Scottish Court of Session Decisions

[1] In this action the pursuer is a body incorporated under the laws of the Kingdom of Norway. The defender is a body corporate constituted pursuant to the laws of the People's Republic of China. It is, I was informed, a state owned entity.

[2] The defender owns the semi-submersible oil drilling unit known as the "Kan Tan IV" ("the Vessel"). On 14 June 1999 the parties to this action entered into a Management Agreement relative to the Vessel. The preamble included the statements that the pursuer (the "Owner") desired to appoint and the defender (the "Manager") desired to accept such an appointment "as exclusive manager of the Vessel for world-wide operations under the terms and conditions set forth in this Agreement" and that

[3] Clause 1 made certain provision in relation to the term of the Agreement. Clause 2 (headed "Performance") provided -

[4] Clause 3 (headed "Operational Duties") provided under sub-clause 3.1 (headed "Personnel") as follows -

Under sub-clause 3.2 (headed "Equipment and Maintenance") it was provided -

Under sub-clause 3.3 (headed "Marketing and Contract Negotiations") it was provided -

Under sub-clause 3.4 (headed "Operation and Maintenance of the Vessel") it was provided -

Sub-clause 3.5 provides for the maintenance by the Manager, at the cost of the Owner, of certain minimum insurance coverage relative to the Vessel and its operation. Sub-clause 3.6 (headed "Administration and Accounts") provided -

Paragraphs (b) and following made provision for financial accounting by the Manager to the Owner.

Sub-clause 3.7 made provision for a management bank account for the Vessel on which, subject to certain controls, the Manager was entitled to draw certain funds.

[5] Clause 4 made provision for a Management Fee to be paid to the Manager by the Owner comprised of various elements, including, (1) U.S. $2,500 per day when the Vessel was operating under a Drilling Contract, (2) U.S. $1,500 per day when the Vessel was laid up, (3) a percentage of the difference between the actual dayrate earned by the Vessel operating under a Drilling Contract and the Operating Cost (as prescribed in a Schedule), that difference to be distributed in the period after 31 December 1999 in the proportions of 13% to the Manager and 87% to the Owner, and (4) certain costs upon termination.

[6] Certain further provision was made including the choice of Scottish law to be that by which the Agreement was to be construed and governed.

[7] The pursuer took charge of the Vessel sometime shortly after the execution of the Agreement. By March 2000 no Drilling Contract had been secured by the pursuer for her. She meantime lay "hot stacked" (i.e. laid up but available for operation) at Invergordon. In separate proceedings instituted by it in this court the present defender seeks certain remedies including declarator that the Agreement has been validly terminated. The present pursuer has lodged defences in that action in which it challenges the jurisdiction of this court to entertain the present defender's claims. In this action, in which the pursuer makes various financial claims based upon alleged repudiation and breach of contract by the defender, jurisdiction has been founded on an arrestment of the Vessel ad fundandam jurisdictionem. An arrestment on the dependence has also been laid. The sums claimed by the pursuer exceed in total U.S. $27 million.

[8] The issues presently before me arise out of a motion by the defender that the arrestment on the dependence be recalled without caution (primarily on the basis that, under section 47(1) of the Administration of Justice Act 1956, it was incompetent and inept), failing which that it be recalled on security being found in the sum of U.S. $6.5 million. That figure originated from an indication which I gave as to the appropriate level of security at an initial hearing of the motion and on the basis of the information and argument then presented, the motion being then continued, without formal determination of the amount of security, for an acceptable cautioner to be identified. Since that indication was given, both parties have taken advantage of the continuation to fortify their respective positions, the pursuer by producing certain documentary material to support the level of its averred claims and the defender by (1) producing certain documentary material in response and (2) presenting for the first time the argument on competency.

[9] It is appropriate first to address the issue of competency. It was not disputed before me that this issue might properly be dealt with in the context of a motion for recall, the case of Interatlantic (Namibia)(Pty) Ltd v Okeanski Ribolov Ltd 1996 S.L.T. 819 being illustrative of such procedure.

Section 47(1) of the 1956 Act provides -

Section 47(2) provides -

The Vessel is a "ship" within the definition of that expression contained in section 48. The pursuer relies on averment on section 47(2)(d).

[10] Mr Clive for the defender submitted that the Management Agreement was plainly not an agreement relating to the hire of the Vessel. Nor, he submitted, was it an agreement relating to its use. The use of the Vessel was for drilling for hydrocarbons. The Management Agreement was not of that character; rather it was for the management of the Vessel and for the marketing of its use by third parties for drilling purposes. There was not a reasonably direct connection between the Management Agreement and the use of the Vessel; at best for the pursuer, the connection was merely with a possible future use, no Drilling Contracts having been secured.

[11] Mr Howie for the pursuer submitted that the Management Agreement fell within section 47(2)(d). It was, on a sound analysis of its provisions, an agreement for the use by the pursuer of the Vessel for drilling purposes; in any event, there was a reasonably direct connection between the Management Agreement and those purposes. He cited, for the proper interpretation of the expression "relating to" in section 47(2), Gatoil International Inc v Arkwright-Boston Manufacturers Mutual Insurance Co and Others 1985 SC (HL) 1 and, for the proper interpretation of the expression "arising out of", Samick Lines Co Limited v Owners of the Antonis P Lemos [1985] A.C. 711. The Management Agreement was in various aspects directly concerned with the operation of the Vessel, including its crewing and equipment. Mr Howie also referred, as an illustration of a "Management Contract" being within the English equivalent of section 47(2)(d) (namely, section 1(1)(h) of the 1956 Act (now section 20(2)(h) of the Supreme Court Act 1981)), The "Stella Nova", briefly reported in [1981] Com L R 200.

[12] In Gatoil v Arkwright-Boston Insurance the issue was whether a claim for premiums on a policy of insurance effected over a cargo of oil to be carried by ship fell within section 47(2)(e) ("any agreement relating to the carriage of goods in any ship whether by charterparty or otherwise"). It was ultimately held in the House of Lords that it did not. The leading speech on the interpretation of the wording of the sub-section was delivered by Lord Keith of Kinkel, who at pps.15-16 said -

Although his Lordship refers in this passage to the expression "in relation to" rather than to the cognate expression "relating to" (the statutory expression), the sense is clear. The agreement need not, in the present case, be one "for" the use of the Vessel, though that will obviously satisfy the requirements; it will be sufficient if there is some reasonably direct connection with such use.

[13] In my view the Management Agreement falls within section 47(2)(d). It is not restricted to the business of the obtaining of Drilling Contracts for the Vessel but also concerns in important respects the operational functioning of the Vessel both generally and in the fulfilment of such contracts as are obtained. To that end the Manager must ensure inter alia that the Vessel is kept in a seaworthy and fully operational condition and with valid certificates. It is responsible for providing the crew and, in respect of equipment and maintenance of the Vessel, for carrying out all the functions which, in accordance with good oil field industry practice, would be performed by persons conducting the marine and drilling operations of a drilling vessel. The latter imports that the marine operations, and possibly the drilling operations or aspects of them, will be carried out by a crew engaged by the Manager, whether employed directly by it or supplied through foreign or domestic crewing agents. The Management Agreement effectively cedes operational control of the Vessel to the Manager. It is not, in my view, of importance in identifying the true character of the Management Agreement that no drilling contracts had, during the period while the pursuer was in charge of the Vessel, actually being secured for it. The responsibility for training Chinese personnel in operational skills also points to a close connection between the Management Agreement and the use of the Vessel. In my view the Management Agreement has a reasonably direct connection with the use of the Vessel. The arrestment was accordingly neither incompetent nor inept. In reaching that conclusion I have not found it necessary or appropriate to rely on The "Stella Nova"; in that case there was apparently no contradictor and the report does not disclose the terms of the management agreement under consideration.

[14] The pursuer's financial claims are identified in seven conclusions, ignoring that for expenses. It is not disputed that, if security, by caution or otherwise, is to be required, it should cover at least the sums claimed in conclusions 1, 2, 3, 4 and 7, which in total amount to approximately US $2.2 million. These relate to claims in respect of periods up to about the end of 2000. Conclusion 5, which is for about US $1.54 million, relates to claims for remuneration which the pursuer contends it would have earned in the period between the end of 2000 and about September 2001, during which period, it says, but for the defender's breach of contract, the Vessel would probably have been engaged on extensions to an identified drilling contract which it claims would earlier have been secured under its management. The sums sued for under the foregoing conclusions total about US $3.74 million, still significantly below the US $6.5 million which, in its alternative motion, the defender accepts would be an appropriate level of security. The defender's essential quarrel is in respect of the amount of security demanded by the pursuer in respect of conclusion 6 (for US $23.29 million), being damages claimed by it in respect of the period from September 2001 until the end of 2005.

[15] The claim made by conclusion 6 is large and prima facie might seem remarkable against the background that the Vessel remained without drilling engagements throughout the nine months or so when it was within the pursuer's charge and the circumstance that it and other drilling units remain stacked at Invergordon (and presumably others elsewhere). The pursuer's claim, however, proceeds on the basis that, while recently there has been a slump in the relative market, that slump, on the basis of a reputable analysis, is predicted to be radically altered in the near future to a highly profitable situation which will not only result in effectively full employment for the Vessel but employment at dayrates which will generate very substantial profits for those having an interest in them. The pursuer claims that, by reason of the defender's unlawful termination of the contract, it has been deprived in respect of the period from September 2001 to the end of 2005 not only of Management Fees of some US $3.79 million but of its share of profit which would have amounted, it claims, to US $19.5 million. As the pursuer's contractual share of profit was 13% of the whole profit, this calculation postulates a total profit earned by the Vessel during that period of some US $150 million.

[16] Mr Howie relied primarily on a document issued in December 1999 by Petrodata Limited (an oil industry analyst). He submitted that on the basis of the material contained therein it was responsibly forecast that, from a current slump in utilisation of and dayrates for a rig such as the Vessel, in 2001/2002 there would be experienced effectively full utilisation (subject only to necessary breaks for servicing and the like) and very substantially enhanced dayrates. From current dayrates which only modestly exceeded current daily costs (the latter amounting to about US $30,000), dayrates might well be achieved of about US $130,000 giving a daily net profit of US $100,000, of which the pursuer's share would be US $13,000. At an effective utilisation rate of 92%, this would have generated, over the four and a quarter year period to the end of 2005, profits for the pursuer of the order of US $19.5 million in that respect. The taking of a multiplier of 4.25 itself, it was argued, demonstrated restraint by the pursuer since the Management Agreement had no fixed term, being terminable only in certain defined events none of which might have happened. Mr Howie indicated that another 1999 document (not produced) forecast similar spectacular increases in utilisation and dayrates over those recently achievable. Before the recent slump very high returns had been made. The previous manager of the Vessel had, he stated, earned about US $25 million over a four year period.

[17] Mr Clive submitted that the pursuer's claim was unspecific, speculative and, on an overview, grossly excessive. The vessel had recently been valued at US $40 million, albeit insured for twice that amount. It would, he suggested, be extraordinary if, as would follow from the pursuer's figures, this asset were expected to generate over a four year period net income amounting to four times its capital worth. The background against which the pursuer's claims must be set was the absence of work found by the pursuer for the Vessel and the fact that currently dayrates were only at about break-even levels, with several rigs being hot stacked. The documentary material relied on by the pursuer had been published in December 1999 and necessarily relied on information earlier than that time; more recent material (including documentation from the same source) demonstrated that the earlier predicted take-off in dayrates had simply not occurred nor shown any sign of occurring. Documentation from other oil industry analysts predicted a much more modest pattern of dayrates. The defender had recently received an enquiry for the Vessel which indicated dayrates in the order of US $40,000 - $45,000. It was also necessary to take into account the likely increase in costs to be set off against any increase in dayrates. As to the appropriate period over which any assessment of the pursuer's claim should be made, it was important to recognise that the Management Agreement provided for termination in a number of events, including the possible deployment of the Vessel to Chinese waters (which could be effected in a matter of months) and breakdown in co-operation between the Owner and the Manager (a not unlikely occurrence given recent events). Moreover, the defender had a maintainable defence to the action and had raised, prior to the commencement of this action, its own action for damages arising out of essentially the same events.

[18] A pursuer "is entitled to use diligence in order to obtain a proper degree of security on the dependence of his action.... On the other hand, he is entitled to no more. To have more would be regarded as nimious and oppressive" (Henderson v George Outram & Co Ltd 1993 S.L.T. 824, per Lord Abernethy at p.825K.) As regards what is nimious (i.e. excessive), Graham Stewart on Diligence at p.198 observed -

Where a claim is for a "random" sum, as in an action of count, reckoning and payment (where the claim does not ordinarily proceed upon any calculation of loss), the court commonly regards the use of diligence for the whole of that sum as nimious. Where the claim is one for damages, restriction of the diligence to an amount below (sometimes substantially below) the sum sued for may in some circumstances be appropriate. Henderson v George Outram & Co Ltd is illustrative of such substantial restriction. While that action was for defamation, the power of the court to restrict the diligence in an action of damages is not limited to actions of damages for defamation, though the difficulty of exact quantification of damages often experienced in such actions may point to the appropriateness of such treatment.

[19] On the information before me it is plain that the market for the profitable use of rigs such as the Vessel can be highly volatile. It is dependent among other factors on the movement in oil prices, themselves subject to fluctuations which are both substantial and not readily predictable. The historical pattern of dayrates for rigs appears to show among other features a very sharp rise from about 1995 through to 1998 followed by an even sharper fall from then to at least 1999. While it is possible that rates will rise again, there is no clear empirical material to suggest that that has as yet begun to happen. Even less certain is when it may happen, what the increase in rates may be and how long such increase may be sustained. While in no way doubting the responsibility with which the forecast relied on by the pursuer (or indeed by the defender) has been made, such forecasts are necessarily highly uncertain. Nor is it likely that forecasts of this kind will become any more certain. Accordingly, when this court comes, if it does, in due course to assess damages, it will probably require to do so at least to some material extent on the basis of uncertain forecasts, even where the bases of these are fully explained and justified by their authors in evidence. Thus, even if in the meantime the rig market has substantially improved, any future damages then assessed may involve material discounts to reflect the uncertainties necessarily inherent in them.

[20] In these circumstances and against the whole materials and arguments presented to me, I am of opinion that the amount of security to be found by the defender should be restricted to a sum materially less than the total sum sued for (together with interest and expenses). In doing so, however, I recognise that the pursuer may be able to persuade the court that the damages to which it is entitled (if it establishes liability) are, in the circumstances then known and forecast, very substantial notwithstanding the imponderables and that it is proper that the pursuer should retain security for the payment of any such damages.

[21] I fix the total security to be provided (prior to taking into account security already available) at US $15 million. That figure is arrived at on the basis that the pursuer's claims are secured for the full amount of those contained in conclusions 1 to 5 inclusive and conclusion 7. As regards conclusion 6, I have proceeded on the basis of a multiplier of three years from September 2001. In respect of two of those years I have assumed that effective employment of the rig might be as much as 85% (as against the pursuer's 92%) and that the pursuer's share of net profit might be as much as US $10,000 per day (as against the pursuer's highest figure of US $13,000). As regards the other year I have assumed 80% effective employment and a share of net profit of US $7,000 per day; the forecast relied on by the pursuer appears to suggest that the peak predicted would be sustained only for about two years, falling to some extent thereafter. The Management Fees over the same period of three years have been calculated on equivalent proportions of effective employment. These sums total about US $14.5 million. Allowing for some interest (which is likely to be modest as the largest claim is likely to remain one for future loss) and for expenses, US $15 million is, in my view, an appropriate figure.

[22] Parties are agreed that monies presently held on a bank account under joint control are pro tanto security for the pursuer's claims. These monies amount to US $3.7 million. The amount of additional security to be found is accordingly US $11.3 million. Parties are now agreed on an acceptable cautioner.

[23] Mr Clive in support of his alternative motion (for restricted security) referred to the circumstance that the defender was a state owned body and that there was no suggestion that it was in the habit of not paying its debts. In response to Mr Howie, Mr Clive cited West Cumberland Farmers Ltd v Director of Agriculture of Sri Lanka 1988 S.L.T. 296. In that case Lord Weir held that it would be oppressive to maintain the arrestment laid on a ship's cargo in circumstances where the action was directed against the Director as cargo owner. At p.297A-B his Lordship said -

[24] In the present case the defender is a state owned body in the People's Republic of China. Mr Howie did not concede that it could properly be assumed that any decree in the pursuer's favour would be met by the Chinese Government. The defender, he said, had, so far as known, no other assets in this part of the world. The pursuer did not wish to find itself searching the world for a means of enforcing an unsatisfied decree in its favour.

[25] It is not common to use diligence on the dependence against state agencies in this country. Such agencies can with certainty be expected to meet any decree pronounced against it by this court. In such circumstances the use of diligence on the dependence would be oppressive. The position may be less certain in relation to agencies of foreign governments or of bodies otherwise controlled or supported by such governments. On the information before me it cannot be said with certainty that the government of the People's Republic of China would secure that any final decree pronounced against the defender in this action would immediately be satisfied. In these circumstances, and having regard to the sums at stake, the use and maintenance of diligence on the dependence cannot, in my view, be said to be oppressive. Were the position with regard to the Chinese Government to alter, a variation in the disposal relative to security might then be appropriate. It was not, however, suggested that the provision of security in the form of a guarantee, as proposed, by an identified Hong Kong bank gave rise to any serious difficulty.