Rhine Shipping v Vitol - the Dijilah - Court of Appeal

DMC/SandT/24/09

England

Rhine Shipping DMCC v Vitol SA (The “Dijilah”)

English Court of Appeal: Underhill, Asplin and Popplewell LJJ: [2024] EWCA Civ 580: 23 May 2024

Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWCA/Civ/2024/580.html

Steven Berry KC and Patrick Dunn-Walsh (instructed by Hannaford Turner LLP) for Rhine Shipping (Owners)

Paul Toms KC (instructed by MFB Solicitors) for Vitol (Charterers)

VOYAGE CHARTER: BPVOY4 FORM: DELAY TO LOADING OF CARGO AT SECOND LOADPORT: DELAY CAUSED INCREASE IN COST OF PURCHASING CARGO: WHETHER CHARTERERS’ “GAIN” FROM ENTERING INTO INTERNAL HEDGING ARRANGEMENTS FOLLOWING OWNERS’ BREACH OF CHARTER WAS TO BE BROUGHT INTO ACCOUNT TO REDUCE CHARTERERS’ LOSS

Summary

In upholding the judgment of the High Court on the sole ground of appeal, the Court of Appeal held, in dismissing Owners’ appeal, that the “gain” from Charterers’ internal hedging arrangements was not to be brought into account when assessing Charterers’ loss caused by Owners’ breach of the voyage charter.

Further, Owners could not raise a new point that had not been raised before the High Court, because relevant findings of fact, on which further evidence would have been needed, required for that new point to be argued had not been made.

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

Background

Owners, who were disponent owners of the tanker “Dijilah”, voyage chartered her to Charterers on an amended BPVOY4 form to carry a crude oil cargo from West Africa to China. The voyage charter was subject to English law and jurisdiction.

Charterers purchased and on-sold the cargo to be loaded on the basis of index-linked prices, the purchase price depending on the date of loading evidenced by the bills of lading and the on-sale price depending on the date of delivery.

After loading a part cargo at the first loadport, property on board the vessel was arrested by a third party, which caused delay to her arrival at the second loadport, whilst Owners negotiated and provided security for her release.

As a result of the arrest and delay, Charterers “rolled” (i.e. moved forward from the prior estimated date range to the new estimated date range of the cargo being loaded on the vessel) the dates of swaps as part of their internal hedging arrangements and risk management system. This later led to a diverse array of other internal transactions being bundled together which were, eventually, externally hedged with a bank. In the event, this led to a USD2.9m nominal “gain”, which was arbitrarily credited to this particular transaction.

However, the delay to the loading date also meant that Charterers ended up having to pay, based on the index-linked pricing mechanism, an additional USD3.7m to the sellers to purchase the cargo loaded at the second loadport. Owners desired to have that “gain” credited against (to reduce) the loss.

In the event, substantial demurrage had accrued, which Owners claimed from Charterers, who in turn counterclaimed for the loss caused by the delay. The High Court (see case note here)[[1]] found in Charterers’ favour holding, amongst other things, that the “gain” of the internal hedging arrangement was not to be brought into account when assessing the damages for Charterers’ loss. Owners thereafter pursued an appeal on this sole ground before the Court of Appeal.

Judgment

The judgment of the Court of Appeal was given by Popplewell LJ, with whom Underhill and Asplin LJJ agreed, dismissing the appeal for the following reasons.

Having summarised the background to the dispute and noted it was common in the oil industry to hedge pricing risks at least in part, based on the particular risk appetite of a trading house towards taking a speculative position on pricing risks, the Court of Appeal considered it to be necessary to set out the Judge’s description of Charterers’ internal risk management system at some length:

Internal Risk Management System

A. The Judge had not been convinced that the “gain” made on the rolling of the internal swaps was to be brought into account. That was because the internal arrangements were not akin to the conclusion of a contract between two separate entities. Also, the purpose of that automatic internal risk management process was not to look for “matching” equal and opposite physical transactions.

B. Rather, the internal swaps were done so that the risk could be managed along with a series of other risks derived from other unrelated physical transactions. That formed the first stage of Charterers’ process of seeking to identify their net pricing risk exposure across their entire book of physical trades.

C. Thereafter, a decision would be made about what, if anything, to do about the net pricing risk exposure. Principally, the decision would be whether to hedge externally that net position or to run an unhedged position. That process was directed at dealing with a series of physical trades which were likely to have been unconnected and not concluded for the purposes of mitigating or managing the specific price risk on any individual trade, such as the present transaction.

D. While the Judge noted that external hedges entered into as a result of a breach of contract could be brought into account, the internal swaps here were not legally recognised as binding contracts; they were purely internal arrangements within Charterers’ organisation, and they did not affect Charterers’ profit or loss.

E. The Judge had concluded that the USD3.7m quantum of loss caused by the arrest-related delay was not to be reduced by the USD2.9m “gain”. The Judge had held that the internal swaps merely transferred the risk between Charterers’ portfolios, and so did not make good any loss to Charterers. Moreover, applying Swynson v Lowick Rose (fn.1), it had been clear to the Judge that benefits from the other physical transactions in question were res inter alios acta (i.e. could not affect the rights or obligations of Owners, who were not a party to those transactions), and so were not to be brought into account to reduce the loss.

The Court of Appeal considered the High Court judgment to be meticulous and well-reasoned. It applied a valid distinction between an internal and an external hedging arrangement. In the latter scenario, the rolling of external swaps would have been a step taken in mitigation of the delay caused by the breach, and the resultant benefit received from a third party would have fallen to be taken into account as a benefit received as a result of such reasonable mitigation. The same could not be said of what happened with the internal hedging arrangement.

The Court of Appeal considered that this conclusion would also follow from an application of the principles of avoided loss, as summarised in Swynson v Lowick Rose (fn.2). The internal hedging arrangement was not entered into for the purpose of hedging the purchase of the cargo and the decision to do so was in no way caused by the price risks to which Charterers were exposed, still less by Owners’ breach of contract giving rise to the loss on the purchase price. This was because the internal hedge was based on different physical trades in the course of ordinary operations. As such, any benefit was entirely independent of the circumstances giving rise to the loss; it was not derived from steps taken due to Owners’ breach, nor from some third party contract intended to afford Owners some other benefit.

The Court of Appeal also considered the other grounds of reasoning by the Judge to be unimpeachable and compelling, such that it would have had no hesitation in dismissing any appeal based on the case advanced before the Judge. However, Owners sought to advance a new argument that had not been before the Judge.

The new argument was that the benefit of the avoided cost of a “book hedge”, which would have arisen had there been no breach, should have been brought into account. Such a net book risk would, absent breach, have needed hedging. In fact, it was met by the ‘oppositional’ rolling of the swaps. Absent hedging, the risks of a fall in the market would have existed within Charterers’ book, but without the matching market increase risk created by Owners’ breach.

In short, given Charterers’ hedging policy, Charterers would – absent breach – have bought an external hedge of the risk of a decrease in price, which would have created a loss, and that loss had been avoided due to the breach.

The Court of Appeal, having considered the authorities on whether a new point could be raised on appeal, reached the clear conclusion that Owners should not be permitted to raise the new point on this appeal. Determination of the point raised here would have required, during the High Court trial, further factual findings, which were not made by the Judge, on which further evidence, which might have affected the outcome, would have been adduced by Charterers.

Accordingly, the Court of Appeal dismissed Owners’ appeal for the above reasons.

Comment

This judgment is a good example of the wide range of complex issues that may arise on liability and quantum for a claim related to financial loss caused on an underlying cargo transaction resulting from delay under a contract of carriage, particularly in relation to considerations of the hedging of oil cargo price risks.

The evidence concerning the internal hedging and the way in which the issue was addressed were significant. The upshot was that a decision not to mitigate due to a breach, specifically by entering into an external price hedge for the particular transaction, may not provide a sound basis to reduce recoverable loss, while also leaving intact a positive financial result achieved across a global book of physical trades by an internal risk management strategy that centralises all risks. In that way Charterers appear to have found a sound method for a win-win in any case.

The new argument of the type that Owners sought to pursue may, in principle, be grounds to reduce the quantum of loss recoverable if, as a result of a breach, a different loss had been avoided. However, whether such a collateral benefit could be proven and ought to be taken into account are plainly complicated issues. As such, this interesting approach will have to await a suitable test case for exploration.

Footnote 1: [2017] UKSC 32, [11], per Lord Sumption

Footnote 2: Namely, that the innocent party is to be treated as having made good his loss independently out of his own resources, such that the benefit obtained is not to be treated as caused by the breach of contract.