Oceanbulk Shipping and Trading SA v TMT Asia Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Stanley Burnton L JJ,Longmore,Ward |
| Judgment Date | 15 February 2010 |
| Neutral Citation | [2010] EWCA Civ 79 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2009/1799 |
| Date | 15 February 2010 |
[2010] EWCA Civ 79
IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
The Honourable Mr Justice Andrew Smith
Before: The Right Honourable Lord Justice Ward
The Right Honourable Lord Justice Longmore
and
The Right Honourable Lord Justice Stanley Burnton
Case No: A3/2009/1799
Mr Alistair Schaff QC (James Willan with him) (instructed by Hill Dickinson LLP) for the Appellants
Mr Bernard Eder QC & Mr James Leabeater (instructed by Ince & Co) for the Respondents
Hearing dates : 16 th & 17 th December 2009
Lord Justice Longmore:
This appeal raises the question whether evidence of “without prejudice” communications and discussions can be given if there is a dispute about the interpretation of a written settlement agreement.
The underlying dispute is a result of the volatility of the freight market in 2008. The parties effectively bet on the freight market going up or down by means of what are called forward freight agreements (“FFAs”). They agree a contract rate; the “seller” bets that the actual rate on a particular date in the future will be lower than the contract rate; the “buyer” bets that the actual rate will be higher than the contract rate. The appellants (“Oceanbulk”) and the respondents (“TMT”) entered into a large number of FFAs with each other for the year 2008. Oceanbulk thought the market would go up while TMT thought it would go down. It did go up during May, June and July, thereafter the market turned and went down to a very low point in September and the following months. The parties had agreed monthly settlements so that by the end of May TMT owed Oceanbulk about $40.5 million. TMT sought to negotiate terms for payment and a settlement agreement was reached. If (as happened) TMT did not exercise any of the options open to them under the agreement, the first sentence of clause 5 was to apply:—
“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, 50% of those FFAs at the average of the ten days' closing prices for the relevant Baltic Indices from 26 th June 2008 and will co-operate to close out the balance of 50% of the open FFAs for 2008 against the market on the best terms achievable by 15 th August 2008.”
The first 50% of FFAs for 2008 were successfully crystallised but there is a dispute about the meaning of the last part of this clause. Oceanbulk say TMT did not co-operate to close out the remaining 50% of FFAs by 15 th August 2008 or at all. The result has been that, because the FFAs remained open after 15 th August and during the subsequent market downturn, Oceanbulk owes TMT money instead of the other way round. TMT say that the reason why co-operation was needed was because Oceanbulk had liabilities to counterparties and it was those contracts that had to be “closed out” at figures to be agreed. Oceanbulk say the co-operation was only needed to close out the bilateral position as between Oceanbulk and TMT and had nothing to do with Oceanbulk's positions as against third parties.
TMT in support of their construction arguments have pleaded (and I summarise) that Oceanbulk represented in the course of negotiations over a period of 48 hours leading up to the settlement that the transactions entered into between themselves and TMT were “sleeved” transactions which meant that Oceanbulk had made a directly equivalent contract with a counterparty under which they were liable to pay to that counterparty the same sum which TMT were liable to pay Oceanbulk. The parties agree that, for the purpose of this appeal, “sleeving” can be defined as:—
“…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’.”
Oceanbulk say that, if those representations as to sleeving were made, they were made in the course of negotiating the settlement agreement and were expressly or impliedly made in the course of “without prejudice” discussions and should not be referred to. They have, therefore, applied to strike out the paragraphs of the re-amended defence and counterclaim which refer to them. TMT accept that some of the representations and statements on which they rely were made on “without prejudice” occasions, but say that, just as without prejudice discussions can be referred to for the purpose of determining whether a settlement agreement was made and what the terms of that agreement were, so also they can be referred to as an aid to the construction of those terms if there is a dispute about their meaning, at any rate if they evidence the background against which or the matrix within which the parties were contracting. Oceanbulk say that the recognised exceptions to the “without prejudice” umbrella do not go as far as that.
Oceanbulk will apparently also seek to say at any trial that reference to the statements about sleeving were part of the negotiations and should not be referred to in evidence for that reason also. The difficulty about that is that Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 has decided that evidence of negotiations can be given to establish that “a fact which may be relevant as background was known to the parties”. It is said that the statement about sleeving was such a fact and that is why this appeal concentrates on the without prejudice aspect of the negotiations leading up to the settlement agreement and does not deal with the fact that the representations relied on were made in the course of pre-settlement negotiations.
Accordingly the main issue on this appeal is whether without prejudice discussions can be given in evidence in support of arguments about construction if they arguably establish a fact which is arguably part of the background to or the matrix of the contractual agreement. Not surprisingly, the court asked Mr Eder QC for the respondents to specify (more clearly than the pleadings did) what the fact was which he wanted to establish as a fact known to both parties which was arguably relevant to the construction of clause 5. He replied that the relevant fact was a representation made by Mr Pappas both in e-mails and oral discussions (accepted to be without prejudice) that all or most of the FFAs made by Oceanbulk with counter-parties were originally sleeved and continued to be so at the time of the settlement negotiations. It is noteworthy that the relevant fact is said to be that the representation was made, not that the fact said to have been represented was true. This fact is then said to be relevant to the submission that the word “co-operate” in clause 5 of the agreement means that Oceanbulk positions against their counterparties had to be closed out before any question could arise in relation to the position as between Oceanbulk and TMT.
Andrew Smith J has held that evidence about this representation can be given and now that his judgment is reported at [2009] 1 WLR 2416, I need not refer to the factual background to this case in any further detail.
There are undoubtedly some occasions on which without prejudice statements can be referred to in evidence. In Unilever Plc v Procter & Gamble [2000] 1 WLR 2436 Robert Walker LJ described three of the most relevant of them as follows at page 2444:—
“(1) ….when the issue is whether without prejudice communications have resulted in a concluded compromise agreement, those communications are admissible …. (2) Evidence of the negotiations is also admissible to show that an agreement apparently concluded between the parties during the negotiations should be set aside on the ground of misrepresentation, fraud or undue influence … (3) Even if there is no concluded compromise, a clear statement which is made by one party to negotiations and on which the other party is intended to act and does in fact act may be admissible as giving rise to an estoppel. That was the view of Neuberger J in Hodgkinson & Corby Ltd v Wards Mobility Services Ltd [1997] FSR 178, 191 and his view on that point was not disapproved by this court on appeal.”
It is worth remarking that the exception to the without prejudice rule which has been relied on by the judge is not specifically mentioned in Robert Walker LJ's list. The question for us is whether it should now be recognised as another exception, perhaps, as a necessary part of the first example.
The judge gave four reasons for saying that this exception does (or ought to) exist:—
i) the distinction between identifying the terms of an agreement and interpreting them is a fine one and will often be difficult to apply;
ii) there was authority for the existence of the exception in Admiral Management Services Ltd v Para Protect Europe Ltd [2002] 1 WLR 2722;
iii) evidence of without prejudice exchanges is admissible if there is a plea of...
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