England and Wales High Court (Admiralty Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMIRALTY COURT
ADMIRALTY ACTION IN REM AGAINST
THE SHIP "TYCHY"

		11th October 2000

The Hon. Mr. Justice David Steel

Introduction

1. This consolidated action in rem concerns a claim in respect of unpaid slot charter freight amounting to about US$5 million which the Claimant ("MSC") contends is owed to it by the Defendants ("POL"), the owners of the vessel Tychy, pursuant to two agreements made between the parties dated the 17^th May 1993 called respectively the "Memorandum of Decisions of ACL/MSC/POL Regarding Their Slot Charter Agreement Under The Trans Atlantic Agreement FMC No. 202-011375" and the "Memorandum of Decisions of MSC/POL Regarding Their Slot Charter Agreement Under The Trans Atlantic Agreement FMC No. 202-011375" (the "MOD'S").
2. The MODs were subsequently varied or modified by two further written agreements. The first was an agreement dated the 12^th August 1998 executed by MSC and by a subsidiary of POL called Pol Atlantic (POL-A") called "New Agreement for Slot Payments between MSC Mediterranean Shipping Company S.A. (MSC) and Pol Atlantic (POL)" (the "August Agreement") which provided that the minimum number of slots to which POL (as therein defined) was committed under the MODs be reduced, upon an undertaking to discharge the sums then outstanding in instalments over the following five months. The second was an agreement dated the 13^th February 1999 executed by MSC, POL and POL-A called "Addendum to Agreement dated 12^th August 1998" (the "Addendum") which provided that the sums then outstanding would be discharged within 5 weeks from the proceeds of sale of Tychy and that, in the meantime, there would be a further reduction in the minimum number of slots, accompanied by payments of not less than US$100,000 per week.
3. In the event, only one weekly payment was made under the Addendum and, on the 17^th March 1999, MSC issued a writ in rem (1999 Folio No. 394) for the instalments then outstanding (namely US$300,000). Tychy was arrested that same day. On the 20^th March, when the deferred sum became payable, a second writ in rem (1999 Folio No. 414) was issued and served. By that time POL had already issued a notice of motion seeking an order that the warrant of arrest be discharged. There were two grounds relied upon: first, that POL was not the "relevant person" for the purposes of Section 21 of the Supreme Court Act 1981 since it was POL-A, and not the owners of Tychy, POL, that was liable in personam and second, that a slot charterer was not a "charterer" for the purposes of the section.
4. The first of these issues relating to jurisdiction was left in abeyance, the implications of which are a matter of controversy. However, with admirable speed, the second of thee issues was dealt with in a hearing before Mr. Peter Gross Q.C. sitting as deputy judge of the Admiralty Court. The hearing began on Friday the 19^th March and was completed on Monday the 22^nd March when the deputy judge ruled in the Claimant's favour. His reasons were handed down on Friday the 26^th March and the Defendants' appeal was heard and dismissed by the Court of Appeal on Wednesday the 31^st March (see The Tychy [1999] 2 Lloyd's Rep. 11). A petition for leave to appeal to the House of Lords was refused on the 4^th November 1999.
5. In their skeleton argument prepared for the purposes of the hearing before the deputy judge, the Defendants explained the basis upon which it was contended that POL-A, and not POL, were liable on the claim. It was submitted that a letter dated the 1^st December 1995 from POL to MSC operated as a novation of the MODs, whereby POL-A replaced POL as a party. It was no doubt in anticipation of that contention that the Statement of Claim served on the 6^th April 1999 pleaded, in the alternative, that if POL-A was indeed substituted for POL on the 1^st December 1995, then POL was restored as a party to the MOD's by virtue of the Addendum or, in the further alternative, was thereby constituted as guarantors of POL-A's obligations thereunder.
6. The Defence and Counterclaim was served on the 30^th April 1999. This advanced a somewhat different case on novation. The plea was to the effect that the MODs were novated by an exchange of telexes between MSC and POL on the 7^th March 1996 leading to the replacement of POL by POL-A with effect from the 21^st March 1996 (or that there was an estoppel by convention to the same effect). The particulars of that allegation relied primarily on the invoicing arrangements introduced, and the routing of the payments made, as from that date. (Reliance on the letter of the 1^st December 1995 was restricted to a reference to it in the Rejoinder as furnishing context to the March telexes.) In and insofar as on its proper construction the Addendum imposed any obligation on POL whether as party to the MODs or as guarantor (which was denied), such, it was pleaded, was an erroneous record of an earlier oral agreement between the parties. Accordingly, by counterclaim against MSC and POL-A, POL sought rectification of the Addendum, a remedy to which they contended they were entitled by reason of a "mutual error" as to the identity of the parties to the MODs as specified in the August Agreement and as expressly confirmed by MSC in the meting prior to the Addendum.
7. The Defendant's case as to rectification underwent something of a sea change on the eve of the trial when their skeleton argument advanced a case of unilateral mistake on the part of both POL and POL-A, brought about by sharp practice on the part of MSC in the form of surreptitiously reintroducing POL as a party to the MODs and then using subtle and diversionary tactics to obtain the signatures of the Polish delegation without their reading the document concerned properly or at all. By the end of the trial the matter came full circle, with the Defendants abandoning any reliance on unilateral mistake and resurrecting the allegation of mutual mistake, albeit this time without any attempt to make good the pleaded allegation that there was an express pronouncement by MSC at the relevant meeting that it perceived POL-A and not POL as being the other contractual party.
8. I should revert briefly to the Defendants' alternative ground for disputing in rem jurisdiction. It is their case that, even absent rectification, the only liability that POL could arguably incur under the Addendum was as guarantor. Such a liability is not, so the argument ran, enforceable in rem and thus the arrest and all subsequent proceedings were invalid. The Claimants contend that no objection can now be taken to jurisdiction but as a fall back position have issued in personam proceedings against POL in the Commercial Court (2000 Folio No. 544). The Defendants reserve their position as regards those proceedings in respect not only of the costs of the in rem action but also in respect of jurisdiction, since they assert that the only appropriate forum for that claim is Poland by virtue of the Lugano Convention. It has been agreed that these issues should be reserved pending the outcome of this judgment.

The evidence

9. As might be expected, there was a wealth of contemporary documentary material relevant to the issues. In addition the parties put before the court a large number of witness statements. To the extent that they recounted the chronology of events, they were in large part uncontroversial. The principal exception to this was the various accounts of the circumstances surrounding the execution of the Addendum. The only other area of marked disputation centred on the implications of the involvement of POL-A in the North Atlantic service and, in particular, the difference of view between the witnesses as to whether the MODs had been novated by way of POL-A being substituted for POL. That evidence was not strictly admissible, save in the context of the pleaded case of conventional estoppel, and was in any event only of marginal assistance.
10. A number of witnesses gave oral evidence. They were invited to concentrate on matters material to the claim for rectification of the Addendum (an issue, which the Defendants conceded, only arose in the event that they succeeded on their case on novation or estoppel). The Claimant called Mr. Gianluigi Aponte, its President, together with Mr. Pasquale Formisano, its Commercial Director. They both participated in the meeting that led to the Addendum and indeed Mr Formisano executed it. Likewise, the Defendants called the two signatories of the Addendum for POL and POL-A respectively, Mr. Jerzy Barski, a director of POL and a member of the supervisory board of POL-A, and Mr. Aleksander Rubin, Chairman of POL-A. In addition the defendants called Mrs. Elzbieta Konkolewska a director of POL-A who was directly involved in the in-house reaction to the Addendum. The Claimants also called Mr. Milolaj Osinski, formerly a member of the Board of Directors of POL-A who later joined the Claimant organisation in May 1998. The other two witnesses were Mr. Wlodzimierz Pilszyk, operations director of POL-A, and Mr. Giovanni Aprea, a line manager with the Claimants. The evidence of these latter two primarily focused on matters pertaining to damages.

The background

11. It is necessary to outline the background in some detail so as to set the scene for the arguments on novation, estoppel and rectification. The starting point is the MODs. They were in similar form, one relating to cargo shipments from Europe to the northern half of the Atlantic coast of the United States and the other between Europe and the southern half of the Atlantic coast of the United States. The only other significant difference between them was that Atlantic Container Line AB ("ACL") was a party to the first but not the second. Each of the agreements defined as POL as "Polish Ocean Lines and/or POL-America Inc." The MODs contemplated that MSC (or ACL) would operate the vessels with POL participating by way of slot chartering of specific container spaces in those vessels. Thus Clause 6 of the MSC/ACL/POL MOD provided as follows:-

"6.1 Slot Chartering POL will charter from Acl 350 TEUs per sailing in each direction on a "whether used or not" basis at the basic slot price per Schedule 2. POL will charter from MSC 450 TEUs per sailing in each direction on a "whether used or not" basis at the basic slot price per Schedule 2. Notwithstanding the above financial allocations the vessel operators will have the right to swap up to 100 TEUs of POL cargo on each other's vessels whenever necessary."

12. In respect of payment for these slots, by the provisions of Schedule 2, POL were extended a credit term of 21 days after sailing from the first outward bound port, with a late payment being subject to an interest rate of one-half percent per week and with rights of lien being exercisable in respect of any prolonged delays. The figures concerned were substantial. For instance, the minimum slot allocation for the Northern route called for a payment by POL of about US$192,000 per week to ACL and US$247,000 to MSC.
13. However, the North Atlantic trade was notoriously unprofitable and a pattern soon developed of POL falling substantially in arrears on payments due to the vessel operators. By the end of September 1993, Mr Formisano was already notifying POL that some US$ 1 million was outstanding. Mr Formisano wanted matters brought up to date before he would consider proposals by POL that they be given more extended credit terms. But it was not until late November 1993 that the outstanding sums were paid, this being achieved in a manner which was also to become a familiar pattern, namely the sale by POL of one of its vessels.
14. By 1994 the Polish economy was in the course of transformation from socialist state control to a free market. Consistent with this, POL began to restructure itself, with a range of subsidiaries becoming responsible for various shipping activities formerly conducted by the state company. By an agreement dated the 26^th June 1994 between POL and a subsidiary called POL-EURECA, it was agreed as follows:-

"1. Subject of Agreement

The subject of the Agreement is concerned with handling and managing, in the name and on behalf of POL, the POL shipping activity in Northern American Line service....

2 Scope of Services....

2.2 Disposal of POL's (own or chartered) tonnage...

2.3 Negotiation and conclusion of transport contracts...

2.12 Participation in shipping conferences and other ship owners arrangements with the participation and approval of POL

2.13 Negotiating with other shipowners to maintain various types of mutual co-operation and common services with the participation and approval of POL...

POL....

5 Employment

5.1 Employees hired in POL services specified under point 1 hereof as of June 30^th 1994 shall be transferred to the company by virtue of the three party agreements between POL, the employee and company..."

15. One of the principal employees thus transferred from POL to POL-EURECA was Mr. Mikolaj Osinski and the bulk of the communications between MSC/POL/POL-EURECA were thereafter effected by Mr Formisano and Mr Osinski respectively. By April 1994 POL was once again substantially behind in payments for slots. Arrangements were made for a temporary freezing of some US$ 2 million that was outstanding to be covered by eight instalments of US$ 250,000 so as to achieve clearance by the end of the year. As part of the ongoing negotiations, following a meeting in Geneva in November 1994, it was agreed that, once POL had cleared the outstanding debt, MSC would look favourably upon a proposal that future settlements by POL should be achieved for eastbound and westbound traffic separately. At that stage the amount outstanding was still in excess of US$ 1 million and POL had undertaken to pay off that sum in 22 weekly instalments of US$ 55,000 each.
16. The next event of significance was a meeting between the parties in Gdynia in May 1995. The principal participants at the meeting were Mr Formisano for MSC, Mr Hapko for POL (at that stage the Executive Director-Shipping) and Mr Osinski for POL-EURECA. The outcome of the meeting was an increase in the allocation of slots to POL, albeit at a slight reduction in the slot price, together with acceptance in principle by MSC that POL should enter the service with one of its own vessels. In addition there was a discussion of a topic that had not been on the original agenda. This related to a proposal on POL's part to introduce a subsidiary as the operator of the trans-Atlantic trade under the MODs in place of POL. There was some dispute as to the timing and content of the discussions on this topic but it became common ground that the minute of the meeting dated the 19^th May accurately recorded the outcome as follows:-

"4. Name of party in MOD. MSC agreed that if in place of POL, POL's subsidiary becomes the operator on the trans-Atlantic trade this subsidiary will become the party of MOD instead of POL. POL to provide MSC with back letter guaranteeing the fulfilment of the MOD."

17. Given POL's own poor payment record, made good from time to time by sales of assets, it cannot have been surprising that MSC were insisting on guarantee of the subsidiary's performance. Indeed, by August 1995 POL was in arrears again, to the tune of US$2.5 million, and, in response to a threat not to lead any further POL containers, POL responded by promising to make good the deficiency out of the sale proceeds of 3 vessels. Despite this plan, in due course POL were forced to seek agreement to $2 million of the outstanding sum being frozen until the end of December 1995, upon the basis that payments of US$ 400,000 per month would be made thereafter.
18. In an internal memorandum of POL dated 25^th September 1995, a review of POL's participation in the North Atlantic container services was undertaken. The memorandum made the proposal that the service should be conducted by separate legal entity to be called POL-GAL: this was to be a reconstitution of POL-EURECA. This company was to conduct the North Atlantic service "in its name and on its own account" as from January 1^st, 1996. The memorandum nonetheless expressed some reservations about the prospects for POL-GAL in this new role having regard to "uncertainty about the behaviour of the service partners MSC/ACL", "POL's external indebtedness" and "poor POL standing".
19. It is clear however that the broad proposal found favour within POL and, in late 1995, steps were taken to inform interested parties as to the future role and participation of POL-GAL, whose name was revised to POL-ATLANTIC. The announcement was made to MSC in a letter referred to in paragraph 5 above written by Mr Hapko (now Chief Commissioner of POL), addressed to Mr Formisano and also to Mr Aponte, dated the 1^st December 1995 which read as follows:-

"Further to our previous discussion, we would confirm that beginning January 1^st, 1996 POL will transfer its North America services to a newly incorporated company POL-ATLANTIC which will be an autonomous entity of the Polish Ocean Lines Group.

The ownership of the new company does remain in the hands of POL, as the mother company, thus ensuring the continuation in all respects of the present agreements concluded between our companies. In particular, we would stress that all POL obligations towards your company will be paid by us in full on mutually agreed terms.

The establishment of POL-ATLANTIC is the result of POL efforts to entirely commercialise their industries in order to become more competitive in the general conditions of free market economy.

At the same time, please, take this letter as an annex to our agreement by which POL-ATLANTIC is to be officially entitled to act as the party that replaces POL in our arrangement and co-operation.

The approval of the United States Federal Maritime Commission of POL-ATLANTIC activities and operation is expected to be obtained before the 15^th inst. For good orders sake we would add that POL-ATLANTIC will substitute POL as a member of TACA and the Canadian conferences and that the present POL Agency and port/terminal/stevedoring set-up will be taken over by POL-ATLANTIC with no alteration.

Also, by this opportunity, the management of Polish Ocean Lines take pleasure in expressing sincere thanks for the close relationship and co-operation hoping the same will be maintained and still more grounded between your good selves and POL-ATLANTIC."

20. A similar letter was addressed to ACL. ACL wrote back making it plain that it was unwilling to accept a transfer or the agreement to POL-ATLANTIC "unless we receive a separate guarantee from POL for the fulfilment of all obligations." That was duly forthcoming in a letter dated the 12^th September 1995. In contrast, MSC did not reply.
21. The balance of the account between MSC and POL at the turn of the year was rather unsatisfactory. Even after taking account of the credit facility referred to above, involving monthly payments of $400,000 as from the end of December 1995, there was an additional $2 million outstanding as at the 3^rd January 1996 with a further $1.5 million falling due in the remainder of January. In the light of this financial situation, it was agreed between MSC and POL that POL's slot allocation needed to be reduced from that agreed in May 1995. The new quantities were set out in fax from Mr Formisano dated the 2^nd January 1996.
22. On the 23^rd January 1996 Mr Osinski promulgated an announcement within the POL group that POL-EURECA had been renamed POL-A and that, during January and February 1996, POL-A would conduct the management of POL's North American service "in the name and on account of POL as POL-EURECA hitherto has done". The notice also pronounced that "the takeover of the operation from POL on this route is scheduled for the 1^st March 1996". These proposals were formalised in a "General Agreement" dated 29^th February 1996 between POL and POL-A whereby it was provided that as of 1^st March 1996 POL would transfer to POL-A its obligations connected with the conduct of shipping business on the North Atlantic service to start from the 15^th March. Notably the agreement expressly provided that new contracts relating to the conduct of the business would be entered into by POL-A and that "POL would not be responsible for liabilities resulting from these contracts in any capacity except for solely as a shareholder in the company;...POL will not guarantee companies liability..".
23. Neither the agreement nor the notice was sent to MSC but, following a telephone conversation between Mr Osinski and Mr Formisano on the 7^th March, Mr Osinski sent a fax that same day headed "Subject Financial Agreement". The body of the fax read as follows:-

"In reference to our telephone conversation of today am I would like to confirm agreement reached by both parties:

1 On 08 March 1996 POL will arrange remittance of $1,731,696.76 being the overdue balance as of 10^th March 1996....

2 Effective MSC Claudia VI at Antwerp 21.03.96 and MSC Dominique XI at Antwerp 19.03.96 payment terms will be splitted for westbound and eastbound separately. The credit term to remain as per present agreement i.e. 28 days from the date of call at first loading port. This means that the credit term will be counted as follows

North Atlantic service westbound: 28 days after call at Antwerp

eastbound: 28 days after call at Boston

South Atlantic and Gulf service westbound: 28 days after call at Antwerp

eastbound: 28 days after call at Miami

3 Effective vessels as per point 2 invoices will be issued for POL-ATLANTIC (and not POL any longer) as with these vessels POL-ATLANTIC is taking over the North Atlantic service from POL which was advised to you earlier this year.

4 If above meets your acceptance please confirm by return so we can effect payment as per point 1 (tomorrow)."

24. The answer from Mr Formisano by return was in a telex headed "Re: Credit Terms". It read :-

"Many thanks your message dated March 7^th contents of which are being discussed at all internally.

We hereby confirm the agreement as per your message however this facility of extending the credit terms i.e. splitting east/westbound will be immediately be withdrawn on old system will be applied if POL fail to pay in due time the invoice as per existing date and if POL fail to pay the outstanding facility of US$800,000 due March 31^st US$400,000 on April 30^th US$400,000.

Your reconfirmation will be highly appreciated."

25. It was this exchange which formed the basis of the plea of novation referred to in paragraph 6 above. It also led to the introduction of the new accounting procedures, which underlay the estoppel plea. In short, following a request from the accounting department of POL, all new invoices were thereafter rendered to POL-A and the accounting department of MSC also began to issue updated financial position statements at regular intervals first in respect of sums outstanding from POL and second in respect of new invoices rendered to POL-A. The split straddled the two voyages referred to in the earlier fax quoted above.
26. By mid-April POL were still a long way short of having provided funds to cover all the outstandings and a further promise in that regard was made to complete payments by the end of April in the face of a threat by MSC to suspend the new credit arrangements relating to westbound and eastbound traffic. The discussions between the parties were recorded in a fax from Mr Osinski to Mr Formisano, under the heading of "payments", dated the 15^th April. It reads:-

"Following our conversation on Friday (12.04.96) I would like to suggest the following solution to our payment programme:

01 It has to be recognised that POL-ATLANTIC has started its own activity with the following vessels MSC Claudia VI, MSC Dominique XI and we at POL-ATLANTIC will do our utmost to meet all agreed payment terms and hope this will be facts and not words only.

02 As far as POL payments are concerned the following has been arranged:

$470,000 in several remittances to be effected until 17.04.1996.

03 I understand that above does not eliminate totally POL outstanding however it will reduce it substantially and in proportion to total turnover it creates a delay of one week only...

05 Pasquale I hope that you can live with such a plan and can abstain from coming back to old system as long as POL-ATLANTIC is paying on time."

27. By the beginning of May 1996 some progress had been made in reducing the outstanding sums due from Polish Ocean Lines: indeed even including the last instalment of the frozen $2 million, it was down to $700,000. However POL-A was already demonstrating an equal ability to go into deficit and the total due by the 3^rd May was £385,000, with a further $1.5 million payable over the remainder of the month. It was at this stage that Mr Klein, a financial director of POL, wrote to Mr Formisano making a proposal for the settlement of the sum due from POL. In that letter Mr Klein elaborated somewhat on the relationship between POL and POL-ATLANTIC:-

"As you are well aware, POL is now completing the process of reconstruction of its operational activities, started in 1991 with the establishing of the first operating company within the POL group.

... from the beginning of this year this process has been accelerated. The newly formed operational subsidiaries, managing Far East trade, North Atlantic trade as well as container logistics mean the completion of the whole process and transforming POL into a group of companies with a 100% or predominate interest to POL, operationally efficient and co-operating under the control of POL. As you must have noticed, POL-ATLANTIC, one of the newborn companies maintaining close co-op0eratio with you has followed the example of the elder sisters from within POL group improving its operations and maintaining stable financial position.

We are well aware of the fact that there are still outstandings in our settlements. You will appreciate that these have much diminished from the beginning of the year and POL has put much effort to cover existing indebtedness towards your good selves. The process of gradual takeover of POL operational activities by the newly formed companies has had, as an unavoidable side effect, that mainly POL income from previously maintained activity is also diminishing step by step. This effect was foreseen and was due to be bolstered by the extra funds deriving among others from external financing and partly, from the sale of assets to POL subsidiary companies.

... we hope that the proposed schedule of payments will be satisfactory to you and will not affect your co-operation with POL-ATLANTIC who from the legal point is a separate entity and from the beginning has been in line with the agreed terms with your company."

28. The response of Mr Formisano was to demand prompt clearance of the POL account. His final position was identified in a fax addressed to Mr Osinski at "POL Gdynia" dated 10^th May 1996 which required that all POL outstandings should be discharged at the latest on the 31^st May and that all POL-A invoices were to be paid promptly, failing which MSC repeated their threat not to load POL containers. Both Mr Klein and Mr Osinski responded to that fax speaking in terms of what they categorised as the agreement for the "final settlement" with POL.
29. On the 11^th June 1996 POL-A and POL entered into a "Sale of Rights Contract" supplementary to the General Agreement concluded in February. The new agreement provided for the purchase by POL-A of the intangible assets and goodwill relating to POL's interest in the North America service. The purchase price was to be the Polish currency equivalent of US$ 6.5 million. The schedule to the agreement provided for regular payment of instalments of the purchase price over the next six years. However, perhaps not surprisingly given the parlous state of POL-A's resources, it appears that probably only the first instalment was ever paid.
30. In January 1997 Mr Osinski, by now writing regularly on POL-A headed notepaper, proposed a meeting between POL-A and MSC to be held in Geneva. One of the topics in his suggested agenda was the MOD. Following the meeting, Mr Osinski wrote to Mr Formisano by letter dated the 4^th February setting out a note of his understanding of what had been agreed. At the end of a long list of items relating to operational matters, item 16 recorded "POL-ATLANTIC will prepare a new wording of MOD where original slot charter party will be replaced by Bimco slot hire." The note ended "If you are agreeable to above recapitulation will you kindly confirm it. If not please provide with your comments." Mr Formisano duly responded on the 6^th February in the following terms "Many thanks for sending us a recap of what was discussed and agreed in Geneva. We hereby confirm acceptance of your note in full except for point 16 since same is subject to mutual agreement."
31. In August 1997 Mr Osinski reverted to the topic of the MOD and on the 8^th August wrote to Mr Formisano as follows:-

"As indicated before we have signed with ACL separate MOD just between ACL and POL-ATLANTIC to July 22^nd 1997. Except schedule 3 it is the same agreement as old ACL/MSC/POL MOD with slight amendments (e.g. conference membership requirement was removed). I am today sending you via courier proposal for MSC/POL-ATLANTIC MOD which should become effective as of September 1^st of 1997. The major change is schedule 3: slot hire standard slot charter party which is adopted directly from BIMCO slot hire....For your information ACL had no problems to sign it as it is now proposed to you. Please kindly read it and let me know if you can sign it or if you wish to make any amendments."

32. As already recorded, ACL had in fact expressly refused to treat POL-A as a party to the MOD without a guarantee. In any event, the response from MSC came from a member of their claims department, to whom Mr Formisano had sent the draft MOD, making two relatively minor points of detail by way of comment. Mr Osinski reverted enquiring whether the only comments that MSC had were those intimated. Mr Formisano did not respond to that question but negotiations vis-à-vis the points raised by the claims department continued during the autumn. In the event the matter went no further.
33. In November Mr Osinski and Mr Fomrisano agreed to have a meeting in Warsaw in December. From POL-A's perspective the main item of discussion was as intimated in Mr Osinski's fax of November 13^th: "The implementation of POL-ATLANTIC's tonnage in our North Atlantic/South Atlantic and Gulf service as well as finalisation of MOD between MSC and POL-ATLANTIC, draft of which is in your hands." In fact the meeting was transferred to Geneva later on that month. On this occasion it was Mr Formisano who summarised the outcome of the meeting in a letter to Mr Osinski faxed to POL Gdynia. The major items were the provision of a buffer on each sailing over and above the minimum number of slots paid on a used/unused basis, together with a reduction in the slot price. It was also agreed that MSC would "unofficially" time-charter a vessel to POL-A for POL-A to operate in either the North or South Atlantic trade. The note concluded "other details to be mutually agreed otherwise as per memorandum of agreement actually in force".
34. In February 1998 Mr Levy an American lawyer retained by ACL, MSC and POL to make appropriate filings with the Federal Maritime Commission in the United States reminded his clients that, as he put it, the existing multi-party agreement which gave notice of the framework rather than the detail of the MODs needed to be revised to reflect what he understood to be the "name change" from POL to POL-A. Mr Formisano duly gave his written approval to that by fax dated the 4^th March 1998.
35. Shortly thereafter, Mr Osinski left POL-A and joined MSC, his negotiating role at POL-A being initially taken by Mr Wyszomirski. This development prompted Mr Aponte to wrote to Mr Hapko of POL on 22^nd April 1998, being anxious to avoid any ill feelings this development might create. His letter concluded "I wish to assure you that MSC still very much values the relationship we have with POL and does not wish this to be undermined in any way. We hope that Mike Osinski's decision to join us will not upset the existing co-operation we have established and that your business relationship can be allowed to prosper."
36. In May 1998 there was a brisk exchange of correspondence between POL-A and MSC in which POL-A expressed concern about the quality of the service being provided to them. This went hand in hand with an increasing level of indebtedness, which as at the 6^th May 1998, was just over US$ 1 million. There followed an agreement between POL and POL-A on the 11^th May 1998 whereby POL agreed to transfer funds amounting to US$300,000 that were otherwise to be paid to cover its indebtedness to another subsidiary, in exchange for POL-A taking over that indebtedness. The monies were used in reduction of the sums due to MSC. There then ensued a detailed negotiation, following a meeting between Mr Formisano and Mr Wyszomirski in Frankfurt, for a reduction in the slot price and a discount in respect of the sums outstanding. This was eventually resolved in June on the basis that the slot price would be reduced by 10 dollars and that a reduction of $230,000 should be made from the sum then outstanding which had increased to $1,554,000, the balance to be paid in 6 weekly instalments.
37. In June 1998, in a letter copied to Mr Hapko and also to Mr Barski, a Mr Wyszominski proposed a meeting with Mr Aponte and Mr Formisano. Mr Formisano was agreeable to the proposition which was in due course taken up by Mr Hapko (now designated as General Director of Polish Ocean Lines) in a letter dated the 7^th August to Mr Aponte. It read as follows:-

"Having in mind the problems which have been prevailing since several months in the co-operation between your esteemed company and POL-ATLANTIC as well as the endeavours of Mr Formisano and POL-ATLANTIC management directed towards consenting on a most favourable solution to both parties, I think - in my capacity of the General Director of Polish Ocean Lines, owners of POL-ATLATIC - that we should schedule a meeting at the earliest possible convenience... I think you will share our opinion that all aspects of our present and future co-operation (mainly economical and financial matters) as also own tonnage deployment, should be discussed and adequate determinations taken."

38. The meeting duly took place on the 12^th August. Its outcome is evidenced by the August Agreement. The document which had been drawn up by Mr Apontie on MSC notepaper recorded as follows:- "A meeting between POL-ATLANTIC and MSC was held on the 12^th August 1998 and the following agreement was reached:" (and there then followed provision for an adjustment of the minimum slots and the buffer as from the middle of August 1998 without any adjustment in the slot cost). It then went on:-

"Against the above concessions granted from MSC, POL undertake to:

1. Settle the present outstanding at 7^th August 1998 US$1,596,066 In five monthly instalments..."

It contended by the Defendants that it was highly significant that, although Mr Hapko was present at the meeting, it was in fact signed on POL-A's behalf by Mrs Konkolewska and Mr Wyszomirski.

39. I should digress for a moment from the chronology of the relationship between MSC, POL and POL-A. Earlier in 1998 MSC had sustained 2 serous casualties involving the vessels Rita and Carla. Proceedings were instituted in the United States by cargo owners, in protection against which the slot charterers of both vessels instituted limitation proceedings. Some emphasis was later placed before me on the fact that the slot charterers were named in the relevant court documents as Atlantic Container Line (ACL), Hyundai Merchant Marine America Inc (HMM) and POL-Atlantic (POL), albeit with the additional phrase "their affiliates, parents, subsidiaries, successors and assigns." In ironic contrast, solicitors then acting for the Polish Ocean Line interests gave notice of arbitration pursuant to the slot charter agreement on behalf of "POL-ATLANTIC/Polish Ocean Line."
40. By the end of September 1998 POL-A had missed the due date for the second instalment under the recent agreement and, following a meeting between Mr Wyszomirski and Mr Aponte in October, the debt, still standing at in excess of one million dollars, was restructured once more. Following a further complaint on 17^th November from MSC that urgent action was required to deal with the outstanding amount of US$860,000 by the end of the month, there was a meeting between Mr Aponte and Mr Wyszomirski in Geneva the outcome of which was an offer by Mr Aponte to reduce the slot price on condition that the repayment schedule was met. This offer was contained in a fax from MSC addressed to POL Gdynia, attention Mr Wyszomirski, dated November 23^rd, 1998.
41. The response from Mr Wsyzomirski was a request for yet a further postponement of the outstanding sums (now in the region of $1.4 million) together with an additional reduction to the slot price. In the meantime Mr Barski had been approaching various Polish banks with a view to obtaining a loan of some US$5 million for POL as working capital: the security for such a loan was to be a mortgagee on the Tychy. The reaction of the banks was to say that it was necessary for them to embark upon an analysis of the standing of POL and thus they required POL to produce a range of financial materials before they would be in a position to make an offer.
42. The financial position sheet presented by MSC to POL Gdynia on the 2^nd December 1998 showed a balance outstanding as at the 27^th November of US$861,000. At one stage it was said by the Defendants to be very significant, if not sinister, that this was the first of the financial position statements tendered by MSC which did not have as a heading "Re Addendum to Financial Position POL-ATLANTIC". Indeed it was suggested at one stage that the dropping of such a heading was a reaction to the meeting between Mr Aponte and Mr Wyszomirski in Geneva whereby Mr Aponte had appreciated for the first time the need to dispose of any indication by which might be construed as conceding that POL-A was the new counterparty to the MOD. In the event this suggestion was itself abandoned with the same dispatch as the idea had been advanced in the first place.
43. A further meeting between Mr Formisano and Mr Wyszomirski took place on the 15^th December. The primary topic of conversation was the proposal on the part of Mr Wyszomirski that the outstanding indebtedness should in whole or in part be absorbed, given the liquidity problems that were being faced by both POL and POL-A, by the transfer of surplus 20-foot containers and/or by the sale and lease back of Tychy. In the event Mr Formisano wrote to Mr Wyszomirski at POL-A on December 28^th, 1998 advising that he was not minded to accept 20-foot containers, as the world trend had moved on towards 40-foot containers, and that sale and lease back of Tychy was not attractive. In his response Mr Wyszomirski explained that it would take some time to dispose of the containers and accordingly that it was not possible to revert with a plan for dealing with the outstanding sums as Mr Formisano had asked by the latest January 4^th. His letter dated the 30^th December 1998 concluded:-

"MV Tychy. Shall we understand that MSC is definitely not interested in the sale/leaseback of the vessel? Kindly advise since should your standpoint be "no" then POL shall commence contacting in this regard certain financial institutions so that once a deal is made and money received it would also be assigned to your company in order that POL-ATLANTIC financial obligations can be final acquitted."

44. On the 5^th January 1999 POL made proposals to their preferred lending bank, PKO-BP in Gdansk, for a loan of $5 million based on a mortgage or sale and leaseback of Tychy. The bank sent the appropriate application forms to POL on the 7^th January. Concurrently POL entered into negotiations with potential Greek buyers for an out-and-out sale of the Tychy at the asking price of $7.5 million. Meanwhile on the 13^th January Mr Aleksander Rubin had been appointed Chairman and Chief Executive Officer of POL-A and on the 26^th January he wrote to Mr Formisano accepting that as a result of the deteriorating revenues the outstanding payments had increased to $2.1 million as of January 22^nd. His letter went on:-

"After your confirmation that you are not interested to proceed with the sale/lease back transaction concerning one of POL RORO vessels, the ship was placed on the market and POL is now considering several options and offers. According to the information received from our parent company Polish Ocean Lines after transaction is finally concluded funds will be released to POL-ATLANTIC to cover outstanding amount due to MSC. We hope that the above procedure should take about 4 to 6 weeks."

45. On the 2^nd February 1999 the Greek buyers made an offer for Tychy of only $4.5 million. This coincided with a request by MSC for a mortgage in their favour over Tychy in the sum of $6 million (the outstanding indebtedness of POL-A having now increased to $3.3 million). On the 4^th February, in a letter jointly written by Mr Hapko for POL and Mr Rubin for POL-A addressed to Mr Formisano at MSC, it was recalled that the parties had always been able to find solutions to their problems over "the last 5 years of co-operation". The letter went on to insist that funds from the sale of Tychy would be available within 4 to 6 weeks whereafter they would be released to POL-A to cover the outstanding debt. Mr Formisano's response was firm:-

"We fully appreciate with the sale of one holding company vessel you are trying to solve the actual financial problem however same is far from being solved and additional your company is unwilling to give MSC a first mortgage....As for this week your company has to pay all the current amount due and no further concession will be given. Failing to receive weekly all the current account, we will no longer accept load/discharge your containers on board our vessels."

46. On the 11^th February 1999 there was an important meeting of the supervisory board of POL-A. This was attended by a number of people including Mr Hapko, Mr Barski, Mr Rubin and Mrs Konkolewska. The board had before it information relating to POL-A's present financial status, together with comparative figures for 1998 and 1999 vis-à-vis freight rates and anticipated business. The picture was a gloomy one. As regards the future, both a downturn in business and a decrease in freight rates were anticipated to lead to a reduction in net revenue of some 60%, from $97 million to $31 million. The focus however of the discussion at the meeting was on the present financial position, with Mr Rubin stressing his concerns as to the present state of account with MSC. He is recorded as telling the meeting:-

"He emphasised that POL-ATLANTIC can neither pay the existing few million debt nor - because of shortage of sufficient funds - can the company comply with the current obligations. He submitted to the board the latest determinations set forth with MSC with regard to the principles of financial co-operation: MSC agrees on debt freezing till the time of finalising by POL the proposed financial aid to the company, but at the same time MSC insists on timely payments of current obligations. The company is not able - due to shortage of its own funds - to comply with these requirements."

47. Mrs Konkolewska was asked to comment on what steps could be taken to protect POL-A. She pointed out that a major Polish freight forwarder was retaining freight thereby depriving POL-ATLANTIC almost entirely of domestic revenue. She also drew attention to the threat by the Canadian railway companies of stopping their services. In the light of all this the directors of POL-A acknowledged to the supervisory board "that the company's feasibility of improving the actual position had been exhausted". Mr Rubin then informed the meeting that there was a proposal to send a delegation to visit MSC the next day and, accordingly, the board decided to leave further debate open with a view to resuming urgent discussions after the delegation's return from Geneva.
48. The original plan was for Mr Rubin to go to Geneva with Mr Wyszomirski but it was decided at a later stage that Mr Barski of POL should accompany Mr Rubin instead. The meeting duly took place between them and Mr Aponte and Mr Formisano on the evening of 12^th February. Initially the negotiations were rather sticky but as the evening progressed it became clear that MSC were disposed to be flexible and in due course Mr Aponte made some proposals which on any view were better than the Polish delegation had anticipated. The foundation stone of the agreement thereafter reached was that the Tychy would be sold in order to pay the outstanding indebtedness. The Polish delegation suggested that that would be achieved within four weeks. That was regarded as ambitious by Mr Aponte and Mr Formisano. Accordingly it was agreed that the sale should be accomplished within a maximum of 5 weeks.
49. It was also agreed that MSC would receive a payment on account of not less than $100,000 dollars per week pending the sale. Once the sale was accomplished the proceeds would be used to reimburse MSC, not only for the sums already outstanding but for any further sums falling due in that sale period. For that purpose Mr Formisano and Mr Aponte were disposed to accept such slot commitment as the Polish delegation felt could be achieved. Mr Rubin needed to consider this matter overnight and accordingly it was agreed that the parties would meet again the following day.
50. Mr Rubin took the adjournment as an opportunity to discuss with his staff what minimum slot requirement could be lived with, together with what buffer they would seek and the parties met again at lunchtime on the 13^th February. Mr Aponte had prepared a document purporting to record the agreement that had been reached into which was inserted the slot requirements which Mr Rubin had obtained. This document was then signed by Mr Rubin and Mr Barski and Mr Formisano (Mr Aponte having had to leave for another appointment).
51. The document reads as follows:

MEDITERRANEAN SHIPPING COMPANY S.A.

ADDENDUM TO AGREEMENT DATED 12^TH AUGUST 1998 BETWEEN MSC MEDITERRANEAN SHIPPING COMPANY S.A. (MSC) AND POL ATLANTIC

Following the meeting held at Geneva on Friday 12^th February 1999 between Mr. A. RUBIN, Managing Director of POL ATLANTIC, Mr. J. BARSKI, Director of Polish Ocean Line, Mr. P. FORMISANO, Director of MSC and Mr. G. APONTE, President of MSC, the following agreement was reached:

In view of Pol Atlantic's inability to pay the accrued outstanding of US$ 3,614,738.04 as per the attached statement of accounts and in view of Pol Atlantic's momentarily inability to pay the weekly slots cost, MSC agreed to assist Pol Atlantic overcoming their cash flow problems as per the following reasons and commitments.

1. Polish Ocean Line and Pol Atlantic gave their undertaking to sell the motor vessel M/V TYCHY and/or other assets within a maximum of four to five weeks. The proceeds of such sale will be transferred to MSC up to the total outstanding amount of due invoices at the time when Polish Ocean Lines are ready to make the settlement payment.

2. Until such date, i.e. up to 12^th March 1999 or up to 19^th March 1999 at the latest, MSC will accept an on account payment of not less than US$100,000 weekly pending the sale of the above vessel.

3. After the above-mentioned period, Polish Ocean Lines will settle the balance due to MSC for the slots carried during the 4/5 weeks less the on account payments as mentioned above.

This agreement has been reached in order to help Polish Ocean Lines overcoming their liquidity problems until the sale of the above vessel has taken place.

MSC and Polish Ocean Lines agreed that as from 15^th February 1999, Polish Ocean Lines will undertake to buy from MSC the following slots:

North Atlantic West and Eastbound 150 TEUS weekly + 100 TEUS BUFFER*

South Atlantic West and Eastbound 75 TEUS Weekly + 100 TEUS BUFFER*

Price as per existing agreement

Geneva, 13^th February 1999

Signed Signed

A. RUBIN J. BARSKI

Pol Atlantic Polish Ocean Lines

Signed

P. FORMISANO

MSC Mediterranean Shipping Company S.A.

SPACE GUARANTEED FOR BUFFER IS SUBJECT TO 7 WORKING DAYS TO BE GIVEN AT FIRST LOADING PORT IN EUROPE AND USA TO MSC GENEVA ON WRITING TO ATT. MR. G. APREA

52. At the same time, two other agreements were signed which had been prepared by Mr Formisano. The first read "MSC Geneva confirm their agreement to give consideration to the purchase of assets (vessels and/or containers) belonging to Polish Ocean Lines, Pol Atlantic at market prices." The second read "MSC Geneva herewith confirm that as soon as all the outstanding debts are settled with regard to all the slot charter shipments, a review of the slot charter price, as previously agreed will be undertaken and will be retroactively applied from December 1^st, 1998". There was a third agreement which, whilst signed by Mr Barski and Mr Formisano, Mr Rubin did not sign as he wished to discuss the matter with his staff. This read "Considering the financial difficulties of Polish Ocean Lines and Pol Atlantic and considering Polish Ocean Lines are the holding company of Pol Atlantic and Baltic Container Lines and/or all other subsidiary feeding companies it has been mutually agreed that MSC and Polish Ocean Lines will negotiate feedering rates and that MSC will use Baltic Containers Lines for their feedering necessities all freight costs will be deducted from any amount due by Pol Atlantic to MSC." Attached to the main agreement was a further statement of the balance of account between Pol Atlantic and MSC showing the sum of $3,614,738.04 outstanding as the 12^th February with a further million dollars falling due prior to the 12^th March.
53. Hopeful no doubt that the new agreement would furnish a route for the continued operation of the North Atlantic sieve, Mr Rubin reported by telephone the outcome of the meeting at least as regards the acceptance of his proposed slot commitment and buffer. He also reported that, whilst the slot prices were retained, there was a possibility of a reduction to $170 per TEU and $220 per TEU retrospective as from 1^st December 1998 in the event that final settlements were achieved. Mr Rubin then left for London for a meeting of the Conference. On Monday 15^th February, whilst in London, Mr Rubin despatched copies of the agreements to Mrs Konkolewska and Mr Pilszyk. In his covering fax he drew attention to the changes in slot numbers which he described as particularly important. He also authorised the despatch of a message to Gdynia America for general circulation to the following effect:-

"This is a message which we kindly ask you to convey to our customers. Polish Ocean Lines and Pol Atlantic would like to refute all the rumours which have been spread in the market lately regarding operations on the North Atlantic.

It was confirmed at an agency meeting last week, by both Polish Ocean Lines and Pol Atlantic, that it is their intention to continue operations in the North Atlantic, by US, Gulf and Canada trades. At another meeting last weekend between Pol Atlantic and Mediterranean Shipping Company a co-operation agreement was reached within which our weekly service from the UK, Continent and Baltic will continue uninterrupted. I do hope that this announcement will allay your doubts about future relationships and once again we can get on with business as usual."

54. In Poland a meeting took place on the 15^th February attended by Mr Hapko, Mrs Konkolewska, a Mrs Chmurkowska, Mr Barski and Mr Pilszyk. The purpose and content of this meeting was highly controversial. It was the Defendant's case that it was at this meeting that various "mistakes" with regard to the agreement which Mr Barksi had signed were identified. So far as the documentary material was concerned the position was as follows. On the 16^th February, Mr Pilszyk of POL-A wrote to Mr Formisano noting that "the above addendum besides financial matters defines a new slot allocation for Pol-Atlantic which according to this addendum is valid from February 15^th, 1999. It was agreed also that a request for additional space (buffer) is to be sent to MSC seven working days prior to the first port of lading." Mr Pilszyk was anxious to determine which were the first ships for the new allocation. The same day arrangements were made for the transfer of $100,000 out of one of POL's bank accounts in favour of MSC, this being the first weekly payment on account. (This was against the background of a loan agreement executed on the 16^th February between POL and POL-A whereby POL agreed to advance POL-A a loan of some $516,000 to cover the five instalments anticipated before the sale of the Tychy: this was apparently financed by the proceeds of sale of a POL vessel for scrap.)
55. However, on the 18^th February, the board of POL-A made a resolution seeking the approval of the supervisory board to one of three options: either terminating the company's activities with immediate effect or, alternatively, closing down at some future date or, in the further alternative, identifying some part of the company's activities which were profitable and worthy of continuation. The terms of the resolution made it plain that the board favoured the first of these options. This no doubt reflected the increasing concern with regard to the actins of various creditors of POL-A, particularly in the United States. On the 19^th February Gdynia American Line Inc summarised the position by way of an update of an earlier report dated the 28^th January. Very substantial sums were owed to port authorities and port operators in Boston, Norfolk, Wilmington, Charleston, Miami, New Orleans, Houston and New York. The overall assessment was that the accounts payable amounted to some $7.5 million and the accounts receivable to some $2.6 million.
56. That same day Mr Hapko wrote to the Deputy President of the supervisory board of POL requesting an urgent session of the supervisory board. In his letter he said:-

"Coming back to the gist I would like to add that the grounds for an urgent summoning of a session of the supervisory board of POL result from the necessity of taking up steps aimed at further operation of one of POL's companies - POL-ATLANTIC a limited liability company - as well as in view of dangers to all the group POL generated by the POL-ATLANTIC's loss of liquidity.

Just to remind you I would like to mention that the company is a carrier in the North Atlantic line. In the last few months in that zone there has been recorded a violent slump in the sea freight market caused by a twenty per cent fall in the freight rates at the simultaneous increase in costs...

The company's creditors (mainly container terminals and stevedoring firms and tonnage suppliers) have started resorting to vindicating steps and they cannot hold the increasing level of the mercantile credit extorted by a company. Our fear of dangers to all group POL arises out of the fact that we know from our experience that group POL is perceived in the external market as one enterprise hence vindicating actions (we have got to know it already) will affect the remaining group's entities including the POL themselves..."

57. It also appears on February 19^th that Mrs Chmurkowska prepared a new version of the addendum in the form of a draft "memorandum of meeting held at Geneva on the 12^th February 1999". This purported to express the agreement in the following way:-

During the meeting held at Geneva on Friday 12^th August 1999 between:

Mr. A. Rubin - president of POL-ATLANTIC Sp. z.o.o. (hereinafter called PL-ATLANTIC"),

Mr J. Barski - Strategy & Development Director of PRZEDSIEBIORSTWO PANSTWOWE POLSKIE LINIE OCEANICZNE (hereinafter called "POL"), on one side and:

Mr P. Formisano Director of Mediterranean Shipping Company S.A. (hereinafter called "MSC")

and Mr G. Aponte - President of MSC on the other side

the following agreement has been reached:

In view of POL-ATLANTIC's inability to pay the accrued outstanding of USD 3.614.738,04 as per the statement of accounts (such statement to be mutually agreed and attached to this Memorandum) and in view of POL-ATLANTIC's temporary inability to pay the weekly slot costs, MSC agreed to the following procedure of co-operation:

1. until 19^th March 1999 at the latest POL-ATLANTIC will pay weekly to MSC the amounts of not less than USD 100.000, - for the account of slot costs,

2. on 19^th March 1999 POL-ATLANTIC is obliged to settle the total outstanding balance accrued on this date. The balance to be mutually confirmed.

3. POL, as the mother company of POL-ATLANTIC, being fully aware of the financial problems of POL-ATLANTIC does hereby confirm the fulfilment of POL-ATLANTIC's obligations as described under points 1 and 2 above towards MSC. The commitment to be valid until 19^th March 1999 and after that date will automatically expire without necessity of any prior notification or confirmation from either party.

4. POL further confirms that it is willing to provide such financial support for POL-ATLANTIC as will be needed to meet the commitments of POL-ATLANTIC resulting out of this Memorandum. The source of such support to be the financial transaction based on POL's vessel - M.V. "TYCHY".

58. In the event that document was taken no further. It was not until 22^nd February 1999 that the suggestion that there had been any mistakes in the format of the agreement that had been signed was brought to the attention of MSC. This was by virtue of a letter signed by Mr Barski and Mr Rubin which read as follows:-

"With reference to the meeting held on February 12^th concerning slot charter agreement between MSC and POL-ATLANTIC, would like to draw your attention to the following formal mistakes which should be corrected. The vessel POL is selling is owned by POL and POL-ATLANTIC will only receive proceeds to settle the outstanding amount due to MSC,

POL-ATLANTIC is the party to the slot charter agreement therefore we have introduced logic changes to the addendum, which also is in line with the spirit of our agreement reached on Feb, 12^th,

Para 1. First Line - delete POL-ATLANTIC

Third Line - will be transferred to POL-ATLANTIC

Fourth Line - at the time when POL-ATLANTIC

Para 3. First line - delete Polish Ocean Lines replace it with POL-ATLANTIC

First Line after para 3 - replace Polish Ocean Lines with POL-ATLANTIC

Additionally as far as new number of slots as from Feb. 15^th it should state MSC and POL-ATLANTIC agreed that as from 15^th Feb. POL-ATLANTIC will undertaken to buy from MSC the following slots etc....

It is necessary to make above changes in order to have clear understanding between the parties concerned what is position of Polish Ocean Lines, POL-ATLANTIC and Mediterranean Shipping Company in the agreement signed. For your easy reference enclosed please find corrected photocopy of the agreement, which I hope you will find in order."

59. That very same day the board of POL-ATLANTIC despatched material to the supervisory board relating to their resolution seeking approval to one of the three courses of action and specifically petitioning for approval of the proposal to terminate trade immediately. This was duly confirmed by the supervisory board on the 23^rd February and notified to Mr Aponte at MSC. In their letter to MSC Messrs Rubin, Konkolewska and Pilszyk on behalf of POL-ATLANTIC sought a meeting with MSC to discuss the outstanding sums. The letter concluded "We do hope that the meeting in question will enable us to review the present extremely difficult financial situation of POL-ATLANTIC and to find an amicable solution. We would like to take this opportunity to thank you for long-lasting partnership we have both enjoyed from 1993". In his reply Mr Aponte expressed shock at the news.
60. Steps had immediately been taken with regard to POL containers that were caught up in termination of the POL-ATLANTIC business, including containers that were ready for loading, containers already loaded and containers which had already been discharged. By telex dated 25^th February Messrs Pilszyk and Ringer recorded an agreement with respect to these matters reached with a Mr Aprea of MSC in the following terms:-

Below please find conditions which have been agreed as to taking over our containers and invoicing our shippers for sea carriage - you would not charge us for slots - you would take care of stevedoring and terminal handling - cargo would be realised by you when freight is paid to you so those cases when freight was already paid to us those containers will be automatically released - you must collect POL-ATLANTIC Bill of Lading prior to container release..... Please confirm".

61. This duly was confirmed by Mr Aprea in a reply dated 26^th February expressing his understanding of the agreement in similar but not precisely the same language:-

-"We hereby confirm/agree to taking over POL full containers and to invoice shippers sea carriage. In view of that we also confirm following

-MSC will collect Polish Ocean Line bill of lading (where issued) prior to

-MSC will not charge slot costs for same boxes which freight and additional charges were cashed directly

-for said boxes we will take care of stevedoring and terminal handling of those case where freight was already paid to Polish Ocean Lines

-cargo will be released by SMC when freight is paid to us with exemption container release....

62. There was a later exchange of correspondence relating to freights outstanding on vessels not owned or operated by MSC in which MSC were requested to help in pressing for payment. Finally on 8^th March 1999 POL-ATLANTIC filed for insolvency. The following day Messrs Richards Butler acting on behalf of the Claimant wrote to Mr Barski of POL as follows:-

"We refer to the agreement made between yourselves, POL-ATLANTIC and our clients in Geneva on the 13^th February 1999 in which you agreed to sell the vessel "TYCHY" and/or other assets within five weeks of the date of the agreement. The due date is the 20^th March 1999. The proceeds of sale are to be transferred to MSC up to the total outstanding invoices due under the slot charter agreement up to the time of payment. Following notification of the liquidation of POL-ATLANTIC we write to seek your confirmation that steps are in hand to pay the sums due by the 20^th March including the sale of the "TYCHY" and the realisation of other assets if necessary. For your information the sum due on the 20^th March will be $5,337,816.72..."

63. That day Polish Ocean Lines made an application to the Minister in Warsaw seeking ministerial approval to the sale of various vessels including "TYCHY". The reasons advanced for seeking such approval were expressed as follows:-

"As a consequence of filing the application for insolvency by the companies POL-ATLANTIC and POL Container as well as due to POL's partial obligations towards both companies creditors (POL as 100% shareholder of both companies and guarantor of some of their contracts) we do hereby extend our request for non-refusal of our intention to sell the above vessels.

Our idea is to enter into sale-leaseback transactions of the roro vessels mentioned.... consequently we wish to sell above ships on auction as an outright sale or on the basis of long-term lease back contract with a US$1 purchase option."

64. On 15^th March Messrs Richards Butler pressed for a response to their earlier letter to which Mr Rubin replied that POL was in the process of selling some of their assets but some of the contracts were not yet concluded. The following day as already recorded Tychy was arrested by the Claimant.

Novation

65. As might be expected, there was no dispute as to the relevant legal principles. They can be summarised as follows:-

a. Novation involves the creation of a new contract where an existing party is replaced by a new party

b. Thus, novation requires the consent of all parties, including in particular the party which is thereby accepting a new person as his debtor or as his counterpart under an executory contract

c. The consent may be apparent from express words or inferred from conduct.

d. The consent must be clearly established on the evidence as being only consistent with the intent of achieving a novation:

see In Re European Assurance Society (1875) 1 Ch D34 Lorentzen v. White Shipping Company Ltd (1942) 74 Ll L Rep 161 and Lindern Trawler Managers Ltd against v. WHJ Trawlers (1950) 83 Ll L Rep 131.

66. The burden of establishing the novation was on the Defendants. Their difficulty in formulating a coherent plea as to the creation of the novated contract was indicative of some weakness in this regard. In the final event, the Defendants appeared to plump for the argument that the letter of the 1^st December 1995 had been accepted by the Claimant as a prospective novation and was thereafter "triggered" into effect by the telexes on the 7^th March 1996.
67. But it is not possible to view the 1^st December letter in isolation. It is necessary to consider it in its proper context and, with that in mind, to revert to the discussions between POL and MSC in Gydnia in May 1995. It was accepted by MSC that, during that meeting (albeit probably as a topic of conversation over dinner), MSC was told, first, of POL's intention to introduce a subsidiary company as operator of its trans-Atlantic trade and, second, of the proposal that the subsidiary should indeed replace POL as a party to the MODs. MSC were not concerned with the former proposal: it was simply a matter of internal organisation. As regards the latter proposal, I accept the evidence of all the MSC witnesses that MSC were agreeable but only so long as POL furnished a guarantee of the subsidiary's performance (and payments) under the MOD. That is not only apparent from the terms of Mr Osinski's and Mr Pilszyk's note but also entirely consistent with a proposal to replace POL with an assetless subsidiary.
68. By the time of the May 1995 meeting POL-EUREKA had already been acting as the operator of the North America service for over a year pursuant to the June 1994 agreement with POL whereby POL-EUREKA had the conduct of the service "on behalf of and on account of POL". The internal decision of September 1995 to impose on POL-GAL (the then contemplated new name for POL-EUREKA) the obligation of conducting the North Atlantic service "on it's own account" from 1^st January 1996 was not something that was brought to MSC's attention.
69. This is to be contrasted to the somewhat more revealing letter written by Mr Hapko of POL to Ceres Terminals Inc. on the 29^th November 1995 which included the following passage:-

"We herewith would like to inform you as follows

1. It is planned and will become effective that since 1^st January 1996 the shape of POL's North Atlantic service will be transformed into the self-financing legal entity as the company fully controlled by POL named POL-ATLANTIC. The reason for such a step is to make the service more effective, easily managed and due to many more commercial reasons well known to you.

2. As a natural consequence due to our long-lasting mutual co-operation we feel ourselves obliged to clarify to you some basic assumptions of functioning of the new company. POL-ATLANTIC is to take over from POL it's entire activity in the North Atlantic service. In other words POL-ATLANTIC since the 1^st January will be carrying the activity on its own account collecting freights and being responsible for all expenses and costs connected with its creational business.

3. POL-ATLANTIC wishes to be the party to all these contract agreements POL is till now and which contracts/agreements are determining our presence on the North Atlantic line."

70. The letter written to MSC on 1^st December is more obscure. Whilst obviously making it clear that POL will transfer to POL-A the operation of the North Atlantic service as from 1^st January 1996, the letter is somewhat coy as to POL's perceived status thereafter. The letter emphasises that POL-A is a subsidiary "thus ensuing the continuation in all respects of the present agreement.... in particular we would stress that all POL obligations towards your company will be paid by us in full". The later passage that the letter be taken as an annex to the MOD whereby POL-A is to be "officially entitled to act as the party that replaces POL" is equally ambivalent.
71. It is fair to say that ACL regarded a similar letter as indeed a proposal to transfer the MOD to POL-A. But just as MSC had done in the May meeting, they rejected the proposal absent a separate guarantee from POL. It is notable that the first material communication from MSC to POL in the new year as Mr Formisano's fax of the 2^nd January addressed to Mr Osinski at POL and headed "Re: POL MSC Agreement". This confirmed a conversation on the 29^th December to the effect that the slot allocation agreed in May 1995 should be reduced as from the 1^st January but otherwise that "the contract will be extended firm for another year." Mr Osinski's response was to the effect that the extension was unnecessary as the contract had "no end date". None of this is remotely consistent with there having a prospective novation of the MODs.
72. The in-house decision to the effect that POL-ATLANTIC would take over the North Atlantic service on its own account of the 1^st March was taken on the 23rd January 1996. But the only pertinent communication between the parties was the exchange between Mr Osinski and Mr Formisano on the 7^th March which was indeed at the forefront of the Defendant's pleaded case. But Mr Osinski's telex focuses on the accounting arrangements as from the sailing of Claudia and Dominique whereby invoices would thereafter be issued to POL-A on 28 day credit terms. Whilst the assertion is made that "with these vessels POL-ATLANTIC is taking over the North Atlantic service from POL which was advised to you earlier this year" it is very difficult to derive from it any proposal that POL-A should be treated not merely as operating the service but as replacing POL as a party to the MOD, particularly where the telex is headed "Financial Arrangements". The answer from Mr Formisano, headed "Credit Terms", is equally inapt for the purpose of constituting consent to such a proposal.
73. It may well be that the reference to MSC having been advised "earlier this year" maybe a mistaken reference to the 1st December letter and was duly perceived as such. But as already explained, that letter contained in effect two proposals, one for POL-A to be the operator and the second for POL-A to replace POL as a party to the MOD. Accordingly the implications of the telex dated 7^th March viewed in isolation remain very confined and I am not persuaded that is appropriate to regard that telex, together with the reply, as constituting evidence of tri-partite consent to the novation of the contract. Nor am I persuaded that it is appropriate to view the exchange, in the alternative, as a trigger of a novation already established in principle by the despatch of the 1^st December letter, the contents thereof being in some way accepted by the absence of any express rejection by MSC of the proposals contained in it.
74. I recognise that this analysis is without reference to the written and oral evidence of the witnesses as to their understanding of the implications of the contemporary correspondence. But in my judgment that evidence is not material and thus not admissible. The creation or otherwise of a novated contact must depend upon an objective assessment of the intentions of the parties as emerges from the documents relied upon.
75. In any event, the author of the 1^st December letter, Mr Hapko, was not called to give evidence by the Defendants. In contrast, if it be relevant, Mr. Aponte's reaction to the letter is exemplified by his evidence in cross-examination at Day 3 pp. 12 and 13:-

Q. Your understanding of this letter...was...that MSC should do business with the new subsidiary company as if it was Polish Ocean lines, that Polish Ocean Lines should remain a party supporting the contracts and Polish Ocean Lines would be responsible for Pol-Atlantic. That was your understanding. A. Both. First of all that Polish Ocean Lines would be responsible for the contract and responsible for Pol-Atlantic as well.

Q. On the basis of your understanding, you were therefore content to accept this letter as an annex to the MOD's as requested. A. Yes.

Q. You saw no reason not to comply with Polish Ocean Line's requests. A. As long as they were assuring me of their responsibility under the MOD, I had no problems.

76. Mr Formisano's reaction was in a similar vein as recorded at Day 1 p.53:-

Q. How did you understand that, that it was an offer of the guarantee that you wanted? A. I understand that we continue to with Polish Ocean lines, okay, and if a change had to happen we were asking for a proper guarantee, okay, and it was up to them, if they were minded to continue to do business with us, to provide with the guarantee - very simple. We had no reason to refuse doing business if they were giving to us the proper guarantee or satisfaction

Post March conduct

77. None of this evidence nor the content of the statements provides any material support, in my judgment, for the Defendants case of mutual tri-partite consent to a novation. But the Defendants had a further argument to the effect that the conduct of the parties from March 1996 onwards was only consistent with there having been a novation arising from the exchanges relied upon or, if not, the parties nonetheless proceeded on the common assumption that there had been a novation and thereby established an agreed convention to that effect. The basis of this case was set out in paragraph 2 of the defence and counterclaim, the emphasis being on the accounting procedures whereby MSC invoiced POL-A as from the 21^st March 1996 (together with a weekly account statement) and POL-A made payments against these invoices. Reliance was also placed on the content of faxes sent by MSC which were said unequivocally to recognise POL-A as a party to the MODs.
78. As regards the accounting documents, the Defendants are correct in their assertion that, as from 21^st March, the outstanding debt of POL was run off and all future slot payments were invoiced to and paid by POL-A. But this process is not consistent only with a novation. It is equally consistent with a book-keeping exercise whereby POL-A were treated as the sole operator of the trans-Atlantic service under the umbrella of POL with the latter remaining the sole contracting party. The proposition might have had greater force if MSC's association with POL and POL-A alone was at stake. But POL was seeking to achieve a distribution of its business and its contractual commitments to individual subsidiaries. In some respects progress had been made: see for instance the agreement of the 1^st March 1996 with Europea de Consignaciones S.A. of Madrid. But absent express contractual substitution, such cannot be inferred for all third party contracts simply from revised accounting procedures, a point of view brought home by ACL's letter of 8^th December 1995.
79. So far as the other communications between the parties are concerned, there was no consistency of nomenclature. Indeed, Mr Formisano's telex of the 7^th March itself was addressed to POL and the subsequent sequence of statements of the financial position of POL-A were also all addressed to POL. Other telexes and faxes of MSC were addressed almost randomly to either POL or POL-A: see Core Bundle pages 1021, 1135, 1155, 1292, 1297, 1348, 1445, 1550, 1597, 1631, 1680, 1700, 1847, 1934, 1939, 1962, 1999, 2013, 2097, 2110, 2140, 2151. This is not the material from which a novation can be inferred.
80. Even the Defendants were not consistent. For instance, their own arbitration appointments made following the casualties concerning Carla (and earlier Rita) were expressly premised on the supposition that POL was at least a party to the MOD. However, the Defendants were perhaps on potentially firmer ground in regard to the August Agreement. Despite the presence of Mr Hapko, it was signed solely by the representatives of POL-A. Viewed in isolation, this might fairly be regarded as only consistent with novation. But it has to be borne in mind that the meeting which led to the agreement was set up by Mr Hapko of POL by his letter of the 7^th August which spoke in terms of an agenda to discuss "all aspects of our future and present co-operation". This was just a equivocal as to POL's status (whether as a party to the MOD, a guarantor of POL-A or a mere furnisher of comfort as the holding company) as his earlier pronouncements in the letter of 1^st December.
81. Furthermore, while the agenda may have been a broad one, the written agreement was expressly confined to slot numbers and payments. In short, there were mutual promises of payment on the one hand by POL-A of outstanding sums in return for relaxation by MSC of the number of slots required as a minimum. These matter were foursquare within the sphere of interest of POL-A if acting merely as operator of the route and not as the counter party to the MOD. In any event, the August Agreement cannot properly be viewed in isolation. I must have regard to the entire picture and I am not remotely persuaded that the documentary material postmarked 1996 is only consistent with there having been a novation.
82. I have not forgotten that the Defendants also advanced a case of estoppel by convention. But the short answer is that if the material does not give rise to the inference of novation, the same material cannot realistically found the basis of a convention or an agreement that there has been a novation. Indeed the rollup nature of the defendants' pleaded case is really a recognition of just that.

The Addendum

83. In the result, these conclusions limited the need on the part of the defendants to seek rectification of the Addendum since it follows that treating POL as a contracting party to the MODs involved no mistake whether mutual, unilateral or otherwise. Indeed, the Defendants concede that a conclusion that there was no novation renders that part of the case, on which much evidence and argument was directed, redundant.
84. However, it seems to me that the Addendum in fact furnishes very strong evidence in support of the conclusion there had been no consent to novation. By the time the meeting was organised both POL and POL-A were in a parlous financial state. POL-A was facing a collapse of freight rates. Substantial sums were owed, not just to MSC, but also to a number of contracting parties, particularly in the United States. Freight forwarders were reluctant to transfer freight revenue to Poland. MSC was threatening not to accept further containers. In short the prospects were bleak. The visit to Geneva represented a last-ditch attempt to keep the North Atlantic service in existence.
85. So far as POL was concerned it too had severe liquidity problems. The only cash available was the proceeds of the sale of a ship for scrap. Whilst some negotiations were underway for sale, leaseback or loan relating to Tychy, they were only at their most preliminary stage.
86. The case opened by the Defendants was that MSC, appreciating their exposure by reason of the fact that POL were no longer a contracting party, dishonestly sought to reintroduce them into the MODs. That case was in due course very properly abandoned. The alternative case then advanced was that, far from having deliberately included POL in the Addendum, they did so by mistaken having forgotten that POL had dropped away by consent. Quite apart from being a forensically difficult case to run as an alternative, it was, in my judgment, equally misconceived.
87. The evidence of Mr Aponte and Mr Formisano was that the draft agreement represented precisely what had been orally agreed. The fact that they were not proceeding under some illusion as to who were the parties to the MOD is to my mind confirmed by the signature of Mr Barksi and Mr Rubin. If the true position was, as the Defendants contended, that the POL had not been a party to the MOD for three years (and indeed not even a guarantor of POL-A's performance), it is inconceivable they would have signed such an addendum. Put another way, I accept the Claimant's submission that the Defendants had nowhere near achieved the remarkably ambitious project of demonstrating that the only written and signed tri-partite agreement was inconsistent with the true state of affairs.
88. The Defendants case was not so much that they (or rather their representatives) had mistakenly signed the agreement, having forgotten that POL was no longer a party, but more that they had simply made a mistake as to what the agreement said because they had not read it properly or at all. I am afraid that I am quite unable to accept this plea.
89. Mr Barski's evidence was to the effect that he only read that part which recorded the compromise of a period of four to five weeks to achieve the sale. Given the importance of the overall outcome of the negotiation to the continuance of the North Atlantic service and the unimportance of the extension of the period which Mr Barski thought was already adequate, I fear I regard that evidence as incredible. So also the evidence of Mr Rubin that he read the opening and closing paragraphs but not the middle section of the agreement which included the obligation imposed to POL to settle the indebtedness after the sale. When combined with his assertion that he did notice the absence of any reference to a retrospective slot price reduction and required that to be the subject of a supplementary agreement, this evidence defies belief. The final straw was his suggestion that he noticed the obligation on POL to buy slots as from the 15^th February but, whilst appreciating that this was a mistake, in that it should have been a reference to POL-A forgot to take the matter up.
90. Events in Poland thereafter fortify the conclusion that there had been no mistake in Geneva. Indeed the $100,000 first instalment due under the agreement was duly paid by POL on Monday the 13^th. Albeit it was suggested by the witnesses that the "mistake" was soon identified in meetings, in the event no notification was given to MSC until the 19^th. By that time the board of POL-A had already firmly focused on the likely closure of the service. It was then that Mrs Chmurkowska prepared her version of the agreement which was no less than a complete re-write. I have concluded that the appreciation of the "mistakes" only arose at this later stage: this arose in the context of an abandonment of any hope POL-A's survival and the resurrection of the hope that POL might escape responsibility for the sums outstanding.

Quantum

91. There were a number of issues of quantum relating to both the claim and the counter-claim. Some of these were resolved by agreement: others had been referred by consent to the Registrar. The full details will be set out in the Order of the Court. I have been merely asked to resolve three issues of principle.

Revised slot price

92. One of the agreements executed on the 13^th February 1999 was that relating to the revised slot price as agreed in November 1998 which was to be backdated to 1^st December 1998 "as soon as all the outstanding debts are settled with regard to all slot charter shipments". These revised rates had not been implemented because POL had not maintained the repayment schedule of five months of instalments $215,370. But the Defendants contend that they can set off the sums attributable to the newly reactivated rebate against the judgment otherwise due to the claimant.
93. The Defendants' construction is not arguable. It is sufficient to say that, on any commercially realistic construction, payment of a judgment debt is not the equivalent of the contractual settlement of an outstanding debt. The agreement to re-introduce the rebate was made in the context of the Addendum which called for repayment of the outstanding amount within five weeks out of the proceeds of the sale of Tychy. (Indeed Mr Rubin would have preferred that the rebate was incorporated in the addendum). Thus the settlement contemplated by the rebate agreement is payment within five weeks under the Addendum. Put another way, the machinery devised was for settlement to be followed by a rebate. There was no concurrent right of set-off, let alone against a judgment in respect of the various sums that the Defendants had failed to pay.

Containers in transit

94. The agreement reached as regards the containers in transit at the time of POL's suspension of the North Atlantic service is, it is agreed, well documented in the telex exchanges of the 24^th and 26^th February 1999 between Mr Aprea and Mr Pilszyk.
95. The Defendants took two points:-

i. that the agreement related to all POL containers whether shipped or to be shipped to MSC vessels or not.

ii. subject to the deduction of discharge cost, MSC were obliged to account to POL for any freight recovered in this respect of containers shipped.

96. As regards to the former proposition, it was notable that it was expressed to be the common ground in a joint note on quantum prepared for the Court that the "agreement was made on the terms set out" in the two telexes. In any event, there was no evidence to support a case that the agreement was modified to encompass shipments on non-MSC vessels. MSC were requested to assist POL-A in obtaining freights from their customers in respect of shipments even on non-MSC ships. To the extent that MSC responded to such a request, they should account for the net proceeds. But MSC were under no obligations with that regard.
97. As regards the MSC shipments, I disregard the oral evidence as to the meaning of the contract evidenced by the telexes. The Defendants' case depended upon the implication of a term that, when freight was recovered, was to be accounted for and paid to POL-A. This implication, far from being necessary, would be entirely consistent with the expressed term that, where freight was recovered, MSC would not charge for the slot cost. The argument advanced by POL-A would give rise to the commercially absurd consequence that, for no outlay, POL-A would receive the gross freight less discharging expenses. I have no hesitation in rejecting that proposition.

The indemnity

98. The final issue relates to a claim in the Chapter 11 proceedings instituted in the United States by POL-A in 1999. In those proceedings, creditors of POL-A appeared to be threatening to assert a claim to recover the sum of $900,000 from MSC as being a voidable preference. This matter seems to me to be in such an embryonic form that I see no good ground for requiring POL to pay into Court such a sum, pending the outcome of the United States proceedings, particularly in the light of my findings on the primary issue.