QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| MARINE TRADE S.A.
|- and -
|(1) PIONEER FREIGHT FUTURES CO LTD BVI
(2) ARMADA (SINGAPORE) PTE LTD
Mr M. Tselentis QC and Mr M. Ashcroft (instructed by Holman Fenwick Willan) for the First Defendant
Hearing dates: 20 to 23 October 2009
Crown Copyright ©
The Hon. Mr Justice Flaux :
Introduction and factual background
(1) US$7,085,981.85 under the FFAs for which Marine Trade was the Seller;
(2) US$12,116,223.67 under the FFAs for which Pioneer was the Seller;
The terms of the contracts
5. Settlement Dates:
The last Baltic Exchange Index publication day of each Contract Month.
7. Settlement Sum:
The "Settlement Sum" is the difference between the Contract Rate and the Settlement Rate multiplied by the Quantity by Contract Month. If the Settlement Rate is higher than the Contract Rate, the Seller shall pay the Buyer the Settlement Sum. If the Settlement Rate is lower than the Contract Rate, the Buyer shall pay the Seller the Settlement Sum.
8 Payment Procedure and Obligations:
Payment of the Settlement Sum is due on the later of two (2) London business days after presentation of payee's invoice (with complete payment instructions) or five (5) London business days after the Settlement Date and for this purpose a "London business day" means a day (other than a Saturday or Sunday) on which commercial banks are open for business in London). The Settlement Sum will be deemed "paid" when it has been received into the bank account designated by the payee.
Payment of the Settlement Sum shall be made telegraphically, in full, in United States dollars. The costs incurred in effecting payment shall be for the account of the payer. Payment may only be effected directly between the parties. The Settlement Sum shall be paid without any deduction or set-off except as permitted pursuant to the Master Agreement or otherwise as agreed by the Buyer and the Seller in writing.
9. ISDA Master Agreement:
This clause 9 applies only if either:
(i) this Confirmation does not already constitute a Confirmation under an existing master agreement entered into by the parties to this Confirmation; or
(ii) the parties agree, either by virtue of clause 20 or otherwise, that the terms of the Master Agreement that is constituted by this clause are to replace any such existing master agreement.
This Confirmation constitutes and incorporates by reference the provisions of the 1992 ISDA® Master Agreement (Multicurrency - Cross Border) (without Schedule) as if they were fully set out in this Confirmation and with only the following specific modifications and elections:
(a) Section 2(c)(ii) shall not apply so that a net amount due will be determined in respect of all amounts payable on the same date in the same currency in respect of two or more Transactions;
(a) Definitions. The terms defined in Section 14 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement.
(b) Inconsistency. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction.
(c) Single Agreement. All Transactions are entered into in reliance on the fact that this "Master" Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions.
(a) General Conditions.
(i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement.
(ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement.
(iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement
If on any date amounts would otherwise be payable:-
(i) in the same currency; and
(ii) in respect of [two or more Transactions],
by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount.
5. Events of Default and Termination Events
(a) Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party:-
(i) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party;
(vii) Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:
(2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due;
6. Early Termination
(a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).
(e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off.
(i) Events of Default. If the Early Termination Date results from an Event of Default:-
(1) First Method and Market Quotation. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party.
(2) First Method and Loss. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement.
(3) Second Method and Market Quotation. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.
(4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party.
(d) Remedies Cumulative. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law.
"Loss" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or re-establishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets.
"Unpaid Amounts" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate. Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed. The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties.
1. Was Pioneer affected by an Event of Default under Section 5(a)(vii)(2) when the January 2009 Contract Month was due for Settlement?
2. If so, were Settlement Sums in favour of Pioneer available for netting under Section 2(c)/clause 9(a) against Settlement Sums in favour of Marine Trade?
3. Was Marine Trade affected by an Event of Default under Section 5(a)(vii)(2) when the January 2009 Contract Month was due for Settlement?
4. In the light of the answers to Issues 1 to 3, what (if anything) became due to Marine Trade from Pioneer in respect of the January 2009 Contract Month when it was due for Settlement?
5. If a sum became due to Marine Trade from Pioneer in respect of the January 2009 Contract Month when it was due for Settlement, is Pioneer presently under an obligation to pay that sum to Marine Trade? In particular:
(iii) is Marine Trade now affected by an Event of Default under Section 5(a)(vii)(2) and if so, is the result that Pioneer is not presently obliged to pay Marine Trade any sum in respect of the January 2009 Contract Month? [Issues 5 (i) and (ii) are no longer live for reasons explained later in the judgment.]
6. Is Marine Trade entitled to restitution of the net aggregate Settlement Sums in respect of the January 2009 Contract Month paid to Pioneer by Marine Trade under protest?
7. If Pioneer was affected by an Event of Default when the January 2009 Contract Month was due for Settlement, and continues to be affected by an Event of Default, should any declaration (if so in what terms) be made as to what the parties' rights and obligations will be if the latter Event of Default ceases to affect Pioneer hereafter?
Issues 3 and 4
Burden of proof
Event of Default: the facts
1) April account: BHP & Classic monies to be paid asap-$3.3M plus $0.7M other, totalling $4M.
2) April balance: $5.4m to be paid by 28th.
3) Assign/novate BHP and Classic to TMT-current worth $26M.
4) Other freight business: reduction in charterparty rate from $72k/day to $15k/day.
5) Marine Trade has outstanding debtors:-
Balance of Marine Trade debt to TMT to be received from recoveries from these parties. Marine Trade and TMT to cooperate with information sharing and actions that are mutually beneficial.
A joint proposal for Cal 10?
[Mr Su] immediately came back and said he wanted 2) by 21st May and 5) he was very blunt and said no way did he agree to accept payment from these parties.
Can you please review your position, and see if you have any other alternatives?
After your ..message I tried to find alternatives but regretfully at this moment due to the defaults and to the expected future bad news about our paying parties this is our best (ie point 2 cannot be satisfied within the proposed terms but to be postponed subject to recover[y] of money from our debtors.
To be absolutely clear the negotiations are not finalised. TMT cannot accept the proposals at this level.
We are able to accept assignment of the BHP/Classic whilst negotiations continue.
I have a response from Mr Su: in return for the $4M payment (payable now) he agrees not to pursue legal channels.
I have no instructions regarding the entire proposal, but suggest we at least keep communications open via the above payment.
We take this opportunity to recall your firm message dated 13 May wherein you have confirmed that as per instructions received from Mr Su in his capacity as representative of TMT, you undertook not to take any action in respect of sums payable in May 2009 settlement provided that Marine Trade would pay the sum of $4 million.
Relying on this undertaking, Marine Trade have remitted the sum of US$4 million to TMT. We trust that the above is sufficiently clear and any default notice for May 09 account will be clearly invalid and considered in breach of the covenants.
It is denied that my email of 13 May amounted to an undertaking or a representation on behalf of TMT Asia Limited that it would not rely on its contractual rights under the FFAs in the absence of proper and timely payment by Marine Trade. Indeed it was subsequently made clear to you that TMT Asia Limited would take any and all action that it deemed appropriate in the circumstances including any legal action. Your alleged and/or purported reliance on that email is also denied.
The consequences of there being an Event of Default
To the simple call of justice, there are a number of possible objections. The first is to be found in the structure of our law of restitution, as it developed during the 19th and early 20th centuries. That law might have developed so as to recognise a condictio indebiti - an action for the recovery of money on the ground that it was not due. But it did not do so. Instead, as we have seen, there developed common law actions for the recovery of money paid under a mistake of fact, and under certain forms of compulsion.
The answer, at any rate for the moment, is that unlike civilian systems, English law has no general principle that to retain money paid without any legal basis (such as debt, gift, compromise, etc) is unjust enrichment. In the Woolwich case  AC 70, 172 Lord Goff said that English law might have developed so as to recognise such a general principle - the condictio indebiti of civilian law - but had not done so. In England, the claimant has to prove that the circumstances in which the payment was made come within one of the categories which the law recognizes as sufficient to make retention by the recipient unjust. Lord Goff provided a list in the Woolwich case at pp 164-165 and the decision itself added another. [i.e. money paid by way of tax to a public body which was acting ultra vires]
(1) It was Mr Arnese's clear view at the end of January 2009 (as a result of market rumours and reports in Lloyd's List and Tradewinds that Pioneer had defaulted on its obligations to Armada) that Pioneer was affected by an Event of Default pursuant to Section 5(a)(vii)(2) of the Master Agreement. He also understood that, if this was the case, Marine Trade was not obliged to make any payment to Pioneer, by virtue of Section 2(a)(iii).
(2) When Pioneer issued a Section 5 Notice on 9 February 2009, Marine Trade concluded that Pioneer maintained its view that it was not affected by an Event of Default and that the balance invoiced of US$5,030,242.50 was due and owing.
(3) When Marine Trade's application for an injunction was refused, it was faced with a real risk that Pioneer would take steps to bring about early termination of the FFAs. Despite Mr Arnese's view as to Pioneer's financial situation, Pioneer was the party in a position to know in fact whether or not it was affected by an Event of Default. Its demand for payment amounted to a statement on its part that it was not affected by an Event of Default. If Pioneer had not served a Section 5 Notice, Marine Trade would not have paid Pioneer the sum of US$5,030,242.50.
(4) To avoid the risk of liability in the event of early termination, Marine Trade paid the sum of US$5,030,242.50 on 13 February 2009 under protest and on the express basis that the sum was not due and that Marine Trade would seek to recover the sum in these proceedings. Mr Arnese describes this as "the only option available to Marine Trade to avoid the risk that Pioneer would take steps to designate early termination".
(5) If Pioneer were correct in its view that it was not affected by an Event of Default and that sums were due to it from Marine Trade (which Mr Arnese did not consider to be the case), the consequences of Pioneer designating early termination would have been a debt due to Pioneer of some US$116 million. However, if Pioneer were not correct in its view and Marine Trade failed to pay, he believed Pioneer would still designate early termination.
(6) Even though Mr Arnese was confident that Marine Trade would succeed in establishing that it was not liable to pay any sums to Pioneer because Pioneer was affected by an Event of Default, the damage to Marine Trade's reputation of a designation of early termination, even if not justified, would have been very severe.
Cases where the payer was aware that there was an issue of law which was relevant but, being in doubt as to what the law was, paid without waiting to resolve that doubt may be left on one side. A state of doubt is different from that of mistake. A person who pays when in doubt takes the risk that he may be wrong--and that is so whether the issue is one of fact or one of law.
I should say in conclusion that your Lordships' decision leaves open what may be difficult evidential questions over whether a person making a payment has made a mistake or not. There may be cases in which banks which have entered into certain kinds of transactions prefer not to raise the question of whether they involve any legal risk. They may hope that if nothing is said, their counter-parties will honour their obligations and all will be well, whereas any suggestion of a legal risk attaching to the instruments they hold might affect their credit ratings. There is room for a spectrum of states of mind between genuine belief in validity, founding a claim based on mistake, and a clear acceptance of the risk that they are not. But these questions are not presently before your Lordships.
64. In support of these arguments reference is made to what I said in Kleinwort Benson  2 AC 349 about the state of mind of the payer who claims to have made a payment under a mistake. At p 409-410 I said that cases of mistake could vary from complete ignorance to a state of ample knowledge but a misapplication of what was known to the facts - from sheer ignorance to positive but incorrect belief, as Mason CJ said in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 374. But I also said that a state of doubt was different from a mistake, and that a person who pays when in doubt takes the risk that he may be wrong. I ended this passage at p 411C-D by saying that the critical question was whether the payer would have made the payment if he had known what he is now being told was the law.
65. These propositions are capable of further refinement: see Professor McKendrick, 'Mistake of Law' - Time for a Change, in The Limits of Restitutionary Claims: A Comparative Analysis (ed Swadling, 1997), pp 232-233; Graham Virgo, The Principles of the Law of Restitution (1999), p 161; Professor Burrows, the Law of Restitution, 2nd ed (2002), p 140. The difficult question is what degree of doubt is compatible with a mistake claim, as Professor Burrows points out. I see the issue as being essentially one of causation. What was the effect of the mistake on the payer? But the basic principle is, of course, that of unjust enrichment. At what point can it be said that the payee has been unjustly enriched? The answer to these questions will depend on the facts of the case. One can leave on one side cases where there is another ground on which the payee was entitled to be paid: frustra petis quod mox restiturus es. As for the rest, the payer's reason for making the payment despite his doubt will have a part to play in resolving the issue as to whether the payer, who would not have made the payment had he known the true state of the facts or the law at the time of the payment, should bear the risk or can recover on the ground that he was mistaken.
26. This was a very compressed remark in the course of a discussion of other matters and I do not think that Lord Hope could have meant that a state of doubt was actually inconsistent with making a mistake. Contestants in quiz shows may have doubts about the answer ("it sounds like Haydn, but then it may be Mozart") but if they then give the wrong answer, they have made a mistake. The real point is whether the person who made the payment took the risk that he might be wrong. If he did, then he cannot recover the money. Speaking for myself, I think that there is a parallel here with the question of whether a common mistake vitiates a contract. As Steyn J said in Associated Japanese Bank (International) Ltd v Credit du Nord SA  1 WLR 255, 268:
"Logically, before one can turn to the rules as to mistake…one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many pleas of mistake will either fail or prove to have been unnecessary."
27. Likewise, the circumstances in which a payment is made may show that the person who made the payment took the risk that, if the question was fully litigated, it might turn out that he did not owe the money. Payment under a compromise is an obvious example: see Brennan v Bolt Burdon  EWCA Civ 1017;  QB 303. I would not regard the fact that the person making the payment had doubts about his liability as conclusive of the question of whether he took the risk, particularly if the existence of these doubts was unknown to the receiving party. It would be strange if a party whose lawyer had raised a doubt on the question but who decided nevertheless that he had better pay should be in a worse position than a party who had no doubts because he had never taken any advice, particularly if the receiving party had no idea that there was any difference in the circumstances in which the two payments had been made. It would be more rational if the question of whether a party should be treated as having taken the risk depended upon the objective circumstances surrounding the payment as they could reasonably have been known to both parties, including of course the extent to which the law was known to be in doubt.
Lord Hoffmann suggests (at paragraph 26) that: "The real point is whether the person who made the payment took the risk that he might be wrong. If he did, then he cannot recover the money." But my thesis is not that, if someone pays money knowing that he may not be under any liability to do so, he cannot recover it. Rather it is that he cannot recover it as money paid under a mistake of law so as to benefit from the longer limitation period available under section 32. Certainly he can recover the money provided only that he sues in time and has some other cause of action, such as total failure of consideration. Clearly the quiz contestant who, in doubt whether Haydn or Mozart wrote the eine kleine nachtmusik answers Haydn, made a mistake. Suppose, however, that, making that mistake, he had paid out money legally due only if Haydn had been the correct answer. To my mind he, no less than the quiz contestant, took the risk that he might be wrong: he could not recover his payment as money paid under a mistake of law (or fact) although, provided he sued within six years, he could well recover it on another basis.