Cargill International Trading v Uttam Galva Steels
Cargill International Trading Pte Ltd v Uttam Galva Steels Limited (Commercial Court): Bryan J:  EWHC 476 (Comm): 28 February 2019
Ms Jackie McArthur, instructed by Freshfields Bruckhaus Deringer, for the Claimant
Ms Karishma Vora, instructed by Marsans, for the Defendant
SUMMARY JUDGMENT: CONTRACT TERM: DEFAULT COMPENSATION CLAUSE: INTEREST RATE: WHETHER UNENFORCEABLE AS A PENALTY: WHETHER INCORPORATED INTO RELEVANT CONTRACT: WHETHER ONEROUS OR UNUSUAL TERM: ILLEGALITY UNDER INDIAN LAW
In a summary judgment application, the Commercial Court was asked to consider the validity and enforceability of a clause in two agreements, which provided for “default compensation” at a rate of interest of one month LIBOR plus an additional margin of 12%. The court held that the contract term was valid and enforceable, and that the defendant had no real prospect of showing that the term amounted to a penalty, or was not incorporated into the relevant agreements, or that payment would be illegal under Indian law.
This Case Note has been contributed by Candice Lau, BBA(Law), LLB (HKU), LLM (Cantab), a barrister at Alan Leong SC’s Chambers, Hong Kong.
The claimant and the defendant entered into two advance payment and steel supply agreements (“APSA Agreements”). The APSA Agreements were successors of prior agreements, which had been governing business relations between the parties for over a decade. They were contracts for the sale and purchase of steel whereby the claimant agreed to provide advance payments to the defendant in respect of contemplated future sales by the defendant of steel products to the claimant. The defendant was then obliged to repay those advances within a specified time period either by the sale of steel products or by payment in cash.
Pursuant to the APSA Agreements, the full amount of the financing facility was drawn down and paid, totalling USD61,800,000 (“the Sum”). The defendant failed to repay those advances by means of a sale of steel or payment in cash. The claimant commenced proceedings for the repayment of the Sum and subsequently obtained summary judgment for the Sum.
At the handing-down hearing, however, the defendant sought to raise new defences at the eleventh hour relating to the validity and enforceability of Clause 8.12 of the APSA Agreements. Clause 8.12 provided that, if the defendant seller failed to pay on the due dates, “default compensation” would accrue on the overdue amount until it was paid at the rate per annum equal to one month LIBOR plus an additional margin of 12%. The defendant contended that (i) Clause 8.12 was unenforceable because it was a penalty; (ii) Clause 8.12 had not been incorporated into the APSA Agreements as an onerous or unusual term of which sufficient notice had not been given; and (iii) Clause 8.12 was illegal at the place of performance because it was not in compliance with the Reserve Bank of India (“RBI”)’s regulations and so invalid under Indian law.
Bryan J granted the summary judgment on the claimant’s claim for default compensation. None of the defences put forward by the defendant was considered to have any real prospect of success at trial.
First, the court confirmed that the true test of a penalty was whether the impugned provision was a secondary obligation which imposed a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. Therefore, the fact that a clause is not a pre-estimate of loss does not - at any rate without more - mean that it is penal. Bryan J was satisfied that the claimant had a legitimate interest in ensuring that the defendant repaid the money advanced and at a time at which the defendant had undertaken to repay it. There was a good commercial justification for charging a higher interest rate in the event of default since the defaulter was then known to be a greater credit risk. There was no evidence of oppression in the process of negotiation either. In fact, evidence before the court showed that the default compensation rate was the commercial norm for Indian companies comparable to the defendant obtaining unsecured loans. Even outside of the context of the Indian market and Indian steel industry, higher default interest rates have been upheld in other cases. For these reasons, Clause 8.12 could not be said to be exorbitant or oppressive so as to constitute a penalty.
Second, Bryan J held that the suggestion that Clause 8.12 had not been incorporated into the ASPA Agreements was hopeless. The APSA Agreements had been stamped and signed on every page by the defendant to signify acceptance of the terms. In any event, it is trite law that a party is held to its contractual bargain whether or not it has read or paid attention to its terms. Further, the defendant was barred from relying on the principle that where a particular term is unusual or onerous, the counterparty will not be bound by it unless it had been brought specifically to the party’s attention. No evidence suggested that the claimant exerted any undue pressure upon the defendant to sign or that the defendant had no opportunity or time to read the ASPA Agreements before signing them. On the contrary, the ASPA Agreements had been negotiated between the parties at arm’s length and the parties had been doing business on similar terms for years. There was also no evidence that the ASPA Agreements were standard form agreements imposed by the claimant. Given that default interest rate clauses are commonplace and that the default compensation rate in question did not amount to penalty, the court held that Clause 8.12 was not an unusual or onerous clause which had to be brought specifically to the attention of the defendant.
Lastly, Bryan J held that there was no realistic prospect of the defendant establishing that Clause 8.12 was illegal and unenforceable as matter of Indian law. The court first noted that the ASPA Agreements were expressly governed by English law, not Indian law. As such, the fact that Clause 8.12 would be invalid and unenforceable as a matter of Indian law was irrelevant. In any event, considering the expert evidence as well as the ordinary and natural meaning of the words used in the regulations, the court concluded that the regulations issued by RBI only applied to the rate of interest on an advanced payment but did not put a limit on a default compensation rate.
Nonetheless, the court went on to consider the illegality defence in the event that it was arguable that Clause 8.12 was illegal as a matter of Indian law. In this regard, the rule that prevents enforcement of a contract if performance is required in a place where it would be illegal (“Rule”) was not engaged. The reason for this was that, under the APSA Agreements, the place of performance of the defendant’s obligation to pay default interest was Singapore, not India. Therefore, even if Clause 8.12 were illegal under Indian law, it would not be caught by the Rule.
The court in this case affirmed the true test of a penalty, which was authoritatively laid down in Makdessi v Cavendish Square Holdings BV  UKSC 67, and disapproved an overly rigid reading of the test set out in Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Co Limited  AC. Following Makdessi, litigants should be reminded that the question is not whether a default compensation rate is a genuine pre-estimate of a claimant’s damages after default, but whether a default compensation rate has a legitimate commercial justification and whether the rate is in all the circumstances exorbitant. As such, a very high default interest rate does not automatically render a clause unenforceable.
It is also worth noting that where a contract is expressly governed by English law, illegality under foreign law would be irrelevant, unless illegality under foreign law would render the contract unenforceable as a matter of English law. One instance is where a contract requires a party to do something unlawful in the place of performance – that is the rule in Ralli Bros v Compania Naviera Sota y Aznar  2 KB 287. The Ralli Bros rule was, however, inapplicable in the present case because the defendant was required to perform its payment obligation in Singapore, not India. Litigants are reminded to ascertain carefully the place of performance of a contractual obligation if they intend to rely on the Ralli Bros rule.