Jiangsu Shagang Group Co Ltd v Loki Owning Company Ltd

This is a challenge by Jiangsu Shagang Group Co Ltd (“JSG”) pursuant to s. 67 of the Arbitration Act 1996 (“the Act”) to the award of an arbitral tribunal as to its substantive jurisdiction dated 9^th December 2016 (“the Award”). The tribunal consisted of Messrs David Farrington, Timothy Marshall and Patrick O’Donovan (“the Arbitrators”).

The Award was made in the context of a claim by Loki Owning Company Ltd (“the Owners”) as (nominated) owners of the vessel M/V “Pounda” (“the POUNDA”), a new build Capesize bulk carrier, against JSG as alleged guarantors of the obligations of Shagang Shipping Co Ltd (“Shagang”), now in liquidation. The Owners and Shagang entered into a charterparty by exchange of emails in November 2008 in respect of the POUNDA for a period of 118-122 months as from delivery ex the yard at a hire rate of US$60,000 per day. The POUNDA was a substitute for an earlier vessel agreed for charter between the parties, M/V “Daytona” (“the DAYTONA”).

In the normal way, the charterparty was subsequently formalised in a longform charter (on an amended NYPE 1946 form) (“the Pounda Charter”). When recording the identity of the parties (at lines 11 and 12) the Pounda Charter stated that the charterparty was made between the Owners and:

“Shagang….to be guaranteed by [JSG]..” (“the Guarantee”)

The Pounda Charter then included an arbitration clause as follows:

“Any disputes arising out of this contract which cannot be amicably resolved shall be referred to arbitration in London. Unless the parties agree on a sole arbitrator, the reference shall be to a tribunal of three arbitrators….The arbitrators shall be members of the London Maritime Arbitrators’ Association or otherwise qualified by experience to be deal with commercial shipping disputes.”

The Pounda Charter was in due course signed for the Owners but not for either Shagang or JSG.

The Owners claimed to have suffered over US$10million in unpaid hire and over US$57million in damages as a result of Shagang’s repudiation of the Pounda Charter. They allege that Shagang’s obligations under the Pounda Charter were guaranteed by JSG.

Without prejudice to its position on jurisdiction, JSG has admitted Shagang’s repudiation of the Pounda Charter and the arbitral proceedings have proceeded, despite the outstanding jurisdictional challenge. Indeed, the Arbitrators have this month delivered an award (dated 8^th February 2018) in relation to liability and quantum. Liability has been established in favour of the Owners with damages in respect of unpaid hire (quantified at some US$10.7million), damages from 12^th April 2015 to 1^st February 2018 (quantified at some US$39.1million) and future damages (quantified at some US$18.2million), together with interest and costs.

More specifically, the Owners allege that JSG authorised Shagang to conclude the Guarantee on its behalf, and that Shagang in turn authorised shipbrokers Howe Robinson & Co Ltd (“HRS”) to enter into the Guarantee for JSG.

JSG denies entering into the Guarantee. It did not authorise Shagang (or HRS) to do so on its behalf. It contends that it did not in fact know about the Pounda Charter, let alone the Guarantee, at the time that the charter was concluded in November 2008.

JSG indicated its jurisdictional objection at the outset of the arbitral proceedings. Its application for the question of jurisdiction to be determined by this Court (pursuant to s. 32 of the Act) was resisted by the Owners and then rejected by the Arbitrators (in March 2016). The matter was accordingly pursued by way of preliminary issue pursuant to s. 30(1) of the Act in the following terms:

“Did JSG authorise HRS (whether London or Shanghai) to conclude the guarantee contract in the charterparty on behalf of JSG?” (“the preliminary issue”).

(The issue was formulated thus in the light of the Owners’ original contention in the early days of the dispute that HRS was broker to Shagang/JSG.)

The Arbitrators answered the preliminary issue in the affirmative: on the basis of the evidence before them, JSG had authorised HRS to conclude the guarantee through the following chain:

“...The charter was concluded through the medium of HRS on behalf of JSG, following the instructions given by Shagang.”

Accordingly there was a valid arbitration agreement between the Owners and JSG.

It is this conclusion that is the subject of the present claim to set aside or vary the Award.

It is common ground that JSG’s challenge under s. 67 of the Act proceeds by way of re-hearing rather than review (see for example Azov Shipping Co v Baltic Shipping Co (No 1) [1999] 1 Lloyd’s Rep 68), and a party is (in general) entitled to adduce evidence which was not before the Arbitrators. As will become apparent, JSG has exercised that right fully here, adducing fresh witness material. Additionally, there has been substantial further disclosure, principally from Shagang’s liquidators.

JSG is thus entitled to a full judicial determination on the evidence now, without any preconception that the Arbitrators reached the correct conclusion. This is an “unfettered right” – see People’s Insurance Co of China (Hebei Branch) v Vysanthi Shipping Co Ltd (The Joanna V) [2003] 2 Lloyd’s Rep 617. In The Kalisti [2014] 2 Lloyd’s Rep 449 Males J confirmed (at [9]) that the Court is “not confined to a review of the arbitrators’ reasoning but effectively starts again…the decision and reasoning of the arbitrators is not entitled to any particular status or weight, although (depending on its cogency) the reasoning will inform and be of interest to the court”.

Whilst the Award is therefore of indirect relevance at best, given the criticisms made by JSG of the Arbitrators’ reasoning, it is nevertheless helpful to summarise the Arbitrators’ key findings and those criticisms. The hearing spanned a week in July 2016 during the course of which Mr Shen Wen Ming (“SWM”) alone gave oral evidence for JSG via (an unsatisfactory) video link from the PRC (and with the aid of an interpreter). SWM was at all material times the Vice President of JSG and also a director of Shagang.

The Arbitrators found that JSG was in “serious breach” of its disclosure obligations. They therefore deemed it appropriate to draw (unparticularised) “adverse inferences”. They found (at [57]) that JSG gave actual express authority for the Guarantee, since SWM had expressly approved it:

“[57] We accept [SWM’s] evidence that he was only consulted on charterparties where a guarantee was required from JSG. We find that [SWM] did give oral agreement to Mr Shen Wen Fu to give the JSG guarantee for at least four vessels on long term charter. However, despite his previous denials, he did concede in cross-examination that it was possible that he told Shen Wen Fu that he could fix the POUNDA on the same terms as the DAYTONA. He agreed that Owners wanted a guarantee because JSG was a stronger company than Shagang. We find from his evidence as a whole that [SWM] expressly approved the terms of the POUNDA charter including the guarantee (he said that he was cross with Shen Wen Fu for agreeing to the POUNDA replacing the DAYTONA) but that he later sought to change his mind because of the fall in the market.”

For the sake of completeness, the Arbitrators went on to accept the Owners’ case that the Guarantee was important to the Economou Group (which nominated the Owners through Cardiff Marine Inc on 6th March 2009). A guarantee by a big steel mill to stand behind a paper company would be important to any ship owner and “this was appreciated by JSG”.

The Arbitrators went on (at [91] and [92]) to find that there was also actual implied authority:

“91.

… we do not consider that the requirement of a countersignature necessarily means that there could not be implied authority as well [as express authority]. If the relationship between JSG and Shagang was such that the latter had some discretion as to how to carry out company policy, and, in particular, what brokers to use, Shagang’s authority was none the less real if the modus operandi was known and approved of by JSG.

92.

Accordingly, if it is necessary, we also find that Shagang had implied authority to give the necessary instructions to HRS to consider the contract with the Owners, which included the guarantee.”

JSG contends that there were serious flaws in the process of reasoning that led to the Award. In summary,:

JSG’s offices are situated in Zhangjiagang, northwest of Shanghai. JSG’s primary business was the production of steel and steel-related products. It operated the largest private steel mill in China. As already indicated, SWM was vice-president (from 2006 to 2014). He was also a director of Shagang (from 2004 to 2011); his elder brother, Mr Shen Wen Rong (“SWR”) was chairman and CEO; Mr Gong Sheng (“GS”) was president. SWM’s evidence was that SWR was the main person in charge of JSG. Board meetings were infrequent and record keeping in 2008 limited. It was normal business practice for internal matters to be dealt with orally.

JSG had a trading arm subsidiary, Jiangsu Shagang International Trade (“JSIT”), set up in 2002, and of which SWM was a director until 2011. It was established to support JSG’s international trade with various departments, each handling its own shipping needs.

Shagang was a Hong Kong based company managed from offices in Hong Kong and downtown Shanghai. It was established in 2004 following an approach in 2003 by Mr Shen Wen Fu (“SWF”), then of Baosteel, the largest state-owned steel mill in China, with Mr Gao Xiang of JSG (“GX”), to JSG. SWF, who shares the same surname but is no relation to SWM, proposed that JSG should diversify into shipping in order to hedge against fluctuation risks in freight rates associated with the procurement of iron ore. SWF was appointed managing director, with a 20% stake. JSIT held a 51% stake until December 2008 when it transferred its shareholding to Shagang Group (Hong Kong) Holdings Ltd (“Shagang Hong Kong”), owned by JSIT. The balance of shares (29%) was held by Pacific Minerals Ltd (“PML”), a holding company of GX. PML transferred its shares to Shagang South-Asia (Hong Kong) Trading Co Ltd (“Shagang South Asia”), another company owned wholly or partly by JSG, in June 2008, and GX’s role in Shagang ceased, leaving only SWM and SWF as directors of Shagang. SWM was not involved in chartering or the day to day running of Shagang’s operations. SWM’s evidence was that he was normally only consulted about prospective Shagang business because a guarantee from JSG was required. SWF ran the day to day operations as managing director of Shagang. Mr Xu Wen Zhong (“Winer Xu”), the chartering manager for period charters at the time, generally negotiated the main terms of prospective fixtures, reporting to SWF.

A “Grand Opening” of Shagang Hong Kong took place at the Four Seasons Hotel, Hong Kong on 26^th November 2008. Invitations were sent out in around mid-October by Shagang in the names of SWR of JSG, Mr Shen Bin of Shagang Hong Kong and SWF of Shagang. The invitation stated that Shagang, “a subsidiary of [JSG], is incorporated to streamline [JSG’s] overseas trading, shipping and financing, share the synergies among Shagang…, Shagang Resources and Shagang Trading under one umbrella of Shagang [Hong Kong] and strive for the overseas expansion of [JSG].” SWR gave a keynote address at the opening.

It is common ground that strong bull market conditions in bulk carrier trades prevailed between about 2005 and 2008, with an all time “high” in July 2008, followed then by a dramatic collapse in the long-term charter market around October 2008. JSG places the start of the crash on or about 16^th September 2008.

JSG and Shagang were involved in many charters together. An audit report from December 2008 shows over 30 charters (30 inbound and 2 outbound) involving Shagang and JSG. (Charters fixed but not yet performed do not appear to feature in the report.) In some JSG was guarantor; in some JSG or its guaranteed nominee was charterer; in some JSG and Shagang were co-charterers. So in many instances, JSG was actually charterer (albeit that JSG contends that the substance of the position was always that JSG was the guarantor). Between 2004 and 2008 JSG acted as guarantor to Shagang on at least 18 long term charters. In each case SWM signed the long form charterparty for JSG.

As set out further below, and importantly, it is common ground that, when a guarantee was required from JSG, there was an established practice whereby SWM would be asked for JSG’s authority. If he approved it, he would give that authority for JSG. It was always SWM who would sign for JSG. Winer Xu’s evidence was that he would negotiate the terms, but no fixture could be concluded without SWF’s approval. As SWF explained to everyone in the Shagang chartering department, if a guarantee from JSG was required, SWF was required to approach SWM and ask for one.

Both parties have referred to certain specific other charters where JSG has alleged that SWF also failed to seek the necessary authority from SWM: the m/v “HOUSTON” (“the HOUSTON”) in June 2008, two CPO vessels in July 2008 (“the CPO vessels”), and the m/v “MINERAL NINGBO” (“the MINERAL NINGBO”).

In April 2008 the owners of the “Cape Eregli” vessel (“the CAPE EREGLI”) contacted Drybulk SA (“Drybulk”), brokers to the Owners and companies associated with them, in connection with a possible purchase. A charter of the CAPE EREGLI to Shagang on 24^th June 2008 was proposed on terms which included a guarantee by “Shagang Group Parent Co. (either by way of letter of performance guarantee per ows’ pandi standard wording or by Shagang parent counter-signing CP to be discussed”. The owners of the CAPE EREGLI opted for the latter proposal, with the recap on 26^th June 2008 providing that there was to be a guarantee from JSG, with JSG countersigning the charterparty. The fixture was subject to the purchase of the CAPE EREGLI by the Owners, which in fact never took place and the charterparty therefore did not proceed.

On 1^st July 2008 the Owners offered terms on the “Omaha” vessel (“the OMAHA”) to Shagang, followed on 3^rd July 2008 by a proposal for 10 year charters for both the OMAHA and the DAYTONA with laycan November/December 2008. SWF decided to proceed on the basis of a 5 year charter for the OMAHA and a 10 year charter for the DAYTONA. Winer Xu’s evidence was that, whilst finalising the charter details, he raised with SWF the fact that the Owners wanted guarantees from JSG. SWM approved such guarantees and fixtures were concluded on 8^th July 2008 on “terms as per recap mv cape eregli previous fixed with logically amended”. The recaps for both charters stated in terms identical to the CAPE EREGLI recap that there was to be a guarantee from JSG, with JSG countersigning the charterparty.

The DAYTONA was then sub-chartered by Shagang to Eastern Media International Corporation (“EMIC”) on 22^nd July 2008 at a rate of US$75,500 per day. Shagang was thus due to make a daily profit of US$15,000 per day.

The long form charters were signed for each vessel by each of Shagang (as charterer by SWF) and JSG (as guarantor by SWM) at some point between 16^th September and 31^st October 2008. SWM’s evidence was that he signed “definitely around early October and after the market crashed”. He also stated that at the time of signing these charters he warned SWF that he needed to pay attention to the market now, “the market is falling down big time. But as far as the two charters are concerned, we have already confirmed and then we will sign, we had to sign….If we promise something, we sign something, we will perform, we will not regret.” They were paying a price higher than the market price, but they could not do it in the future. At a board meeting in December 2008, he repeated to SWF that he had to be careful in future.

Winer Xu’s evidence was that he remembers that the Owners were concerned about the possible effect after the market crash and were asking for the charters to be signed as a result. After signatures, between 31^st October and 17^th December 2008 the Owners chased for documents demonstrating authority on the part of SWF and SWM to sign, together with “business licences” (as referred to in the charterparties).

On 28^th October 2008 HRS emailed Winer Xu with a message from Drybulk, the Owners’ brokers, containing what was described as “a surprising request from owners”. The message stated that the DAYTONA was due to be delivered about 12^th November. Drybulk had asked if, instead of her, Shagang would be interested in “taking an exact sister bss dely ex yard about April 2009. All terms as per agreed.” Otherwise, they would proceed with the DAYTONA as contracted. HRS stated that they did not know if this was “good or bad”.

On 4^th November 2008 HRS responded to Drybulk, confirming a telephone call from the day before, to say that Shagang thanked the Owners for the suggestion but would not take up the offer to substitute with a sister ship.

The next day, however, on 5^th November 2008, HRS emailed Drybulk to say that Shagang “might now consider taking the identical sister newbuilding basis delivery April 2009 subject to their sub-chrs approval. Please advise if owners are still interested.”

The reference to sub-charterers’ approval reflected the fact that, in order for the substitution to be acceptable to Shagang, it had to be acceptable to EMIC as well. Later the same day, HRS emailed Drybulk stating that Shagang needed subcharterer approval by 9am on 10^th November. If agreed, Shagang would “make addendum”.

On 6^th November 2008 HRS informed Drybulk that if the Owners “need their own subject until 12^th Nov, Shagang kindly request that they have until 13^th Nov to lift subject charterers approval. On this difficult market, they do not want to be in a position whereby they could potentially lose the sub subcharterers. If they lift their subjects on the 12th, this could cause difficulties….”

Later that day Drybulk sent a recap in the following terms:

“-MV “DAYTONA” to be replaced by SWS sistership of Maltese flag BLT 2009 – DWAT ABT 177,000 MT on ABT 18.322M SSW draft and otherwise as per MV “DAYTONA” description

-Lay/can 1^st April 2009/31 May 2009…..

-Otherwise as per terms/conditions/exceptions/details including but not limited to period and hire of MV “Daytona”/Shagang CP DD 08/07/08…

-Sub chartrs’ approval before 0900 hours London time Mon 10 Nov 2008

AND

-Sub owners’ approval before 0900 hours London time Tue 11 Nov 2008

-If both subs confirmed, a new CP to be issued as above and the Daytona/Shagang CP DD 08/07/08 to be considered null and void

-In case either of the above subs cannot be confirmed timely both chartrs and owners are to perform cp dd 08/07/08 with MV “DAYTONA”…

-Trust chartrs in agreement with above which pls reconfirm for sake of good order.”

On 10^th November 2008 HRS told Drybulk that Shagang was pushing for a hull number for the substitute vessel. Drybulk replied, stating that the Owners intention was “SWS 1154 or 1155” without guarantee.

Shagang was simultaneously in negotiation with EMIC. On 11^th November 2008 Winer Xu emailed EMIC to give Shagang’s final proposal on a “take it or leave it base”. The terms were those set out in Drybulk’s email of 6^th November 2008:

“The……..MV “DAYTONA” to be replaced by SWS sistership of Maltese flag BLT 2009 – DWAT ABT 177,000 MT on ABT 18.322M SSW draft and otherwise as per MV “DAYTONA” description

-Lay/can 1^st April 2009/31 May 2009…..

-The Charterers to compensate and pay lumpsum US3,000,000….to [Shagang’s] nominated bank account. The payment of such amount shall be divided into [2] equaly payments on Nov 17 2008 and March 17 2009…..

-Otherwise as per terms/conditions/exceptions/details incl but not limited to the hire and TC period of the CP DD 22/07/08…..”

The rationale for the additional payment of US$3 million by EMIC can be explained by the later delivery date for the POUNDA. Given the collapse of the market, it was advantageous to EMIC for delivery to be delayed, so as to delay the time for payment of what was by now significantly over the market rate. In return for that benefit Shagang was seeking extra payment.

After further email exchanges, EMIC accepted the terms on offer, subject to charterers’ board approval being lifted at the latest before noon on 12^th November 2008.

By close of play on 12^th November 2008 all parties had lifted their subjects and Drybulk emailed HRS:

“….we are pleased to advise that owners hereby lift their own subject as well.

Therefore hereby confirm:

(1)

The clean fixture of Cardiff SWS TBN/Shagang with CP DD 12/11/08

And

(2)

The MV “Daytona” Shagang CP DD 08/07/08 to have been cancelled.”

Thereafter Drybulk sent the following recap to HRS in the late evening of 12^th November 2008 :

“Re:Cardiff tbn/Shagang

Hereby confirm clean recap of fixture with CPdd12/11/08 as foll:

Cardiff TBN – all details “about” SWS BLT 2009 – DWAT ABT 177,000 MT on ABT 18.322M SSW draft and otherwise as per MV “Daytona” description

Lay/can 2st April 2009/31 May 2009……

Otherwise as per terms/conditions/exceptions/details, including but not limited to period and hire, of m/v DAYTONA/Shagang CP dd 08/07/08 which both charterers and owners mutually agree to cancel….

Note: OWS’ intn is SWS 1154 or 1155 WOG

Trust above in good order which kindly request chrtrs to reconfirm for sake of good order and pls proceed issuing CP accordingly…”

This recap differed from previous communications, in that it described the subject-matter of the charter differently and also referred to the fixture as a Cardiff TBN fixture.

On 14^th November 2008 HRS forwarded the Owners’ clean recap to Winer Xu for confirmation. He replied stating that he could confirm the same but on the basis that the hull number was to be 1155 or 1154 at the Owners’ option, not other newbuilding. He asked for reconfirmation of the same. Drybulk responded to the effect that there could be any newbuilding meeting the specification description, irrespective of hull number. Following further exchanges, on 18^th November 2008, the Owners agreed that their option to deliver related only to hull number 1155 or 1154.

In the meantime, on 13^th November 2008 Shagang and EMIC had entered into an addendum agreement to their sub-charter agreement of 22^nd July 2008 agreeing to the replacement of the DAYTONA, delivery in April/May 2009 and payment of US$3million by EMIC to Shagang as compensation.

A long form charterparty was drawn up by HRS reflecting the above on around 20^th November 2008. As indicated above, it was on an amended NYPE 1946 form and contained a London arbitration clause. When recording the identity of the parties (at lines 11 and 12) it stated that the charterparty was made between the Owners and:

“Shagang….to be guaranteed by [JSG]...”

Drybulk sent originals signed by the Owners to HRS on 24^th February 2009, requesting that they be signed now by Shagang and JSG. Prompt execution and return of one original was requested. HRS (London) forwarded the documents to HRS (Shanghai) on 27^th February 2009 requesting execution, stating that it was “imperative” that HRS forward the documents to “charterers and their guarantors”. It is not clear when or if HRS forwarded the documents but it seems likely (from the brokers’ correspondence in March) that HRS sent them at least to Shagang by mid-March 2009. SWM denies that the documents ever reached him at this time. There is no documentary trail to show that they were forwarded to anyone at JSG.

The Owners nominated the POUNDA on 26^th February 2009 and the Owners as owners on 6^th March 2009. Around March 2009 SWF met with Drybulk representatives at Drybulk’s offices in Athens. Mr Antonis Skoulaxenos (“AS”) of Drybulk states that SWF sought to renegotiate the Omaha and Pounda charters in the light of difficulties with Shagang’s sub-charterers. EMIC was threatening not to perform. SWF tabled a proposal for the charter periods to be extended in return for a reduced rate of hire. AS states that he communicated the proposal to the Owners who firmly and consistently rejected it. AS states that at no time (either at this meeting or at a meeting a few weeks’ later in Shagang’s offices in Shanghai) did SWF suggest that JSG had not guaranteed the Pounda Charter. The POUNDA was delivered on 30^th April 2009.

In December 2008 JSG undertook an audit of Shagang, led by Lian Gui Zhi (“LGZ”). She found the management practices at Shagang generally to be poor. Her audit report listed the DIONE (as lacking SWM’s signature) but did not refer to the charters for the POUNDA, the MINERAL NINGBO or the CPO vessels.

JSIT became more active in the supervision of Shagang. In 2010 Zhang Jie (“ZJ”), then deputy general manager of JSIT conducted a review of Shagang’s contracts and finances, subsequently taking over from SWF as Shagang’s managing director in April 2011. In the course of investigations it emerged that SWF had or may have misappropriated over US$6m from Shagang and criminal proceedings followed. There is no suggestion that SWF’s activities related to the Pounda Charter or related charters. He has not been called as a witness by either party.

The POUNDA was delivered into the charter with Shagang on 30^th April 2009. Shagang repeatedly failed to pay hire under the Pounda Charter on time, apparently with EMIC resisting delivery. On 12^th June 2009 Shagang entered into a further agreement with EMIC whereby Shagang agreed to a reduction in the daily hire rate from US$75,000 to US$45,000 net (with a back to back charter from EMIC in favour of Shagang at the market rate determined by reference to the BCI, combined with a profit share clause for EMIC to share 50% of the profit if the market rate exceeded US$60,000 per day).

Arbitrations were commenced against both Shagang and JSG in May 2009, August 2010, January 2011 and November 2011, prompting some hire payments. The first reference to which JSG entered a defence on jurisdiction was the last one (in November 2011). Shagang went into voluntary liquidation in February 2015 and repudiated the Pounda Charter shortly thereafter, on 10^th April 2015.

SWM’s evidence was that the first time that he learned of the substitution of the POUNDA for the DAYTONA was shortly before a trip to England and France with SWF. He states that he mistakenly dated that visit as having taken place in 2009 when giving evidence to the Arbitrators. Having now considered his passport, (albeit one which only commences in November 2010), that visit in fact took place a year later, in (November/December) 2010.

JSG relies on the following witnesses:

The Owners rely on the following witnesses, neither of whom gave oral evidence in these proceedings but both of whom gave written and oral evidence to the Arbitrators:

It is convenient to record some general comments at the outset:

The relevant question can be distilled very simply: did JSG give express authority to Shagang to enter into the Guarantee on its behalf? The agency must derive from the consent of both principal and agent (see Bowstead and Reynolds on Agency (20^th ed) (“Bowstead”) at 2-031. The principal’s consent is not usually derived merely from silence (see Bowsteadat 2-032). As regards the position between principal and third party, the relevant act is the conferring of authority. The authority will bind the principal provided that it was given in sufficient terms for the agent reasonably and in good faith to have believed it to have been granted (see Bowstead at 3-017).

More specifically, the question is whether or not there was (probably) a conversation between SWM and SWF in or around early to mid-November 2008 in which SWM authorised a new charter guaranteed by JSG in place of the existing DAYTONA charter. The issue is one of pure fact.

The Owners plead their case in this regard as follows:

In the course of closing submissions the Owners identified seven general points against which they submitted the Court should test SWM’s evidence:

For JSG it is said (in summary only):

As developed in the course of closings, JSG stated that the starting point for consideration should be the only direct evidence on the central issue, that of SWM, which should be accepted. SWM was an honest, straightforward and non-evasive witness. He positively remembers that there was no conversation with SWF about the replacement of the DAYTONA. His evidence was corroborated by that of Winer Xu. He had no motive for disavowing his authority. The Court should make a positive finding that the need for SWM’s authority for the Guarantee was simply overlooked by SWF (as well as by the Owners). No adverse inferences should be drawn from a lack of documents, and “similar fact” evidence is irrelevant as it reveals nothing about the discussions between SWF and SWM in November 2008.

I find at the outset as follows (and essentially non-controversially) that there was an established procedure in place at all material times for the obtaining of JSG’s authority to guarantee Shagang’s obligations as follows. SWM only at JSG had authority for JSG to authorise a JSG guarantee. The guarantee would generally be contained in the charterparty itself. If a guarantee was required, SWF would seek his authority for a JSG guarantee (by telephone or face to face) after the key terms had been negotiated to agreement or substantial agreement. This procedure was well-known to those within Shagang’s chartering department. Accordingly, as Winer Xu or others within the chartering department negotiated the terms of prospective fixtures, they would flag up to SWF if a guarantee was requested. In the discussion between SWF and SWM the proposed hire rate, the length of charter, the existence of a sub-charter and the total cash value would be discussed. SWM would indicate whether he agreed to a guarantee by JSG. Where Winer Xu had raised with SWF the need for a guarantee it would normally take about 2 days for SWF to revert with confirmation that JSG had given approval. Once SWM had given his authority and a charter concluded, the formal contract would be drawn up, sent to Shagang and taken by SWF to SWM for signature. This was the unchallenged evidence of SWM and Winer Xu, and indeed the existence of this practice is a positive plank of the Owners’ case.

I turn next to the task of assessing the reliability of SWM’s evidence. SWM was not accused of dishonesty in the witness box, nor is that how the Owners advanced their submissions before me, although they suggested that matters were put sufficiently in cross-examination for me to reach whatever conclusion (including as to dishonesty) that I saw fit. Their position was that his evidence is simply unreliable when assessed in the round.

The exercise of assessing SWM’s credibility in the witness box was a difficult one. Not only does SWM not speak English but he also does not read it. So when he was taken to English-only documents, as he often was, he was at a very significant disadvantage. (There was, for example, at least one occasion when he appeared not to answer a question by reference to an English document (for example an email of 30^th April 2010 from an English solicitor to Su Hong of Shagang)). Having watched him in the witness box, however, I do not conclude that he was being evasive at the time. He appeared to me genuinely not to understand the nuance of what was being put to him.

Cultural and linguistic differences also mean that care needs to be taken not to adopt an over-literal approach to his answers in oral evidence. (By way of example, the Owners sought to emphasise SWM’s use of the future tense in answers to questions dealing with the timing of SWM’s discovery of the Guarantee. I do not consider that his use of the future tense can fairly carry the weight contended for.) I also bear in mind that this is the second time that he has given evidence on the same or similar material with a significant passage of time and further witness statements in between.

Nevertheless, based on his evidence before me, I found SWM to be not only courteous and patient but also in general terms to be giving his evidence to the best of his ability and recollection. He also came across, again in general terms, as a professional and good businessman. There was a mantra-like element to his assertion that if he agreed something, he would sign it, but that is understandable in circumstances where he was keen to ensure that an English court understood his position on the central issue in the case. These broad findings are not determinative on the specific issue of authority for the Guarantee. The probabilities fall to be assessed on the detail, but they set the background.

The Owners rely on the well-known remarks of Leggatt J in Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm) (at [15] to [22]), which emphasise the fallibility of the human memory, particularly in the context of the litigation process, and on the desirability of basing factual findings (either wholly or largely) instead on inferences drawn from the documentary evidence and known or probable facts. There is here effectively a total absence of documentary evidence in this case on the key question of authority; this makes the assessment task an unusual one for this jurisdiction.

I approach the exercise before me on the basis that, given the passage of time, the history of these proceedings and the absence of a contemporaneous documentary trail to follow, it is important to consider the probabilities in the round, including by reference to objective facts and documents, motive and overall probabilities (see for example Grace Shipping Inc and another v CF Sharp & Co (Malaysia) Pte Ltd [1987] 1 Lloyds’ Rep 207 per Lord Goff at 215-6, albeit that that was a case concerning alleged fraud). But this is not a case where the only direct evidence on the central issue, namely that of SWM, falls simply to be relegated without more to “second tier”. Rather it falls to be assessed against the inherent probabilities, and taking account of the limitations imposed by the differences in language and culture, the passage of time and the complications of the litigation process.

I find SWM’s evidence on this central issue on the facts of this case to be reliable. He did not have a conversation in about early November 2008 with SWF authorising the Guarantee. He has never said otherwise and has always positively denied that any such conversation took place. (I do not find the “concession” relied upon by the Arbitrators to have been a material concession, certainly not when taken in the full context of his evidence. There are also difficulties arising out of the precise wording of the questions and answers relied upon. In fairness, the Owners did not press the “concession” before me.) The Owners sought in closing to identify “internal inconsistency” in various aspects of SWM’s oral evidence, albeit in relation to matters not necessarily bearing centrally on the issue of authority. In fact, on a close reading of the passages relied upon, there were no such inconsistencies.

I do not find it likely that SWM would have forgotten an authorising conversation in November 2008, as the Owners suggested was the case. True it is that SWM said in his oral evidence on many occasions that he could not remember certain documents, conversations or events, often wholly unsurprisingly. But this would have been a memorable occasion for SWM, first in terms of the giving of authority (in circumstances where it was the first charterparty being fixed since July 2008 and SWM had just cautioned SWF to limit risk) and, perhaps even more strikingly, involving him then refusing to sign something which he had agreed relatively recently (in 2009 or 2010). I find that SWM would have confirmed the validity of the Guarantee if he previously had approved it. He honoured his previous authorities when signing the OMAHA and DAYTONA charters, in the absence of any documentary record binding him to them and notably after the market crash had commenced. Even if SWM had been someone who would pick and choose which guarantees to confirm formally by signature, irrespective of what he had authorised previously, there is no evidence that, at the time that the Pounda charter was presented by the Owners for signature, SWM was aware of any default on the part of EMIC, for example. This accords with Winer Xu’s recollection, who stated that, to the best of his knowledge, SWM was unaware of any such matters. Additionally, SWM stated that at the time he believed, and was being told by SWF, that the market would recover. It is also to be noted in the context of any motive for SWM to decline to sign up to something that he had previously agreed that, on the Owners’ own case as put to SWM, the market was already in decline at the very time when they assert that SWM orally approved the Guarantee.

The Owners submitted that SWM’s acceptance of the OMAHA and DATYONA (and indeed other) charters could be explained by the existence of profitable sub-charters on those charters. However, JSG was able to point to at least one other charter, the m/v “HOUSTON”, where there was no signature from SWM despite the existence of a sub-charter. This tends to undermine the theory. There was also reference to 3 other charters where JSG has not signed and there are (ongoing) issues as to whether SWM authorised the guarantees in question. In circumstances where those issues are, so I was told, the subject of separate litigation, and the issue of authority on those charters is unresolved and not fully before me, I am unable to derive any significant assistance from them. The experience with the m/v “HOUSTON” demonstrates the dangers of proceeding in any other way and by reference to partial or contested facts.

There were from the documents undoubtedly occasions when SWM’s signature on formal charterparties was significantly late, and where there was much “chasing”. I accept SWM’s evidence that he was dependent on SWF to bring him such documents for signature and that he was unaware of the detail of delays. He accepted that it was perfectly possible that SWF was using the delay as leverage in order to renegotiate better terms. But this was not a practice in which SWM was directly engaged.

I find that the likelihood is that the Guarantee and the need for SWM’s authority was overlooked by SWF at the material time. This is inherently probable in circumstances where it was originally anticipated that the DAYTONA would be simply be replaced, rather than the charter party and associated guarantee cancelled. There was no question of a new guarantee being required at this stage. The decision and agreement to cancel the DAYTONA charter came later. The question of authority for a replacement guarantee was then overlooked. On any view it was not a standard transaction. The Owners, Drybulk and HRS never mentioned the Guarantee in terms to Shagang or SWF in the context of the POUNDA at the time. Shagang and SWF never mentioned the Guarantee in terms to the Owners, Drybulk or HRS in the context of the POUNDA at the time. This is to be contrasted with the recaps on the CAPE EREGLI, OMAHA and DAYTONA charters which all made express reference to a JSG guarantee. This reflects the fact that it was an unusual transaction. Winer Xu’s email of 14^th November 2008 is at least consistent with such an oversight within Shagang at the time:

“TKS FOR THE OWNERS RECAP, WHICH THE CHTERS CAN CFM THE SAME…..”

The Guarantee and the need for SWM’s authority for JSG to give it on the new charter was not on anyone’s radar.

The conclusion that SWF probably overlooked the need to speak to SWM for the Guarantee is supported by the evidence of the very impressive Winer Xu, who could be said to be an entirely independent witness (since he no longer works for Shagang or any JSG related entity, having left Shagang in early 2010). Winer Xu could not speak of course directly to the contents of any conversation between SWF and SWM. But he could confirm that there was never any discussion of the Guarantee within Shagang or with SWF in particular. Whilst his opinion that it seemed likely that SWF never asked SWM for authorisation for JSG to guarantee the POUNDA charter was, as he freely accepted, “pure speculation”, it was nevertheless the opinion of someone very well placed to express a view.

There was a debate on the evidence as to who had carriage of the negotiations on the POUNDA charter within Shagang. Winer Xu was clear that SWF was in charge of the sub-charter negotiations with EMIC and he was merely assisting with those communications. His evidence and the documents confirm that SWF was heavily involved in the deal with EMIC. Indeed, the fact that SWF was so focussed on these negotiations may provide another reason why he overlooked the need for authority from SWM.

As to the main charter, Winer Xu’s evidence was that he usually handled negotiations for longer period charters of the type where a guarantee might be required. So typically it fell to him to inform SWM of the need for a guarantee from JSG when it arose. He stated, and I accept, that he did not at any stage inform (or remind) SWM of the need for a guarantee from JSG for the Pounda charter. Asking for SWM’s consent to such a guarantee never crossed his mind. In response to this the Owners suggested that SWF, and not Winer Xu, was in charge of the negotiations for the Pounda charter, as he was for the negotiations with EMIC. This was not borne out by Winer Xu’s evidence, the clear thrust of which was that he was substantively involved in the negotiations for the main charter, or by the documents. For example, the important email of 14^th November 2008 referred to above came from Winer Xu.

As an oversight, the error did not involve SWM behaving in some underhand way, something which the Owners suggested would be most unlikely. It was also suggested in closing by the Owners that the relevant conversation between SWM and SWF may well have taken place on 4^th/5^th November 2008 when there was a change of heart on the part of Shagang in terms of first refusing and then agreeing to consider a substitute vessel. It was suggested that it could have been SWM who was responsible for the change of position. This was never put to SWM as a direct proposition. In any event it is unlikely that SWM would have forgotten such a turn of events, which is far more likely to have been driven in such a short space of time by internal business considerations within Shagang (not involving SWM). As Gao Feng deposed, SWM was not very involved in Shagang’s business and on Shagang’s board to protect JSG’s interests.

It was also submitted by the Owners that SWF would not have made such a mistake given SWM’s earlier instructions to him in October 2008 to be more cautious in taking on risk in the future and also given the impending Golf day and associated announcements. These submissions lose their force once it is recognised that this was an oversight on the part of SWF. It was also suggested that SWF was someone who would have been very pleased with himself and wanted to tell SWM of the advantageous deal that he had struck with EMIC (by way of the additional US$3million payment). Winer Xu, however, was not impressed with this suggestion. He said that SWF was “not too pleased or too proud”. The market was very bad, and the deal, in some respects, was a good one for EMIC.

The Owners placed heavy reliance on the absence of any documentary record of JSG’s discovery of the Guarantee, and on the fact that SWF was never disciplined or held to account for what, on JSG’s case, would have been a significant error on his part.

This raises the contentious topic of when SWM first discovered the existence of the Guarantee which, on his case, he never authorised. SWM’s evidence on this issue has not been consistent. Before the Arbitrators he gave evidence that he learned of it for the first time in discussions with SWF in late 2009 before a visit to Europe. His evidence before me was that the relevant visit in fact took place in December 2010, and so it was just before then. He was able to place the date by reference to his passport (albeit one only issued on 8^th November 2010). His first witness statement before me in fact put forward two dates of discovery: November/December 2010 (see for example paragraphs 124 to 126) and then also early 2011 (paragraph 129).

Although such inconsistency is unsatisfactory, I am ultimately persuaded that the time of discovery by SWM of the Guarantee was November/December 2010 (not 2009) in discussions. SWM’s passport shows that he entered the United Kingdom through Heathrow on 29^th November 2010. The correspondence demonstrates that a meeting took place, amongst others, with Classic Maritime Inc (“Classic Maritime”) in December in Monaco (alongside meetings in London and Paris). It is not suggested that SWM visited Monaco, France or England for such meetings on more than one occasion. He visited Norway in 2009, but there is no record of meeting Classic Maritime then. It is very likely that SWF raised the Pounda Charter with SWM in that context, since Classic Maritime was a company within the Economou group and which also included Drybulk. The position needed to be discussed, as SWF would have known.

I do not overlook the fact that on the face of it SWM at JSG (and SWF at Shagang) was the recipient in 2009 and 2010 of arbitration notices from the Owners which referred explicitly to the Guarantee. Those notices were in English. SWM explained how (in general) English documents addressed to him would be delivered to JSG and given to JSIT. Someone at JSIT would explain to him what the letter was for. His evidence was that anything involving Shagang’s shipping business would be forwarded to Shagang. In particular, litigation matters involving Shagang and resulting from Shagang’s business would be left to Shagang and the papers would be passed over to Shagang. This was a matter of principle but also because in many cases Shagang had relevant insurance cover. Winer Xu confirmed that it was Shagang’s job to handle any legal disputes arising out of charters, including claims against JSG as guarantors.

SWM was taken in cross-examination to the first arbitration notice against Shagang and JSG (dated 18^th May 2009). It was put to him that, further to his explanation of the postal system and explanation as to how English documents would be translated for him by JSIT, this document would have “come to somebody who spoke English at JSIT, who would have conveyed to you its contents”. SWM agreed. This is very far from an acceptance on SWM’s part that the details of the Guarantee would have been translated to him. In full context, that is not what he was accepting (and indeed he went on to make that clear). The explanation that he had given earlier did not accept this. It is more likely that he was told that this was a litigation matter relating to Shagang shipping business and the matter was then passed on from JSG. It is worth noting that the documents are dense and technical. SWM was also someone who did not recognise names, rather delivery dates and hire rates. I find it difficult to believe that every single word and line would have been translated. Whether the documents were shown and translated in broad terms for SWM or not, or simply referred to in general terms, I am not persuaded that SWM understood the necessary detail or implications of the documents at the time so as to understand that the existence of this particular guarantee was being alleged.

The absence of any record or formal documentary reaction (either within JSG or Shagang) to the discovery of the Guarantee in late 2010 is surprising, at least to an English lawyer’s eyes. However, allowances must be made for differences in working practices. It is clear that much of JSG’s dealings (such as the giving of authority by SWM for guarantees) went undocumented. Additionally, it is apparent that JSG’s record keeping systems were very far from perfect. Moreover, it appears that the error by SWF was dealt within as an internal matter. SWM said that he himself never made a complaint. But it is clear that, shortly after the visit to Europe in 2010, SWF was removed from his position as managing director (in April 2011), well before the discovery of possible misappropriation on his part. He was demoted deliberately and specifically because of concerns as to personnel at Shagang exceeding their authority. ZJ was made managing director in place. On ZJ’s unchallenged evidence, JSG was by this stage extremely concerned about SWF’s ability and stewardship of Shagang.

For the sake of completeness, I record that I have found no material assistance to my fact-finding exercise from any lack of disclosure on JSG’s part. Again, in fairness, the Owners did not press the point with any particular vigour, at least in closing. Their position rather was to rely on the absence of documents as supporting their case. There are categories of missing documents, as the Owners identify. It appears that JSG did not retain all documents. However, JSG has made full efforts (at its own expense) to obtain and produce disclosure from Shagang’s liquidators and those at JSG, including SWM, have deposed to their searches. And on the central question of authority, it is not suggested there are any missing contemporaneous documents, since the relevant conversation between SWF and SWM would have been a) oral and b) undocumented. As for the absence of any documents relating to the alleged discovery of the Guarantee so as to support the Owners’ claim, I have already addressed that in the paragraph immediately above. Nor do the monthly reports from Shagang to JSIT from about April 2009 onwards assist in identifying SWM’s date of discovery of the replacement of the DAYTONA. They were sent to Gao Feng at JSIT and there is no evidence that he (or anyone else at JSIT) reported the Pounda charter to SWM as a result of those reports.

I have therefore come to the conclusion that it is unlikely that SWM gave JSG’s authority for the Guarantee.

Implied authority is ordinarily an adjunct to an existing express authority. Article 27 of Bowstead puts it thus (at 3-019):

“An agent has implied authority to do whatever is necessary for, or ordinarily incidental to, the effective execution of his express authority in the usual way.”

The suggestion of an implied authority on the part of Shagang to enter into guarantees for JSG faced insuperable hurdles, not least given the existence of an established procedure requiring express approval from JSG which is wholly inconsistent with the existence of the implied authority contended for. Nor could any relevant express authority to which the alleged implied authority could attach be identified.

As already indicated, the Owners no longer pursue this aspect of their case and I say no more about it.

For these reasons, I conclude that the Owners have not established on a balance of probabilities that JSG, though SWM, authorised the Guarantee. Accordingly, there is no valid arbitration agreement between the parties such as to give the Arbitrators substantive jurisdiction over the Owners’ claim against JSG. JSG’s challenge to the Award will be allowed.

This conclusion will naturally come as a disappointment to the Owners, not least given the very recent substantial award on liability and quantum in their favour. But that outcome cannot drive, nor should the wider merits be allowed to distort, the result on the factual issue at the centre of this dispute, which I have resolved as fairly as I can on the basis of my assessment of the probabilities in the round on the evidence before me. As already indicated, that evidence was both fuller than the evidence before the Arbitrators, and presented in different circumstances.

I invite the parties to agree an order reflecting the above, together with all consequential matters, including costs, so far as possible. I also repeat my gratitude to all counsel for their able submissions and assistance throughout this matter.