England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON COUNTY COURT BUSINESS LIST
(HIS HONOUR JUDGE KNIGHT, QC)

		Royal Courts of Justice Strand London WC2
		6th December 2000

1. LORD JUSTICE SCHIEMANN: Rix LJ will deliver the first judgment.
2. LORD JUSTICE RIX: The case before the court involves an appeal and a cross-appeal arising out of a judgment of His Honour Judge Knight, QC, sitting in the Central London County Court Business List. The appeal involves a question of construction concerning the demurrage provisions of a sale of gasoil, and the cross-appeal concerns a question of the award of interest.
3. The background of the appeal is briefly as follows. By a contract dated 3 February 1993 the claimant, Galaxy Energy International Limited ("Galaxy"), sold a parcel of gasoil to Bayoil Limited cif Port Banias, Syria. The cargo was in the event carried by the mt "Ama Ulgen". The defendant, Bayoil SA ("Bayoil"), is the successor in title of the buyer, Bayoil Limited, and it is common ground that it is liable for any demurrage due under the contract.
4. Galaxy's claim was for some 12 days' demurrage in the sum of US$130,155.90. There is no dispute in this court, nor was there any dispute in the court below, as to the quantum of that demurrage claim. The issue arises out of clause 11 of the sale contract which provided as follows:

"Demurrage as per charterparty but recoverable to the extent that same can be recovered from Banias terminal."

5. For purposes of that clause Banias Terminal referred to the Syrian storage and distribution petrol products company, Mahroukat. Mahroukat is one of three state owned entities, the other two being Sytrol and Scotraco, involved in the import and export of petroleum products in Syria. Bayoil sold the cargo on to Mahroukat under a contract number 1/93, dated 14 January 1993, which incorporated the Sytrol general conditions, clause 6 of which provided:

"In case vessels are delayed in Buyers port without a justified cause Buyers shall pay to Sellers the demurrage according to Worldscale and C/P conditions."

6. It was common ground on the pleadings below that the effect of clause 6 was to provide for demurrage as per charterparty.
7. Clause 14 of the Sytrol general conditions provided for arbitration on the International Chamber of Commerce Paris rules before three arbitrators in Damascus, Amman or Beirut. There was no express clause relating to the governing law of the sub-sale. It is accepted that demurrage in the sum of US$130,155.90 would have been due to Galaxy if Bayoil had recovered demurrage in that sum from Mahroukat and it is also common ground that Bayoil has recovered no demurrage from Mahroukat. It is clear that Bayoil made quite some efforts, at any rate up to June 1994, to recover demurrage from Mahroukat. In the period up to June 1994 there were four meetings between Bayoil and Mahroukat. However, since June 1994 Bayoil's efforts have been only desultory and at the claimant's prompting. In particular, no arbitration was ever commenced against Mahroukat.
8. Mahroukat's position in relation to the demurrage claim against it has essentially been that, while it has not accepted the claim, it has given no positive reason for declining it other than a cross-claim against Bayoil under a later gasoil contract in 1993, contract 12/93. That cross-claim was disputed by Bayoil both on the ground that that contract was with a different party, namely Scotraco, and that it was time-barred. In the event, however, the issue on the cross-claim was never resolved.
9. Judge Knight, in his judgment, after setting out the basic facts, referred to the essential argument between the parties. He referred to the fact that Mr Michael Ashcroft, who appeared below as he has done again in this court on behalf of Bayoil, argued initially that Galaxy could not recover unless and until Bayoil recovered from Mahroukat. The argument was that the words "can be recovered" in clause 11 should be read as "is recovered". The judge then said that, as he understood it, that position was then modified because Mr Ashcroft acknowledged that some implication would be necessary to reflect the party's common intention that Bayoil could not simply sit on its hands and do nothing to prosecute the claim against Mahroukat. But, submitted Mr Ashcroft, that implication would be satisfied by Bayoil assuming an obligation to present the claim to Mahroukat and demand payment, which Bayoil had done. Thus Galaxy could only succeed if Bayoil was bound to commence and prosecute proceedings against Mahroukat, but such an implication could not be justified.
10. Mr Andrew Baker, who similarly appeared both below and in this court, submitted on the other hand, that Bayoil could only defend the claim if it could demonstrate that it had exercised due diligence to effect recovery; and that was the implication contended for by Galaxy below. On the facts, Mr Baker submitted that due diligence had not been exercised by Bayoil essentially on the basis that the claim was undisputed subject to the cross-claim. The judge accepted Mr Baker's submission as to the implication to be made in the sale contract. He supported that conclusion on the basis of a case to which I shall have to make further reference below, Socap International Ltd v Marc Rich & Co AG [1990] 2 Lloyd's Report 175. On the facts, there was a dispute as to whether the only relevant period to examine was that up to the time of commencement of Galaxy's claim in these proceedings. The judge decided that issue against Mr Ashcroft's submission to that effect, and looked at all the facts before him. He said:

"It seems to me that I have to consider how the evidence stands in regard to the question whether Bayoil used due diligence to effect recovery of demurrage. That evidence is contained in the documents before me, and the affidavit of Mr Elias, and the exhibits thereto. (Counsel have also provided helpful chronologies). In the light of this it seems to me, as it did to Hobhouse J, in Nissho, that in the present case nothing turns upon the burden of proof. If I am wrong about this I shall assume, in Mr Ashcroft's favour, that the burden lies upon Galaxy."

11. In placing the burden of proving that Bayoil had not exercised due diligence on Galaxy, the judge was certainly not being unfair to Bayoil. The issue as to burden of proof may depend on whether the proviso"but recoverable..." etc is properly to be regarded as part of the definition of Bayoil's obligation to pay demurrage, in which case the burden would, I suppose, be on Galaxy, or whether the proviso is a true exception, in which case the burden of proving that it had exercised due diligence would rest on Bayoil. It is unnecessary to resolve that question.
12. The judge then turned specifically to the facts, accepted that up to mid-1994 Bayoil had acted diligently in prosecuting the claim for demurrage against Mahroukat but found that thereafter Bayoil was at fault in not carrying through the threat of proceedings contained in its telex to Mahroukat of 15 June 1994. He said:

"There was no obstacle to Bayoil commencing proceedings against Mahroukat. No explanation for not doing so has been given, save for the "CALAY" cross-claim, and the overage insurance premium claims. The latter have been accepted by Bayoil."

13. He therefore concluded that he accepted Mr Baker's submissions on the facts, as on the law, and found that Bayoil had failed to exercise due diligence to effect recovery of demurrage from Mahroukat, and that demurrage was, therefore, payable by Bayoil to Galaxy pursuant to clause 11. I shall come to the question of interest raised by the cross-appeal below.
14. Judge Knight gave permission to Bayoil to appeal on the question of the correct construction and implication to be made concerning the provision at clause 11. Pursuant to that permission, Bayoil filed a notice of appeal setting out its case on what it submits was the judge's error of law in implying a term into the contract requiring Bayoil to exercise due diligence to effect recovery of demurrage, and, in the circumstances, requiring Bayoil to commence and prosecute legal proceedings against Mahroukat in order to recover demurrage. The notice states that such an implied term was unnecessary to give business efficacy to the contract and was not so obvious as to go without saying. On the contrary, upon a proper construction of clause 11, Galaxy could recover demurrage only when and to the extent that Bayoil recovered demurrage from Mahroukat, and the only term which was required to be implied into the contract was one which required Bayoil to present a demurrage claim to Mahroukat and demand payment.
15. In the course of his submissions before this court Mr Ashcroft requested permission to amend his notice of appeal to include submissions on the factual question of whether, upon the basis that an implication of due diligence or reasonable efforts was to be made in the contract, that requirement had been complied with or not. The submissions which he wished to make were indicated in his skeleton argument at paragraph 26. Nevertheless, permission so to amend his notice of appeal was refused him by this court in the course of his submissions. There was nothing in the judge's permission to appeal below which foreshadowed such an appeal on the facts, nor was there anything in Bayoil's notice of appeal which did so. If in these circumstances this court were to permit a complete re-opening of the facts below there would seem to be little reason why last minute applications of this kind at the appeal hearing itself would not be made and given in any case. Permission was therefore refused.
16. Before this court, as below, Mr Ashcroft's primary submission was that the words in clause 11 "can be recovered" should be construed as "is recovered". He relied on Socap v Marc Rich to support that submission. His second submission, however, was that he would accept that the contract was subject to an implied term imposing upon Bayoil the obligation to present a claim for demurrage and demand payment. Thirdly, however, he was prepared to accept that such an implied term could be put in terms of Bayoil's obligation to use reasonable efforts to recover the demurrage claim from Mahroukat. Subsequently, in argument, he conceded that this third way of putting the matter, an obligation to use reasonable efforts, was the same as an obligation to use due diligence. He made clear, however, that, in making such concessions, he still wished to submit that in the circumstances of this contract no implication, whether put in terms of reasonable efforts or in terms of due diligence, could have a content which obliged Bayoil to any greater extent than the presentation of a claim and the demand for payment, and in any event could not have a content which amounted to an obligation to bring and prosecute proceedings against Mahroukat. It seems to me that at the end of the day all these three submissions amounted to the same thing, which was that Mr Ashcroft accepted that some implication had to be made or some gloss put upon the true construction of the contract, with this qualification, that he also submitted that, as a matter of law, no such implication could require more than the presentation of a claim and a demand for payment.
17. In the circumstances it is perhaps unnecessary to say that, in my judgment at any rate, the words in clause 11 "can be recovered" do not mean the same as "is recovered" and that therefore Mr Ashcroft's primary submission is an impossible one.
18. To explain why that submission was made and at the same time accompanied, as it was, by an acceptance that some implication had to be introduced, it is necessary to say something further about Socap v Marc Rich, to which I now come. That was a case heard by Saville J, on appeal from an arbitrators' award. The clause in that case read as follows:

"Demurrage as per Sonatrach GTCs. However Buyer shall not be entitled to recover demurrage from Seller except to the extent that the Seller is able to recover such demurrage from his Supplier and Seller shall not be obligated to pay any amount in excess thereof."

19. In their award the arbitrators had construed the words in that clause "is able to recover" as having the same effect as "recovers". However, they did so in the context of also finding that an implied term would have to be attached to that construction of the clause, namely, "that the sellers would use their best endeavours to pursue their rights against their suppliers in respect of demurrage" (see at 176).
20. On appeal Saville J was faced by a very narrow submission on construction from Mr Young, who appeared for the appellant. In effect, Mr Young submitted that recovery of demurrage was justified provided that there was at the time when the demurrage was being incurred nothing in law or in fact which would, in theory, prevent the accrual of that demurrage against the supplier. Faced by the choice between that narrow submission on the construction of the clause and the construction favoured by the arbitrators, Saville J accepted the construction of the arbitrators. He said (at 177):

"The words 'is able to recover' read in context are perfectly capable of meaning 'recovers'. That meaning allows the clause to operate in a clear and simple way. If of course the sellers fail to exercise due diligence to effect recovery of demurrage from their suppliers, then the buyers would doubtless have rights against them on the basis that it must be implicit that the sellers will do their best to recover demurrage from their suppliers."

21. Therefore Saville J's construction of the clause was tied, as were the arbitrators' conclusions in their award, together with the implication of a term of due diligence. The appeal therefore failed.
22. In the present case, however, this court was not faced with the limitations of an appeal from an arbitration award, nor with the narrowness of submission that Mr Young there presented to Saville J. It seems to me that the words "can be recovered" are not the same as "is recovered" and that that is reflected in Mr Ashcroft's concession that some implication must be made. The question therefore is, what implication?
23. Mr Ashcroft also relied upon UBH (Mechanical Services) v Standard Life unreported, 13 November 1986, a judgment of Rougier J in which that judge, faced with a clause which required the use of reasonable endeavours, held that reasonable endeavours meant something appreciably less than best endeavours and, on the particular facts of that case, did not require the commencement of legal proceedings. I am quite happy to deal with this appeal, as has Mr Ashcroft, on the basis that the implication is one of reasonable efforts or (its equivalent) due diligence, rather than one of best endeavours, leaving on one side whether or not best endeavours adds anything further to the former implication. I do not think, however, that I am assisted by any consideration of the particular facts of Rougier J's case, which were quite different.
24. In my judgment the correct analysis of clause 11 is not such as to impose upon Bayoil a true obligation to use due diligence, but rather that the words "can be recovered", upon their true construction, mean "can with the exercise of due diligence be recovered". It is in that sense that one can speak of an implication of the use of due diligence. An analogy I have in mind is the phrase "latent defect". It is well established in maritime law that the words "latent defect" mean a defect which cannot, with the exercise of due diligence, be discovered. It is up to Bayoil to decide how it wishes to deal with its contract partner, Mahroukat, but, if it fails to use what a court might subsequently decide was the proper due diligence, then it is at risk of being obliged to pay the demurrage otherwise due even though it has not, in fact, made recovery from Mahroukat. The concept of due diligence is used to define whether the demurrage "can be recovered" from Mahroukat.
25. I return, therefore, to Mr Ashcroft's submission that his implication of reasonable efforts or due diligence cannot, as a matter of law, amount to a requirement of the commencement of litigation, but should, as a matter of law, be confined simply to a presentation of a claim and a demand for payment. In my judgment that is an unlikely construction, and, against the ordinary background of the factual material in the case relating to the making of this contract, an impossible one. It is inconceivable that Galaxy would have put its ability to recover demurrage from Bayoil so completely into Bayoil's hands, especially when Bayoil was, of the two parties, that with the specialist relationship with Mahroukat. There was simply nothing to suggest a willingness on Galaxy's part to put itself at risk in the way suggested.
26. Mr Baker, in his skeleton argument, gave a counter example. Suppose Mahroukat expressly acknowledged its liability to pay the demurrage claim but asked for three months grace in paying it: would Bayoil have exercised due diligence if it took no further action beyond its original presentation of claim and demand of payment? Would the implication of due diligence require no follow up? In my judgment the question answers itself. The implication of reasonable efforts or due diligence is an entirely familiar implication of law. It is the typical implication where there is some lacuna in the contract which has, as a matter of business efficacy, to be filled in, and the courts fill in the gap on the basis of an implication of reasonableness. It is seen in many different situations - the implication of payment of a reasonable price, the implication of something having to be done in a reasonable time, and so forth. Although the implication is, as far as it goes, imprecise, it nevertheless has a perfectly familiar and ascertainable objective content. The usefulness of its imprecision, as far as that goes, is just that, that in circumstances where the parties have left a lacuna, possibly because, if they had tried to fill it, they would not have been able to agree on the exact terms with which to fill it, they are left with a term which they could easily agree upon, a term as to which they would have said "Of course!" if it had been raised by the well known officious bystander, and the content of which is left for another time to decide, perhaps by way of the parties' own agreement, but in case of necessity for the determination of court or arbitrator. It is very unlikely in such situations that the parties would instead have agreed with an officious bystander, if he had sought to put to them some much more fact-specific implication, such as "This merely requires the presentation of a claim and demand for payment, does it not?" or "But of course it is agreed, is it not, that this does not require the commencement of legal proceedings?" In my judgment, these considerations apply as a matter of generality; but also, if one asks the question, What is there about the particular facts of this contract at the time when it was made that should lead in some different and unusual direction? - the answer is difficult to find. There is nothing in the judgment below which would suggest a basis on which to depart from the normal implication of reasonableness. There is nothing to support the, in my judgment, absurd limitation that would require merely a presentation of claim and demand for payment and nothing more. There is, to look at the other end of things, nothing to suggest that the parties would have agreed that in any event there was no requirement to commence proceedings.
27. The judge below thought that the implication of due diligence was both necessary and represented "a degree of commercial balance between the parties." That phraseology was criticised by Mr Ashcroft, but, in my judgment, the judge meant nothing more by those words other than that, seeking, as he sought to achieve, an objective balance in the question of what implication to make, it was reasonable to imply an implication of due diligence. It is of course standard law that any implication has to be both necessary and reasonable. In my judgment that is precisely what the judge was finding in that passage of his judgment, that the implication of due diligence was both necessary and reasonable as between the parties.
28. Although the question of construction for the court is what is the implication to be made as at the time of contract - and for that purpose the court does not look to post-contractual events - nevertheless the fact that, when the judge did consider what transpired and the question whether or not the absence of commencement of proceedings was reasonable between the parties, he came to the conclusion that he did certainly gives no assistance to Mr Ashcroft upon his attempted limited construction of clause 11.
29. For these reasons I, for myself, would dismiss the appeal.
30. I turn to the cross-appeal. When it came to argue before the judge the date at which interest on the demurrage held to be due should start, Mr Jarvis, who on that occasion appeared for Galaxy, put the matter in this way:

"Insofar as the date from which interest accrues is concerned, in my submission, that date should be the same date as when demurrage became due under the charterparty, not the date from which the defendant failed to exercise due diligence, nor indeed the date from which the defendant ought to have recovered demurrage if due diligence had been exercised. This follows from the proper operation of clause 11 of the contract as interpreted by your Honour in your judgment.

Clause 11 falls to be considered in accordance with your judgment in three limbs. The first limb is 'demurrage as per charterparty'. The second limb is 'but recoverable to the extent that same can be recovered from Banias terminal'. The third limb is the implied term that buyers will exercise due diligence to effect recovery of demurrage. In my submission, the implied term at limb three refers back to the second limb. In other words, if there is a breach of the implied term, the consequence is that the buyer cannot rely on the proviso in the second limb, and one then is left with the first limb, namely demurrage as per charterparty. So on a true construction the second limb only operates as a proviso and if it does not come into play, as it does not in this case, one then is left with demurrage as per charterparty, and that is from the date of discharge."

31. Mr Jarvis then sought to support that analysis by reference to commercial common sense and that of policy. He then made it clear that while that was his primary case, nevertheless, if the judge was against him on that, he had a secondary submission, namely, that interest should at any rate run from the date from which the judge had found that there had been a failure to exercise due diligence, namely mid 1994, and, in any event at the very latest from 18 months after that, from the beginning of 1996. Bayoil's counsel, however, went for a date well into 1997.
32. In giving judgment, Judge Knight simply appears to have overlooked Mr Jarvis' primary submission, for he said:

"The claimants say that in this case interest should be awarded from mid 1994 on the basis that that is the point up to which I was satisfied that the defendant had exercised due diligence."

33. Then he referred to the very final fall-back submission of Mr Jarvis.
34. Having overlooked Galaxy's primary submission on the question of interest, the judge failed to take into account all the facts and circumstances in the exercise of his discretion, and it therefore falls to this court to exercise its discretion anew. In my judgment, the analysis that Mr Jarvis submitted to the judge is substantially correct. Inasmuch as Saville J might perhaps be read as suggesting that there is, instead, a contractual obligation of due diligence in such circumstances, which gives rise to a secondary obligation to pay damages if it is broken, I would, with great respect to Saville J, disagree. But I am not sure in any event that that is what Saville J was saying. It made no difference in that case to decide whether the words "duty" and "obligation" were used in the loose sense in which they are often used (for instance) in the context of the duty of mitigation, or whether they were used in the sense of a contractual obligation whose breach sounds in damages. In present circumstances, where there has been a failure of due diligence, it is simply that, what can for convenience be called the due diligence proviso built into clause 11 comes into effect and prevents Bayoil saying that the demurrage could not be recovered. In my judgment, Mr Baker advancing his cross-appeal is therefore right to say that, prima facie, the entitlement of demurrage goes back to the time at which demurrage accrued. In this case that would be February 1993.
35. Mr Ashcroft nevertheless submitted that that should not be the case where the judge had found that there was no failure of diligence down to June 1994. It seems to me, however, that that is beside the point where there has been a failure of due diligence, which means that Bayoil is not entitled to avail itself of the proviso or defence which would have protected it if it had exercised due diligence.
36. Mr Ashcroft also submits that Mahroukat could, albeit late in the day, have paid the demurrage due before legal proceedings had been started and therefore without any interest added on top, and that it would be wrong in those circumstances for Bayoil to have to accept a greater obligation than Mahroukat might have been under. But those are not the facts of the case. Mahroukat has not paid, albeit late. It is clear from the findings below that Mahroukat was not willing to pay unless perchance proceedings were brought against them.
37. Mr Ashcroft finally submits that there is no evidence that under the proper law of the Bayoil/Mahroukat contract, whatever that proper law may have been, interest would also have been payable at the end of legal proceedings. But in the absence of evidence to the contrary it is necessary to assume that foreign law is the same as English law, and, on that basis, Mahroukat certainly would be liable to interest in the normal way, following the commencement of legal proceedings.
38. In the end, the obligation to pay demurrage as per charterparty in this case must be accompanied in principle by an obligation to pay interest upon that demurrage in the ordinary way. In principle, that could go back to the time when the demurrage was incurred, or, at any rate, some period after that which allowed for the calculation and collection of the claim to demurrage. In this case Mr Baker has made it clear that he only seeks interest from 30 August 1993, which represents the date upon which Galaxy was required to pay demurrage under its charterparty. Therefore, in my judgment, the order for interest that I would make is interest on the demurrage of US$130,155.90 from 30 August 1993.
39. LORD JUSTICE BUXTON: The form of words expressly adopted by the parties in clause 11 of the sale contract were whether demurrage "can be recovered" from Mahroukat. That expression, in my judgment, means, and was intended by the parties to mean what it says. It does not say, nor does it mean is in fact factually recoverable. The only argument advanced for reading that phrase to mean "is recovered", was on the basis of Saville J in Socap had accepted a finding of arbitrators that an expression "is able to recover" was, as he put it, perfectly capable of meaning "recovers".
40. My Lord has already pointed out the limited context in which Saville J was dealing with that question. But in any event I do not feel able to be driven by his judgment to read clause 11 of this contract in the way that we were asked to do. Firstly, a decision of a judge, however imminent upon a different form of words in a different contract, cannot compel this court to a conclusion on the contract that it has before it. But secondly, if comparison is in order, for my part, I find it a good deal easier to read the phrase, "is able to recover" as being capable of meaning "recovers", than to read the phrase in our contract "can be recovered", as meaning "is recovered". In my judgment, therefore, on a simple wording of the contract the primary submission of the appellant fails.
41. How then, operating this contract, is the decision to be made whether demurrage can be recovered? The most prominent consideration affecting such a decision is, in my judgment, the fact that Bayoil were the people attempting the recovery and who had control of and were implicated in the operation to which the contract refers. It would, therefore, be patently unreasonable for Bayoil simply to do nothing and say, therefore, for that reason that it was not shown that demurrage can be recovered; and it was no doubt considerations of that nature that led Mr Ashcroft to accept that, even on the construction which he argued, an obligation rested upon Bayoil in connection with its dealings with Mahroukat.
42. However, the obligation for which Bayoil in fact contended, set out in paragraph 3(b) of the notice of appeal, comes, in my judgment, very close indeed to being an obligation to do if not nothing then very little. And I would respectfully agree with the characterisation that my Lord directed at it in his judgment. The sensible, fair and reasonable obligation in this connection is, in my judgment, that which the judge identified; that due diligence should be used to recover the demurrage. Further, it should be noted that the judge in his judgment not only found that, but also accepted the whole of the submissions of Mr Andrew Baker who appeared for Galaxy, which included the contention set out by the judgment in paragraph 7 of his judgment that if such diligence had been exercised, full recovery would indeed have been paid. The obligation of due diligence being one that was plainly open to the judge and is plainly sensible in commercial terms, and there being no appeal against his finding that due diligence had not been exercised, in my judgment, this appeal must necessarily fail, and I would dismiss it on those grounds in addition to the grounds set out in my Lord's judgment with which I entirely agree.
43. So far as the cross-appeal is concerned I entirely agree with everything that has fallen from my Lord and I have nothing to add to it.
44. LORD JUSTICE SCHIEMANN: I agree with both judgments and the disposal of the case proposed by my Lords, and only add a few sentences on the appeal itself. As it seems to me, even if one assumes an incontrovertibly valid counterclaim by Banias terminal against any claim for demurrage, that does not have the effect that, for the purposes of clause 11, less demurrage can be recovered by Bayoil from Banias terminal. It merely means that the demurrage, or part of it, is used to pay for the cross-claim. One merely has to consider the position which might have obtained if the cross-claim had been paid earlier. In such circumstances this matter simply could not have been argued that way.
45. For the reasons given by my Lords I agree this appeal should be dismissed, the cross-appeal should be allowed, and that interest should be payable from 30th August 1993.
(Appeal dismissed; cross-appeal allowed; costs subject to detailed assessment; interest payable from 30th August 1993).