FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President Lord Eassie Lord Osborne	[2011] CSIH 54 CA115/00 OPINION OF THE COURT delivered by THE LORD PRESIDENT in Reclaiming Motion by TOR CORPORATE A.S. Pursuer and Reclaimer; against SINOPEC GROUP STAR PETROLEUM COMPANY LIMITED Defender and Respondent: _______

Act: D Johnston, Q.C., M Ross; Tods Murray LLP

Alt: Dean of Faculty (Keen, Q.C.); McBrearty; Simpson & Marwick

16 August 2011

[1] The reclaimer ("TOR") is a company incorporated under the laws of the Kingdom of Norway. The respondent, now styled Sinopec Group Star Petroleum Company Limited but previously China National Star Petroleum Corporation ("CNSPC") is a body corporate constituted pursuant to the laws of the People's Republic of China. CNSPC is and was at all material times the owner of the semi-submersible drilling unit known as "KAN TAN IV" ("the Vessel").

[2] On 14 June 1999 TOR and CNSPC entered into a Management Agreement with respect to the Vessel. In that agreement they are respectively referred to as the "Manager" and the "Owner".

[3] Clause 1 of the Management Agreement (head noted "Term of Agreement") provides:-

"This Agreement will be effective from the date of signing.... The term of this Agreement shall continue and shall not be terminated except as follows:

(A)....

(B)...

(C)...

(D) if the Manager or the Owner commits a material breach of this Agreement and has not so remedied such breach within three months of receipt of a written notice by the Owner or the Manager, as the case may be, requiring the breaching party to remedy the same;

(E) if the Owner is not satisfied with his co-operation with the Manager and/or the manner in which the Manager is executing his duties and obligations as stipulated by this Agreement and has advised the Manager of his dissatisfaction in writing and the Manager has not taken the necessary steps to rectify the situation within one month, then the Owner may terminate this Agreement by providing three months written notice, but always subject to completion of ongoing drilling contracts...;

(F)...

For the avoidance of doubt the Agreement cannot be terminated solely with the intent to award the management of the Vessel to another contractor."

[4] Clause 2 (head noted "PERFORMANCE") provides:

"The Owner hereby appoints, and the Manager hereby accepts such appointment, as exclusive manager of the Vessel for world-wide operations under the terms and conditions set forth in this Agreement. The Manager shall on behalf of the Owner and at the Owner's risk and expense manage, maintain and repair the Vessel in accordance with sound drilling rig management and general operation practice, efficiently and economically, to the best of its professional ability in regard to performance, safety, shipshape appearance, and will arrange technical supervision, classification etc in order to keep the Vessel in a seaworthy and fully operational condition and with valid certificates. The Manager shall keep the Owner fully advised of any significant issues concerning the Vessel and its operation. Notwithstanding the foregoing, the Owner has the ultimate and complete responsibility for the Vessel and shall indemnify the Manager in accordance with Clause 5 below.

...."

[5] Clause 3.4 (headed "Operation and Maintenance of the Vessel") provides:

"(a)...

(b) The Manager shall provide for technical supervision, repairs, classification, customary maintenance, upgrade and conversion and in all other respects use its best endeavour so that, at all times, the Vessel is kept duly operational and seaworthy, and maintains its certificates, regulatory compliance as applicable and permissions for maritime and drilling operations.

...."

[6] Clause 9 (headed "ARBITRATION AND GOVERNING LAW") provides:

"This Agreement shall be construed and governed in accordance with Scottish law.

(a) If any dispute should arise in connection with the interpretation and fulfilment of this Agreement same shall be decided by arbitration in the City of Edinburgh in accordance with Scottish law and shall be referred to a single arbitrator to be appointed by the parties hereto. If the parties cannot agree upon the appointment of the single arbitrator, the dispute shall be settled by three arbitrators, each party appointing one arbitrator, the third being appointed by the two appointed arbitrators.

..."

[7] TOR took possession of the Vessel, which at that time was not engaged in drilling operations but was laid up, or "stacked", at Invergordon. It so remained while TOR was in possession of it. CNSPC became dissatisfied that TOR had not secured a drilling contract for the Vessel. In May 2000 they obtained an order in this court, interpelling TOR from holding itself out as having a continuing right to manage the Vessel. CNSPC subsequently secured repossession of the Vessel. Prior to doing so it had sent various communications to TOR purporting unilaterally to terminate the Agreement. In the arbitration proceedings hereinafter referred to the arbitrators found that CNSPC had not validly terminated the Agreement under Clause 1(E), or otherwise, and that by its actings had repudiated the Agreement. TOR accepted that repudiation and sued in the present commercial action for damages. CNSPC resisted that action and also lodged a counterclaim in which it sought damages from TOR for alleged breaches of the Management Agreement by it. After sundry procedure the Lord Ordinary (Hamilton) on 3 May 2001 pronounced the following interlocutor:

"The Lord Ordinary, having heard counsel, on the Pursuers' motion and of consent Repels the Pursuers' second plea-in-law in the counterclaim; further, in respect that the parties have agreed that all questions arising in the principal action and counterclaim except for questions of entitlement to, assessment of or award of damages for any or all breaches of contract the arbiter or arbiters may find to be established, be referred to arbitration, Sists the principal action and the counterclaim to enable arbitration to take place...".

[8] In furtherance of that interlocutor the parties proceeded to arbitration. It was conducted under UNCITRAL rules, although no formal submission to arbitration was entered into. The arbitral tribunal comprised three arbitrators. A record was made up. It comprised a Claim (by TOR) and a Counterclaim (by CNSPC). The order sought by TOR in furtherance of its Claim was that "The CNSPC has repudiated and/or breached its contract with TOR". In furtherance of its Counterclaim CNSPC sought three orders. The first, which related to an allegation that CNSPC had been induced to enter the contract by misrepresentation by TOR, was at debate excluded by the arbitrators as not within the scope of the arbitration. The other orders sought, insofar as material, were (1) "As at 14 March 2000 CNSPC was entitled to terminate the contract in accordance with Clause 1(E) subject to its liability under Clause 4.5 of the contract, and duly did so terminate the contract" and (2) "TOR was in material breach of contract".

[9] In respect of the Claim the arbitrators (therein referred to as "the Tribunal") made the following main findings:

"(222) The Tribunal considered the two questions posed by the order sought by TOR as set out above.

1. The Tribunal finds that CNSPC had no reasonable grounds for purporting to activate Clause 1(E) of the Management Agreement by issuing the letter of 7 December 1999 in respect of the matters contained therein.

2. The letter of 7 December 1999 does not pass the relevant tests as required by Mannai [Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749] and accordingly CNSPC has repudiated and breached the contract (the Management Agreement)".

These findings followed upon earlier findings that certain purported termination communications were ineffective.

[10] With respect to the Counterclaim the arbitrators refused to make the order (1) referred to above. With respect to order (2) they said:

"(231) The Tribunal finds in fact and in law that:

General and interpretative

1. The Manager was bound by the obligations imposed by clause 2 and 3.4(b) of the Management Agreement in respect of the general engineering issues on Kan Tan IV.

...

15. Kan Tan IV was never 'fully operational and ready for contract assignment' during TOR's period of management.

16. TOR was in breach of its obligations expressed in clauses 2 and 3.4(b) at all material times during the currency of the Management Agreement.

17. TOR had no competent plan to make Kan Tan IV fully operational.

18. CNSPC was entitled to serve notice pursuant to clause 1(D) of the Management Agreement but did not do so.

19. CNSPC did not acquiesce in the breach of contract set out in finding 16. It did not know that TOR was in breach standing the monthly status reports that TOR made to CNSPC. TOR always reported the status to be 'fully operational and ready for contract assignment'.

20. CNSPC could not terminate the Management Agreement in respect of a material breach without giving notice pursuant to clause 1(D) and subsequently allowing the Manager three months to cure the breach.

21. TOR was in breach of its obligation to '...keep the Owner fully advised of any significant issues concerning the Vessel and its operation' contained in clause 2 of the Management Agreement when it failed to inform CNSPC that Kan Tan IV was not fully operational and reported monthly that the rig was fully operational. TOR persisted in that breach from receipt of the first Moduspec report until the end of its period of management.

22. The earliest that CNSPC could have known that TOR was in breach was 30 October 2000.

23. The Tribunal makes no finding as to whether or not TOR could have cured its breach within three months in the absence of sufficient evidence on the point".

The arbitrators then proceeded to make findings in relation to specific items (in respect of which it had been contended that the Vessel had not operational status).

[11] TOR brought proceedings by petition for judicial review in which it sought to challenge the arbitrators' conclusion that TOR was in material breach of Clause 2 and Clause 3.4(b) of the Management Agreement. TOR subsequently moved for dismissal of that petition. The Court on 9 April 2009, of consent, dismissed it.

[12] Thereafter the parties reverted to the commercial action in this court. The pleadings having been amended, the case was heard at debate. TOR's claim for damages included a claim (conclusion 4) for losses over the period from 1 September 2002 to 31 December 2011 - in lost management operating fees, lost management stacked fees and lost profit share, amounting in total to US $61,120,785. At that debate CNSPC contended that that claim and associated averments were, standing the arbitrators' findings, irrelevant and should be excluded from probation. The Lord Ordinary accepted that contention, in due course by interlocutor dated 30 June 2010 refusing the fourth conclusion of the summons and refusing to admit to probation the associated averments. Against that interlocutor TOR has reclaimed.

[13] The foundation of CNSPC's contention before the Lord Ordinary, and in this reclaiming motion, was sub-paragraph 23 within paragraph (231) of section 3.3.1 of the arbitrators' Note of Reasons, Findings and Order 20. That section, which was within Part 3 (headed "The Counterclaim"), itself bears the heading "Findings - counterclaim". There then follows, as already set out, the introductory statement - "The Tribunal finds in fact and in law that:"; that introductory statement is then followed in turn by numbered sub-paragraphs which include sub-paragraph 23, the terms of which are narrated above.

[14] Sub-paragraph 23 has a resonance with Clause 1(D) of the Management Agreement. However, no issue arose in the arbitration as to whether or not the composite eventuality provided for by Clause 1(D) had arisen (or might have arisen). The issues as focussed in the arbitration were TOR's claim that CNSPC had repudiated and/or breached the contract and CNSPC's counterclaim (insofar as it survived debate) that as at 14 March 2000 CNSPC was entitled to terminate the contract in accordance with Clause 1(E) and had duly done so and that TOR was in material breach of contract - essentially of Clauses 2 and 3.4(b). No issue arose in the arbitration in relation to damages or their scope. The Court's interlocutor of 3 May 2001 had expressly excepted from the reference to arbitration all questions of entitlement to, assessment of or award of damages. There is nothing in the pleadings in the principal action and counterclaim as at the date of that interlocutor or in the pleadings in the arbitration or otherwise to suggest that the reference included, originally or by consensual variation, any issue for arbitral decision with respect to Clause 1(D).

[15] The arbitrators make certain references to Clause 1(D) but not for the purpose of adjudicating on whether that clause was satisfied or, had CNSPC had the relevant knowledge, might have been satisfied. In oral submissions to the arbitrators counsel for TOR submitted that, on the evidence they had heard, there was no way of knowing how TOR would have responded to any expression of dissatisfaction expressed by CNSPC. So far as drawn to our attention, CNSPC made no submission on this matter. The arbitrators appear, in sub-paragraph 23 of paragraph (231), to have accepted TOR's submission.

[16] Although expressed within a paragraph opening "The Tribunal finds in fact and in law that:", sub-paragraph 23, as its terms make plain, is in effect a conclusion that, by reason of insufficient evidence on the point, the arbitrators were making no finding as to whether or not TOR could have cured its breach (of Clauses 2 or 3.4(b)) within three months of service of any notice by CNSPC. When viewed against the context of the arbitration, including the issues upon which the parties joined within it, that sub-paragraph does not, in our view, constitute a substantive finding of fact (or of fact and law) which inhibits the scope of damages which may be pursued by TOR before the court. The foundation of CNSPC's contention is thus, in our view, unsound and the reclaiming motion falls to be granted.

[17] Before the Lord Ordinary there was discussion as to where the burden of proof lay with respect to Clause 1(D) - which had, by amendment, come to feature in the parties' pleadings in the action. The Lord Ordinary, having concluded that the burden of proof in respect of that clause was on TOR, opined that the arbitrators "had opted for what Lord Brandon of Oakbrook described in Rhesa Shipping [v Edmunds [1985] 1 WLR 948] (at page 955D) as the "third alternative". But in Rhesa Shipping the cause of the sinking of the vessel was the matter centrally in issue between the parties. The plaintiffs sought to explain the sinking as being the result of a collision with a submerged submarine. The defendants disputed that explanation and advanced an alternative theory (wear and tear of the ship's hull). The House of Lords held that the plaintiffs, on whom the onus of proof lay, had failed to prove that the vessel had sunk as a result of perils of the sea, this failure to discharge the burden of proof being the "third alternative".

[18] That conclusion is readily understandable in circumstances where the matter which remained unproved was truly a matter in issue between the parties in the forum in which they were engaged. But Clause 1(D) was not in issue before the arbitrators and, it not being essential to their determination, it is unsurprising that they declined to make a finding upon it.

[19] CNSPC maintains that, had it been aware earlier than the point of time at which it in fact became aware that TOR was in material breach of contract in respect of its maintenance and other obligations, it would have terminated the Management Agreement under Clause 1(D). It attributes that lack of awareness to TOR's failure to keep it apprised of the state of the Vessel. What CNSPC could and would have done, had it had that awareness, may bear on the value of the Management Agreement to TOR and accordingly on the appropriate measure of damages to which it is entitled. Given our conclusion that the Lord Ordinary's conclusion cannot stand, certain elements within the composite terms of Clause 1(D) will require to be explored in evidence. When that has been done, questions of the onus of proof may or may not arise. We do not consider it appropriate to anticipate that possibility.

[20] In all the circumstances we shall allow the reclaiming motion, recall the Lord Ordinary's interlocutor of 30 June 2010 and remit to him to proceed as accords.