Progress Bulk Carriers v Tube City IMS - The Cenk Kaptanoglu
Progress Bulk Carriers Limited v Tube City IMS LLC (The “Cenk Kaptanoglu”)
English Commercial Court: Cooke J:  EWHC 273 (Comm): 17 February 2012
VOYAGE CHARTERPARTY: ARBITRATION ACT 1996 SECTION 69 APPEAL: WHETHER SETTLEMENT AGREEMENT VOIDABLE FOR DURESS: WHETHER OWNERS’ CONDUCT, ALTHOUGH NOT ILLEGAL, AMOUNTED TO “ILLEGITIMATE PRESSURE”
Mark Jones (instructed by Marine Law Solicitors Ltd) for the Claimant, Owners
Paul Henton (instructed by Reed Smith LLP) for the Defendant, Charterers
On the basis of the findings of fact in the arbitration award and its reasons, the settlement agreement made between the parties following a repudiatory breach of contract by Owners was voidable for duress because the conduct of Owners subsequent to the breach amounted to “illegitimate pressure” for the purpose of establishing duress in law.
Case note by Jim Leighton, BSc (Hons), LLB (Hons), LLM (Maritime Law), Solicitor of England & Wales, Foreign Qualified Lawyer (Practising Foreign Law) in Singapore, Associate at Hill Dickinson LLP and International Contributor to DMC’s CaseNotes
The facts were as follows:
Owners of the bulk carrier “Cenk Kaptanoglu”, concluded a charter on amended Gencon form with Charterers for carriage, on that ship, of a cargo of shredded scrap from the Mississippi River to China. The charter did not give any right to substitute “Cenk Kaptanoglu”. The agreed laycan was 15-21 April 2009. Under the sale contract between Charterers and their buyers, the Receivers, the identity of the performing vessel was subject to the Receivers’ approval. That sale contract dated the 16 January 2009 provided for a final shipment date of 30 April 2009.
The charter was concluded on 2 April 2009 but from 3 April onwards Owners indicated they would like to substitute “Cenk Kaptanoglu” with another vessel with a later laycan. On 7 April, Owners fixed “Cenk Kaptanoglu” to other charterers (“Daewoo”) without informing Charterers. On 16 April, Charterers discovered that Owners had chartered “Cenk Kaptanoglu” to Daewoo. Owners were in repudiatory breach of the charter, but Charterers did not accept that breach as terminating the contract, which therefore remained alive. On 18 April, Owners conceded to Charterers that they had made a mistake and said they would find an alternative vessel to load between 27 and 30 April and that they would compensate Charterers for all damages resulting from their failure to provide “Cenk Kaptanoglu”.
Charterers reasonably relied upon these assurances and did not seek to find an alternative vessel elsewhere. On 23 April, Owners proposed “Agia” as a substitute performing vessel with an ETA of 7/8 May. On the following day, Charterers passed on the details of “Agia” to Receivers for their approval and sought to obtain an extension of time for shipment from 30 April to 15 May.
On Monday 27 April, Receivers stated that they would agree to extend the shipment date to 15 May but only on condition that the purchase price was reduced by USD8.00 per metric ton (“pmt”) of cargo. Charterers relayed this to Owners, holding them responsible for the USD8.00 pmt loss which they would suffer, claiming, in addition, barge demurrage and interest in respect of the delay. On the same day, Owners replied, offering a USD2.00 pmt discount on the freight. Charterers then proposed a discount of USD6.00 pmt, which Owners rejected. Later that day, Charterers informed Owners that they accepted “Agia” as the performing vessel with a USD2.00 pmt discount, but reserved their rights in respect of all claims for damages arising out of the breach of the 2 April charter.
On 28 April, the sale contract of Charterers and Receivers was amended with a reduced price for the cargo of USD6.00 pmt and a later shipment date of "on or before 15 May 2009".
On the same day, Owners told Charterers that there was no point in them offering a USD2.00 pmt discount if Charterers still reserved their right to make claims against them. Owners accordingly made a "take it or leave it" offer, by which they required acceptance of “Agia”, clean, with a USD2.00 pmt reduction on the freight and the agreement of Charterers to waive all claims for loss and damage arising out of the nomination of a substitute vessel outside the contractual laycan and its late arrival. This was plainly inconsistent with Owners’ prior assurances of finding a substitute vessel and compensating Charterers for the loss and damage caused by their repudiatory breach of charter.
Charterers, in reply, said "given the exigencies of the circumstances and our urgent need to mitigate our losses and accommodate our customer in China, we are forced to accept Owners terms under protest."
In the arbitration, Owners argued that Charterers had failed to mitigate by not going out into the market and obtaining another vessel. The Arbitrators found as a fact that there was no failure to mitigate by Charterers because, from 16 April onwards, Owners were assuring them that they would be in a position to nominate a substitute shortly. The Arbitrators found that Charterers were not only entitled to believe that a vessel would be forthcoming but, as the days passed, they were "increasingly driven into a corner" from which they could not escape. It was not until 23 April that the substitute vessel, “Agia”, was proposed and the Arbitrators found that, by 28 April, Charterers had no choice but to accept Owners' full and final, take it or leave it proposal. The Arbitrators made this finding both in the context of the argument about failure to mitigate but also, expressly, in the context of the argument about economic duress. Charterers had been "lulled into a false sense of security" by Owners. When Charterers, on Monday 27 April, passed on Receivers’ agreement to “Agia”, they had expected Owners to stand by their earlier assurances and honour the "commitment to compensate" which had been given. By the next day, 28 April, Charterers had run out of time, and there was nothing else they could do if they were to fulfil their sale contract.
The question of law on appeal was:
"On the basis of the findings of fact in the Award and Reasons, was the Settlement Agreement made between the parties on 28th April 2009 voidable for duress, and, in particular did [the owner's] conduct amount to the "illegitimate pressure" required to establish duress in law?"
The judge noted that the majority of the Arbitrators held that Charterers' agreement, under protest, to waive all their claims for damages in respect of the repudiatory breach, was procured by economic duress. The judge further noted that whilst the reasons did not state in terms what test was applied by the Arbitrators in coming to the conclusion, both parties accepted that the point had been fully argued before the Arbitrators, with reference to numerous authorities and that the Arbitrators' attention was directed to the need for "illegitimate pressure" (hence the terms of the question of law posed for the court).
On a fair reading of the arbitration award and its reasons, the Arbitrators had exonerated Owners from illegal or criminal conduct, but they had found that Owners were in repudiatory breach of charter. Thus, when the Arbitrators referred to the problems faced by Charterers because loaded barges were incurring demurrage in the Mississippi and the price of the cargo was dropping so that Receivers would not agree to any further variation of the sale contract without a further significant price reduction, it was obvious that Charterers were in that position because of what Owners had done. But for the situation in which Charterers found themselves, consequent upon Owners' breach and the events that followed, Charterers would not have agreed to take “Agia” on the terms upon which Owners insisted, namely waiver of the right to claim for the original breach. In those circumstances, the Arbitrators found that it was not "appropriate or open" for Owners then to produce their "take it or leave it" offer on 28 April.
The parties agreed that there are two necessary elements in economic duress. The first is "illegitimate pressure" and the second is "causation" in the sense that the illegitimate pressure must cause the pressurised party to enter into the contract that he seeks to avoid. A third element, said to be in doubt by Owners, was whether the victim must show that he had no reasonable alternative but to agree to the contract, or whether this was merely evidence of the causative link between the illegitimate pressure and the contract in question. The judge decided on a review of the authorities that the act had to amount to a coercion of the will, rather than a mere deflection of it, and the form of the duress need not necessarily be illegal.
As the judge noted, the only basis of the appeal put forward was that the Arbitrators had not made findings of fact which could amount to "illegitimate pressure", essentially because they had not found that the pressure put upon Charterers to enter into the settlement agreement involved an unlawful act.
However, Owners' submissions overlooked the fact that their repudiatory breach was the root cause of the problem and that their continuing conduct thereafter was, as described by the Arbitrators, designed to put Charterers in a position where they had no option but to accept the settlement agreement in order to ship the cargo to China and avoid further huge losses on the sale contract to Receivers.
Whilst the Arbitrators did not expressly find that Owners were in bad faith in what they did thereafter, it was clear to the judge that the Arbitrators took the view that Owners had manoeuvred Charterers into the position they were in, following the breach, in order to drive a hard bargain. Charterers had no realistic practical alternative but to submit to the pressure and they did protest at the time. Charterers did not affirm the contract once the pressure was relieved and they were able to bring arbitration proceedings in respect of the claims which they had been forced to waive.
Under those circumstances the judge held that it could not be said that the Arbitrators applied the wrong test given their reference to the line of authorities on the subject. Consequently, the judge held that Owners’ primary position in law was unsustainable since illegitimate pressure can involve the doing of acts which are not unlawful in themselves, albeit not usually in commercial cases. In any event, the refusal to substitute “Agia” for “Cenk Kaptanoglu” unless Charterers agreed to waive Owners’ prior breach, had to be seen both in the light of that prior repudiatory breach, which was unlawful, and Owners’ subsequent attempts to take advantage of the position created by that unlawfulness.
While the court is generally slow to interfere with the rough and tumble of commercial negotiation, it will intervene in more extreme circumstances which fall short of fraudulent and criminal conduct, provided it amounts to unconscionable leverage against a contractual counterparty following a breach of contract.
As this case shows, this will include circumstances where a party in breach of contract has drawn its counterparty by words or actions into a position from which it has no practical alternative either of escape or to mitigate its position, other than to agree to something which is contrary to the circumstances which had first encouraged the counterparty into that position.
As there was no finding of bad faith by Owners, it seems that there is no need to prove any underlying Machiavellian intent to engineer that position by the party being sued for duress. It appears sufficient, to make the contract voidable for duress, merely to abuse that position once it has come about.