Rhine Shipping DMCC v Vitol S.A. - The Dijilah
DMC/SandT/23/07
England
Rhine Shipping DMCC v Vitol S.A. (The “Dijilah”)
English Commercial Court: Simon Birt KC, sitting as a Deputy Judge of the High Court: [2023] EWHC 1265 (Comm): 26 May 2023
Judgment Available on BAILII @ https://www.bailii.org/ew/cases/EWHC/Comm/2023/1265.html
Timothy Young KC and Patrick Dunn-Walsh (instructed by Rosling King LLP) for Rhine Shipping (Owners)
Paul Toms (instructed by MFB Solicitors) for Vitol (Charterers)
VOYAGE CHARTER: BPVOY4 FORM: CLAUSE 13 INDEMNITY: ALSO WARRANTY THAT OWNERS, MANAGERS, DISPONENT OWNERS AND VESSEL FREE OF LEGAL ISSUES: PROPERTY ON VESSEL ARRESTED: DELAY TO LOADING OF CARGO AT SECOND LOADPORT: DELAY CAUSED INCREASE IN COST OF PURCHASING CARGO: WHETHER INDEMNITY AND WARRANTY APPLIED: WHETHER LOSS TOO REMOTE OR WHETHER NO ASSUMPTION OF RESPONSIBILITY BY OWNERS: WHETHER CHARTERERS’ “GAINS” FROM ENTERING INTO INTERNAL HEDGING ARRANGEMENTS FOLLOWING OWNERS’ BREACH OF CHARTER TO BE BROUGHT INTO ACCOUNT: WHETHER CLAIMS UNDER INDEMNITY SUBJECT TO REMOTENESS OF LOSS RULES FOR BREACH OF CONTRACT
Summary
In finding in favour of Charterers, for a substantial loss due to the increase in the price of cargo under a purchase contract caused by delay to the vessel by the arrest of property on board her, the High Court held that the right to an indemnity for “consequences” and damages for the breach of a warranty were engaged on the facts. The Court held that the loss of profit caused by delay to the loading of the cargo at the second loadport was not too remote nor was it a responsibility not assumed by Owners, that the “gains” from Charterers’ internal hedging arrangements were not to be brought into account, and (obiter) that the scope of the indemnity for consequences was not subject to the rules of remoteness of loss.
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 tanker “Dijilah” voyage chartered her to Charterers on an amended BPVOY4 form with additional clauses to carry a crude oil cargo from West Africa to China. The charterparty was subject to English law and jurisdiction.
Owners had the vessel on time charter from the bareboat charterers, Al-Iraqia, although the two companies shared the same personnel and offices. Al-Iraqia in turn had the vessel on bareboat charter from the registered owners, Nera, along with five other vessels on bareboat charters from the financiers behind Nera.
Al-Iraqia had got into difficulties with the trading of the vessels, related to sanctions compliance concerns, and this led to the financiers commencing arbitration in London and purporting to terminate the bareboat charters.
Charterers purchased and on-sold the cargo on the basis of index-linked prices for crude oil, 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 at the first loadport in Ghana, property on board the vessel (bunkers, supplies, etc.) was arrested by the financiers behind Nera (and the other related vessels and companies), which caused delay to her arrival at the second loadport, Djeno in Congo, whilst security was negotiated and provided 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” arbitrarily being 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 that was loaded at Djeno.
In the event, substantial demurrage accrued, which Owners claimed from Charterers, who in turn counterclaimed for the loss caused by the delay.
Judgment
Having set out the background to the dispute, including the key terms of the sale contracts and the charter and the material facts of the case, the Judge addressed the issues in dispute on liability and quantum in turn.
Indemnity
The first issue related to whether or not the clause 13 (fn.1) indemnity was engaged by the circumstances of the delay to the vessel as a result of the arrest of the property on board her in Ghana.
The Judge considered the indemnity was engaged because the arrest detained the vessel, as an inevitable consequence of the property on board being arrested, which prevented the vessel from proceeding to Djeno.
Warranty
The warranty (fn.2) gave rise to two issues:
(1) Did Al-Iraqia fall within the description of entities listed in the clause; in particular, did it fall within the description “managers” or “disponent owners”?
(2) Whether, at the time of and immediately prior to fixing the voyage charter, Al-Iraqia was “free of any encumbrances and legal issues that may affect the vessel’s approvals or the performance of the charter”?
As to (1), the term “managers” was general and wide and Al-Iraqia was, on the evidence, involved with the vessel’s commercial management. That was consistent with Al-Iraqia having been named as the vessel’s “commercial operator” in the voyage charter and copied into operational emails. As such, the Judge considered Al-Iraqia could fairly be described as “managers”.
Further, whilst it was not necessary to decide the point, the Judge also considered Al-Iraqia could fairly be described as “disponent owners”, which term was used to describe any party making available to another party, pursuant to any type of charter, a vessel for a period of time or for particular voyage(s), who was not the registered owner of the vessel. Otherwise, Al-Iraqia could also fairly be described as “owners”, as the vessel was in the possession of Al-Iraqia through its personnel being on board.
As to (2), there was, on the evidence, a legal issue affecting Al-Iraqia at the relevant time – i.e. the London arbitration – when the voyage charter was fixed. It was also possible that that issue could affect the performance of the voyage charter, as it in fact did. The Judge further considered it to be irrelevant, as far as performance of a voyage charter was concerned, whether claims which were the basis for an arrest of property might turn out to be good ones or not.
Accordingly, the Judge found that Owners were in breach of the warranty.
Internal Hedging
The Judge was satisfied, on the evidence, that the USD3.7m quantum of loss alleged had been caused by the arrest related delay. However, Owners argued the loss should be reduced by USD2.9m because of “gains” resulting from Charterers’ internal hedging arrangements. On that basis, only USD800k would be recoverable under the indemnity or for breach of the warranty.
The Judge was not convinced that the “gains” made on the rolling of the swaps were to be brought into account. This was because the internal arrangements were not akin to the conclusion of a contract between two separate entities. Further, the purpose of that automatic internal risk management process was not to look for “matching” equal and opposite physical transactions.
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.
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.
Having considered the authorities, the Judge noted that external hedges entered into as a result of a breach of contract could be brought into account. However, the internal swaps being addressed 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.
As such, the Judge 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.3), it was 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.
Remoteness
Under this heading, Owners contended that (1) the loss was not of a type that was within the parties’ reasonable contemplation on contracting, and (2) that, even if were within the parties’ reasonable contemplation as a type of loss that might be suffered, it was not loss of a type for which Owners assumed responsibility. The Judge addressed both contentions in turn.
(1) Reasonable Contemplation
Owners contended that, as carriers, they would anticipate that Charterers would, by similarities of trading terms or by hedging, “lock in” gains and exclude loss by subsequent market movements. As such, Owners argued that the loss Charterers sought to recover was a loss to which they exposed themselves by (i) entering sale and purchase contracts on different pricing terms, and (ii) failing to hedge their risk or, at least, failing to hedge their risk in a way that was in practice effective to reduce their exposure to market movements. As such, Owners said that that was unusual, and therefore not something within the parties’ reasonable contemplation.
However, the Judge found that the expert evidence amounted to a recognition that the pricing terms on the contracts for the sale and purchase of the oil were usual, and that the internal risk management processes within Charterers were usual. In other words, the system of internal hedging carried out by Charterers was usual, and so something that could reasonably be expected.
Accordingly, the Judge held that the only conclusion that could be reached on the basis of the evidence put forward was that the loss claimed by Charterers was of a type that was usual in respect of a charter such as this one, and so was reasonably within the contemplation of the parties when contracting.
(2) Assumption of Risk
The Judge noted the starting point was that where a type of loss was within the parties’ reasonable contemplation it would ordinarily be recoverable. However, there might be cases where there were particular factors demonstrating that that would not reflect the intention reasonably to be imputed to the parties, such that the implied assumption of responsibility was rendered inappropriate.
Owners advanced no evidence to deal with this point, and so Owners’ case was not advanced along the lines that there was a general understanding in the market that a shipowner would not be liable for the type of loss claimed here. Nor did Owners advance a case that the movement or volatility of oil prices themselves were outside the scope of their assumption of responsibility.
The Judge considered that even if it were difficult to quantify market movements or to predict them in advance – and given the state of knowledge that it would be reasonable to expect a carrier of crude oil to have at the time of contracting – if such a carrier chose to contract on terms which put responsibility upon it in respect of delays but which did not seek to manage its exposure to loss based upon market movements in the price of crude oil, there was no good reason for the court to conclude that such a carrier did not assume responsibility for such loss.
Scope of Recovery under Clause 13
While the decision that the loss was not too remote meant this issue did not need to be decided, having heard full argument, the Judge expressed his views.
The Judge noted that, based on the authorities (fn. 4), whether or not the rules on remoteness of loss were relevant to an indemnity turned on the construction of the provision in the contract as a whole based on the circumstances of the case.
In this case, the scope of the indemnity in clause 13 was wide, the obligation to indemnify would not necessarily come about due to breach of contract, the parties regarded the circumstances triggering the indemnity to be serious, and there was nothing in the indemnity to suggest that it intended to incorporate the rules on remoteness of damages for breach of contract.
On that basis, the Judge held that the clause 13 indemnity was not limited by the rules on remoteness of damage.
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 the carriage contract.
The evidence concerning internal hedging and the way in which the issue was addressed are significant. The upshot is that a decision not to mitigate due to a breach, specifically by entering an external price hedge for the transaction in question, 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.
Footnote 1: “In the event of arrest/detention or other sanction levied against the vessel through no fault of Charterer, Owners shall indemnify Charterer for any damages, penalties, costs and consequences and any time vessel is under arrest/detained and/or limited in her performance is fully for Owner’s account and/or such time shall not count as laytime or if on demurrage, as time on demurrage.
In the event of arrest/detention or other sanction levied against the vessel through no fault of Charterer, Charterer shall be entitled, in Charterer’s option, to terminate the Charter. Termination or failure to terminate shall be without prejudice to any claim for damages Charterer may have against Owner.”
Footnote 2: “THAT AT THE TIME OF AND IMMEDIATELY PRIOR TO FIXING THE CHARTER, THE VESSEL, OWNERS, MANAGERS AND DISPONENT OWNERS ARE FREE OF ANY ENCUMBRANCES AND LEGAL ISSUES THAT MAY AFFECT VESSEL’S APPROVALS OR THE PERFORMANCE OF THE CHARTER”
Footnote 3: [2017] UKSC 32, [11], per Lord Sumption
Footnote 4: The “Eurus” [1998] 1 Lloyd’s Rep. 351 (C.A.), Halsbury’s Laws of England (4th Ed), p 360, col 2, and Wood v Capita Insurance [2017] UKSC 24
