Construction - Contractual team

Pioneer Freight Futures Company Ltd v Cosco Bulk Carrier Company Ltd: Queen's Bench Division, Commercial Court (Mr Justice Flaux): 5 July 2011

The claimant was a company incorporated in the British Virgin Islands. Between January 2007 and August 2008, the claimant entered into a series of eleven forward freight agreements (FFAs) with the defendant, in seven of which the claimant was the seller and in four of which it was the buyer.

All the FFAs were on the standard 2007 Terms of the Forward Freight Agreement Brokers Association (FFABA). The 2007 Terms incorporated, by reference, the International Swap Dealers Association (ISDA) 1992 Master Agreement (the Master Agreement).

A 'Settlement Sum' was calculated for each FFA and each contract month from the 'Contract Rate' agreed between the parties, the 'Settlement Rate' for that contract month derived from the Baltic Exchange indices, and the number of days in the month. Seven of the eleven FFAs between the parties had October 2008 as a contract month.

Under four of those, the defendant was the seller and payment was due from the claimant. Under the other three, the claimant was the seller and payment was due from the defendant. With netting, a balance in favour of the defendant was due (pursuant to cl 8 of each FFA) on 7 November 2008. The claimant did not pay that sum by that date.

It was common ground that as the claimant had failed pay the sum by that date or within the time scale given by a notice of failure, there was an Event of Default under s 5(a)(i) of the Master Agreement. By virtue of s 2(a)(iii) of the Master Agreement, the defendant was not obliged to make any payments falling due to claimant in future contract months during the currency of the Master Agreement, while the claimant's failure to pay had not been cured.

After November, neither party made any payment under any of the FFAs. That remained the position until the claimant went into liquidation in December 2009. The effect of the liquidation of the claimant was to bring about automatic early termination under the Master Agreement.

During that period, in the case of eight of the FFAs, the last contract month for any payment had passed. It was the defendant's case that each of those FFAs had terminated or expired through effluxion of time when the last contract month under the particular FFA passed.

It was also the defendant's case that at the end of March 2009 the Master Agreement came to an end, there being no obligation on it to make any payment in the future. However, in the case of four of those eight FFAs (contracts nos 031863, 072483, 072575 and 80826552500), the defendant was seller and, at the time when the last contract month passed under each of those FFAs at the end of December 2008, substantial sums were due from the claimant for October, November and December 2008, which the claimant had been liable to pay under cll 7 and 8 of the 2007 FFABA Terms and s 2(a)(i) of the Master Agreement, but had not paid.

Accordingly, the defendant contended that, although each of those FFAs had terminated or expired at the end of December 2008, an accrued debt continued to be due on all unpaid sums, together with default interest. Following the claimant's liquidation, the joint provisional liquidators calculated the loss for the purposes of s 6(e)(i)(4) (the closing out calculations) and arrived at a sum due from the defendant to the claimant.

That calculation reflected the net position across all eleven FFAs. The defendant disputed that calculation. The claimant issued proceedings.

The issue to be determined was whether the closing out calculations which the claimant had undertaken pursuant to s 6 of the Master Agreement should include those FFAs where the last contract month under each such FFA had passed prior to December 2009.

The claimant contended, inter alia, that all eleven FFAs were to be brought into account in the loss calculation under s 6(e) of the Master Agreement and that the fact that the contract months under eight of them had come to an end did not mean that they were not still outstanding transactions or transactions 'in effect' within the definition of 'Terminated Transactions' in the Master Agreement.

The defendant argued, inter alia, that of the eleven FFAs, only three (nos 0410701, 037856 and 045828) were 'outstanding transactions' within the meaning of s 6(a) or transactions 'in effect'.  As the other eight FFAs had already terminated or expired (because the last contract month had passed under each of them) before automatic early termination had occurred on 14 December 2009, the defendant therefore contended that the payment on the early termination calculation under s 6(e) should be made only by reference to the three transactions which were outstanding as at 14 December 2009.

The court ruled:Only the three FFAs (nos 0410701, 037856 and 045828) which still had contract months to run as at automatic early termination and thus had outstanding obligations to be performed in the future should be taken into account in calculating the payment due upon early termination under s 6(e) of the Master Agreement.

The other eight FFAs fell outside that calculation, although the defendant had been entitled to set off against the sum calculated under s 6(e) the accrued debt of principal and default interest under the four FFAs where the defendant was the seller (see [107] of the judgment).

Marine Trade SA v Pioneer Freight Futures Co Ltd BVI [2009] All ER (D) 30 (Nov) considered; Lomas v JFB Firth Rixson Inc [2010] All ER (D) 248 (Dec) considered; Lehman Brothers Special Financing Inc v Carlton Communications Ltd [2011] All ER (D) 309 (Mar) considered; Pioneer Freight Futures Co Ltd (in liq) v TMT Asia Ltd [2011] All ER (D) 23 (Apr) considered.

Bankim Thanki QC and Adam Zellick (instructed by Herbert Smith LLP) for the claimant. Richard Jacobs QC and Siddharth Dhar (instructed by Thomas Cooper) for the defendant.