England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Claim No. 2007 Folio 1631 Royal Courts of Justice Strand, London, WC2A 2LL
		29/01/2009

Mr Justice Blair:

1. This case raises a short point of construction on the termination provisions in a crew management agreement, or to be precise six such agreements as amended by various side letters. These were entered into over a period of some twelve years between the claimant ship management company and the defendant company, BP Shipping Ltd ("BPS") which is the shipping arm of the BP oil and gas group. The question is whether on termination the claimant is entitled to half of the annual US dollar and sterling fees to which it was entitled under the agreements, that is US$750,000 and £553,773, or whether (as the defendant submits) it is only entitled to half of the monthly payment in respect of such fees, that is US$62,500 and £46,147.75.
2. There are two well recognised types of crew manager contracts in the shipping trade: "lumpsum" or "cost plus fees". Under a lump sum contract, the ship owner pays the crew manager a fixed amount for all services. The Manager will know within relatively narrow confines what his own office overheads are. The extent of his profit (or loss) depends largely upon the fluctuating expenses he will have to pay for matters such as sourcing, flying out, employing and repatriating the officers and crew. The Owner has the advantage of knowing that his crew expenses are fixed, but takes the risk that he may be overpaying for crew expenses and also takes the risk that the Manager may be tempted to let crew standards drop to save expenditure. By contrast, under a 'costs plus fee' contract, the Manager's remuneration is confined to a fixed fee. The Owner takes the risk of higher than anticipated expenses throughout the duration of the contract.
3. Under the current standard form contracts in this industry, the crew management contract will have a set duration. If there is a premature termination on the occurrence of certain events, e.g. loss or sale of the vessel, the forms provide for the Manager to receive compensation measured by the month: the Manager gets the lump sum paid for an agreed number or fraction of month(s) under a lump sum contract. On a 'costs plus fee' arrangement, the Manager gets the fee element measured by the month(s), or fraction thereof. The current BIMCO 'costs plus fee' form provides that after the initial period of crew management, the contract may swing into an open ended duration, subject to termination by two months' notice. If termination occurs by this method, no compensation is paid. This reflects the fact that the Manager will have been paid for his own set-up expenses in the initial duration. I am grateful to Mr Dominic Kendrick QC, counsel for BP, for this explanation, which I do not think is controversial. That said, I agree with Mr Persey QC for AMLP that the standard forms are of limited assistance, since the particular arrangements between the parties were or became bespoke in nature.

The facts

4. So far as the present proceedings are concerned, the facts as I find them are as follows. The claimant is a Bermuda based body which for most of the period relevant for present purposes was called Atlantic Maritime Limited Partnership, and I shall call the claimant "AMLP" in this judgment. AMLP managed BP vessels over a twenty year period running from 1987 under a number of contracts and extensions made by side letter. Payroll and corporate functions were dealt with by AMLP in Bermuda, whilst accounting and personnel management functions were dealt with in the Isle of Man by an associated company, Dorchester Maritime Ltd ("DML"). Though managed by AMLP, the structure was that officers were employed by BP Maritime Services Ltd. Ratings were all employed by AMLP. It is clear that the relationship between AMLP, DML and BP was very close at least at the operational level.
5. Historically, BP had selected its own officers. However, by the 1990s, to stay competitive with other owners, it could not continue to subject its officers to the British tax regime. Crew management contracts with an off-shore manager like the claimant (which is based in Bermuda) were best from a tax planning viewpoint, and these were duly put in place. The first such agreement was dated 1 July 1994 in respect of BP's then bulk oil fleet. Over the next year or so, it entered into another five such agreements in respect of BP's liquid natural gas (LNG) carriers as well. All of the agreements are in materially identical terms, and for the purposes of this claim, I will refer to the first one.
6. In 1994, the numbers of ships in BP's fleet were in the words of one of its witnesses, at something of a nadir. AMLP was at this time the sole manning agent for BP, and it provided officers and ratings for all seventeen of BP's then vessels. The contracts in question were lump sum contracts. For each vessel, a monthly lump sum was set out in two figures, pounds sterling for payments to officers, and US dollars for payments to ratings and all other expenses. The lump sums were all inclusive—they covered the cost of providing the crew and all ancillary services, together with AMLP's administration costs, overheads and profit. The parties later referred to this as a "closed lump sum" basis of remuneration. The contract had an open ended period, subject to BP giving six months' notice. In this event, clause 5.9(c) provided that compensation equal to one half of the applicable monthly lump sum payment prevailing at the date of termination was payable in relation to the vessel or vessels concerned. I shall set out the contractual provisions later, but, to make sense of what comes later, note that they would have produced a substantial sum by way of compensation. On its part, AMLP had the right to "resign" on giving not less than three month's notice. No compensation was payable in that event.
7. By 2000, there were twenty three vessels under management, and BP had started ordering ships in significant numbers. The company had become concerned that it was paying AMLP too much under the lump sum arrangement. In consequence, adjustments to the contractual regime were implemented by a 2000 side letter. A side letter was used so as not to disturb the tax position. Under it, the crew management arrangements moved to a "costs plus fee" basis, or as AMLP and some of the documentation puts it, from a "closed" lump sum system, inclusive of fees, to an "open" lump sum system. Apart from three fixed price elements—namely AMLP's profit, its indirect staff costs and its own office overheads—AMLP's expenses and costs were auditable by BP. There was still a monthly lump sum, but it was now in effect an estimate, being subject to adjustment upwards or downwards depending upon the audit results. BP therefore took the risk of these costs exceeding predictions, though the evidence was that in practice from a fairly early stage AMLP's figures were accepted. The 2000 side letter stated that the revised arrangements were to continue for four years, but without overriding the rights of termination in the 1994 contract.
8. By a second side letter dated 1 April 2003, further refinements were made to the fee structure. Fees were no longer to be broken down into three elements and were now due at the annual rate of US$1,500,000 and £1,000,000 per year to be paid monthly in advance in 12 equal instalments. The sterling element was subject to annual adjustment in accordance with changes to the UK Retail Prices Index (clause 4). The fee element was based upon AMLP providing crew management for between 25 and 32 vessels. The 2003 side letter stated that the revised arrangements were to continue for three years, again without overriding the rights of termination in the 1994 contract, so that they came to an end on 31 March 2006.
9. This brings me to the 2006 renegotiation of the arrangements, and in this respect I have heard oral evidence from four witnesses. These were as follows. For AMLP, Mr Jens Alers who was General Manager at the time based in Bermuda, and Mr Michael Pridham who was DML's Finance Director based in the Isle of Man. For BP Shipping Ltd, I heard from Mr Andrew Cassels who was in charge of the manning of the fleet, and Mr Timothy Reading, who is manager of the BP Shipping Legal Team. There was little difference between these very experienced commercial people, and I unhesitatingly accept their evidence (whilst noting that in relation to parts of the negotiations in 2006 there was a perhaps understandable tendency towards after the event justification of their positions).
10. The agreement that the parties reached in 2006 was incorporated in a third (and last) side letter. Discussions and negotiations between them were conducted primarily between Mr Alers for AMLP and Mr Cassels for BP starting in February 2006. The structure in relation to fees and lump sums remained the same (Mr Alers did not get the full increase in fee levels he was looking for), as did the fleet size (which remained at 25-32 vessels). The duration was to be the same as under the previous side letter, namely three years. On 23 May, Mr Alers sent Mr Cassels an amended version of the 2003 side letter to reflect the changes that had been agreed. On 24 May, Mr Cassels asked why AMLP only had to give three months' notice of termination whereas BP had to give six months. Mr Alers was prepared to agree that there should be a six months' termination period for both parties. As he said, this was a very important contract for AMLP, and he had no wish to be difficult on such a matter.
11. It was then that Mr Reading became involved. At this time he, though not Mr Cassels, was involved in an internal BP review with a view to changing the arrangements that BP had for its sea staff, and knew that the termination of the arrangements with AMLP was a distinct possibility. He realised that in that event, there was as he put it "a risk" that AMLP would be entitled to compensation based on half the monthly lump sum payments (which on any view would be a substantial sum). On 11 June 2006, he emailed Mr Cassels referring to the notice period, and saying that "equalisation might be a useful first step and give me an entree for a question about the definition of lump sum payments but I am not hopeful of success in changing the definition based on the hints Jens [Alers] has given about the materiality of this major contract". Mr Cassells told me that his concerns were that under the existing contractual provisions, AMLP would be entitled to what he described as a "windfall".
12. Having discussed matters with Mr Cassels, on 19 June 2006 Mr Reading sent an email addressed to both Mr Alers and Mr Cassels. Mr Cassels was aware of what was coming. Mr Alers however was not. The email says, "I had a quick skim through the original Clause 5 from the 1994 … Agreement … and got confused in sub-clause 5.9(c) by the reference to 'monthly lumpsum payment'. Now that the side letters have substantially altered the method of remuneration, there seems to be no clearly identifiable monthly lump sum payment anymore; instead you have auditable and adjustable lump sums in paragraph 3 of the side letter and the non-auditable fee structure in paragraph 4 of the side letter. So should the termination payment now refer to the auditable sums or the non-auditable fees? What is the intention? Can either of you help me?"
13. Mr Alers emailed back ten minutes later to the effect that, "In my opinion logic dictates that the termination payment refers to the non-auditable fee element of the side letter, NOT to the lump sums as referred to in the original crew management agreement. The lump sums had become "BPS property" again after we changed across to the new open system in 2000, so we as managers would have a hard time making those lump sums applicable in a termination scenario".
14. About half an hour later, Mr Reading emailed a redrafted side letter on BP letter head. So far as material, this had the termination provisions in the form ultimately signed. About one and a half hours later, Mr Cassels emailed, "What a muddle. It seems to make sense that under the current structure the termination payment would refer to the fee and not to the adjustable/variable lump sum". Twenty minutes after that, Mr Alers emailed back taking issue with the term "muddle". But so far as the drafting was concerned, he said "Okay, so we are all agreed on the termination clause as well".
15. The change of wording therefore, happened over the period of a single day. Mr Reading says that he does not believe that at the time of responding, Mr Alers believed he was doing anything other than agreeing to termination payment compensation being one half of a monthly payment in respect of fees. My findings in that regards were as follows. It is correct that Mr Alers said that AMLP would have a hard time making the lump sums applicable in a termination scenario. However, having observed him testifying, I have no doubt that Mr Alers gave truthful evidence in this respect. I accept that it was clear to him on reading the draft that was sent to him that the intention was to change the basis of termination compensation from half a monthly lump sum to half the management fee, which was an annual fee. In particular, I am satisfied that, as he says, he did not for a moment consider that Mr Reading was proposing something that would amount to a drastic reduction in the amount of the termination compensation that would otherwise be payable. However important the BP contract may have been to him, and it certainly was important, I am satisfied that he would not have agreed to the proposed draft if he had understood it to involve such a major concession.
16. There were further exchanges between the parties with regard to the performance bonus with the result that the side letter was not in fact finalised and signed until 1 August 2006. It was backdated to April 2006. By then the internal BP review had been concluded, and the decision taken to terminate the relationship with AMLP. However AMLP was not aware of this fact at this time. It did not become aware of it until a meeting in Bermuda on 24 January 2007 at which six month notices of termination were delivered to it in respect of all six of the contracts. Nothing was said at that time as to termination payments. In the news release put out on 6 February 2007 announcing the changes, BP referred to the "long and successful" relationship between the parties, and the "exemplary performance" that AMLP had provided over the past twenty years.
17. So close was the relationship between the parties, that it was essential that AMLP continued to provide its services during the notice period, and this happened, ensuring that the handover was carried out in a spirit of cooperation. AMLP made its software systems, intellectual property, staff and data available to BP for a fee of £320,000. Nine of the DML staff were employed by BP in their new Isle of Man office. It only became apparent that there was an issue between the parties as to the level of compensation due under the agreements following the termination of the contract.

The relevant contractual provisions

18. Clause 5 of the Agreements of 1 July 1994 (which as I have said was in the same form in the other agreements) provided as follows:

"... 5.1 BPS shall have the right to remove AMLP as Crew Manager of any of the Vessels for any reason whatsoever and to terminate this Agreement by giving not less than six calendar months' prior notice in writing to AMLP. ...

... 5.4 AMLP shall have the right to resign by giving not less than three calendar months' notice to BPS or such shorter period of notice as BPS may agree. ...

... 5.9 In the event of termination of this Agreement arising in the circumstances set out in Clause 5.1 ... or in the event that BPS sells or otherwise withdraws a vessel then BPS shall:-

(a) bear, and indemnify AMLP against, all costs incurred as a result of termination by AMLP of their employment of their Crew and the repatriation of the Crew; and

(b) purchase at cost from AMLP existing provisions and slopchest on board the Vessel including any on order prior to receipt by AMLP of the notice of termination which AMLP are, despite the use of reasonable endeavours, unable to cancel; and

(c) pay compensation to AMLP equal to one half of the applicable monthly lumpsum payment prevailing at the date of termination. ..."

19. It is the last sub-clause that is the critical one for present purposes, and the underlining is mine. Clause 5 was not amended by either the April 2000 or the April 2003 side letters. But following the discussions I have described above, the 2006 side letter (signed on 1 August 2006 and backdated to April 2006) did do so. Starting with the other relevant provisions of the 2006 side letter:

3. Auditable lumpsums

In consideration of BPS agreeing to the revised fee structure set out in paragraph 4 below, AMLP hereby agrees to change the basis of its remuneration under Clause 7 and Schedule C of each of the Lump Sum Manning Agreements from a closed lumpsum system, inclusive of fees, to an open lumpsum system under which the build up of the lumpsum costs, exclusive of the fee referred to in sub-paragraph 4.1 below, will be auditable by BPS under Clause 19 of each of the Lump Sum Manning Agreements and subject to adjustment where necessary

20. Broadly, this paragraph had been in the contractual arrangements since the 2000 side letter, as had the provisions in clause 4 dealing with the fee structure (as simplified in the 2003 side letter):

4. Revised Fee Structure

It is agreed a revised structure ("Fee Structure") comprising the following two elements shall be applied:-

4.1 First Element – Fees.

Based upon AMLP providing Crew management for between 25 (twenty five) and 32 (thirty two) Vessels under the Lump Sum Manning Agreements as at the Effective Date, AMLP shall be entitled to receive US$1,500,000 ... per Year and £1,067,000 ... per Year. This fee will be paid by BPS to AMLP with the monthly lumpsums referred to in Paragraph 3 above monthly in advance in 12 (twelve) equal instalments ...

21. Clause 5 of the 2006 letter also goes back to the earlier side letters, except for the final words which were added on 19 June 2006, and which appear unchanged in the final signed version. Again, for clarity, I have underlined the crucial passage:

5. Period

The present intention of the Parties is that the revised arrangements set out in this Side Letter shall continue in full force and effect for a period of 3 (three) years from the Effective Date, or such longer period as the Parties may hereafter agree in writing. However nothing in this Side Letter shall override the express termination rights set out in Clause 5 of each of the Lump Sum Manning Agreements, save that the period of 3 (three) months set out in sub-Clause 5.4 thereof shall be amended to 6 (six) months and the reference to "monthly lumpsum payment" in sub-Clause 5.9(c) thereof shall be deemed to be a reference to the fees in Paragraph 4.1 hereof.

The principles of construction

22. I have dealt above with the witness evidence, however as both counsel rightly accepted, quite a lot of it is not admissible on the construction question. The factual matrix is of course admissible, but the "law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy…" (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 913, per Lord Hoffmann). On the same basis, drafts are not admissible in aid of interpretation of a contract (Chitty on Contracts, 30^th edn, vol 1, para 12-119). These "well established and salutary" rules do not apply however when the evidence of the parties' discussions is being considered, not in order to provide a gloss on the terms of the contract, but rather to establish the parties' knowledge of the circumstances with reference to which they used the words in the contract (see Bank of Scotland v Dunedin Property Investment Co. Ltd. [1998] SC 657, per Lord Rodger, applied in Seagate Shipping Ltd. v Glencore International A.G. [2008] EWHC 1904 (Comm) at [51], per David Steel J). It is common ground therefore that so far as the witnesses sought to treat the negotiations as putting a gloss on the contractual provisions, or testified as to internal discussions between them as to what was being negotiated, or their subjective understanding as to what was being proposed, or what had been agreed, such evidence is not admissible in construing the terms that they actually did agree.

The parties' submissions

23. The parties' submissions were as brief as the question to be answered. In summary, did the 2006 side letter amend the termination compensation provisions so that half the annual fee was payable, as AMLP contends, or only half a monthly instalment of the annual fee as BP contends? Mr Persey QC for AMLP submitted that prior to the 2006 side letter being agreed, BP would have been obliged to pay compensation based on one half of the applicable monthly lump sum payments prevailing at the date of termination. The monthly lump sums for the second quarter of 2006 in respect of all of the vessels were US$1,630,400 and £1,823,100, half of which is US$815,200 and £911,550. By agreeing in 2006 to substitute half the annual fee, this sum was reduced US$750,000 and £553,773 respectively. There was no good objective business (or, indeed, any other) reason, he said, why AMLP would have agreed to a reduction in the compensation to US$62,500 and £46,147.75.
24. I have discussed the evidence in this regard above, and think that there is force in this contention. On behalf of BP, Mr Kendrick QC did not accept the premise as to what would have been payable applying the un-amended 1994 provisions, going no further than to assume "for the moment that the Claimants are correct arithmetically". In fact, he demonstrated in cross-examining Mr Alers on the 2006 figures that working out the "applicable monthly lumpsum payment" referred to in clause 5.9(c) of the 1994 agreement is not a straightforward matter. However he (rightly) accepted the general point that a substantial sum would have been payable to AMLP under the un-amended provisions, and as I have mentioned indeed Mr Cassels said in his evidence that what he regarded as a "windfall" was his concern at the time.
25. But Mr Kendrick QC submitted, any commercial person would say that the relevance of the lump sum payments for compensation purposes disappeared after 2000, and Mr Alers accepted this in the email from which I have quoted. He submitted that there was good commercial reason to reduce the amount payable as compensation to a relatively nominal amount. Once the contract shifted from a lump sum to a cost plus fees basis, the risk of cost fluctuation passed from AMLP to BP. By 2006, all AMLP's start up costs had long been taken account of. The contract by then was only for a three year period, and provided for a generous six month notice period. If AMLP's construction is correct, he said, it would mean that they would do far better financially (and do less work) if the six months' notice was given say seven or eight months before the end of the three year period, than if the contract had been fully performed. Further, in this case, there had been an additional £320,000 paid for various items transferred to BP at the end of the notice period.
26. Mr Persey QC accepted that the compensation AMLP contended for was generous, but said that this was appropriate given the importance of the contract to AMLP, as was well known to both parties throughout their relationship and at the time the 2006 side letter was concluded. He points out that in April 2000, 22 staff were employed by AMLP and DML exclusively for the BP contract and a further 8 full-time indirect staff were engaged following the conclusion of the May 2000 Side Letter. By January 2007 AMLP/DML were directly employing 28 full-time staff exclusively on the BP contract together with 8 indirect staff. This represented 40% of their total workforce. BP had 5 of their own staff (employed by an Isle of Man subsidiary) working alongside AMLP/DML's staff. AMLP's relationship with BP provided a substantial proportion of its business and generated at least 75% of its profits. Since under the arrangements officers were employed by BP Maritime Services Ltd, they were no longer available for deployment elsewhere once the relationship ended.
27. I have not found the factors relied on by either party conclusive one way or the other. Clearly, BP regards the compensation claimed by AMLP as unduly generous. On the other hand, there is nothing commercially surprising about such compensation given the parties' close relationship over twenty years, and indeed it is common ground that compensation on such a basis was payable as a matter of obligation between 1994 and 2006. So one comes back to the words used by the parties when they agreed to change the terms in 2006.
28. Both parties (not surprisingly) contended that their construction accords with the natural and ordinary meaning of the words used. The heart of BP's submission is that the expression "applicable monthly lumpsum payment" in clause 5.9(c) still remains in the contract after the 2006 amendment. It submits that AMLP proceeds on the mistaken assumption that those words are deleted. In fact, the expression is simply deemed to refer to AMLP's fees, so that the expression "applicable monthly lumpsum payment" is now deemed to mean "applicable monthly fees". If the parties had meant that there was to be a substitution of an "annual fee" they would have said "annual fee" and they also would not left "monthly" in the wording.
29. AMLP submits with some force that in discussions leading up to the 2006 side letter, fees were always considered on an annual basis. But it relies primarily on the words used in the various provisions in question. Paragraph 5 of the 2006 side letter states that "the reference to 'monthly lumpsum payment' in sub-Clause 5.9(c) [of the 1994 contract] shall be deemed to be a reference to the fees in Paragraph 4.1 hereof". The fees in paragraph 4.1 are US$1,500,000 per year and £1,067,000 per year. Though these are to be paid with the monthly lump sums monthly in advance in twelve equal instalments, this is simply (it submits) a matter of mechanics. It follows that the obligation in clause 5.9(c) of the 1994 agreement to pay compensation to AMLP equal to one half of the applicable "monthly lumpsum payment" prevailing at the date of termination is now deemed to be an obligation to pay one half of the applicable fees in paragraph 4.1, and the applicable fees are US$1,500,000 and £1,067,000.
30. This seems to me to be a commercial construction, and I have concluded that it is the preferable construction. In brief, by the terms of the 2006 side letter, the parties substituted for half the "monthly lumpsum payment" a reference to half the paragraph 4.1 fees, namely US$1,500,000 and £1,067,000. This reduced the amount of compensation payable on termination, but did not reduce it to a nominal amount. It is, as the parties have emphasised, a short point, and the consequence of my conclusion on it is that AMLP's claim succeeds. I am grateful to both parties for their assistance.