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Commodities Brief
December 2011
Time bars and indemnities – commercial sense and certainty
In this edition of Commodities Brief, we highlight two recent English legal decisions involving demurrage
claims and time bars, and a Uniform Customs and Practice for Documentary Credits (UCP 600) case involving
indemnities under a credit facility and the obligations of a confirming bank.
Glencore Energy (UK) Ltd v Sonol Israel Ltd (2011)
This was a claim by the sellers (Glencore) against the buyers (Sonol) for unpaid demurrage, which the buyers
resisted, and applied to strike out, on the basis that it was time-barred.
The sellers entered into two contracts to sell gasoil in late 2004, and the gasoil was procured from BP
on CIF basis. The sale contracts stated that demurrage was to be “as per charter-party rate, terms
and conditions”.
The performing vessel, the “Team Anmaj”, arrived at the discharge port in Israel in December 2004, but
discharge was only completed in January 2005. BP claimed demurrage from the sellers in late April 2005
under a demurrage invoice. The sellers claimed against the buyers in mid-April 2011 for this demurrage.
The question arose as to when the sellers’ cause of action accrued.
The sellers argued that the demurrage provisions constituted an indemnity from the buyers to the sellers, in
which case time should only start running from when the sellers made their claim for demurrage, i.e. the
date the sellers presented their demurrage invoice to the buyers.
The buyers argued that the demurrage provisions in the sale contracts constituted free-standing
independent obligations by the buyers to pay demurrage. The obligation accrued day-by-day pro rata from
the moment when the laydays expired. The claim was therefore time-barred, since discharge was completed
in January 2005, more than 6 years ago.
The Court agreed with the buyers and held that the claim was time-barred. In doing so, the Court said that as
a matter of commercial certainty, parties should be able to know precisely where they stand. This may
include having an independent demurrage provision in a sale contract adopting the demurrage rate in the
charter-party a s a genuine pre-estimate of the receiving party’s exposure, regardless of the seller’s
position under the charterparty.
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Another important factor was whether the sale contracts contained laytime provisions, and if so whether
the sale contract terms coincided with those in the charterparty, so as to suggest that parties had intended an
indemnity. In the present case, the charterparty terms and the sale contract terms differed.
The Court also commented that if the sellers’ argument was correct, that would mean that the sellers would
be able to present a claim long after discharge was complete, which would have been “commercially very
unattractive”.
National Shipping Company of Saudi Arabia v BP Oil Supply Company (2011)
This was another demurrage case where the issue of time bar arose.
The owners (NSCSA) chartered their vessel to the charterers (BP) on BPVOY4 form for a single voyage from
Freeport, Bahamas to Singapore. The cargo was to be dirty petroleum products.
During loading at Freeport, the vessel was required to leave berth due to unavailability of cargo. Laytime and
demurrage continued to run. The vessel alter re-berthed and loaded a further cargo, heavy sulphur fuel oil,
before sailing for Singapore. The owners tendered a supplementary invoice to the charterers for the time
incurred for the second berthing at the demurrage rate, and for bunkers consumed. The owners also issued a
demurrage invoice with supporting documents. However, the demurrage invoice incorrectly failed to reflect
the fact that laytime had been wholly used at Freeport so the vessel was on demurrage at Singapore. After a
small adjustment, the demurrage invoice was settled by the charterers. The owners sought payment of the
supplementary invoice.
At first instance, the Court held that the settlement of the demurrage invoice settled all and any claims by
the owners in respect of demurrage. In any event, a further demurrage claim was time-barred under the
charter and the cost of bunkers for the second berthing was not recoverable. The owners appealed.
The owners claimed that the delays encountered by the vessel for the voyage were all attributable to the
charterers, and the owners had submitted all the necessary supporting documents for the demurrage claim
within time.
The charterers’ two defences were that there was a settlement which precluded a further demurrage claim,
and that the owners had failed to comply with the charterparty terms for making the demurrage claim.
Hence, the claim was now time-barred.
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On the settlement argument, the Court of Appeal held that the agreement to settle the demurrage invoice
related only to that invoice. It did not preclude the owners’ claim for a further sum for time used at both
Freeport and Singapore 1 . Concerning the time-bar argument, the Court held that it would have been
“unattractive and uncommercial” to find that the owners’ claim for demurrage was time-barred when it was
common ground that owners had furnished all the documents required to enable the charterers to verify the
demurrage claim within time, and the charterers were not misled as to the nature of the claim. The cost of
bunkers consumed for the second berthing was not recoverable.
The Court of Appeal added:
“Where in a commercial contract one finds a provision to the effect that one party is only to be liable
to the other in respect of claims of which he has been given notice within a certain period, it is
fair to assume that the parties wish their relationship to be informed rather by certainty than by
strictness…
…Thus the touchstone of the approach ought in my view to be a requirement of clarity sufficient to
achieve certainty rather than a requirement of strict compliance which, if applied inflexibly, can lead
to uncommercial results.”
Société Générale SA v (1) Saad Trading (2) Maan Abdulwahid Abduljmajeed Al-Sanea (2011)
The claimant bank (SG) claimed US$50 million under a facility letter (the Facility) against the first defendant
(D1) and the same sum against the second defendant (D2) under a guarantee of D1’s liabilities under the
Facility (the Guarantee). D1 sought the Facility from SG in order to finance its gold trading activities.
Pursuant to the Facility, SG issued two letters of credit for approximately US$25 million each to enable the D1
to buy “approximately 28,000 fine oz’s of large 12.5kg gold bars” from AGR Matthey. The Facility contained
instructions, or a mandate, relating to letters of credit to be issued by SG and provided that:
(a) D1 would indemnify SG against all liabilities to a confirming correspondent under or in respect of such
letter of credit; and
(b) Under the letter of credit applications D1 agreed to hold SG harmless pursuant to the provisions of the
Facility.
1 The owners’ claim for demurrage succeeded, subject only to charterers being at liberty to argue on rates for the effect of
adverse weather.
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Having delivered the gold to Brinks Australia for shipment to London, AGR Matthey presented documents to,
and received payment from, the confirming bank, National Australia Bank Limited (NAB). SG informed NAB by
a SWIFT message that the documents were in compliance with the letter of credit terms. SG reimbursed NAB;
however, D1 did not reimburse SG. SG wrote to D1 stating that its failure to make the payments was an event
of default. SG duly terminated the Facility and demanded immediate payment. SG also wrote to D2
demanding payment under the Guarantee.
D1 argued that it was not liable to indemnify SG under the Facility on the grounds that the bills of exchange
drawn on and accepted by NAB 2
were not forwarded by NAB to SG. D1 also argued that the failure of NAB to
forward the drafts had the consequence that SG was entitled to refuse to indemnify NAB, and that in those
circumstances, where a waiver had not been sought by SG from D1 pursuant to Article 16 of UCP 600, D1 was
not obliged to indemnify SG 3 .
The Court held that the letters of credit did not contain or evidence the relationship between SG and D1.
D1’s obligation to indemnify SG was to be found in the Facility and in the particular instructions, or mandate,
which D1 gave to SG to issue the letters of credit. In the circumstances, there was not reason why the
indemnity in the Facility should not be given its ordinary and natural meaning. On the issue of SG’s liability to
reimburse NAB, Teare J agreed that:
“…UCP 600 distinguishes between presenting and forwarding and between honouring and reimbursing;
compare Article 7(a) and (c) and Article 8(a) and (c). Honouring is defined in Article 2, where the credit
is available by acceptance, as meaning to accept a bill of exchange drawn by the beneficiary and pay at
maturity. On the facts of the present case it was the confirming bank, NAB, that was to honour by
accepting the bills of exchange. By contract the Claimant was to reimburse NAB if NAB honoured a
complying presentation.”
He added:
“But in my judgment, where the drafts are included in the letter of credit in the list of documents to be
presented by the beneficiary to the confirming bank and are so presented, the duty of the confirming
bank on the true construction of UCP 600, and in particular of Article 7(c), is to forward them to the
issuing bank. The language of Article 7(c) does not permit any exception. Further, to permit NAB a
discretion to decide not to forward a listed document because it would appear to serve no useful
2 They were included in the documents listed in the letters of credit as being required for presentation and were in fact
presented by AGR Matthey to NAB.
3 D2 adopted the same defence.
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purpose seems to me to be contrary to the principle of strict compliance which permeates the law of
documentary letters of credit…
In the present case the drafts, although required to be presented under the letter of credit and in fact
presented by AGR Matthey to NAB, were not forwarded by NAB to the Claimant. However, I do not
consider that that failure, in circumstances where there is no dispute that the documents presented by
AGR Matthey to NAB were compliant, would ultimately have enabled the Claimant to refuse to
indemnify NAB.”
The Court concluded that SG was obliged to reimburse NAB and D1 was liable to indemnify SG in respect of
that liability. If SG was not obliged to reimburse NAB, it did so in good faith and D1 was bound by that decision.
In circumstances where D1 was liable to indemnify SG pursuant to the terms of the Facility, there was no
dispute that D2 was in breach of the Guarantee and was also liable to SG.
Regulation: Update
Regulatory reform and its impact on global markets continue to be hot topics in the news and at conferences
from the US to Asia in the past few months.
In early September, the Commodity Futures Trading Commission (CFTC) outlined a timetable for the rules it
expects to consider in 2011 and the first quarter of 2012. On the list for 2011 were clearinghouse rules,
end-user exception, position limits and real-time reporting. For 2012, rules for capital and margin, disruptive
trading practices and swap execution facilities. In September it was also reported that US securities
regulators, including the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange
Commission (SEC), had begun making requests for proprietary code and algorithmic trading data as part of
investigations into suspicious market activity, and to examine financial firms for compliance with US
regulations.
On 26 October, pursuant to the Dodd-Frank Act, the CFTC released the long-awaited final rule for position
limits within commodity markets. The final rule, which seeks to address concerns over excessive speculation
and marketing manipulation in commodity markets, will affect futures and swaps traders in any of the
selected 28 commodities. The position limits regime has been referred to as “a critical component of
comprehensive regulatory reform of the derivatives market” 4 .
4 Gary Gensler, Chairman of the CFTC.
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On 21 October 2011, the European Commission (EC) published its legislative proposal to replace the Markets
in Financial Instruments Directive 5
(MiFID) with a new directive, MiFID II, and a regulation, MiFIR. The EC also
published a new Market Abuse Regulation (MAR) to replace the existing Market Abuse Directive 6
(MAD).
Both proposals, which are key components of the EC’s response to the G20 agreements, will have a significant
impact on commodity and energy traders.
Also in October, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC)
commenced a joint consultation on a proposed new regulatory regime, whose new rules are aimed at
reducing systemic risk, as part of G20 commitments. According to the SFC, certain over-the-counter (OTC)
derivatives transactions, including those booked and cleared offshore through an appropriate jurisdiction,
are likely to receive reporting and clearing exemptions from new rules set to become law in Hong Kong.
There continues to be speculation as to whether Asia and Europe will be able to meet the G20 deadline to
move OTC derivatives activities onto central counterparty (CCP) clearing by the end of 2012.
In other news
It’s time to load up on CARBS. Not carbohydrates, but major commodity producing countries, Canada,
Australia, Russia, Brazil and South Africa 7 .
According to a report from PricewaterhouseCoopers 8 , Australia’s top mid-tier miners saw net profits grow
from A$38 million in 2010 to A$2.4 billion this year. Last month, Australia’s Lower House of Parliament passed
legislation for a 30 percent tax on coal and iron ore profits. It is likely that the Minerals Resource Rent Tax Bill
will be passed and become law early next year. It has been reported that BHP Billiton, Rio Tinto and other coal
and iron ore producers face paying around A$11 billion in extra charges in the first three years of the tax.
In other legislative news, Australia’s Senate has approved a long-debated law on pollution, The Clean Energy
Act, which will force Australia’s 500 worst-polluters to pay a tax on their carbon emissions from 1 July 2012.
The government has initially set the price per ton of carbon at A$23, significantly higher than other similar
schemes such as in the EU. It is expected that Australia’s miners, steel makers, energy firms and airlines will
be amongst those hardest hit by the new tax.
5 2004/39/EC.
6 2003/6/EC.
7 According to a report published in November by Citigroup.
8 ‘Aussie Mine – Onwards and Upwards’.
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Rio Tinto’s joint venture with Chinese state owned resources company Chinalco has been green-lit to begin
exploration for resources. It is understood that the new entity, Chinalco Rio Tinto Exploration (CRTX), will
first focus on copper before moving into other resources.
It was reported in November that China has been in talks with Rio Tinto, Vale and BHP Billiton to agree a new
iron ore pricing mechanism after a significant drop in bash market prices. Last month iron ore prices for
immediate delivery plummeted 32 percent as a result of slowing industrial steel demand and China’s credit
tightening.
Indian ore exports could be brought to a halt after a commission set up by the Indian government last year
recommended a complete ban on the trade until it initiates "a proper mechanism" to stop unlicensed ore
mining and exports. Such a ban could wipe out 100 million tons of ore exported annually to China, according
to industry experts. Last month it was also reported that a consortium of 7 Indian companies, led by the
state-owned Steel Authority of India, has succeeded in a deal worth US$10.3 billion to mine iron ore deposits
in three sites in Afghanistan.
In an effort to boost prices, in October 15 tin producers in Indonesia agreed to extend a self-imposed ban on
exports after the metal lost 17 percent the previous month in the wake of the European debt crisis. Last month
30 Indonesian smelters, representing about 40 percent of global exports, agreed to extend the halt on spot
shipments in order to push the global price to US$25,000 per metric ton.
For more information, please contact
Iain Sharp – Partner
Kennedys
80 Raffles Place
#44-05 UOB Plaza 1
Singapore 048624
T +65 6671 7413
E i.sharp@kennedys-law.com.sg
www.kennedys-law.com.sg
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