanbulk and TMT. TMT's case is that the meaning of the term depends upon a fact which it says was in the contemplation of both parties: viz that the FFAs between Oceanbulk and TMT were "sleeved" by Oceanbulk. In para 5 of his judgment Andrew Smith J ("the judge") quoted Oceanbulk's summary of what the parties meant by sleeving, which the parties have agreed is sufficient for the purposes of this appeal. It is in these terms:
"'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 (eg because of perceived counterparty risk) and/or (ii) party A does not wish to reveal to the market that he is seeking that position, eg because he is concerned that he will move the market. However, once the contracts have been concluded then (absent eg an agency arrangement), the two contracts are independent and each party acts as a principal: the contracts do not necessarily remain 'coupled'."
In para 18(1)(ii) of the re-re-amended defence and counterclaim TMT pleads that, in the context of the relevant negotiations, the words "co-operate to close out … against the market" mean that 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"; that Oceanbulk would then close out those positions; and that thereafter the FFAs between Oceanbulk and TMT "would be crystallised at rates to be agreed." As it is put in the agreed statement of facts and issues, there is therefore a dispute as to whether the "closing out" process envisaged by the co-operation term was bilateral (on Oceanbulk's case) or trilateral (on TMT's case).
The phrase "opposite market position" is defined in para 18(1)(i) of TMT's re-re-amended defence and counterclaim by references to "sleeves". TMT pleads that both parties understood that, in respect of all or substantially all the FFAs between Oceanbulk and TMT, Oceanbulk held an opposite position with other participants in the FFA market – so that the liabilities TMT had to Oceanbulk were "sleeved" by Oceanbulk in that they were equal in amount to liabilities Oceanbulk had to counterparties under equivalent swap agreements.
In support of its case that the parties understood that the FFAs were "sleeved", TMT relies upon four representations made or allegedly made by Mr Pappas on behalf of Oceanbulk. They are pleaded in para 18(1)(i) of the re-re-amended defence and counterclaim and are summarised in the agreed statement of facts and issues.
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i) In an email dated 1 June 2008 from Mr Pappas to Mr Su of TMT he said that Oceanbulk was expecting US$40.5m from TMT on Friday, 5 June and that "most of this position is in any case due to sleeves we did for you when you asked us in the past to assist". It is common ground that this was an open communication and that it is arguably admissible in evidence on the issue of construction as part of the factual matrix.
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ii) TMT...
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