Vinergy International (PVT) Ltd v Richmond Mercantile Limited FZC

This is an appeal against an arbitration award dated 25 September 2014 pursuant to section 69 of the Arbitration Act 2016 brought with leave granted by Burton J. There is also a challenge to the award pursuant to section 68 of the Act. However, counsel for the Appellant very sensibly said little about the section 68 application beyond remarking that it “supported” the section 69 application.

The Appellant (“Vinergy”) is an Indian company which entered into an agreement with the Respondent (Richmond”), a UAE company, in August 2008 for the supply of bitumen by Richmond to Vinergy for an extendable term of 10 years. 39 shipments took place but then disputes developed between the parties leading to Richmond terminating the agreement on 20 July 2012. Richmond commenced arbitration proceedings in August 2012 and claimed damages. Vinergy denied liability and said that Richmond had unlawfully terminated the agreement for which Vinergy was entitled to damages. The hearing took place in June 2014 and the award was issued in September 2014.

The tribunal held that there had been three repudiatory breaches by Vinergy. The first was a breach of the exclusivity provisions of the MSA, by which Vinergy undertook to buy bitumen exclusively from Richmond. The tribunal found that Vinergy

“secretly contracted for the supply of cargo from Hazel and carried those transactions out by three shipments over a period of three months. On any view, the amount of cargo was not de minimis and this breach, alone, entitled Richmond to treat Vinergy as in repudiatory breach and the contract as terminated and the Tribunal so finds and holds (see paragraphs 54 and 59(c) and (d) of the Tribunal’s reasons).

The second was a failure by Vinergy to pay the 2010-2011 invoice of 9 July 2011 for almost a year (see paragraphs 55 and 59 (a) and (d) of the Tribunal’s reasons) and the third was a failure by Vinergy to pay demurrage for certain of the shipments between numbers 19 and 39 of the shipments (see paragraphs 49, 59(b) and (d) of the Tribunal’s reasons).

The tribunal further held that Richmond had lawfully terminated the agreement and awarded Richmond both sums which had fallen due for payment and damages (the latter being in the sum of $5,925,826 less a discount for accelerated receipt).

On this appeal Vinergy says that the tribunal’s finding that Richmond’s termination was lawful was wrong in law.

In order to explain how this point arises it is necessary to refer to the terms of the agreement. The agreement between the parties was described as a Master Supply Agreement (“the MSA”). The preamble noted that Vinergy had the use of bulk bitumen import, storage and delivery facilities in India and Richmond had the expertise and resources to procure, carry by sea and supply bulk bitumen at terminals in India. The commercial objective of the agreement was for Richmond to source and supply bulk bitumen at a competitive price.

Clause 2.2 provided that Vinergy

“shall exclusively purchase its entire Product import requirements for the Indian market from [Richmond]”.

But clause 2.3 provided that where Vinergy received an offer to supply bulk bitumen at a better price than was on offer from Richmond, Richmond

“will therefore purchase the Product from the third party source and will supply the same directly to” [Vinergy]….. [Richmond] “will add its agreed margin of US$10 ……per mt.”

Clause 9.5 provided as follows:

“It is the intention of the parties that the Activities will be performed by [Richmond] on a “cost plus” basis and that therefore, [Richmond] will not charge [Vinergy] anything more than the cost it incurs for the Activities plus the amount due to it pursuant to clause 2.3 ……and [Richmond] will furnish to [Vinergy] invoices and other documents in support of such costs it incurs for the Activities. In the event it is discovered that [Richmond] has breached the provisions of this clause, (1) [Richmond] shall within 3 days of demand from [Vinergy], reimburse the excess to [Vinergy] and (2) without prejudice to the foregoing or to any other right or remedy available to [Vinergy] under this Agreement or at law, [Vinergy] shall, notwithstanding clause 17 of this Agreement, be entitled to forthwith terminate this Agreement.”

Clause 17 concerned Termination and provided as follows:

“17.1

Either party may terminate this Agreement immediately upon:

17.1.1

failure of the other party to observe any of the terms herein and to remedy the same where it is capable of being remedied within the period specified in the notice given by the aggrieved party to the party in default, calling for remedy, being a period not less than twenty (20) days; ….

17.1.2

the other party suffering an Insolvency Event …….”

Clause 18 concerned Effect of Termination and provided as follows:

“18.2

Termination of this Agreement, including but not limited to Termination in accordance with Clause 17, will not prejudice the rights of action or remedy of [Vinergy] or [Richmond] in respect of any antecedent breach by the other party of any of such party’s obligations under this Agreement.”

When Richmond terminated the MSA Richmond did not give notice in accordance with clause 17. It was argued on behalf of Vinergy that for that reason the termination was not lawful and was in fact a wrongful repudiation of the MSA. The tribunal did not accept this argument. The tribunal dealt with the point at paragraph 53 of its reasons:

“Richmond pleaded termination under Clause 17 as well as at common law but in their arguments before the Tribunal they placed the emphasis of their argument on the latter. It was clear that some of the claims, such as those for non-payment, were capable of remedy and the notice of termination on 20th July 2012 was premature given that the initial notice to remedy was served on 2nd July and Clause 17.1.1 requires the parties to give notice of not less than 20 days to remedy before termination. This is, however, of limited relevance since Richmond also have common law rights to terminate on the ground of a repudiatory breach and these rights (and rights in respect of antecedent breaches generally) are expressly preserved by Clause 18.2 of the MSA.”

This decision has given rise to the first question of law which is expressed in these terms:

“Whether Richmond was able to rely on an unhindered common law right to terminate the MSA by reason of a repudiatory breach so as to completely bypass the notice and remedy requirements in the termination clause.”

Mr. Quirk, counsel for Vinergy, submitted that the parties’ common law rights to accept a repudiatory breach as terminating the MSA were limited to the extent of the relevant termination provisions in the contract. He did not submit that the MSA excluded the common law right to terminate for repudiatory breach but submitted that such right, if exercised, had to be exercised in the manner prescribed by clause 17. Mr. Mawrey QC, counsel for Richmond, submitted that this was not so and that in any event clause 17 only applied to breaches capable of remedy and that at least one of the repudiatory breaches found by the tribunal was not capable of remedy.

Mr. Quirk founded his submission on the proposition that where a contract provides that a breach of a particular gravity will give rise to a right to terminate the contract such term will be taken into account when determining whether the breach was repudiatory in the sense that it deprived the innocent party substantially of the benefit it expected to gain from the contract. Thus, in Amoco v BAOL [2001] EWHC 485 (Comm), Langley J. said at paragraph 104, when referring to such provisions:

“Those provisions themselves must in my judgment form part of an appreciation of the benefit the parties were intended to derive from the contract. Thus circumstances otherwise within the scope of the termination provisions but falling short of the precise terms would in my judgment not give rise to the right to terminate at common law for the very reason that the parties agreed when and how such circumstances should have that consequence: see Lockwood Builders v Rickwood.”

Similarly, in BSkyB v HP Enterprise Services UK Ltd. [2010] EWHC 86 (TCC). Ramsey J. said:

“……in deciding whether by its conduct a party evinces an intention not to be bound by the terms of the contract, the way in which parties agreed to treat breaches within the terms of their contract must be a factor to take into account. In particular, if a breach of a term had to reach a degree of seriousness before a contractual termination clause could be applied, it is unlikely that a breach which was less serious would, by itself, amount to a repudiatory breach.”

Lockwood Builders v Rickwood was considered by the Court of Appeal in Stocznia Gydinia SA v Gearbulk Holdings Ltd. [2010] QB 27. The particular issue before the court was whether, when an express right to terminate was granted by the contract, the right carried it with the usual consequences of being able to claim damages as on a termination at common law. Moore-Bick LJ did not regard Lockwood Builders v Rickwood as laying down any general principle. He emphasised that all will turn on the language of the clause in question understood in the context of the contract as a whole and its commercial background; see paragraph 19. With regard to the contract before him (a shipbuilding contract which provided for an express right to terminate) Moore-Bick LJ concluded at paragraph 20:

“In my view it is wrong to treat the right to terminate in accordance with the terms of the contract as different in substance from the right to treat the contract as discharged by reason of repudiation at common law. In those cases where the contract gives a right of termination they are in effect one and the same.”

Mr. Quirk submitted that it followed from these cases that where a contract provided for a notice to be given before a contract could be terminated that notice also applied with regard to the right to terminate at common law. He relied upon this observation in BSkyB v HP Enterprise Services UK Ltd. by Ramsey J., immediately after the text quoted above:

“Equally, the fact that for a particular breach the contract provided that there should be a period of notice to remedy the breach would indicate that the breach without the notice would not, in itself, amount to a repudiatory breach.”

However, in the present case the court is not concerned with what amounts to a repudiatory breach. The arbitral tribunal has made its findings in that regard and there is no permission to appeal against them. Rather, the question is whether, on the true construction of the MSA the notice provision in clause 17.1.1 of the MSA is intended to apply when a party seeks to exercise its common law right to accept a repudiatory breach as terminating the MSA.

Mr. Quirk submitted that the parties’ common law right to accept a repudiatory breach as terminating the MSA must be exercised in accordance with clause 17. As I have already indicated there was no dispute that under the common law a party to the MSA has a right to accept a repudiatory breach of the MSA as terminating the contract. Indeed, the last sentence of clause 9.5 refers to rights or remedies “at law”.

Clause 17.1.1 provides the parties to the MSA with an express right to terminate which is not dependent upon the other party having committed a repudiatory breach of the MSA. The express right arises on (i) the failure of the other party to observe any term of the MSA and (ii) the failure of the other party to remedy the breach within the period specified in the notice of the aggrieved party calling for remedy. There is nothing in clause 17.1.1 which expressly refers to the right of a party to accept a repudiatory breach as terminating the MSA. The question is whether one can imply in clause 17.1.1 an agreement that before a party terminates the MSA whether pursuant to clause 17.1.1 or pursuant to the common law the party must follow the procedure laid down in clause 17.1.1 of giving notice to remedy within a period of time not less than 20 days.

In my judgment one cannot imply such an agreement in clause 17.1.1. First, there is no mention in clause 17.1.1 of the common law right to accept a repudiatory breach as terminating the MSA. The express right to terminate provided by clause 17.1.1 is expressed to be dependent upon the "failure ....to observe any of the terms herein". Such a failure may be major or minor in terms of seriousness. Second, clause 17 as a whole provides 6 contractual rights to terminate of which clause 17.1.1 is but one. The requirement to give notice to remedy in clause 17.1.1 does not apply to the other 5. For example it does not apply to the right to terminate in clause 17.1.2 where one party suffers an Insolvency Event. Thus the agreement which can be inferred from clause 17 is that the procedure in clause 17.1.1 was intended to apply only to the specific right to terminate found in clause 17.1.1. and not to any of the other express rights to terminate in clause 17 or to the right at common law to accept a repudiatory breach as terminating the contract. Clause 18 dealt with the effect of termination and clause 18.2 in particular made clear that however the MSA was terminated rights of action in respect of any prior breach remained unaffected by the termination. That is consistent with the position at common law. Nothing in clause 18 touched on the question whether notice of remedy was required before a party could accept a repudiatory breach as terminating the MSA.

The authorities to which I was referred involved differently expressed terms and there is therefore an obvious limit to the assistance they can give in the present case. That is clear from the judgment of Moor-Bick LJ in Stocznia Gydinia SA v Gearbulk Holdings Ltd.

In Lockland Builders v. Rickwood (1995) 46 Con LR 92 (CA) a clause in a building contract gave the owner a right to terminate for delay or poor materials if he served a notice of breach and complied with the procedure set out in the contract. The owner did not follow this procedure but sought to terminate for repudiatory breach. The Court considered whether, had there been a repudiatory breach, there had to be a notice of breach in accordance with the clause. Russell LJ said at 98:

"My own view -- returning to the facts of the instant case -- is that cl 2 and the common law right to accept a repudiatory breach can exist side by side, but only in circumstances where the contractor displays a clear intention not to be bound by his contract, for example, by walking off the site long before completion (as suggested during the course of argument by Hirst LJ) or, by way of further illustration, failing to comply with plans in a very fundamental way, for example, by not building a third storey when contractually bound to do so. But such cases are far removed from the instant one. On the facts of this case, I, for my part, would be prepared to hold that cl 2 created the only effective way in which Mr Rickwood could determine this agreement. It is difficult to understand why the clause should be there at all if that were not the true position."

Hirst LJ said at 102:

"In my judgment, this cl 2 did impliedly preclude Mr Rickwood from terminating the contract on the facts of the present case otherwise than by the exercise of his rights under cl 2 since the complaints made fell squarely within the scope of cl 2, ie complaints as to the quality of materials and workmanship. However, cl 2 would not have done so in relation to breaches outside the ambit of cl 2, eg. by Mr Ryan walking off the site when the works were still substantially incomplete."

Thus the court accepted that whilst the notice of breach was required in respect of breaches that fell within the scope of the clause in question notice of breach would not have been required in respect of a repudiatory breach arising from the renunciation of obligations under a contract.

Lockland Builders v. Rickwood and Amoco v BAOL were considered by Ramsey J. in BSkyB v HP Enterprise Services UK Ltd. [2010] EWHC 86 (TCC) where there was also a notice provision in the event of a breach. It is, I think necessary, to quote at greater length from this judgment than Mr. Quirk did in his Skeleton Argument. Ramsey J. said:

“1366.

I do not read those decisions [Lockland Builders v Rickwood and Amoco v BAOL] as laying down any hard and fast rules. Rather, in deciding whether by its conduct a party evinces an intention not to be bound by the terms of the contract, the way in which parties agreed to treat breaches within the terms of their contract must be a factor to take into account. In particular, if a breach of a term had to reach a degree of seriousness before a contractual termination clause could be applied, it is unlikely that a breach which was less serious would, by itself, amount to a repudiatory breach. Equally, the fact that for a particular breach the contract provided that there should be a period of notice to remedy the breach would indicate that the breach without the notice would not, in itself, amount to a repudiatory breach.

1367.

In this case, the fact that there was a failure to meet a Major Milestone must be viewed in the light of Clause 16.2 which provides:

"Notwithstanding Clause 16.1, if a Milestone (with the exception of the first and last Milestones) is not Accepted under Clause 8.2 on the relevant date the parties have agreed that the Contractor shall not be deemed to be in material breach of the Agreement until three months after the relevant date and the provisions of Clause 11 or Clause 22.2 shall not apply to such delay prior to that date."

1368.

The effect of this is that until three months after the relevant milestone date there is not a material breach of the Prime Contract. In the light of that provision, I consider that there could be no question of a repudiatory breach in relation to acceptance of a Milestone until that period of three months had elapsed. In terms of material breach, then clause 22.2 of the Prime Contract provides:

“Termination for Material Breach

In the event of any material breach of this Agreement by either party, the other party may give to the party in breach notice specifying the same, requiring its remedy and stating that this Agreement may be terminated if the material breach in question is not remedied in accordance with this Clause 22.2. If the party in receipt of such notice fails to remedy the breach within 30 days of receipt of the notice the party who served the notice may by further notice, forthwith terminate this Agreement, whereupon the provisions of Clauses 22.3 and 22.4 shall apply."

1369.

That merely deals with a case where there has been a material breach and would cover breaches which could have a whole range of seriousness. I do not consider that this means that before any breach can be treated as being repudiatory it must be the subject of a notice requiring the breach to be remedied and cannot lead to termination unless there has been a failure to remedy the breach within 30 days. Take, for instance, a case where a party says that it will no longer perform the contract or acts in such a way. I do not consider that in such a case the innocent party must give notice and wait 30 days before it can terminate the contract at common law based on a repudiatory breach. In the case of less serious breaches, the failure to give any notice may well mean that the breach in itself cannot be treated as repudiatory but a failure to comply with a notice to remedy the breach may be.

1370.

In the present case, the conduct has to be viewed in relation to the Prime Contract and the Letter of Agreement. It must be remembered that the Letter of Agreement was entered into because EDS was in breach of its obligations under the Prime Contract. The provision of resources, completion on time and proper performance were all matters which were of importance in relation to the Letter of Agreement.

1371.

However, I have come to the conclusion that viewed objectively neither the breaches alone nor the combination of breaches amounted to a repudiatory breach of the Prime Contract, as varied. The contemporaneous correspondence is inconsistent with that view and the delay to the milestones had not reached a stage where I consider that it amounted to a repudiatory breach. As I have said most of the failures on the behalf of EDS reflected delay in performance.”

Paragraph 1369 appears to me to be the most relevant in the present context. Ramsey J. draws a distinction between repudiatory breaches, to which the notice period did not apply, and to material breaches within the meaning of the clause he was considering, to which the notice period did apply.

Nevertheless, neither of these cases can determine the construction of clause 17.1.1 in the present case. For the reasons I have already given I consider that that clause does not apply when the innocent party seeks to exercise his right at common law to accept a repudiatory breach as terminating the MSA.

If, contrary to my view, Lockland Builders v. Rickwood and BskyB v HP Enterprise Services express a principle which applies to this case that principle is that a clause requiring notice to remedy applies to breaches within the scope of the clause. In the present case the breaches within the scope of clause 17.1.1 are breaches which are capable of remedy. Were the repudiatory breaches found by the tribunal capable of remedy ?

I have already noted there were three such breaches. The first was a breach of the exclusivity provisions, the second a failure to pay an invoice for almost a year and the third was a failure to pay demurrage, also over a period of time.

Mr. Mawrey accepted that the second and third breaches were remediable but said the first was not. The secret contract to buy cargo from Hazel could not be undone. Mr. Quirk submitted that it was remediable. A remedy does not have to “undo” the breach. The appropriate remedy was to call for a payment of $10 per ton which had been bought from Hazel, that being the margin to which Richmond was entitled where Vinergy had sourced a cheaper cargo from a third party; see clause 2.3 of the MSA.

Mr. Quirk’s submission is attractive. But the tribunal held in paragraph 59(c) of its reasons that the breach of the exclusivity arrangement was “incapable of remedy”. By contrast it held that the failure to pay the 2011 invoice was “capable of being remedied”. If the finding that the breach of the exclusivity arrangement is a finding of fact it cannot be challenged. If it is a holding of law it also cannot be challenged because Vinergy does not have leave to appeal on that issue of law. The court must therefore deal with this appeal on the basis that the breach of the exclusivity arrangement was incapable of remedy.

It must follow that even if clause 17.1.1 applies to repudiatory breaches which are capable of remedy it cannot apply to the breach of the exclusivity provisions because that breach, as held by the tribunal, was not capable of remedy. Thus Richmond was, on any view as to the scope of clause 17.1.1, entitled to accept Vinergy’s repudiatory breach of the exclusivity provisions as terminating the contract without the need to require a remedy of the breach within a period of not less than 20 days.

The first ground of appeal must therefore be dismissed because (i) clause 17.1.1 does not apply to repudiatory breaches and (ii) even if it does the breach of the exclusivity provisions, being incapable of remedy, was not within the scope of clause 17.1.1. It seems likely that the tribunal had both of these reasons in mind in paragraphs 53, 54 and 59 (c) and (d) of its reasons.

The second ground of appeal is that the tribunal was wrong in law in holding that time for payment of Richmond’s invoices was of the essence. The tribunal made this finding in paragraph 59(d) of its reasons. There is force in Mr. Quirk’s submission that in a ten year contract the time for payment of an invoice was not of the essence. However, it is unnecessary to decide this point because the tribunal found that the failure to pay the 2011 invoice was a repudiatory breach not because it had not been paid on the due date but because it had not been paid for almost a year; see paragraph 55 of the reasons. Furthermore, there is another reason why the tribunal’s error, if error it was, cannot lead to the appeal succeeding. Richmond was entitled to accept Vinergy’s repudiatory breach of the exclusivity provisions as terminating the MSA whether or not time for payment was of the essence.

The third ground of appeal relates to the assessment of damages. The tribunal awarded damages by reference to Richmond’s contracted margin of $10 per ton for the remainder of the contract period; see paragraph 57 of the reasons. Vinergy contended, in accordance with an established principle relating to the assessment of damages, that Richmond’s damages must be assessed on the assumption that the party in breach will perform the contract in the way most beneficial to himself; see McGregor on Damages 19^th.ed para.10-104. Mr. Quirk submitted that the tribunal failed to do so. He further submitted that in circumstances where Richmond had failed to pass on certain discounts or rebates to Vinergy that was a breach of the MSA which, pursuant to clause 9.5 of the MSA, entitled Vinergy to terminate the MSA. In assessing the damages recoverable by Richmond Mr. Quirk therefore submitted that it must be assumed that Vinergy would have exercised that right. In the result Richmond’s damages would have been nil. The tribunal’s failure to take this into account was the third suggested error of law.

This suggested error of law is inextricably bound up with the fourth ground of appeal which concerns the question whether Richmond's failure to pass on rebates or discounts was a breach. In paragraph 59(j) of its reasons the tribunal held that the failure to pass on the rebates or discounts was not a breach. The tribunal said as follows:

“While the Tribunal has upheld the Respondent’s case that it is entitled to discretionary rebates, that item was the subject of a without prejudice agreement subject to which the Claimant provided an agreed fixed discount of US$5 per metric ton to the Respondent pending a decision in arbitration. The purpose of that agreement was to retain the status quo between the parties pending that decision. Although the tribunal has now determined that issue in favour of the Respondent and made a finding that an additional sum is due to the Respondent as a result, the Claimant is not thereby in breach of its obligation to perform the MSA.”

The fourth ground of appeal was that the tribunal erred in failing to conclude that Richmond’s failure to pass on the rebates or discounts was a breach of the MSA. If the failure to pass on the rebates or discounts was a breach then Vinergy had a right to terminate the MSA pursuant to clause 9.5 of the MSA. If it was not a breach then Vinergy had no such right.

The tribunal’s decision was based upon a without prejudice agreement between the parties. It is also referred to in paragraphs 40 and 41 of the reasons. The tribunal described the agreement in these terms in paragraph 40:

“At an early stage the parties were in dispute on the issue of rebates. They had intended to put the matter to an arbitrator for early determination, pending which they agreed on a without prejudice basis that Richmond would provide a discount of US$5 pmt but that this would be adjusted later in accordance with the arbitrator’s determination. In the event this process was not progressed at that early stage and neither party took the dispute to arbitration at that time. Hence it was that Richmond provided a discount of US$5 pmt to Vinergy from shipment 21 in January 2010 forwards, irrespective of the level of rebate earned or received by Richmond from Pasargad. That discount resulted in a total credit of US$153,238.47 to Vinergy.”

The tribunal went on to hold that Vinergy were in fact entitled to rebates in the sum of US$270,143.56 and so awarded Vinergy the difference between the two figures, namely, US$116,905.09.

I accept that the usual effect of a without prejudice agreement is that it does not affect the strict rights and obligations of the parties. That would suggest that because Richmond had not passed on the full amount of the rebates Richmond had been in breach. But the tribunal concluded that in circumstances where Richmond had provided the “agreed fixed discount” of US$5 pmt the Claimant could not be said to have been in breach. This conclusion depended very much on the terms of the without prejudice agreement which is a question of fact. Those terms were not set in the reasons in any more detail than is to be found in paragraph 40 of the reasons. In these circumstances I am unable to say that the tribunal’s conclusion that Richmond was not in breach of the MSA was wrong in law. The terms of the without prejudice agreement may well have justified the tribunal’s conclusion.

I must therefore dismiss the fourth ground of appeal. That being so it must also follow that the third ground of appeal must be dismissed because Vinergy lacks the necessary finding of a breach by Richmond which would have entitled Vinergy to terminate the MSA.

In his Skeleton Argument Mr. Quirk also relied, in support of his third ground of appeal, on the right of Vinergy pursuant to clause 2.8 of the MSA to suspend performance of the MSA where product imports were “not economically practicable”. However, clause 2.8 was never invoked by Vinergy (see paragraphs 20 and 24 of the reasons) and there was no finding that imports would have been “not economically practicable” so as to give rise to an entitlement on the part of Vinergy to suspend performance of the MSA. Vinergy therefore lacked the necessary finding to support a case based upon clause 2.8.

All four grounds of appeal fail and accordingly the appeal must be dismissed.

The challenge to the award pursuant to section 68 was not pursued in any meaningful sense. In any event there did not appear to be any substance in the suggestion that there had been a serious procedural irregularity within the meaning of section 68. A challenge pursuant to section 68 is designed as a long stop, only available in extreme cases. There was no attempt to suggest that the present was such a case.