Great Elephant Corp v Trafigura Beheer - The Crudesky

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DMC/SandT/14/16

England

Great Elephant Corporation v Trafigura Beheer BV v Vitol SA & Vitol Asia Pte Ltd v China Offshore Oil (Singapore) International Pte Ltd (The “Crudesky”)

English Court of Appeal: Longmore, Tomlin and Underhill LJJ: [2013] EWCA Civ 1547, [2014] 1 Lloyd’s Rep 1: 25 July 2013

Robert Bright QC and Jessica Sutherland (instructed by Reed Smith LLP) for Trafigura

Chirag Karia QC (instructed by Andrew Jackson Solicitors) for Great Elephant

Charles Kimmins QC and Socrates Papadopoulos (instructed by Ince & Co LLP) for Vitol Asia and Vitol

Simon Rainey QC (instructed by Herbert Smith Freehills LLP) for China Offshore

VOYAGE CHARTER: FOB SALE CONTRACT CHAIN: DEMURRAGE: “RESTRAINT OF PRINCES” EXCEPTION: UNFORESEEABLE FORCE MAJEURE BEYOND CONTROL OR REASONABLE CONTROL

Summary

In allowing the appeal, the Court of Appeal held that the owner’s demurrage claim succeeded in full and could be passed by the charterer, as end-buyer under a FOB sale contract, down the chain of FOB sale contracts to the head-seller, as the governmental interference in the vessel’s departure from the oil terminal was not a “restraint of princes” exception, that is, an unforeseeable force majeure event beyond the (reasonable) control of the charterer, seller(s) and terminal, and did not break the chain of causation following serious breaches of the contracts.

Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor of England & Wales, and International Contributor to DMC’s Case Notes

Background

In April 2009, China Offshore sold about 1 million barrels of Akpo condensate crude oil to Vitol Asia who then sold on to Vitol SA, who in turn sold on to Trafigura, all on FOB terms, for delivery at the Akpo FPSO Terminal (“Terminal”).

The Terminal was operated by Total and required an official from the Nigerian Department of Petroleum Resources (“DPR”) to be present during loading of vessels to verify for tax purposes the actual quantity of oil loaded on board.

Trafigura, as the FOB end-buyer, had to provide a vessel to load the cargo at the FPSO terminal and chartered the vessel “CRUDESKY” from Great Elephant (“Owners”), on an amended BP Voy 3 form dated 30 July 2009 (“Charter”). Trafigura later nominated the vessel pursuant to the FOB sale contract and ordered her to the Terminal.

The DPR official was not on board the Terminal at the time of the vessel’s arrival at 0300 hours on 29 August 2009. He had left the terminal earlier that day without informing Total and without permission or approval of the DPR in Port Harcourt. The notice of readiness was tendered at 0001 hours on 30 August and laytime under the Charter began at 0601 hours on that day.

On 31 August 2009, Total’s Terminal representative made arrangements by telephone with the DPR’s Head of Operations in Port Harcourt for a DPR official to be sent to the Terminal. He also obtained oral permission to sever the padlock on the Terminal’s export valve to commence loading of the vessel. Loading began at 1612 hours that day.

On 1 September 2009, the DPR representative arrived at the Terminal and at about the same time, Total in Lagos applied to the DPR in Lagos for clearance for the vessel to load. This was granted. However, following completion of the vessel’s loading at 2100 hours that day, the DPR in Lagos revoked the clearance they had given previously.

The laytime allowed under the Charter expired at 0919 hours on 3 September. The vessel was thereafter on demurrage pending provision of the documents required for the vessel to depart Nigeria for the port of discharge with the requisite clearance.

The DPR in Lagos wrote to Total on 7 September noting that loading proceeded without the requisite clearance and Total’s actions were viewed as an economic crime. A demand for Total to pay a USD12 million fine was made by the Nigerian Ministry of Petroleum Resources on 9 October 2009 and Nigerian Naval personnel were put on board the vessel to prevent her sailing. Total paid the fine on 13 October. The cargo and clearance documents from the DPR arrived on board the vessel at 0954 hours on 16 October. The vessel sailed for the port of discharge at 1300 hours on that day.

The Owners claimed demurrage for the totality of the period between 3 September and 16 October 2009.

At first instance, the judge held that the vessel was on full demurrage from 0919 hours on 3 September until 7 September but as from that date she was only on half demurrage by reason of a “restraint of princes” clause in the Charter. He further held that Trafigura could claim that their vendors had failed to give them quiet possession of their cargo from 1-7 September – as the vessel was unable to sail during that time - but that Vitol, Vitol Asia and China Offshore could rely on force majeure clauses exempting them from governmental interference or unforeseeable consequences from 7 September to 16 October.

Judgment

The leading opinion was given by Longmore LJ, with whom Tomlinson and Underhill LJJ agreed. He noted that the burden of presenting the appeal lay with Trafigura, whose main concern was to pass the demurrage, for which they were liable under the Charter, down the FOB sale contract to Vitol.

The three key issues identified to be resolved on the appeal were:

1. Whether, as the judge had held, the delay was caused by an unforeseeable force majeure event beyond the reasonable control of Total (for the purpose of the Trafigura/Vitol contract) or beyond their reasonable control (for the purpose of the Vitol/China Offshore contract);

2. Whether, if not, China Offshore and Vitol can say that the delay was beyond their own control or reasonable control;

3. Whether, as the judge held, the unlawful act of the Nigerian Petroleum Minister in seeking to impose a "fine" of USD12 million broke the chain of causation so that any liability of Vitol or China Offshore is to be confined to the delay before 7 September.

1 Reasonable Control: Total and Trafigura

Longmore LJ noted that force majeure clauses must be constructed in accordance with their terms and that any ambiguity in such exceptions clauses must be resolved against the party seeking to rely thereon. He added that the concept of being “beyond [a corporate person’s] control” set a comparatively high hurdle since corporations usually have a significant measure of control over their own business.

Longmore LJ noted that the judge was prepared to assume that, since the loading of the vessel was Trafigura's responsibility under clause 15 of the Charter and since the loading could only be performed by Total as operator of the Terminal, Total were the agents of Trafigura for the purpose of clause 21 (fn1) but he held that, since the cause of the delay was beyond the reasonable control of Total, Trafigura could rely on the “restraint of princes” exception in the Charter to reduce the demurrage rate by half.

Having considered the relevant contractual provisions and the facts found, Longmore LJ was unable to agree with the judge. The reason was that the judge had not, in Longmore LJ’s view, sufficiently taken into account the wider considerations that related to Total’s conduct.

The judge had based his conclusion on the actions of Total’s Terminal representative whereas a wider consideration of the facts, found by the judge, showed that the situation was not beyond Total’s reasonable control. Total had failed to comply with the applicable Terminal Procedure Guide which provided for the DPR to sign the inwards clearance certificate of the vessel on arrival and before loading commenced. In practice, this had become a requirement for the DPR in Lagos to grant clearance through the official channel of communication with Total in Lagos, which Total at Lagos did not seek until 1 September after loading had already commenced.

Longmore LJ considered that, in these circumstances, Total had opted to take a riskier route via their Terminal representative instead of going through the official channel in Lagos. This was an action that was within Total’s control.

Longmore LJ next identified that the question which then arose was whether Trafigura could say, even if the cause of the accrual of demurrage was within Total’s reasonable control, it was not within their (Trafigura’s) reasonable control or that of “their servants or agents” within clause 21 of the Charter.

A literalist construction would conclude that Total were not Trafigura’s “agents”, given the chain of FOB sale contracts. However, Longmore LJ took the view that this would be unnecessarily strict. Further, it would not be consistent with the concept of the charterers being responsible for defaults in loading, if they were able to excuse themselves on the basis that the event causing the damage was outside the control of themselves or their immediate contracting party. By contracting with Vitol SA, Trafigura initiated (or participated in) a chain of contracts which led to the actual loading of the vessel being done by Total. If the events that occurred were within the (reasonable) control of Total, then Trafigura should be contractually liable to the Owners of the vessel for the consequences of those events. In other words, for the purpose of clause 21 of the charterparty, Total were the agents of Trafigura in relation to the loading of the cargo.

2 Reasonable Control: Vitol, Vitol Asia and China Offshore

Longmore LJ next considered and analysed the key provisions in the FOB sale contracts. The provisions and terminology used in the FOB sale contracts were not identical to that in the Charter. However, he considered them to be sufficiently similar for the same considerations that applied to the Charter to again apply to the FOB sale contracts.

Longmore LJ came to the same conclusion as for the Charter, namely that the delay in loading arose from an event within the seller’s reasonable control, thereby enabling the demurrage claim to be passed down the chain of FOB sale contracts.

3 Intervening Event: Break in the Chain of Causation

The conclusions above required Longmore LJ then to consider whether or not the Nigerian Petroleum Minister’s “abuse or arbitrary exercise of power” (as the judge accepted, based on the evidence of an expert Nigerian lawyer) became a new intervening cause that displaced the original breaches of contract by Vitol, Vitol Asia and China Offshore.

Longmore LJ noted that Chitty on Contracts (fn2) states that the voluntary act of a third party intervening between the breach of contract and the loss suffered will normally break the chain of causation but adds that this will depend on the court’s appraisal of the particular circumstances. Having considered the particular circumstances, he came to the conclusion that the chain of causation could not be said to have been broken in this case, with the delay-related loss resulting from the contract breaches. The key reasoning was that:

(a) Total could not say that the circumstances were beyond their control when they loaded the vessel by severing the padlock on the export pipe without inwards clearance being granted for the vessel beforehand by the DPR;

(b) The fact that the Nigerian authorities over-reacted and sought to impose an unlawful fine did not change the fact that the authorities could have investigated the incident without illegal conduct and thereby still inevitably have caused a certain amount of delay;

(c) If arbitrary exercise of power in any country where vessels come and go were sufficient to displace serious breaches of contract then that might be an encouragement to lawlessness; and

(d) The delay between 7 September and 16 October was never suggested to have been too remote. That the Nigerian authorities would take a very serious view of what had happened was within the reasonable contemplation of the parties, and the loss after 7 September had the same quality as the initial loss incurred up to that date.

Comment

The judgment highlights (i) the difficulties that can arise where there is interplay between shipping contracts and international sale of goods contracts involving multiple parties all trying to achieve a common goal, and (ii) the need to consider carefully the wider factual and legal matrix of the circumstances of the dispute to achieve a result that accords with the commercial intentions of the parties, so far as lawfully justifiable.

Fn.1 Clause 21 of the charterparty provided for only half demurrage to be paid if the vessel were detained by a number of causes, including “arrest or restraint of princes, rulers or peoples.” But this exception was subject to the further provision that the cause of the delay “was not within the reasonable control of Charterers or Owners or their respective servants or agents.”

Fn.2 31st Edition, 2012, paragraph 26-059.