Glory Wealth Shipping PTE Ltd v Flame S.A.

The arbitration between Glory Wealth Shipping and Flame SA has the rare distinction of having given rise to two appeals pursuant to section 69 of the Arbitration Act 1996. The first was Flame SA v Glory Wealth Shipping [2013] 2 Lloyd’s Rep. 653. In that appeal Flame was the appellant. In this appeal Glory Wealth is the appellant.

The arbitration arose out of a Contract of Affreightment (the “COA”) made in 2008 between Glory Wealth as owners and Flame as charterers and provided for shipments of bulk commodities, in particular coal and coke products, in 2009, 2010 and 2011. Glory Wealth’s claim for damages against Flame in relation to 2009 and 2010 was heard first for case-management reasons and gave rise to the first appeal. It is Glory Wealth’s claim for damages in relation to six shipments in 2011 which were not made which has given rise to this appeal. It is brought by leave of Cooke J.

The question of law to be determined is formulated in these terms:

The circumstances which have given rise to that question of law may be shortly described as follows.

Glory Wealth did not actually own ships but carried on business as “owner” by chartering in and sub-letting bulk carriers. Prior to the events which gave rise to the arbitration it ran a substantial and successful business. The COA was agreed in August 2008 when the shipping market was buoyant and Flame wished to protect itself from further rises in the market. The sudden collapse in the shipping market in October 2008 caused serious problems for both Glory Wealth and Flame. Glory Wealth was committed to period time charters at high daily rates but could not employ them at other than a loss. Flame could only provide cargoes from shippers who were prepared to pay freight only at the much reduced market rate. Flame breached the COA by failing to nominate cargoes and so Glory Wealth claimed damages assessed by reference to the margin between the expected inward freight payable under the COA and the expected outward freight payable to the owners of the vessels which had been (or would have been) chartered in to perform the voyages under the COA. In respect of the six shipments not provided in 2011 that margin, allowing for the fact that Glory Wealth could only charter in at above market rates in 2011, produced a net profit of US$3,025,800.53.

Glory Wealth’s financial difficulties were such that it became insolvent in 2009 and by 2011 was “deeply insolvent”. Glory Wealth redelivered early a number of ships which had been on long term time charter. This led to substantial claims against Glory Wealth with the risk that Glory Wealth’s monetary assets in US dollars would be subjected to Rule B attachments in New York. In an endeavour to protect its monetary assets Glory Wealth used two companies, Evensource and First Goal, which were owned by two directors of Glory Wealth, to receive all inward freight earned under the COA and to pay all outgoing freight or charter hire on the vessels used to carry the nominated cargoes. The thinking was that freight (or net freight) held by Evensource and First Goal would be immune from Rule B attachments of Glory Wealth’s assets.

This arrangement gave rise to two issues in the arbitration. The first issue was whether, having regard to the fact that neither the inward freight nor the outward freight would have passed through the hands of Glory Wealth, Glory Wealth had suffered any loss at all. The tribunal decided that it had not suffered any loss. It is that decision which has given rise to this appeal.

The second issue was whether the COA was unenforceable on the grounds that Glory Wealth intended to perform it in an illegal manner. The tribunal found that the purpose of using Evensource and First Goal was to hold freight in the name of those companies so that claims against Glory Wealth could not be enforced against those funds. The tribunal also found that the existence of the freight would not have been disclosed to the High Court of Singapore (which in April 2013 had approved a Scheme of Compromise and Arrangement between Glory Wealth and its creditors pursuant to section 201 of the Singapore Companies Act) or to Glory Wealth’s creditors. The tribunal said that this conduct amounted to turpitude. However, the tribunal concluded that the turpitude was not central but was incidental to Glory Wealth’s performance of the COA. “It would only have been later that ….the freight would have been concealed dishonestly from its creditors.” In the circumstances the defence of illegality failed. There is no appeal from that decision.

The tribunal considered the question of loss between paragraphs 27 and 79 of its reasons. Before the tribunal Counsel for Glory Wealth took a point on the facts and a point on the law. The point on the facts was that Evensource and First Goal were agents of Glory Wealth and would have held the freight in that capacity such that the freight was at all times available to Glory Wealth (see paragraph 34 of the reasons). The point on the law was that the argument that Glory Wealth had suffered no loss was misconceived because “if A (Glory Wealth) instructed his contracting party B (Flame) to pay to C (Evensource or First Goal) an amount that would otherwise be payable to and due to A, A would benefit by the amount of the payment to C whatever the relationship between A and C” (see paragraph 35 of the reasons).

The point on the law was considered between paragraphs 42 and 44 of the reasons. The tribunal noted the submission made on behalf of Glory Wealth that if the missing six 2011 voyages had been performed Glory Wealth would have earned the right to be paid freight and that being deprived of that right by Flame’s breach was sufficient to entitle Glory Wealth to substantial damages. The tribunal also noted the submission made on behalf of Flame that the mere deprivation of the right to receive freight was not sufficient for Glory Wealth’s damages to succeed. If Glory Wealth were unable to prove that the freight would have been held to its order, would have been beneficially owned by it or would have been available to it as and when it needed the freight then Glory Wealth would have failed to prove that it had suffered a loss. The tribunal then stated its conclusion in paragraph 44:

My understanding of the tribunal’s decision is that, although Glory Wealth was deprived, by Flame’s breach of the COA, of the right to receive freight, in the circumstances of this particular case that had caused no loss to Glory Wealth because it would never have received the freight and the freight would never have been transferred to Glory Wealth by Evensource or First Goal.

The point on the facts was considered at length by the tribunal between paragraphs 45 and 79 of its reasons. The tribunal concluded that Evensource and First Goal were not acting as agents of Glory Wealth and so would not have held the freight on behalf of Glory Wealth. The tribunal reached this conclusion having considered the purpose of the arrangements involving Evensource and First Goal, the absence of documents evidencing the suggested agency and Glory Wealth’s failure to disclose relevant documents. Glory Wealth did not distinguish itself in the arbitration. The tribunal considered that the apparent attitude to and lack of knowledge of financial matters of Mr. Xu, a director and general manager of Glory Wealth, lacked credibility. The tribunal also concluded that Glory Wealth, although it knew what its disclosure obligations were, had decided not to comply with the tribunal’s orders as to disclosure. There is and could be no appeal against the tribunal’s finding of fact that Evensource and First Goal were not agents of Glory Wealth.

Mr. Southern QC, on behalf of Glory Wealth, submitted that the tribunal erred in law when deciding the point on the law. If Glory Wealth had the right to receive freight under the COA (which was not disputed) then, by reason of Flame failing to perform its obligations under the COA, Glory Wealth had been deprived of that right. The deprivation of such a right was a loss and the quantum of the loss was the gross freight less the expense of earning it. It was irrelevant that Glory Wealth would have directed its freight be paid to Evensource or First Goal just as it would have been irrelevant if Glory Wealth would have directed the freight to be paid to charity or to any other unrelated person or entity.

Mr. Bright QC, on behalf of Flame, submitted that on the facts of this particular case the tribunal was entitled to find that Glory Wealth had not suffered a substantial loss. He accepted that in most cases, particularly in a commercial context, the deprivation of a right to receive money will cause the person who had the right to receive the money a measurable financial disadvantage. He gave examples. One was where A, who had a right to be paid by B, directs B to pay C in circumstances where A owes money to C. In such a case A would suffer loss if B deprives A of his right to receive the money. But he said that was not always the case and there may be exceptional circumstances where that was not so. The present case, where, he said, there were “very unusual circumstances underlying Glory Wealth’s claim”, was such a case.

The cogency of Mr. Southern’s submission is reflected in Mr. Bright’s acceptance that in most cases it is true. However, the tribunal reached its decision by reference to what it described as the “well-known purpose of damages” which is, “so far as money can do so, to place the innocent party in the position he would have occupied if the contract had been performed according to its terms” (see paragraph 27 of the reasons). That is of course the compensatory principle which was the subject of discussion in Flame SA v Glory Wealth Shipping [2013] 2 Lloyd’s Rep. 653. The tribunal concluded, in effect, that because Glory Wealth would never have received the freight a nil award of damages would place Glory Wealth in the position it would have been in had Flame performed its obligations under the COA.

This appeal makes it necessary to consider whether the tribunal’s decision, whilst apparently rooted in the compensatory principle, is nevertheless wrong in law.

There is no dispute that Glory Wealth had a contractual right under the COA to payment of freight from Flame. There is also no dispute that Glory Wealth, by reason of Flame’s breach of the COA, has been deprived of that right.

The first question therefore is whether that right had a value. The tribunal found that the difference between the incoming freight and the outgoing freight was in excess of US$3 million. Thus the right to receive freight under the COA in respect of the voyages in 2011 for which Flame failed to nominate cargoes had a substantial value of just over US$3 million.

The next question is whether Glory Wealth can claim to have suffered a US$3 million loss by reason of having been deprived of the right to receive that (net) sum. The tribunal held that Glory Wealth cannot claim to have suffered such a loss because, in circumstances where it would have directed Flame to pay the freight to Evensource and First Goal, it would never have received any sum on account of freight. The freight would never have been “transferred” to Glory Wealth (that being the word used in paragraphs 44 and 45 of the tribunal’s reasons). However, Glory Wealth was entitled to dispose of the fruits of its right to receive freight under the COA. A shipowner who has a right to receive freight is entitled, once he has received the freight, to pay it to another. He is also entitled to direct the charterer to pay the freight to another. The right to dispose of the freight is a right which attaches to the ownership of the right to the freight. If the charterer then fails to ship any cargo with the result that the shipowner is deprived of the right to receive freight the shipowner is deprived not only of the right to receive the freight into his bank account but also of the right to dispose of the freight. He is deprived of the benefits which attach to the right to receive the freight. One would not ordinarily conclude that the shipowner has suffered no loss because the freight, even if had become payable, would not in fact have been transferred to the shipowner but would, pursuant to the direction of the shipowner, have been paid to another. Indeed, to conclude that Glory Wealth has suffered no loss would amount to saying that the right to receive freight was valueless, when, as found by the tribunal, that right was worth over US$3 million. It is therefore strongly arguable, it seems to me, that Glory Wealth did suffer a loss, namely, being deprived of the right to receive freight under the COA. An award of damages in the sum of US$3,025,800.53 would compensate Glory Wealth for that loss.

This argument may, if one concentrates upon the position of Glory Wealth, appear to be unattractive. For it can be said that Glory Wealth is able to have it both ways. It can, for its own purposes, plan to ensure that the freight does not pass through its hands, and then, when it wishes to claim damages, assert that damages should be assessed on the basis that the freight would have passed through its hands. However, if one looks at the position of Flame there is no obvious merit in a result which enables Flame to escape having to pay damages for its admitted breach of the COA where its breach has caused loss in a sum in excess of US$3 million.

Mr. Bright has nevertheless argued that this argument is not available to Glory Wealth, or to the court, on this appeal. He accepts that the tribunal’s conclusion is “remarkable” but suggests that it follows from the no less remarkable evidence and factual findings in the case. He submits that in circumstances where Glory Wealth failed to establish its case on the facts, namely, that Evensource and First Goal were its agents, the natural conclusion was that Glory Wealth had suffered no loss. He further submits that that cannot be characterised as anything other than a finding of fact which cannot be challenged on appeal.

If the tribunal had assessed the value of the right to freight in question as nil (for example, on the basis that the outward freight equalled or exceeded the inward freight) that would indeed be a finding of fact unchallengeable on appeal and there would be no doubt that Glory Wealth had failed to establish that it had suffered a loss. But the tribunal found that the value of the right to freight in question exceeded US$3 million. The tribunal held that Glory Wealth could not establish that it had suffered a loss because it would have directed that the freight be paid to Evensource and First Goal who would not have transferred the net freight to Glory Wealth. The finding that the freight would never have been transferred to Glory Wealth is a finding of fact but the conclusion drawn from that fact, that therefore Glory Wealth had not established that it had suffered a loss is, it seems to me, a conclusion of law.

Mr. Bright submitted that there is no general (by which I understood him to mean universal) answer to the question posed by Mr. Southern and which is quoted above at paragraph 3. He submitted that the answer to the question all depends upon the facts. Usually, the answer will be that being deprived of a right to receive freight will result in a loss being suffered by the person to whom that freight was owed. But it need not always be so; and in this case the tribunal concluded that it had caused no loss to Glory Wealth.

It may be that there is no universal answer to the question posed by Mr. Southern. But it is not the task of the court on this appeal, even if it were possible, to consider all possible factual scenarios in which the question might arise. The question which the court must answer on this appeal is whether the circumstance that the freight for the six 2011 shipments which were not performed would never have been transferred to Glory Wealth (given that Evensource and First Goal were not the agents of Glory Wealth and would not have held the freight to the order of Glory Wealth) leads in law to the conclusion that Glory Wealth cannot have suffered a loss by reason of Flame’s breach in nominating the six cargoes in question for the 2011 season.

I have reached the conclusion that it does not in law lead to that conclusion. Glory Wealth had a right to receive the freight due under the COA. The value of that freight was found by the tribunal to be worth in excess of US$3 million. It is not worth any less because Glory Wealth had decided for its own reasons (even if they involve turpitude) that the freight would be paid to another company with the result that the freight would never have been transferred to it. To award damages of US$3 million for Flame’s breach would not put Glory Wealth in a better position than it would have been in had Flame performed its obligations under the COA. Had Flame performed its obligations under the COA Glory Wealth would have been entitled to receive freight, the net value of which was US$ 3 million, and to dispose of that freight. An award of damages in that sum would compensate Glory Wealth for having been deprived of the right to receive and dispose of that freight. Just as it would not matter to the assessment of loss if Glory Wealth had intended to give the freight away once it had received it, so it matters not that Glory Wealth had previously decided that the freight should in fact be paid to Evensource and First Goal. That was its prerogative as the person entitled to be paid freight under the COA.

Mr. Bright submitted that Glory Wealth’s plan was to shield the freight from its creditors by ensuring that Glory Wealth was not the beneficial owner of the freight. He observed that the fact that the freight was not beneficially owned by Glory Wealth was confirmed by its Annual Reports which did not include Evensource or First Goal as a related party and did not treat the freight held by those companies as an asset of Glory Wealth. However, Evensource and First Goal only became the beneficial owners of the freight because they had been given it by Glory Wealth and because Glory Wealth, as the person entitled to receive freight under the COA, had the right to give it away.

In my judgment the tribunal, when rejecting Mr. Southern’s point on the law, erred in law by failing to hold that by being deprived, by Flame’s breach, of its right to receive freight Glory Wealth had suffered a loss. The tribunal did not take into account that whilst one limb of the right to receive freight is the right to receive it into one’s bank account another limb of that right is the right to give it away. Flame’s breach had deprived Glory Wealth of the benefits of ownership of the right to freight under the COA. In fairness to the tribunal it is only right to say that whereas the argument before this court was focussed upon the point of law relied upon by Mr. Southern I suspect that before the tribunal the focus was on Glory Wealth’s case on the facts that Evensource and First Goal were the agents of Glory Wealth, which case was considered carefully and at length by the tribunal.

I have not reached this conclusion with any enthusiasm because Glory Wealth’s intended conduct with regard to the freight amounted to dishonest concealment and turpitude. Moreover, Glory Wealth’s conduct in the arbitration, giving dishonest evidence and refusing to comply with the tribunal’s orders as to disclosure, does little to inspire sympathy. But these matters cannot affect the court’s consideration of the question of law raised by this appeal.

Mr. Southern advanced a further argument based upon the suggestion that if Glory Wealth would not have profited from the 2011 voyages that must have been because of improper diversion of the profits by the directors of Glory Wealth which would have been a fraud on the insolvent company and on its creditors with the result that Glory Wealth would have had a cause of action to recover those profits for the benefit of its creditors. In the light of my decision it is unnecessary to deal with this further argument. Moreover, although this matter was touched upon in submissions before the tribunal (see for example paragraphs 52 and 53 of the reasons) this was not the basis of Glory Wealth’s case that it had suffered loss and so the necessary findings of fact were not made by the tribunal to enable the matter to be argued as a question of law on appeal.

The answer to the question of law posed by this appeal on the facts of this case is therefore: No - Glory Wealth did suffer a substantial loss. The appropriate order is to set aside the tribunal’s award and substitute it with an award in favour of Glory Wealth of US$3,025,800.53. I shall ask counsel to draw up and if possible agree an order giving effect to my decision.