BP Shipping Ltd v Bernhard Schulte Shipmanagement (Bermuda) Ltd Partnership

This appeal from an order of Blair J raises a short issue of construction of a ship crew management agreement and a side letter to that agreement. The dispute arose in relation to the sum payable when the agreement was terminated. The judge decided the issue in favour of the managers and the owners appeal with leave of Moore-Bick LJ.

By 1994 the claimants, the respondents in this court (to whom I shall refer as “the managers”) had for some years managed in Bermuda the crewing arrangements for vessels owned by the defendants, the appellants in this court (to whom I shall refer as “the owners”). For various reasons, largely fiscal and regulatory, the owners decided in 1994 to enter into a new crew management agreement which was to include provision of officers which the owners had prior to that time arranged themselves. This was a negotiated agreement; it is not on a standard form, but on specifically negotiated contract wording. The industry standard forms referred to in paragraphs 2 and 3 of the judge’s judgment are therefore, as he concluded, of little assistance.

The agreement covered one part of the owners’ fleet. Over the following year, another 5 agreements in respect of other parts of the fleet were entered into on materially the same terms.

Under these agreements, taking the one dated 1 July 1994 as an example, the managers were paid an all inclusive sum for managing the crewing arrangements and providing the crews. Clause 7 of the agreement provided that the managers would be paid in accordance with the provisions set out in Schedule C to the agreement. Schedule C provided that the owners were to pay the managers “a monthly lump sum as specified in Schedule A (1-2) and pro rata for part of a month”. Schedule A set out for each of the vessels that were subject to the agreement the crew required and a specific monthly lump sum expressed in a US Dollar amount and a Pounds Sterling amount for that crew, including a specified amount of overtime. If the costs of managing the crewing arrangements and the costs of employing the crews (wages, travel, training and other costs) exceeded the monthly lump sum, then the managers made a loss, but, if the costs were less, then they made a profit. In other words the financial risk was entirely theirs.

The agreement contained in clause 5 a detailed clause about termination entitled “Resignation and removal”. Although, as is usual, a number of events which might give rise to termination were set out in clause 5, only three were relevant to the financial consequences of termination set out in clause 5.9 in relation to which the dispute arose. These were (i) the right of the owners to remove the managers for any reason on notice (clause 5.1), (ii) the termination of the agreement in respect of a vessel which was either lost or sold (clause 5.7) and (iii) the right of the owners to terminate if there was a material change in the management of the managers (clause 5.8). In any of those events, Clause 5.9 provided that the owners would indemnify the managers against the costs of termination, purchase at cost various items and, by Clause 5.9(c):

“pay compensation to [the managers] equal to one half of the applicable monthly lump sum payment prevailing at the date of termination”.

In 2000 the agreement was first amended by a side letter dated 8 May 2000 with the essential purpose of changing the basis of the agreements from the inclusive cost arrangements (to which I have referred) to a basis where the actual costs of crewing would be borne by the owners with the managers remunerated on a fee basis. This came about because, as the judge explained in paragraph 7 of his judgment, the owners had expanded their fleet and the terms of remuneration of the managers under the 1994 form of agreement was considered by BP to be too generous. Under the terms of the side letter which took effect from 1 April 2000, the managers’ remuneration comprised two portions – monthly lump sums and sums payable by way of fees.

Before the expiry of the terms set out in that first side letter, a second side letter was agreed amending the side letter dated 8 May 2000 with effect from 1 April 2003. It was to run for a period of three years. This side letter retained the monthly lump sum payments in relation to the costs of crewing unamended. However it simplified the fees: it replaced (a) the net profit element and (b) the fee element by providing for a single annual fee of $1.5m and £1m in part index-linked and with a variation clause for the number of vessels; it retained (c) the performance bonus, albeit in different amounts.

When the period provided for in the 2003 side letter came to an end on 31 March 2006, the parties had not reached an agreement as to what was to happen. The judge heard evidence in relation to the background to the negotiations which resulted in the third side letter; it is summarised in paragraphs 9-16 of his judgement. Inevitably in the course of hearing evidence on the background, as the judge pointed out in paragraph 22 of his judgment, a significant amount of evidence was given as to what the parties meant and the various commercial considerations each might have had in mind. That was inadmissible to construction.

It is always easy after the event to see that only a very small amount of such evidence was admissible or of any relevance. It can be summarised in short order:

It is unfortunate, in my view, that those simple facts could not have been agreed. It would have rendered the calling of all other evidence unnecessary and enabled what is a short point of construction to have been determined more speedily and at much less cost than a trial involving evidence.

The negotiations were finalised in the summer of 2006 and resulted in the third side letter. It was back dated to 1 April 2006 and took effect from that date. The basis of remuneration was again revised. Paragraph 3 of the side letter continued the amended provision for the monthly lump sum payment so that it covered the actual costs of the crew. Paragraph 4 continued the revised fee structure set out in the second side letter with minor adjustments. As the relationship of this paragraph to clause 5.9(c) is important, it is necessary to set it out:

“4.1

First Element – Fees

Based upon [the managers] providing Crew Management for between 25 (twenty five) and 32 (thirty two) Vessels under the Lump Sum Manning Agreements as at the Effective Date, [the managers] shall be entitled to receive US $1,500,000 (one million five hundred thousand United States Dollars) per Year, and £1,067,000 (one million and sixty seven thousand Pounds Sterling) per Year. This fee will be paid by [the owners] to [the managers] with the monthly lump sums referred to in Paragraph 3 above monthly in advance in 12 (twelve) equal instalments.

4.1.1

Indexation of Fee Structure

…..

4.1.2

Variation in vessel numbers

If the number of Vessels under Crew Management by [the managers] under the Lumps Sum Manning Agreements reduces below 25 (twenty five) or increases over 32 (thirty two) then the Fee Structure will be revised by mutual agreement.”

The change to the termination provision and the amount payable on termination was effected by paragraph 5 of the side letter:

“5.

Period

The present intention of the Parties is that the revised arrangements set out in this Side Letter shall continue in full force and effect for a period of 3 (three) years from the Effective Date, or such longer period as the Parties may hereafter agree in writing. However nothing in this Side Letter shall override the express termination rights set out in Clause 5 of each of the Lump Sum Manning Agreements, save that the period of 3 (three) months set out in sub-Clause 5.4 thereof shall be amended to 6 (six) months and the reference to “monthly lump sum payment” in sub-Clause 5.9(c) thereof shall be deemed to be a reference to the fees in Paragraph 4.1 hereof.”

In January 2007 the owners gave six months notice of termination on all the agreements. In due course it became evident that the managers considered that the amount due under Clause 5.9(c) as amended by the third side letter, was half of the specific sums set out in paragraph 4.1 (US $ 1.5m and £1.067m), whereas the owners contended that all that should be paid was one half of the monthly instalments of those sums. The judge decided that the managers’ construction was correct.

There was argument on both sides which went to the economic advantages and disadvantages each would suffer if the construction of the other was preferred. It is clear that if the managers are right they will receive $750,000 and £553,773 and if the owners are right the managers will only receive one twelfth of those sums, namely $62,500 and £46,147.75. It was submitted by the owners that no-one could commercially have intended payments being made of the magnitude that would result on the managers’ construction. The only payment to be expected was a nominal payment, as the managers’ start up costs had been covered over the years, the six month notice period was generous for a three year contract, payments were to be made for various matters and the risk of fluctuations in cost was no longer that of the managers.

I cannot accept those as relevant considerations. It is a matter of commercial negotiation as to the amount that is payable on a termination. It certainly cannot be said that the payment that will result on the managers’ construction is one that is commercially absurd. It might, as the managers accepted, be generous, but they contended that the contract with the owners was a very important part of their business which employed a number of people. In my view, an attempt by a court to assess whether a payment to a manager in these circumstances is generous would be very difficult. But in any event it is no guide to the construction of the clause. Furthermore, unless a court was to have entirely re-written the agreement as amended by the first and second side letters, the payment that would in fact have been due on termination under the agreement as varied by those side letters would have been substantially more than that claimed by the managers under the agreement as varied by the third side letter.

It was also contended by the owners that the construction advanced by the managers would produce results that were uncommercial, if the agreement was terminated in two out of the three circumstances where the payment provisions of Clause 5.9(c) applied.

As in all cases of construction, the decisive factor is the language which the parties used. Paragraph 5 of the side letter is very clear in specifying that the term “monthly lump sum payment” as used in clause 5.9(c) of the original agreement was to be deemed to be a reference to the “fees in paragraph 4.1”. We were referred by Mr Kendrick QC who appeared on behalf of the owners, to a passage in Lewison: The Interpretation of Contracts where there is a discussion of deeming clauses and of the way in which a deeming clause is used to “expand the ordinary meaning of a word or phrase”. Reliance was expressly placed on an observation of Lord Bingham of Cornhill giving the judgment of the Privy Council in Dairy Containers Ltd v Tasman Orient Line CV [2005] 1 WLR 215, at [13]:

“Thus the purpose of the deeming provision is to give the rules a meaning different from that which they would have in the absence of a deeming provision.”

As Laws LJ observed during the course of argument, the use of the word “deem” by the draftsman of the side letter was used in the much simpler sense of giving the particular phrase in clause 5.9(c), “monthly lump sum payment”, a lexicon meaning. The task of interpreting the contract is therefore to insert into clause 5.9(c) of the original agreement the phrase “fees in paragraph 4.1” of the third side letter in place of the phrase “the monthly lump sum payment” so that it reads:

“pay compensation to [the managers] equal to one half of the applicable fees in paragraph 4.1 of the side letter dated 1 April 2006 prevailing at the date of termination.”

The only sums referred to as fees in paragraph 4.1 of the third side letter are the dollar amount of $1.5m and the sterling amount of £1.067m. No other fee is mentioned in 4.1. It is, of course, correct that paragraph 4 of the third side letter refers to “fee” in the singular and not to “fees” in the plural, but this is done almost interchangeably. This, however, does not detract from the simple point that the only fees referred to in paragraph 4.1 of the side letter are the sums of $1.5m and £1.067m. It can make no difference that the parties chose this method of amendment in place of providing for a new clause 5.9(c); there is no significance at all in the fact that therefore the phrase “monthly lump sum payment” was retained, as the whole of the phrase has been given a defined meaning. It might very well be different if the phrase given the defined meaning had simply been “lump sum payment”.

Paragraph 4.1 of the third side letter does provide for the fees to be paid in equal monthly instalments. But this provision goes to the method of payment, not to the amount of the fees set out in the paragraph. If the draftsman had intended in paragraph 5 of the side letter to refer to “the monthly instalments of the fees in paragraph 4.1”, it would have been a matter of simple drafting to have set that out in those terms in paragraph 5 of the side letter. Moreover, the distinction between the method of payment and what was to be paid was one that was reflected in the original agreement. This is entirely consistent, therefore, with the interpretation of drawing the distinction between the fees and the method of payment.

It was also contended that the annual fees could not be the “applicable” fee “prevailing at the date of termination” as specified in clause 5.9(c); I do not understand why that cannot be the case, as the sterling part of the fees were adjustable annually. If the agreement had run into the second or third year and then been terminated, then it would be the fee prevailing in those years. Other arguments were addressed to us, including a contra proferentem argument. However, in my judgement, none of these arises, as the point in the end is a simple one of reading the words of the contract in the context of the agreement as a whole against its factual matrix. Far from being unclear or ambiguous, it is clear. The payment due under clause 5.9(c) of the agreement was to be calculated as half of $1.5m and £1.067m.

For these reasons, therefore, I consider that the judgment of Blair J was correct and this appeal should be dismissed.

I agree.

I also agree.