Pioneer Freight Futures Company Ltd ((in Liquidation)) v TMT Asia Ltd
| Jurisdiction | England & Wales |
| Judge | MRS JUSTICE GLOSTER, DBE,Mrs Justice Gloster, DBE |
| Judgment Date | 01 April 2011 |
| Neutral Citation | [2011] EWHC 778 (Comm) |
| Docket Number | Case No: 2010 Folio 559 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 01 April 2011 |
[2011] EWHC 778 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION COMMERCIAL COURT
Before : Mrs Justice Gloster, Dbe
Case No: 2010 Folio 559
Charles Kimmins Esq, QC & Luke Pearce Esq (instructed by Holman Fenwick Willan LLP) for the Claimant
Jonathan Crow Esq, QC & James Leabeater Esq (instructed by Ince & Co) for the Defendant
Hearing dates: 19 th November 2010 and 23 rd November 2010
(additional submissions received 26 th January 2011)
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.
Mrs Justice Gloster, DBE:
Introduction
The Claimant, Pioneer Freight Futures Company Limited ("Pioneer") is a company incorporated in the British Virgin Islands. It is now in liquidation, with liquidators having been appointed both in the BVI and in England and Wales. By application notice dated 30 June 2010 Pioneer applied for summary judgment against the Defendant, TMT Asia Limited ("TMT"), a company incorporated in the Marshall Islands, in the sum of US$26,088,865.94 plus interest due under 18 forward freight agreements ("FFAs") entered into between 10 September 2007 and 1 July 2008, as listed at Schedule 1 of the Amended Particulars of Claim. Pioneer claims that the sums are due to it upon the automatic early termination ("Automatic Early Termination") of the FFAs.
FFAs are contracts for differences pursuant to which the parties agree a fixed price ("the Contract Rate") in respect of future months (or years) ("the Contract Period") for designated contract routes published by the Baltic Exchange. If the final settlement price for the designated route ("the Settlement Rate") is higher than the Contract Rate, then the seller will pay the difference to the buyer, usually at the end of a contract month, and vice-versa. In essence, an FFA is a "bet" as to the future movements of the freight market. The product can be used as a hedge by parties involved in shipping freight to protect themselves against fluctuation in shipping rates, or as a means of trading in futures.
The volatility of the freight market in 2008 gave rise to a number of liquidations amongst traders, including Pioneer, in respect of which provisional liquidators were appointed by the High Court of Justice of the British Virgin Islands on 16 December 2009.
There is no dispute that the first 14 FFAs, entered into between 10 September and 7 November 2007 ("the Early FFAs"), incorporated standard FFABA 1 2005 terms. The last four FFAs, entered into between 21 April and 1 July 2008 ("the Late FFAs"), refer to the standard FFABA 2007 terms, but whilst Pioneer contends that the Late FFAs incorporate the FFABA 2007 terms, TMT denies that they do so.
Each of the FFAs incorporated by reference the ISDA 2 1992 Master Agreement (Multicurrency–Cross Border) ("ISDA 92"). The incorporating provisions were in different terms in FFABA 2005 and FFABA 2007 respectively.There is a dispute between the parties as to the effect of these provisions. Pioneer contends that the incorporation of ISDA terms is intended to ensure that all FFAs entered into between the parties would be part of one agreement, because, if the FFAs are part of the same agreement, then this enables the parties to reduce counterparty credit risk, and ensures uniformity of terms. TMT denies that this was necessarily the intention, and contends that, on the true construction of the relevant provisions, it may be the case that the Early FFAs are subject to different terms from the Late FFAs.
The basic (pre-termination) payment obligation in ISDA 92 is contained in Section 2(a)(i). This provides:
"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."
Section 2(a)(iii) in turn provides that a party's obligation to pay sums due under Section 2(a)(i) is conditional upon that other party not being affected by certain specified events:
"Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement."
Thus it is a "condition precedent" to an obligation to make payment that the other party is not subject to an "Event of Default" ("the condition precedent"). Events of Default are defined in Section 5(a) of ISDA 92, and include failure to pay an outstanding sum 3, and "bankruptcy events" 4.
Other relevant provisions of ISDA 92 are the Early Termination provisions 5. The first limb of the Early Termination provisions permits one party, at its option, to terminate all outstanding transactions in certain circumstances. Thus, for example, if party A is affected by an Event of Default, as a result of late payment of an invoice, then party B can serve a default notice, and, if party A fails to remedy the default within a specified period, party B can terminate "all Outstanding Transactions". 6 The relevant provision of Section 6(a) dealing with elective Early Termination is the following :
"Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the 'Defaulting Party') has occurred and is then continuing, the other party (the 'Non-defaulting Party') may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. …"
In addition, the second limb of the Early Termination provisions permits the parties to elect for Automatic Early Termination, if Automatic Early Termination is specified in the schedule to the agreement. The relevant provision of Section 6(a) dealing with Automatic Early Termination is the following:
"… If, however, 'Automatic Early Termination' is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding
or presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8)."
In other words, upon the occurrence of certain specified (but not all) bankruptcy Events of Default associated with the bankruptcy of one party, all outstanding transactions under the Master Agreement will automatically terminate. The specified bankruptcy events include the appointment of provisional liquidators 7. It is common ground that in this case there was a relevant bankruptcy Event of Default in mid December 2009, which, if the Automatic Early Termination provisions applied to the relevant FFAs, would have triggered Automatic Early Termination.
The relevant provision of the FFABA 2005 terms 8 did not incorporate the ISDA provisions for Automatic Early Termination. This had the capacity to create unfairness for insolvent companies, illustrated by the following example articulated by Mr. Charles Kimmins QC, leading counsel on behalf of Pioneer:
"Assume a number of FFAs had been concluded between party A and party B. Assume party A became subject to an Event of Default, on the basis that it was insolvent. Assume party A was substantially in the money in respect of all its outstanding transactions with party B. Party A would not be able to recover such sums because it fell foul of the condition precedent in s.2(a)(iii) of ISDA 92. And if party B chose not to terminate, then party A's rights would disappear forever. This problem is commonly referred to in the market as "walkaway", because party B could simply walk away from its contractual obligations."
Market concern about this issue, possibly following inter alia the bankruptcy of North American Steamships Limited in British Columbia, led to the introduction of the FFABA 2007 terms. The single most significant difference, for present purposes, between the FFABA 2007 Terms and the FFABA 2005 Terms was that the FFABA 2007 Terms apply Automatic Early Termination to both parties, whereas the earlier terms do not.
The factual background and the contentions of the parties
In October – December 2008, the market had turned against Pioneer. In respect of October 2008, Pioneer was obliged to pay TMT $1.75m, but it paid TMT late. For the contract months of November to December 2008, TMT contends that a net sum of around US$10 million was due from Pioneer to TMT under the various FFAs 9. Pioneer failed to pay the sums in question. TMT contends, that because, as from October 2008 Pioneer was subject to an Event of Default under Section 5(a)(vii)(2) of ISDA 92 (on the grounds that it had become insolvent and was unable to pay its debts as they fell due) —which itself was not a bankruptcy Event of Default giving rise to Automatic Early Termination), thereafter TMT was not obliged to pay any sums that might otherwise
have been due to Pioneer, because the latter could not satisfy the condition precedent in Section 2(a)(iii) of ISDA 92.
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