Vitol SA v Conoil Plc

The Claimant is an oil trading company. One of its businesses is selling petroleum products into West Africa. The Defendant is a Nigerian company which buys and distributes petroleum products in Nigeria. The Claimant has sold automotive gas oil to the Defendant since 2007. This action arises out of 4 contracts made in July-September 2008.

The Defendant has been served with these proceedings and has been notified of the trial date but has chosen not to defend the claim which has been brought against it. Service and notification of the trial date were evidenced by the witness statement of Jamila Khan, a solicitor at Ince and Co., the Claimant’s solicitors, and the documents which were exhibited to her witness statement. I am satisfied that it is appropriate to hear the trial of this action notwithstanding the absence of the Defendant. Instead of defending these proceedings the Defendant has pursued proceedings against the Claimant in Nigeria notwithstanding that an anti-suit injunction was made restraining the Defendant from doing so.

Although the Claimant could have obtained a judgment in default it has chosen to proceed to a trial and establish its case by evidence. The court was provided with a witness statement of Ian Brown, head of operations for Mansel Commercial Services, which is a subsidiary of the Claimant and is its commercial agent in Nigeria. I treated his statement as his evidence in chief. Although he was in court I had no questions for him. The court was also provided with two witness statements of Nicholas Fay, who is the Claimant’s broker responsible for Africa and the Middle East. I treated his statements as his evidence in chief. There were certain matters regarding the evidence he gave as to the Claimant’s damages which required clarification. I therefore asked him for that clarification which he gave from the witness box. I was also provided with two bundles of documents which included, in addition to the pleadings, orders and witness statements, copies of documents relevant to the Claimant’s claims.

In short, the case of the Claimant is that the Defendant failed to perform its obligations as buyers under four agreements of sale made by the Claimant and Defendant between July and September 2008 which agreements were in consequence terminated by the Claimant on 31 October 2008. Damages are claimed for the Defendant’s breaches of contract.

The Claimant sought permission to re-amend its Statement of Case at the commencement of the hearing. One element of the damages claim was recast and another element was increased to take account of additional damages which had been sustained since the proceedings had begun. There were some additional minor amendments. The proposed re-amendment had been served on the Defendant. I gave leave for the re-amendment to be made.

In the course of his submissions Counsel for the Claimant drew my attention to arguments which the Defendant might have advanced had it been represented.

The first contract was concluded by telephone on 17 July 2008 by Mr. Brown on behalf of the Claimant and by Mr. Dele Bankole on behalf of the Defendant. It is evidenced by a letter dated 18 July sent by the Claimant to the Defendant in which the Claimant thanked the Defendant for the order that was negotiated and agreed on 17 June. The letter enclosed a copy of the contract “for your perusal and signature” and set out a summary of the terms agreed. The copy of the contract in the trial bundle bears a manuscript signature to the effect that it had been received on 21 July. The contract stated the number of the contract, no.846000. It named the Defendant as buyer and the Claimant as seller. The quantity of gasoil to be sold was 60,000 metric tonnes, plus or minus 10 per cent at seller’s option. Delivery was to be ex-ship in four lots on various dates between 15 August and 14 September off Cotonou via a ship to ship (STS) operation from a mother vessel to a daughter vessel nominated by the buyer. There were detailed terms as to quality, arrival and loading dates, the STS operation, price and payment. The price for the first 30,000 metric tonnes was fixed but the price for the balance was to be “IPE September +50 USD as published in Platts on BL date of each STS vessel.” However, the Defendant wanted all prices to be fixed and so fixed prices were later agreed as evidenced by an email dated 28 July from the Claimant to the Defendant. Provision was made for payment by letter of credit, for the provision of a security deposit (in respect of non-performance of the buyer’s obligations), a delay penalty clause and laytime and demurrage. Among the remaining provisions was a Law and Jurisdiction Clause which provided for English law as the governing law and for this court to have exclusive jurisdiction to determine any disputes.

These terms were standard terms which had been used in the course of dealing between the parties since 2007. They were therefore incorporated into the oral agreement reached on 17 July. In any event, the agreement dated 17 July was partly performed by the buyer who provided a letter of credit as required by the agreement and took delivery of 30,000 mt on the daughter vessel UNION PRIDE in August.

The second contract (no.876110) was also concluded by telephone on 20 August 2008 by Mr. Brown on behalf of the Claimant and by Mr. Dele Bakole on behalf of the Defendant. It is evidenced by a contract which was hand delivered to the Defendant. It bears a manuscript notation to the effect that it was received on 25 August. The quantity of oil to be supplied was 30,000 metric tonnes and the price was fixed. Delivery was envisaged between 25 September and 10 October. The contract contained the same terms as before.

The Defendant did not nominate daughter vessels or open letters of credit for the balance of the oil to be bought under the first contract. By an email dated 3 September the Defendant sought the Claimant’s understanding. The Defendant said it had not been able to sell the oil “and our tanks are full”. It stated that the “the total quantity locked for was 90,000mt out of which we have lifted 30,000mt –still in our tanks.” It said that it intended to lift the 30,000mt under the second contract but asked the Claimant “to outrightly cancel the 30,000 mt” under the first contract “at no cost or damage claims to Conoil.”.

Discussions ensued and these led to the third agreement dated 25 September 2008. This was agreed by Mr. Fay on behalf of the Claimant and Mr. Omoruyi on behalf of the Defendant. Their agreement is evidenced by an email exchange on 25 September. The agreement opens with a statement that “all rights of original contracts are reserved”. It then refers to the two contracts nos.846000 and 876110 and provides that the Defendant will lift 7000mt per month from each of those contracts together with 31,000mt per month of “new cargo at prevailing international prices.” The price was to be calculated by the formula IPE+ US$44. The contract was to last 4 months from October 2008 to January 2009 so that there would be 45,000mt shipped each month (in two tranches of 22,500mt).

On 26 September a contract in the usual form was produced in respect of the first 8,500mt of the “new cargo” (that is, the first tranche of 22,500mt less 14,000mt shipped under the first two contracts). Delivery was expected between 5 and 7 October. This has been described as the fourth contract though in fact it related to part only of the additional cargo agreed to be bought by the Defendant pursuant to the third contract.

However, no further cargo was lifted. On 15 October the Claimant gave the Defendant “one last opportunity” to take up the cargo they had agreed to buy by 31 October. But the Defendant did not and so on 31 October 2008 treated the Defendant’s conduct as a repudiatory breach of the contracts and accepted such breach thereby bringing the contracts to an end.

I am entirely satisfied that the four contracts were entered into by the Claimant and the Defendant on the detailed terms of the contracts sent by the Claimant to the Defendant, for several reasons. (i) The first contract was partly performed by the Defendant. (ii) It is plain from the email dated 3 September that the Defendant acknowledged that it was bound by the terms of the first and second contracts. There is no suggestion that the contracts which the Defendant had received from the Claimant did not evidence the terms which had been agreed. The email therefore corroborates the evidence of Mr. Brown. (iii) The first and second contracts are recognised as such by the terms of the third agreement dated 25 September, which the Defendant expressly agreed by email. (iv) The fourth contract was a working out of the third contract and is consistent with it. (v) In the proceedings which the Defendant has commenced in Nigeria the Defendant has made no suggestion that the contracts sent to it by the Claimant were not agreed by the Defendant.

The point taken by the Defendant in Nigeria is that until a confirmed irrevocable letter of credit has been issued “there cannot be a contract” between the parties. The letter of credit is “the final binding document” between the parties.

There is no support in the terms of the contracts for the suggestion that the issue of letter of credit is a condition precedent to the contract becoming enforceable. Clause 10 of the contract terms is headed “Payment Secured by L/C” and provides as follows:

“Payment to be secured by a fully operative and workable irrevocable documentary letter of credit…………….

Without prejudice to time being of the essence and seller’s other rights generally, seller shall not be required to discharge the mother vessel prior to receipt of such letter of credit………

In case the letter of credit is not made operational to sellers satisfaction on or before 8 August 2008 (Footnote: ¹) at seller’s option seller has the right to (1) terminate the contract and claim damages …….”

Thus the seller is not obliged to discharge until the letter of credit is issued and he may terminate the contract if it is not operational by a particular date but neither provision can support the suggestion that there is no binding contract until a letter of credit is issued.

I therefore find that there were four binding contracts as alleged by the Claimant. I further find that by failing to lift (i) the balance of the cargo agreed to be bought in the first contract and (ii) any of the cargo agreed to be bought under the further contracts by 31 October 2008 the Defendant acted in repudiatory breach of them and that the Claimant is entitled to damages in respect of such breaches of contract.

Damages have been claimed under several heads. The major head was the loss of bargain. The market price had fallen dramatically between the date of the contracts and the date on which the contract were brought to an end. The conventional and correct measure of loss is the difference between the contract price and the market price on the date on which the cargo ought to have been taken up by the Defendant. There were various dates for delivery but they had been extended in the circumstances which I have described until 31 October 2008. I consider that it is appropriate to measure the loss of bargain by the difference between the contract price and the market price on 31 October which was when the Claimant was free to sell the cargo on the open market. Mr. Fay has given evidence, which I accept, that the market value on that date can best be assessed by reference to the IPE price on that day. That is probably beneficial to the Defendant because in reality it would have been difficult to achieve that price since the market in West Africa was inactive.

The contract prices for the first and second contracts were US$1217 per mt and US$1092 per mt respectively. The market price on 31 October was US$636.50 per mt. Thus the loss of bargain for the first and second contracts (taking into account the 10% option likely to have been exercised by the Claimant) was:

So far as the losses on the third contract are concerned (including the fourth contract which represented the first tranche of the additional oil agreed to be bought under the third contract) the contract price was based upon the IPE plus $44. Accordingly, the loss of bargain can be assessed solely by reference to the additional $44 as follows:

Clause 12 of the contract terms was headed Delay Penalty Clause was and provided as follows:

“In case of delay in taking delivery from mother vessel by daughter vessel and if full contractual quantity not lifted in agreed dates, without prejudice to all seller’s other rights and without prejudice to time being of the essence, seller has the right to claim the security deposit (Footnote: ²) (at seller’s absolute discretion) USD 0.50 (fifty US cents) per metric ton per day of delay commencing three days after the last day of delivery date/window…..”

The evidence of Mr. Brown was that this penalty was the Claimant’s pre-estimate of its financing losses caused by delay in taking up the cargo. I have no reason not to accept this evidence and it is to be observed that since the value of the cargo was considerable the financing losses are likely to have been substantial. Thus although the penalty is described as a penalty there is no reason why I should not regard it as other than a genuine pre-estimate of the Claimant’s financing costs and accordingly enforceable. The penalty which is due in respect of each contract (again allowing for the seller’s 10% option) has been calculated by counsel in his skeleton argument as follows:

The first contract:

Third tranche: from 09/09/08 to 31/10/08: 53 days x $0.50 x 16,500mt	= $437,250
Fourth tranche: from 17/09/08 to 31/10/08: 44 days x $0.50 x 16,500mt	= $363,000
The second contract: from 13/10/08 to 31/10/08: 19 days x $0.50 x 33,000mt	= $313,500
The fourth contract: from 10/10/08 to 31/10/08: 22 days x $0.50 x 8,500mt	= $93,500. (Footnote: 3)

The Claimant also claims damages “for failure to lift the cargo on time”. Demurrage has not been claimed pursuant to clause 16 because, in the absence of a notice of readiness, demurrage did not fall due pursuant to that clause. However, the Claimant incurred losses, measured by the demurrage it had to pay the owner of the mother ship, by reason of the failure of the Defendant to provide a letter of credit and nominate a daughter ship. The claimant seeks to recover the demurrage it had to pay the mother ship as damages for breach of those obligations.

I consider that it is entitled to do so. The existence of clause 16 does not disable it from doing so. The liability to pay demurrage under that clause arises in circumstances where a daughter ship has been nominated and the Claimant has given a NOR and transfer takes longer than the allowed laytime. However, the Claimant relies upon a prior breach by the Defendant, namely, its failure to issue a letter of credit and nominate a daughter vessel. Nor does clause 12, the delay penalty clause, prevent the Claimant from making this claim. The penalty provided by that clause is “expressly without prejudice to the seller’s other rights” and clause 10 expressly states that “the buyer shall be responsible and liable for any delay, demurrage and expenses to the mother vessel incurred as a result of late opening of such letter of credit”.

Mr. Fay gave evidence that the cargo to be delivered to the Defendant (and no other cargo) was on board MT LUDOVICA from 7 September until 9 September. For that period demurrage in the sum of $105,000 was incurred. Thereafter that cargo went elsewhere and the cargo on board MT BLACKFIN (together with cargo loaded on board shortly after) was allocated to the Defendant. The Claimant incurred demurrage on that ship in the total sum of $1,536,000 for the period from 10 September to 24 October. On 25 October MT CORK SPIRIT arrived offshore Cotonou and her cargo was allocated to the Defendant in place of that on board MT BLACKFIN. The demurrage incurred on MT CORK SPIRIT until 31 October was $357,000.

I consider that all of the above sums were incurred by the Claimant as a result of the Defendant’s breaches and are recoverable as damages. They total $1,998,000.

Finally, the Claimant claims the costs of storing the cargo which ought to have been taken up by the Defendant for a period of 65 days after 31 October 2008. The reasoning underlying this claim which was calculated by Mr. Fay was that because of the glut of oil in Nigeria and the lack of activity in the market it was not possible to sell the cargo. It therefore had to be stored on board MT CORK SPIRIT. It remained on board her until February 2009 when the market had improved sufficiently for it to be sold and discharged. However, the Claimant accepts that if attempts had been made to sell it off in small parcels to the Nigerian market that could have been achieved in about 65 days. Accordingly storage costs are claimed for 65 days. They were paid at the demurrage rate until 11 November (in total $596,000) when the Claimant was able to convert the basis on which it chartered the vessel to a time charter basis. Thereafter the Claimant paid daily hire for a further 55 days hire which totalled $1,754,445 plus bunkers in the sum of $97,500. Those sums are recoverable as damages by the Claimant.

The damages recoverable by the Claimant are therefore substantial. But against them credit must be given for the security deposit which had been paid by the Defendant. That was made up of US$2m and 148,560,000 Nigerian Naira. The latter could not be converted into US$ because of currency control regulations in Nigeria. After it was paid the value of the Nigerian Naira has fallen. The current value of the security deposit is US$3,010.577.87 which should be deducted from the Claimant’s recoverable damages.

I shall also award interest on the damages at the rate of US prime plus 1% which is the customary rate in this court. I shall ask counsel to prepare a draft order setting out the recoverable damages which I have assessed and the interest which is due on them up until the date on which I give judgment.

The interim anti-suit injunction which I granted on 27 November 2008 should be made permanent. The contract terms agreed provided for this court to have exclusive jurisdiction and there is no reason why the Defendant should not be held to that agreement. Such an injunction should be included in the draft order.