Glencore Energy v Transworld Oil

From DMC
Jump to: navigation, search


English Commercial Court

Glencore Energy UK Limited v Transworld Oil Limited (The “Narmada Spirit”): English Commercial Court: Blair J: [2010] EWHC 141 (Comm): 3 February 2010


Available on BAILII @

Richard Southern QC and Alexander MacDonald (instructed by Clyde & Co) for the claimant buyer, Glencore Andrew Baker QC (instructed by Jones Day) for the defendant seller, Transworld


Quantum - Calculation: as there was no available market for Ukpokiti crude oil, the loss was to be assessed under section 51(3) of the Sale of Goods Act 1979. This was to be achieved with reference to the dated Brent futures price on the day of non-delivery, rather than a dated Brent swaps price at the time of contracting, because this accorded with the standard assessment of damages at the time of non-performance and was readily calculable without the uncertainty posed by swaps.

Quantum – Mitigation: as the buyer had a policy of hedging the risk created by the difference in the pricing formulas of its purchase contracts and on-sale contracts, the loss saving made by the buyer when it closed out its position early after the seller repudiated the contract, was to be taken into account when determining damages, because the buyer would have had to close out its position later if the physical transaction had gone ahead anyway, which would have caused a greater loss, and to discount the obligation on the buyer to mitigate its loss by closing out the position here would otherwise provide the buyer with a windfall profit.

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


Glencore, as buyer, claimed damages against Transworld, as seller, for repudiating a FOB contract for the sale of a cargo of Nigerian crude oil known as Ukpokiti. Whilst the vessel was waiting to berth, the crew of a tug that was to assist in that operation was subject to a kidnapping. Although the kidnap was resolved quite quickly, the vessel by then had sailed away. The parties thereafter sought to put in place alternative arrangements for loading her but these ended in failure. The parties then affirmed the contract but Transworld later repudiated, in relation to the timing of calculating the price to be paid, which Glencore accepted as bringing the contract to an end.

Glencore bought the Ukpokiti oil on terms that required the price formula to be calculated against the dated Brent market price, based on a 5 day consecutive period around the time of loading, declared at Glencore’s option. Glencore were selling on with a price formula based on the dated Brent market for a 5 day consecutive period commencing after the bill of lading date. Although Glencore were selling on with a premium of US$3.00 per barrel, it followed that the disparity in reference dates exposed Glencore to an outright risk of any market volatility in dated Brent. On the basis of the period declared by Glencore at its option to Transworld, the Ukpokiti oil was to cost US$101.433 per barrel. The price per barrel for on-sale to BP, including the premium, was US$103.483. The total price of the prospective shipment, of 271,000 barrels, was agreed to be US$28,043,893.

In order to protect its prospective profit margin, Glencore hedged its position by selling 271 lots of Brent May futures at an average price of US$102.23 between 27 March and 2 April. In order to match the physical and futures position, Glencore had to sell May futures, which would expire in mid April, which is what Glencore did. Had the cargo loaded at the end of March as intended, these futures would have been closed out by the purchase of May futures in batches of 20% of the total number of futures lots to be acquired over the 5 day pricing period in the BP contract, with the result that Glencore’s physical and future position would both have been closed out well before the expiry of the May futures in mid-April.

An exposure to hedging losses arises where:

1. there is no physical cargo against which to offset the futures position as a result of non-delivery; and

2 there is an alteration of the pricing period for the physical cargo after hedging contracts have been entered into.

It followed that Glencore wished to maintain the declared pricing period under the affirmed contract for the purpose of making alternative arrangements for loading, because changing the pricing period, which is what Transworld wished to do, would have adversely impacted Glencore’s hedging arrangements.

Once Transworld repudiated the contract, Glencore accepted this and immediately reversed its futures position by buying back 271,000 barrels of July 2008 Brent futures, to avoid having an ‘outright position’ (a paper position not hedged by a physical position). This occurred under circumstances where the market was falling against Glencore without the prospect of rising back in its favour. In so doing Glencore incurred a loss in the order of US$8m. However, a greater futures loss would have occurred had the Transworld contract been performed, so that there was a net futures saving made by closing out early.

The issues that broadly arose for decision were:

(i) whether the claim was time barred under terms incorporated into the contract; and

(ii) the correct measure of damages for breach of contract.

On the time bar issue, the court decided that the relevant set of terms incorporated into the contract did not time bar the claim, as a matter of incorporation or construction. This issue will not be dealt with in detail in this case note.

It was common ground that there was no available market for Ukpokiti oil within the compass of section 51(3) Sale of Good Act 1979 so that the measure of damages was to be assessed under section 51(2), which provides that where a seller wrongfully refused to deliver the goods to the buyer, the “measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract.”



The issues on quantum covered two elements:

(i) the correct approach to calculating damages under section 51(2) of the Sale of Goods Act 1979 in the circumstances of the case; and

(ii) whether the reduced hedging loss made by Glencore in closing out early its position following Transworld’s repudiation was to be taken into account as mitigation of the loss for the purpose of assessing damages.

On calculation, Glencore claimed the difference between the contract price and the value of the oil on the date when it ought to have been delivered. For that purpose Glencore used the dated Brent futures price at the time of non-delivery. On this basis Glencore’s damages were US$11,112,626. Transworld submitted that damages should be assessed at the date when a contract for delivery of Ukpokiti oil would typically have been entered into, which on the evidence was between 15 and 45 days before the FOB delivery date. For that purpose Transworld used dated Brent swap prices as an average across the 15 to 45 day period before the date of non-delivery. That gave a figure for recoverable loss of US$7,562,797.

The judge agreed with Glencore’s approach. It would be wrong in principle to adopt for the purposes of damages a time equivalent to the time of the making of the contract (the swaps formula), rather than its performance (the futures formula), and Transworld’s formula was impossible to apply on a basis of any certainty. The price of dated Brent was by its nature a price for future delivery, which provided the court with a ready means to measure the market price of the oil in question at the time of non-delivery. If on the day of non-delivery one wanted to buy a cargo of Brent, the dated Brent futures price was the one that would have had to be paid on that day, albeit with a future delivery date. By comparison, dated Brent swaps prices prevailing weeks previously were essentially predictive, and did not provide a basis for valuing the oil at the time of non-delivery, because the price may have gone up or may have gone down by then. It followed that subject to mitigation, Glencore’s calculation was correct.

On mitigation, Glencore submitted that the reduced hedging loss was not to be taken into account, because the only step it could have taken in mitigation was to purchase a replacement physical cargo, which it could not do because there was no available market for Ukpokiti oil. Glencore argued that the hedges were independent transactions and, as such, should not to be taken into account. They were in the nature of an insurance policy and therefore to be ignored. Transworld submitted that Glencore’s smaller hedging loss, by closing out early, must be taken into account, because Glencore was required to close out its position in order to reduce its exposure to the accrual of greater hedging losses against which there was no physical cargo to off set. To ignore the hedging position would have given Glencore a windfall of US$2.4m, in circumstances where it would have had to close out its hedging position in any event, thereby making a loss even if the contract had been performed. Equally, hedging was not in the nature of insurance. On the basis that the reduced hedging losses were to be taken into account, the recoverable damages were reduced to US$8,516,496.

The judge held that account was to be taken of Glencore’s reduced hedging loss. Glencore’s submissions had to be seen against the rest of the evidence. In applying the approach in Kaines v Osterreichishe Warrenhandelsgesellschaft (1), it was plain on the evidence that, having accepted Transworld’s breach as bringing the contract to an end, Glencore not only did but was required to mitigate its loss by closing out its hedges. To have allowed the hedges to run on would have been to speculate in the movement of the price of oil, which Glencore had asserted was no part of its business. By closing out its hedges Glencore established its loss. Hedging was on the evidence an integral part of the business by which Glencore entered into the contract for the purchase of oil, and since the closing out on early termination established a lower loss than would otherwise have been incurred, that had to be taken into account when determining recoverable loss. If Transworld had duly performed the contract, Glencore would have closed out its hedges at the then current lower prices. There was here no reason to put Glencore in a better position in the case of non-performance.

It followed that Glencore were entitled to judgment in the sum of US$8,665,496.


Time Bar

Although not covered in detail in this case note, one aspect of the time bar issue is of interest. The judge had held that the 2008 set of terms, which included the time bar, were not incorporated into the contract, whilst the earlier 2007 set of terms - which did not include a time bar - were incorporated. The judge’s reason was that the 2008 set of terms, which were those of the national Nigerian oil company, had not been ‘published’, in the sense that the terms had not been publicly made available, so that parties could familiarise themselves with the terms, and the parties were otherwise unaware that those terms had come into effect and what the provisions of those new terms were. Further information can be found on this aspect by reading the law report on BAILII.


A fundamental element in the decision on mitigation was the judge’s finding that hedging was integral to Glencore’s business in order to manage the risk of market volatility where there was a difference in the pricing formula between the purchase contract and on-sale contract. The risk was that Glencore would have to pay more to Transworld for the oil than they would receive from BP because the contract periods for determining the average market price were different for each contract.

Derivative contracts are used to protect the anticipated profit margin/premium on transactions by limiting or off setting (hedging) the risk involved whichever way the market goes. It follows that a paper market gain would be balanced out by a physical market loss and vice versa, assuming the physical transaction goes ahead as planned. The price paid by the on-seller for protecting against the risk of a loss is foregoing the possibility of a windfall if the market rises in its favour. By comparison, no such future market exposure risk arises where a trade is made on back-to-back terms, because the profit margin is statically fixed by the price/premium agreed in the contract.

As the decision in Addax v Arcadia Petroleum (2) indicates, the use of different derivatives contracts to manage market price volatility is entirely foreseeable for physical crude oil trading, due to the fact that a slight movement of price can make a significant difference to the profitability of a deal. However, the use of derivative contracts may be unusual in relation to some types of commodities, because of the terms of the contracts ordinarily used for on-sale, the risk appetite of the particular market and the comparative cost benefit of using derivative contracts compared to market volatility for that market. It follows that in certain circumstances losses or gains caused by the use of derivative contracts may be considered too remote to be taken into account other than where the party who later defaults is put on notice of a hedging strategy before the contract is agreed.

Footnote (1): [1993] 2 Lloyd’s Rep 1 (CA), per Bingham LJ: “If a seller repudiates a contract before the time for performance arrives the buyer on existing authority is entitled to accept that anticipatory repudiation, treat the contract as at an end and claim damages. The basic measure of damages is such sum as will put the buyer in the same position as if the seller had duly performed the contract. The prima facie measure is, therefore, the difference between the contract price and the market price at the time of contractual performance. The seller is, however, only liable for such part of the buyer’s loss as is properly to be regarded as caused by the seller’s breach. If the buyer fails to take reasonable steps to mitigate his loss consequent on the seller’s breach, he is debarred from claiming any part of the damage which is due to his neglect to take such steps. The seller’s breach is not causative of that additional loss and therefore not recoverable”.

Footnote (2): [2000] 1 Lloyd’s Rep 493 (Comm Ct).