Russian wheat ban: Court construes GAFTA 49 Prohibition and Default clauses Bunge S.A. v. Nidera B.V. 04

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1 April 2013 CONTENTS INTRODUCTION 02 SALE OF GOODS Unstable gasoil cargo held to be of unsatisfactory quality and unfit for purpose Bominflot Bunkergesellschaft fur Mineralole mbh & Co v. Petroplus Marketing AG (Mercini Lady) 03 Russian wheat ban: Court construes GAFTA 49 Prohibition and Default clauses Bunge S.A. v. Nidera B.V. 04 The relevance of market expert evidence in determining whether a deal has been done Proton Energy Group SA v. Public Company Orlen Lietuva 06 Export ban: Court construes FOSFA 201 Prohibition and Default clauses Novasen S.A. v. Alimenta S.A 08 SHIPPING Clean and claused bills of lading: how a ship-owner might be sued for problems with goods that were in existence before loading Breffka & Hehnke GmbH & Co KG and others v. Navire Shipping Co. Ltd and others (Saga Explorer) 10 COMMERCIAL LITIGATION Supreme Court confirms corporate veil cannot be pierced to make a puppeteer party to his puppet s contract VTB Capital Plc v. Nutritek International Corp and Others 11 CONTACTS 13

2 02 international trade and commodities INTRODUCTION I am delighted to introduce the latest issue of our International Trade and Commodities Legal Update. As usual, we have sought to include articles covering a wide range of issues that we believe will be of particular interest to you. The decision in The Mercini Lady related to a dispute over the quality and fitness for purpose of a cargo of gasoil that was found to be unstable on discharge after a four day voyage. The Judge held that instability was not a characteristic of the cargo that was directly covered by the specifications. The fact, therefore, that the cargo had been certified as on-spec prior to loading did not mean that the Buyer had no recourse against the Seller in respect of the cargo s instability. The judgment in the Proton Energy case is the latest in a line of recent decisions dealing with whether there was a validly concluded sale contract between the parties or only an agreement to agree or negotiations that were subject to contract. The interesting aspect of the Judge s decision was his willingness to permit the Buyers to present expert evidence to demonstrate that participants in the oil and gas industry would have certain expectations as to when a binding contract would be concluded. Ince & Co LLP s International Trade and Commodities Group provides a full service to clients in the global trading community. We advise clients in a range of industries including oil and gas, biofuels, coal, sugar/molasses, grain and feed, oils and fats and metals. If you have any queries arising out of the content of this Update, or any matters you wish to discuss with us, please feel free to contact me or the authors of specific case reports you are interested in, or your usual contact at Ince & Co. Two cases, Bunge v. Nidera and Novasen v. Alimenta deal with the GAFTA and FOSFA Prohibition and Default clauses respectively, in particular whether the Buyers could recover substantial damages where the Sellers cancelled the sale contract following the announcement of an export ban even though, at the time of cancellation, it was not clear whether the ban would prevent the Sellers performance of the sale contract. Although the Judges in the two cases came to a somewhat different conclusion, based on the different wording of the GAFTA and FOSFA Default clauses, the clear lesson to be drawn from both judgments is that sellers should refrain from any premature declarations that their contract has been cancelled due to an export ban. On the shipping side, we report on the much-discussed decision in The Saga Explorer, dealing with RETLA clauses which are sometimes inserted into bills of lading for shipments of steel, metal or timber. The case highlights the dangers for shipowners in failing to clause bills of lading where the condition of the cargo indicates that this is the appropriate thing to do. Finally, we discuss the recent Supreme Court decision in VTB v. Nutritek, which considered the scope and effect of piercing the corporate veil under English law and confirmed that the corporate veil cannot be pierced so as to impose contractual liability on those controlling a corporate entity that has ostensibly entered into the contract concerned.

3 03 SALE OF GOODS Unstable gasoil cargo held to be of unsatisfactory quality and unfit for purpose Bominflot Bunkergesellschaft fur Mineralole mbh & Co v. Petroplus Marketing AG (Mercini Lady) [2012] EWHC 3009 The parties in this case were in dispute over the quality and fitness for purpose of a cargo of gasoil. The Commercial Court, and subsequently the Court of Appeal on appeal by the Sellers, were asked to decide a number of preliminary issues between the parties (see our Legal Updates of February 2010 and March 2011), the outcome of which we summarise briefly below by way of background. We then go on to consider the recent judgment of Mr Justice Hamblen in the Commercial Court on the substantive issues. The background facts and the preliminary issues The cargo of gasoil in question was certified as on-spec prior to loading, including as to sediment content, but found to be off-spec as to sediment at the discharge port, after a voyage of just four days. As a result, the Buyers original on-sale contracts fell through and they were obliged to find alternative buyers. They sought to claim their losses from the Sellers. One of the preliminary issues put to the Court was whether the sale contract incorporated the implied term contained in S.14(2) of the Sale of Goods Act 1979, as amended (the SGA ), namely that the gasoil would be of satisfactory quality ( the implied term ). The Court held that it did and that one aspect of the implied term was that the gasoil would remain of satisfactory quality for a reasonable period after delivery. The Court also found in the Buyers favour on another preliminary issue, namely that the contractual exclusion clause was not sufficiently wide as to exclude the implied term. The main issues for consideration by the Judge at the trial (at which the Sellers, having gone into foreign insolvency proceedings, were unrepresented) were as follows: 1. Were the high sediment levels found in the cargo at the discharge port due to contamination during the voyage? 2. If not, was the increase in sediment levels due to the gasoil being unstable on shipment/delivery? 3. If the gasoil was unstable on shipment/delivery, was it consequently not of satisfactory quality? 4. If the gasoil was not of satisfactory quality, what was the correct measure of damages recoverable by the Buyers? The Sellers had, prior to their insolvency, sought to argue that the issue of instability was covered by the express specifications of the sale contract, given that the amount of sediment was expressly referred to in the contractual specifications, and that the implied term was limited to characteristics of the cargo that were not covered directly or indirectly by the contractual specifications. Accordingly, said the Sellers, the Buyers were bound by the certificate of quality issued at the load port which was conclusive, subject to manifest fraud or error. They argued that this was the case regardless of the fact that instability had not been tested for at the load port and was not covered by that certificate. The Judge rejected this argument, holding that instability was not a characteristic of the cargo that was directly covered by the specifications, rather the specifications were silent as to stability. Nor was instability indirectly covered merely because it resulted in an increase in sediment. He concluded that instability was an entirely separate characteristic of the cargo from the sediment level. Quantum S.53 of the SGA states that the usual measure of loss in cases of this kind will be the difference between the sound and unsound market value of the goods at the time of delivery. In this case, however, the Judge accepted the Buyers argument that the starting point should be the date when the latent defect in the cargo was discovered by them. He further agreed that, given they were unable immediately to sell the unsound cargo, the relevant date should be the date of the eventual resale. The Judge concluded that the resale date should be used for the assessment of both sound and unsound values, so as to compare like with like. Comment This case provides a useful reminder that just because a cargo meets the contractual specifications does not necessarily mean that the buyer has no recourse against the seller if the cargo is in some way defective and unfit for purpose. Of course, it is usual in the oil and gas trading world to exclude all the terms implied by the SGA which would have been the situation in this case had the relevant exclusion clause been drafted effectively. In contracts where such an exclusion is properly drafted, it is important from the buyer s perspective to ensure that the contractual specifications are comprehensive enough to cover every aspect of the quality/condition of the cargo that is of importance to the buyer. The Commercial Court decision Liability The expert evidence adduced by the Buyers, and accepted by the Court, found that the increase in the sediment level was not the result of contamination on board the vessel. Rather, this was due to the instability of the cargo on shipment. The Judge accepted the expert evidence and concluded that an unstable gasoil cargo would not be of satisfactory quality and would not be fit for purpose, fitness for purpose meaning for all the uses for which gasoil of this description was commonly used. Ruaridh Guy Solicitor, London ruaridh.guy@incelaw.com

4 04 international trade and commodities Russian wheat ban: Court construes GAFTA 49 Prohibition and Default clauses Bunge S.A. v. Nidera B.V. [2013] EWHC 84 (Comm) The parties here entered into a contract for the sale of Russian wheat shortly before the Russian government announced a ban on wheat exports for a period of four and a half months extending over the whole of the contractual shipment period. The Sellers immediately notified the Buyers of the prohibition and cancelled the contract. The Sellers argued that, pursuant to the GAFTA 49 Prohibition clause incorporated into the sale contract, the contract was automatically cancelled as soon as the export ban was announced. The Buyers contended that was not so since, at the time the Sellers purported to declare the contract cancelled, the ban had not yet in fact prevented the Sellers from performing under the contract and that the Sellers were consequently in repudiatory breach of the sale contract. The GAFTA Board of Appeal found in favour of the Buyers and awarded them substantial damages pursuant to the GAFTA 49 Default clause in the contract. The Commercial Court has upheld that decision, confirming that the Sellers purported cancellation of the contract was premature as, at the time of the purported cancellation, it was not certain that the prohibition would in fact prevent shipment of the cargo. The Court also agreed with the Board of Appeal that the Buyers were entitled to receive damages calculated by reference to the scheme set out in the Default clause, irrespective of any argument that, under common law, they might only have recovered nominal damages, because the Sellers would have been entitled to cancel the contract if they had waited until the end of the shipment period. The contractual terms The sale contract was concluded on 10 June 2010 and incorporated the GAFTA 49 contract form, a standard set of FOB terms designed for contracts for goods sold in bulk or bags from Central or Eastern Europe. The two relevant clauses, the Prohibition clause and the Default clause, read as follows: Prohibition clause In the case of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the government of the country of origin of the goods, or of the country from which the goods are to be shipped, restricting export, whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment whether by shipment or by any other means whatsoever and to that extent this contract or any unfulfilled portion thereof shall be cancelled. Sellers shall advise Buyers without delay with the reasons therefore and, if required, Sellers must produce proof to justify the cancellation... Default clause In default of fulfilment of contract by either party, the following provisions shall apply: a. The party other than the defaulter shall, at their discretion have the right, after serving notice on the defaulter, to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price. b. If either party be dissatisfied with such default price or if the right at (a) is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be settled by arbitration. c. The damages payable shall be based on, but not limited to, the difference between the contract price and either the default price established under (a) above or the actual or estimated value of the goods on the date of default established under (b) above. d. In all cases the damages shall, in addition, include any proven additional expenses which would directly and naturally result in the ordinary course of events from the defaulter s breach of contract, but shall in no case include loss of profit on any sub-contracts made by the party defaulted against or others unless the arbitrator(s) or board of appeal, having regard to special circumstances, shall in his/their sole and absolute discretion think fit. e. Damages, if any, shall be computed on the quantity called for, but if no such quantity has been declared then on the mean contract quantity and any option available to either party shall be deemed to have been exercised accordingly in favour of the mean contract quantity. The background facts On 5 August 2010, the Buyers nominated a vessel to load the cargo. However, on the same day, the Russian government announced a ban on exporting wheat between 15 August and 31 December The contractual delivery period was 23 to 30 August On or around 9 August, the Sellers declared the contract cancelled under the Prohibition clause. On 11 August, the Buyers declared the Sellers to be in anticipatory repudiatory breach of the sale contract which they, the Buyers, accepted. The Buyers contended that, at the time the Sellers declared the contract cancelled, it could not be said with certainty that the export ban would prevent the Sellers from performing. They sought substantial damages from the Sellers for breach of the sale contract. The GAFTA Board of Appeal upheld the Buyers claim. The Board commented that it was always possible that, before the delivery period under the contract expired, the export ban might be revoked or modified in some material way that permitted performance by the Sellers; it was not unknown for such export bans to be subsequently varied. On appeal to the Commercial Court, the Sellers argued that, on its true construction, the Prohibition clause meant that the contract was automatically cancelled as soon as the export ban was announced and the Sellers did not have to prove that the prohibition had in fact had any effect on their ability to perform the contract. The Buyers, on the other hand, contended that the Sellers had to show that the ban effectively prevented performance, in the sense that it remained in place during the entire delivery period. In other words, the Sellers should have waited until the time for performance had expired and then declared the contract cancelled. With regard to damages under the Default clause, the Sellers argued that the whole clause was subject to, and limited by, the general common law in relation to the recoverability and mitigation of damages. They said that the Buyers should get

5 05 only nominal damages because: (a) damages are designed to compensate the innocent party for being deprived of his bargain and since, if matters had been allowed to run their course, the Sellers would have been entitled to cancel the shipment at the end of the shipment period in any event (as the ban was not in fact lifted before the end of the shipment period); and (b) the Buyers had failed to mitigate their loss, because they had refused an immediate offer to reinstate the contract. The Commercial Court decision Mr Justice Hamblen dismissed the Sellers appeal. He held that the Sellers had to show that the prohibition prevented them from exporting goods of the contractual description within the shipment period. On the facts, the Board had found that it was possible that the ban would be revoked or modified before the shipment period expired. The fact that the export ban had ultimately remained in place without revocation or modification, so that the sale contract would have been cancelled in any event without liability under the Prohibition clause had it continued, was irrelevant for the purposes of the Buyers claim. The ruling in relation to the effect of the Default clause is, as the Court in essence acknowledges, a victory for certainty over fairness. Since the Sellers would, but for their impetuosity, have been able validly to cancel the contract anyway, it might be said that it is rather harsh to treat them as common defaulters and subject to the full force of the Default clause. However, the GAFTA Board, with whom the Judge agreed, took the view that in terms of assessing damages for default (technical or otherwise), the market preferred certainty and that the Default clause provided that certainty untrammelled by the subtleties of the normal common law rules formulated by the courts in order to bring fairness into the assessment of damages generally. The Judge also upheld the Board s decision to award the Buyers substantial damages under the Default clause. He dismissed the Sellers argument that, pursuant to the House of Lords decision in The Golden Victory [2007] 2 AC 353, when assessing the Buyers losses the Court should take into account the fact that, but for the premature termination, the contract would have been legitimately cancelled anyway at the end of the shipment period. The Golden Victory involved the wrongful early termination of a time charterparty which would, in the event, have been frustrated had it continued, due to a subsequent outbreak of war. The Judge was not convinced that The Golden Victory approach applied to a one-off sale of goods contract such as the present one, where there was an available market, as opposed to a long-term or period contract. Furthermore, the parties, by virtue of the inclusion of the Default clause, had already agreed in advance to the measure of damages recoverable in the event of default. That clause was neither expressly nor implicitly subject to any common law principles limiting the recovery of damages generally. Finally, the Judge dismissed the Sellers arguments that the Buyers had failed to mitigate their losses by refusing the Sellers subsequent offers to reinstate the sale contract on the same terms. The Default clause did not require the Buyers to agree to the Sellers offer and, in any event, the Buyers had no guarantee that they would receive the goods because the ban remained in place. Comment The Judge s decision in this case is an important one for all those who trade on GAFTA terms as it settles, for now at least, debate as to the proper interpretation of the standard form GAFTA Prohibition and Default clauses. As to Prohibition clauses, the Sellers in this case will have learnt to their cost the dangers of shooting too early. It is crucial that any seller seeking to rely on the Prohibition clause holds his fire until the sun has well and truly set on the shipment period. Reema Shour Professional Support Lawyer, London reema.shour@incelaw.com

6 06 international trade and commodities The relevance of market expert evidence in determining whether a deal has been done Proton Energy Group SA v. Public Company Orlen Lietuva [2013] EWHC 334 (Comm) In this case, in the context of an application for summary judgment, the Commercial Court considered whether or not there was a real issue to be tried as to whether a binding contract had been concluded between the parties, based on a review of their negotiations. The background facts Proton Energy Group SA ( Proton ), a Swiss trader of oil and gasoline related products, and Public Company Orlen Lietuva ( Orlen ), a petroleum refining company incorporated in Lithuania, exchanged s regarding the sale and purchase of crude oil mix. The parties accepted that the following exchanges had occurred: 14 June 2012 > > Proton ed Orlen a firm offer to sell CIF Butinge, Lithuania 25,000mt +/- 10% in Seller s option of crude oil mix CN , European origin as per the specifications attached, with delivery period at the discharge port during July 2012 and at a price based on five quotations after the bill of lading date. > > correspondence continued between the parties on the same day, culminating in a one-word from Orlen stating Confirmed. 20 June 2012 > > Proton sent Orlen a detailed draft contract for the sale June 2012 > > The parties exchanged various s regarding the terms of the contract. 27 June 2012 > > Proton sent Orlen a revised draft contract. By this time, there was at least one issue on which the parties had not agreed: namely, the documents which Proton would be required to present for payment under a proposed documentary letter of credit. 29 June 2012 > > Orlen wrote to Proton to say that it was withdrawing from the negotiations. It did not open any letter of credit and it did not accept the cargo. 2 July 2012 > > Proton notified Orlen that it was accepting Orlen s failures to open a letter of credit or to take delivery of the cargo as repudiatory breaches of contract and was thereby bringing the sale contract to an end. Proton applied for summary judgment in relation to their claim that a contract had been concluded, such that Orlen was in breach by not opening a letter of credit or taking delivery of the cargo. Summary judgment is a judgment available where the defendant (a) has no prospect of successfully defending the claim or issue; and (b) there is no other compelling reason why the claim or issue should be disposed of at a trial. Accordingly, the issue for determination by the Commercial Court was whether there was a real (as opposed to a merely fanciful or imaginary) prospect of Orlen successfully defending Proton s claim that the parties had entered into a binding agreement. The Commercial Court decision The Judge identified the legal principles applicable to the contract formation question before him by reference to the following passage from Lord Clarke s judgment in the Supreme Court in RTS Flexible Systems Ltd. v. Molkerei Alois Müller GmbH & Co. [2010] 1 WLR 753 The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement. Taking the position as at 14 June 2012 first, the Judge considered the evidence and, in particular, the firm offer and subsequent from Proton which concluded 4. Contractual price is fixed per the confirmed offer. All other contractual terms not indicated into the offer shall be discussed and mutually agreed between parties upon contract negotiations and Orlen s one word response to that Confirmed. The Judge noted that it was clearly the case that the parties understood at this stage that not all contractual terms had been agreed. As a matter of English law, that would not be fatal since a contract will be binding on the parties where it is the parties intention to enter into contractual relations and they have agreed on the essential terms, even if they leave certain less significant provisions open for future agreement. What matters is the objectively ascertainable intentions; did they intend to be bound even though there were further terms to be agreed? In assessing the evidence, the Judge took into account the language of the offer (firm and serious); the apparent urgency in the exchanges (indicating an intention to be bound) in support of the argument that a binding deal had been reached, with the detailed contractual form to follow. He also considered the conduct of the parties subsequent to the alleged deal on 14 June, which could be read either as indicating that the parties were merely negotiating the detailed terms of the deal already concluded or that no binding contract had yet come into existence.

7 07 Of particular interest in this case was the submission by Orlen of an expert report in relation to the contract formation issue. Orlen engaged an expert, an oil and gas industry participant with experience in the technical, commercial and contractual aspects of the industry, who produced a report opining on whether reasonable participants in the market for crude oil mix would understand that a legally binding contract was concluded between the parties on 14 June 2012 (or by 27 June). Proton objected to the admission of the expert report, arguing that the evidence was not properly admissible and would not genuinely assist the trial judge (those being the two factors necessary to fulfil the requirements of CPR 35.1 as explained by Aikens J. in JP Morgan Chase Bank and others v. Springwell Navigation Corp. [2007] 1 All ER (Comm) 549, at 553, paragraph 19). The expert report addressed matters such as the industry expectations as to the effect of the confirmation of a recap in different categories of trades (OTC v. physical trades) between different categories of counterparty (refineries owned by international oil companies, national oil companies and independents). In particular, the expert asserted that, in the market, confirmation of a recap offer is often considered: The Judge dismissed Proton s summary judgment application accordingly. Comment This judgment is interesting in respect of the Judge s approach to the question of whether a contract had been concluded by the parties at any particular point in time and in particular, his willingness to permit Orlen to adduce evidence to the effect that participants in the relevant industry would have certain expectations as to when a binding contract would be concluded. The courts have already shown willing to recognise the industry practice of commodity contracts being concluded on main terms, with the parties intending to iron out the finer points of the deal thereafter. This case suggests that the courts are also inclined to hear evidence from industry experts as to the nuances of industry expectations. Whilst theoretically this might appear sensible, establishing a certain market practice through expert evidence is notoriously difficult particularly where, as is often the case, you have two market experts saying the complete opposite about such practice. > > binding in over the counter paper transactions where no physical delivery is contemplated; > > binding in contracts for physical delivery where the seller has a long-term mandate to supply a refinery with feedstock; > > not binding in cases involving sales to a national oil company; and > > not binding when a transaction for the sale and delivery of crude oil mix to a refinery is viewed as a once-off event i.e. as a one-off transaction and not part of a prior course of dealing between the parties. The expert concluded therefore that Proton s recap dated 14 June 2012 and Orlen s confirmation would not have been understood by reasonable market participants as creating a binding contract because they would have understood Orlen s confirmation to have been subject to contract, without it needing to be said. The Judge decided that the expert report was properly admissible. He did so on the basis that, in assessing the parties objective intentions as expressed to each other, their conduct and communications should be considered in light of the relevant background, which may include evidence as to the practices prevailing in that market at the relevant time, if it could be inferred that the parties intentions were or may have been informed by those practices. He also thought that the evidence would genuinely assist the trial judge in deciding the issue. The Judge relied heavily (although not solely) on the expert report in coming to his decision that it was clear that there was a real issue to be tried as to whether a legally binding contract was concluded between the parties on 14 June Jane Fitzgerald Solicitor, London jane.fitzgerald@incelaw.com

8 08 international trade and commodities Export ban: Court construes FOSFA 201 Prohibition and Default clauses Novasen S.A. v. Alimenta S.A [2013] EWHC 345 (Comm) The parties here entered into a contract for the sale of Senegalese crude groundnut oil in bulk. Before the goods were shipped, a Senegalese government prohibition on export that applied to this commodity was declared. This stayed in force for just over two months. The Sellers immediately notified the Buyers of the prohibition in accordance with the FOSFA 201 Prohibition clause incorporated into the sale contract, the result of which was that the shipment period was automatically extended by 30 days. At the same time however, the Sellers also purported to terminate the sale contract on the grounds of the prohibition. The Buyers declared this to be an anticipatory repudiatory breach of contract which they accepted as bringing the contract to an end and sought damages. The Sellers argued that the Buyers had suffered no loss because, pursuant to the Prohibition clause, the contract would, in any event, have come to an end without any liability on the Sellers part after the 30 day extension had expired. The FOSFA Board of Appeal disagreed and held that, by terminating the contract prematurely, the Sellers had deprived themselves of the right to rely on the potential automatic cancellation of the contract without any liability on their part, under the provisions of the Prohibition Clause. The Board awarded the Buyers default damages at the difference between the contract price and the market price as at the date of the termination. The Commercial Court has now allowed the Sellers appeal, finding that the Default clause in the contract placed a ceiling on the recoverable damages and conferred no right to recover damages if no loss had been suffered. The sale contract The sale contract incorporated the terms of FOSFA Contract 201, a standard set of CIF terms for the sale of African crude groundnut oil. The two relevant clauses, the Prohibition and Default clauses, read as follows: 22. PROHIBITION: In the event, during the contract shipment period, of prohibition of export or any other executive or legislative act by or on behalf of the Government of the country of origin or of the territory where the port/s of shipment named herein is/are situate, or of blockade or hostilities, restricting export, whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment whether by shipment or by any other means whatsoever and to that extent this contract or any unfulfilled portion thereof shall be extended by 30 days. In the event of shipment within the extended period still proving impossible by reason of any of the causes in this clause, the contract or any unfulfilled part thereof shall be cancelled. Sellers invoking this clause shall advise Buyers with due dispatch. If required, Sellers must produce proof to justify their claim for extension or cancellation under this clause DEFAULT: In default of fulfilment of this contract by either party, the other party at his discretion shall, after giving notice, have the right either to cancel the contract or the right to sell or purchase, as the case may be, against the defaulter who shall on demand make good the loss, if any, on such sale or purchase. If the party liable to pay shall be dissatisfied with the price of such sale or purchase, or if neither of the above rights is exercised, the damages, if any, shall, failing amicable settlement, be determined by arbitration. The damages awarded against the defaulter shall be limited to the difference between the contract price and the actual or estimated market price on the day of default. Damages to be computed on the mean contract quantity. If the arbitrators consider the circumstances of the default justify it they may, at their absolute discretion, award damages on a different quantity and/or award additional damages. Prior to the last day for making a declaration of shipment a Seller may notify his Buyer of his inability to ship but the date of such notice shall not become the default date without the agreement of the Buyer. If, for any other reason, either party fails to fulfil the contract and is declared to be in default by the other party and default is either agreed between the parties or subsequently found by arbitrators to have occurred, then the day of the default shall, failing amicable settlement, be decided by arbitration. The background facts The contract provided for shipment from Senegal between December 2007 and 10 January This shipment period was, however, held open after 10 January 2008 and was still open when the export ban came into force on 2 April On that same day, the Sellers notified the Buyers of the prohibition in accordance with the Prohibition clause. This automatically extended the shipment period for 30 days up to 2 May As it happened, the prohibition was still in force on 2 May 2008 and was not in fact lifted until 6 June The Sellers did not, however, wait for the 30 day extension to expire before declaring the contract automatically cancelled. Instead, they notified the Buyers that it was cancelled as soon as the export ban came into force. In the FOSFA arbitration proceedings, the Board of Appeal found in favour of the Buyers. The Sellers appealed to the Commercial Court on the following point of law: whether the FOSFA tribunal should have taken account of matters occurring after 2 April 2008 when assessing whether or not the Buyers suffered a loss and whether or not the Buyers were consequently entitled to damages. Relying on the majority House of Lords decision in The Golden Victory and the common law principle that the purpose of an award of damages for breach of contract is to compensate an innocent party for the losses it suffers as a result of its counterparty s breach, the Sellers argued that the Buyers were only entitled to nominal damages. The Buyers contended that subsequent events after the date of default should be ignored because they and the Sellers had agreed, in the form of the Default clause, a contractual scheme for measuring recoverable damages which replaced the common law measure.

9 09 The Commercial Court decision Mr Justice Popplewell rejected the Buyers argument that the Default clause conferred a right to damages where none had been suffered and where there would otherwise have been no right to such damages under the common law. Rather, the Judge said that, insofar as the Buyers went into the market to buy replacement goods, the defaulting Sellers would have to reimburse them for any difference between the market price and the contract price (if lower). To that extent, the Buyers were entitled to compensation irrespective of subsequent events and the effect they might have had on the contract had it remained in force. However, if the Buyers chose not to buy against the default, then they could only recover such damages, if any, based on the common law position. That meant that, if subsequent events demonstrated that the contract would, in any event, have been terminated without any liability on the Sellers part (as in this case), then the Buyers might recover only nominal damages because their losses were in fact nil. In the Judge s view, while this might mean that the Buyer who decided not to replace his lost bargain was in an uncertain financial position and would have to wait and see what subsequently happened with the export ban before knowing whether or not he had made the right decision in not buying against the default, this might be seen as an acceptable uncertainty inherent in his decision not to replace the lost bargain, or at least one which from the seller s point of view should not override the compensatory principle. the decision in Bunge S.A v. Nidera. However, whether trading on GAFTA or FOSFA terms, the clear message for sellers is to refrain from any premature declarations that their contract has been cancelled due to an export prohibition. Reema Shour Professional Support Lawyer, London reema.shour@incelaw.com A further issue that the Judge was asked to consider was whether an effective cancellation under the Prohibition clause required only one notice, as the Sellers argued, that being the notice of the prohibition which triggered the running of the 30 day extension of the shipment period (on expiry of which the contract was cancelled) or whether a second notice on expiry of the extension was required stating that the Sellers were cancelling the contract. The Judge was not inclined to accept the Sellers argument on this; he tended to the view that two separate notices would be required but did not express a final view because the question would then be whether the Sellers would in fact have given a final notice of cancellation. That was an issue for the tribunal to decide and so the Judge remitted the arbitration award back to the FOSFA Board of Appeal for further consideration in the light of his judgment. Comment This decision comes hot on the heels of the Commercial Court decision in Bunge S.A v. Nidera, in which Mr Justice Hamblen construed the GAFTA 49 Prohibition and Default clauses against the background of the Russian wheat export ban in In that case, Mr Justice Hamblen upheld the GAFTA Board of Appeal s decision to award the Buyers substantial damages under the GAFTA Default clause, while acknowledging that this was, in essence, a victory for certainty (as provided for in the Default clause) over fairness in the assessment of damages. However, there is a material difference in the wording of the FOSFA Default clause, in that the FOSFA clause provides that, where the claiming party does not sell or purchase against the defaulter, his claim is for damages, if any. This was sufficient for Mr Justice Popplewell to distinguish this case from

10 10 international trade and commodities SHIPPING Clean and claused bills of lading: how a ship-owner might be sued for problems with goods that were in existence before loading Breffka & Hehnke GmbH & Co KG and others v. Navire Shipping Co. Ltd and others (Saga Explorer) [2012] EWHC 3124 (Comm) This case arose out of the crash in steel prices in about September 2008, although the point in issue is potentially of relevance to all traders of bulk/break bulk cargoes. The Claimant cargo interests brought a claim under bills of lading in relation to a heavily rusted cargo of steel pipes. The pipes were in fact very rusty on shipment and the Owners had carried them from Korea to the USA without causing further damage. The Owners had not however claused the bills to describe the actual condition of the cargo on loading. Instead, with the agreement of the shippers, the Owners issued bills marked Shipped in apparent good order and condition but also containing a standard form RETLA clause (named after the US case, Tokio Marine & Fire Insurance v. Retla Shipping). The RETLA clause is sometimes added to the face of a bill of lading where the carriage involves iron, steel, metal products or timber. The aim of the clause is to qualify the term apparent good order and condition by stating that, when the cargo was received for shipment, it was not necessarily free of visible rust or moisture, staining, chaffing etc. The intention is that such a bill will still be regarded as a clean bill of lading yet protect the carrier if the goods do in fact suffer on shipment from such matters as referred to in the clause. The decision of Mr Justice Simon in this case is the first time that the English courts have considered this clause. He disagreed with the reasoning behind the decision in Tokio Marine and held that the representation made in the bills as to the cargo s apparent condition was false and that the cargo claim succeeded. The RETLA clause The vessel loaded a cargo of steel pipes at Ulsan, for carriage to Los Angeles, San Francisco and Vancouver. The bills of lading contained a US General Paramount Clause incorporating US COGSA. They also contained the usual statement that the goods were shipped in apparent good order and condition. In addition, however, the bills included a RETLA clause, which provided in material terms as follows: If the goods as described by the Merchant are iron, steel [or] metal..., the phrase apparent good order and condition set out in the preceding paragraph does not mean the Goods were received... free of visible rust or moisture... If the Merchant so requests, a substitute Bill of Lading will be issued omitting this definition and setting forth any notations which may appear on the mate s or tally clerk s receipt. A load port survey contained a number of comments relating to rust staining and surface oxidisation of the steel pipes and recommended clausing the bills and mate s receipts. The mate s receipts also included a RETLA clause and specified that the condition of the cargo was as per the surveyor s report. The surveyor s report was not, however, attached. The relevant booking note stated that bills were to be issued as per mate s receipt. The Owners did not, however, clause the bills. Instead, at the Shippers request, they issued clean bills, containing the RETLA clause. They did this against an LOI from the Shippers. When the cargo was discharged, it was found to be significantly rust damaged. The cargo interests sued the Owners for damages. The Commercial Court decision There was no suggestion that there had been significant deterioration in the condition of the cargo during the voyage, so the main issue was the nature of the representation as to the condition of the cargo made by the Owners on shipment. The Owners relied on the RETLA clause and argued that the clause should be interpreted as meaning that all surface rust, of whatever degree and extent, was excluded from their representation as to the apparent good order and condition of the cargo. They cited the decision in Tokio Marine & Fire Insurance Company Ltd v. Retla Steamship Company [1970] 2 Lloyd s Rep 91 in support of their argument. In that case, the US Court of Appeals (Ninth Circuit) took the view that the clause meant, reading the bill of lading as a whole, that there was no representation that the pipes loaded were free of rust or moisture. The cargo interests contended that the RETLA clause qualified the representation as to apparent order and condition, but that the two provisions still had to be read together. They further argued that, since the clause sought to avoid liability, it ought to be read restrictively and should only be effective to exclude liability for surface rust likely to be found in any normal cargo and that would not detract from the cargo s overall quality or merchantability. The Judge broadly agreed with the interpretation argued for by the cargo interests, taking the view that the RETLA clause had to be read together with the standard statement as to condition. He, therefore, concluded that it was, in effect, a qualification directed to the superficial appearance [of the cargo]. The Judge went on to set out two good reasons for disagreeing with the Owners interpretation: 1. It would rob the representation of apparent good condition of all effect. 2. The reasoning in the US case on which the Owners relied was flawed. The US court placed great emphasis on the fact that the Shippers had the right, if they so wished, to have substitute bills of lading issued, noting the actual condition of the cargo (in practice, referring to the surveyor s report). In reality, a shipper would be very unlikely to do this, given the difficulties a seller will generally have in obtaining payment against a claused bill.

11 11 The Judge concluded that the representation made by the Owners in the bills was fundamentally false (deceitful in fact) and that that representation had been relied upon by the cargo interests, to their detriment. He found, therefore, in favour of the cargo interests. Comment At first blush, this looks to be a cargo-friendly decision, cutting down an effort by a ship-owner to restrict his liability. However, it may be that in the long/medium term, the ramifications of the decision will not be quite so helpful. Owners will inevitably be more likely to clause bills of lading if they have no other way of protecting themselves in this sort of situation. This is bound to cause difficulties for sellers. Nevertheless, the English law position is now, by virtue of this decision, that the inclusion of a RETLA clause will only protect an owner in cases of merely superficial rust or moisture. Therefore, readers who are engaged in trades where this sort of wording is used may well find that the owners they do business with are no longer prepared to issue bills of lading with RETLA-type clauses. We understand that the Owners in this case have obtained leave to appeal. We will report on the Court of Appeal decision in due course. Ted Graham ted.graham@incelaw.com Ruaridh Guy Solicitor, London ruaridh.guy@incelaw.com COMMERCIAL LITIGATION Supreme Court confirms corporate veil cannot be pierced to make a puppeteer party to his puppet s contract VTB Capital Plc v. Nutritek International Corp and Others [2013] UKSC 5 The Supreme Court has unanimously rejected VTB Capital Plc s ( VTB ) case that the corporate veil of their contractual counterparty could be pierced so as to render those controlling the counterparty jointly and severally liable under their contract. In doing so, the Supreme Court rejected the approach adopted by Mr Justice Burton in the Commercial Court in Antonio Gramsci Shipping Corporation and Others v. Stepanovs [2011] EWHC 333 (Comm), who held that, in certain circumstances, the corporate veil could be pierced so as to impose contractual liability on those controlling the corporate entity that had ostensibly entered into the contract concerned. The background facts VTB lent US$225,050,000 to a Russian company, Russagroprom LLC ( RAP ), under a Facility Agreement. The advance was primarily to enable RAP to buy six Russian dairy companies and three associated companies from Nutritek International Corp ( Nutritek ). RAP subsequently defaulted on the loan. It was VTB s case that it was induced to enter into the Facility Agreement in relation to the loan, and an accompanying interest rates swap agreement, by misrepresentations made by Nutritek for which other Respondents were jointly and severally liable. The misrepresentations alleged were first, that RAP and Nutritek were not under common control and, second, that the value of the dairy companies was much greater than was in fact the case. VTB s case was that the misrepresentations were fraudulent. VTB sought to pursue their claims against Nutritek and others, including the individual allegedly pulling the strings behind the corporate veil, Mr Malofeev, both in tort and in contract. In order to pursue a claim in contract, and, in particular, to seek to rely on the English jurisdiction clause in the Facility Agreement, VTB argued that the Court should pierce RAP s corporate veil on the basis of the alleged fraudulent conduct so as to render Nutritek and others jointly and severally liable under the Facility Agreement. The piercing of the corporate veil issue was not the only issue that the Court had to deal with. The other main issue, which logically had to be dealt with first, was in relation to jurisdiction. VTB had obtained ex parte permission to serve the Respondents out of the jurisdiction. At that stage, their claim was limited to one in tort. The Respondents applied to set aside the permission to serve out and, at the same time, VTB sought to amend their case so as to introduce a contractual claim against the Respondents based on the argument that RAP s corporate veil could be pierced in the manner described above. At first instance, Mr Justice Arnold set aside the leave to serve out and refused to grant VTB permission to amend. VTB s appeal to the Court of Appeal in relation to both issues was rejected. They were then given permission to appeal on both issues to the Supreme Court.

12 12 international trade and commodities The Supreme Court s judgment Jurisdiction issue On the question of jurisdiction, whilst the Supreme Court took a different view to both Mr Justice Arnold and the Court of Appeal in relation to the law applicable to VTB s tortious claims, concluding that they were governed by English law rather than Russian law, they upheld the lower Courts decision in relation to jurisdiction by a majority of 3:2, with Lords Clarke and Reed dissenting from the judgments of Lords Mance, Neuberger and Wilson. Corporate veil issue With regard to VTB s attempt to pierce the corporate veil in respect of RAP, the Supreme Court unanimously rejected their appeal and, in so doing, it read the last rites over the decision of Mr Justice Burton in Antonio Gramsci and Others v. Stepanovs. Lord Neuberger gave the leading judgment in respect of the corporate veil issue. He considered the Respondents argument that there were in fact no circumstances in which the Court could pierce the corporate veil. In essence, the Respondents case was that previous cases that appeared to involve piercing the corporate veil were not what they seemed and were decided on a different basis. In summary, they said that piercing the corporate veil is contrary to high authority, inconsistent with principle and unnecessary to achieve justice. Lord Neuberger obviously found the arguments in this respect finely balanced and concluded: In my view, it is unnecessary and inappropriate to resolve the issue of whether we should decide that, unless any statute relied on in the particular case expressly or impliedly provided otherwise, the Court cannot pierce the veil of incorporation. It is unnecessary, because the second argument raised on behalf of Mr Malofeev, to which I shall shortly turn, persuades me that VTB cannot succeed on this issue. It is inappropriate because this is an interlocutory appeal, and it would therefore be wrong (absent special circumstances) to decide an issue of such general importance if it is unnecessary to do so. Lord Neuberger went on to consider (and obviously reject) VTB s efforts to pierce the corporate veil in this case. In doing so, he observed that the notion that the principle of piercing the corporate veil, if the principle exists at all, can be extended as contended for by VTB receives no support from any case save, of course, from Mr Justice Burton s decision in Antonio Gramsci. That, he said, did not necessarily mean VTB s case in this respect must fail but concluded: However, given the principle is subject to the criticisms discussed above, it seems to me that strong justification would be required before the court would be prepared to extend it. Once one subjects the proposed extension to analysis, I consider that it is plain that it cannot be sustained: far from there being a strong case for the proposed extension, there is an overwhelming case against it. Observing that the notion of joint and several contractual liability of the puppet and the puppeteer is inconsistent with the reasoning and decision in Salomon v. Salomon, Lord Neuberger said: In any event, it would be wrong to hold that Mr Malofeev should be treated as if he was a party to an agreement, in circumstances where (i) at the time the agreement was entered into, none of the actual parties to the agreement intended to contract with him, and he did not intend to contract with them, and (ii) thereafter, Mr Malofeev never conducted himself as if, or led any other party to believe, he was liable under the agreement. That that is the right approach seems to me to follow from one of the most fundamental principles on which contractual liabilities and rights are based, namely what an objective reasonable observer would believe was the effect of what the parties to the contract, or alleged contract, communicated to each other by words and actions, as assessed in their context... So, in conclusion, Lord Neuberger said that even assuming that there is jurisdiction to pierce the corporate veil on appropriate facts, VTB s proposed pleaded case did not give rise to arguable grounds for contending that that jurisdiction could be invoked in the present case. Comment Whilst there were two issues before the Supreme Court in this case, namely jurisdiction and the circumstances in which the corporate veil might be pierced, if at all, it is only in relation to the latter issue that the Supreme Court s decision is of significance. Whilst it certainly settled the debate as to whether a puppeteer can be liable under his puppet company s contract, it still leaves open for future determination whether there is, in fact, any jurisdiction in any circumstances to pierce the corporate veil in a true sense of the term and, if so, what these circumstances are.