Longulf Trading (UK) Ltd v Niyazi Onen Gida SAN AS & Anor

This is a claim brought by the Claimant against two Guarantors, under a written Guarantee signed 23 January 2016.

The Defendants were duly served with the claim in Turkey, and in June 2018 instructed solicitors Morgan Lewis LLP, who received (among other items) the order of 22 October 2018 listing the claim for trial. Despite that, the Defendants have failed to date to file a defence or any evidence in these proceedings, or to apply to set aside or vary the order of 22 October 2018. I have therefore heard the trial in the absence of the Defendants.

The Claimant has acknowledged its obligations when presenting a claim in the absence of the Defendants. In CMOC Sales & Marketing Limited v Persons Unknown and 38 Others [2018] EWHC 2230 (Comm), HHJ Waksman QC conducted the trial of a claim against defendants who, as here, did not engage with the process, and observed the following:

“14 Where the trial is not attended by one of the parties, there is still an obligation of fair presentation which is less extensive than the duty of full and frank disclosure on a without notice application. Mr Justice Cresswell inBraspetro Oil Services vFPSO Construction Inc [2007] EWHC 1359 (Comm)said as follows, that he required the claimant to draw to the attention of the court: " points, factual or legal, that might be to the benefit of [the defendant]. " He noted that claims which were considered not to be sustainable were not in fact pursued. He said that the claimant brought to the attention of the court points which the defendant had taken before it decided to play no further part. He said that the claimant brought to his attention points which had never been taken by the defendant but which might have been had it decided to defend the proceedings, and it had taken all steps to bring to the attention of the defendant what has been happening here. The court had, in that case, through the eightday hearing, carefully examined and tested the claimant's case. I adopt those observations and I consider that the injunctions of Mr Justice Cresswell have been fully followed here. I also did not regard this trial as merely an exercise of rubber-stamping but tested and considered all aspects of the case.

15 Another feature of this case which follows on is that, in my judgment, this litigation brought by CMOC has been marked by (a) scrupulous attention to detail and to the requirements of the very many applicable procedural rules, and (b) rigorous observance of the obligations of material disclosure on the many without notice applications on the part of solicitors and counsel involved for the claimant, and the obligations of fair presentation otherwise, to which I have referred. There have been no short cuts taken and no glossing over of any problematic points. This is also the case for the trial itself.”

I also note these injunctions, and I have followed them. I consider that the Claimants have clearly complied with their obligations here. Accordingly, the claim has been fully and fairly presented; I have been taken carefully through all of the evidence; all of the points which might have been taken by the Defendants have been brought to my attention and I consider them all in this judgment.

In my judgment, the Claimant must satisfy the Court of the following matters:

I have heard from the Claimant and its witnesses. I have also seen documentary evidence produced by the Claimant Finally, I have heard from Ms Zaman, of Counsel, who, I am satisfied, has put before me all the arguments that the Defendants might have put before me had they appeared.

I was referred to the Guarantee. It is in writing and signed by the First Defendant’s President and by the Second Defendant in person. The Second Defendant is the Chairman of each of Dardanel and the First Defendant.

The Guarantee is in the form of a written contract rather than a deed. It is therefore necessary for the Claimant to show that consideration has moved from it to the Defendants in return for the promise of guarantee. That consideration is referred to in the Preamble to the Guarantee. The Guarantee is dated January 19, 2016, and is stated to be made between Niyazi Onen Gida San. A.S, a corporation organised under the law of Turkey and Mr Niyazi

The Preamble to that Guarantee records the following:

The Procurement Agreement, also dated January 19 2016, in its turn, contemplated the entering into of the Guarantee and was indeed expressly conditional on the provision of such a guarantee. Thus, the Procurement Agreement, which was made between Dardanel Onentas Gida Sanayi A.S., a corporation organised under the laws of Turkey (the “Company”), Niyazi Onen Gida San, A.S, a corporation organised under the laws of Turkey and the personal guaranty of Mr Niyazi Onen (the “Guarantor”) and Longulf Trading (UK) Ltd, a company organised under the laws of England (“LGT”), stated in its recitals that LGT was “willing to enter into this Agreement only if Guarantor guarantees all of the obligations of Company hereunder and Guarantor has agreed to do so”.

The Procurement Agreement was thus entered into shortly before the Guarantee. Ms Zaman recognised that it might therefore have been argued by the Defendants that any consideration for the guarantee was past consideration. In this connection, the relevant approach is set out clearly in Chitty on Contracts, 33^rd ed, at paragraph 45-022, where the learned editors say this:

“More difficulty arises where the surety guarantees some past debt or transaction. Prima facie such a guarantee is given merely for past consideration and is void. So where a surety guaranteed payments under a hire-purchase agreement entered into four days previously, it was held that the guarantee was given for past consideration only and was void. However, if the consideration is expressed so as to be ambiguous whether it is past or not, it is open to the creditor to show that the consideration was not past. Thus where a guarantee was expressed to be given “in consideration of your having this day advanced to” the principal debtor some £750, it was held that parol evidence was admissible to prove that the money was advanced simultaneously with the giving of the guarantee, and that there was therefore good consideration. Moreover, in accordance with the position as regards contracts in general, consideration to support a promise of guarantee may be found in an act done before it is made, provided that the act is done at the guarantor’s request, that the parties understood that the act was to be remunerated in some way and that the conferment of a benefit would have been legally enforceable had it been promised in advance.”

Here, it is clear that at the time of the Procurement Agreement, it was understood that the Guarantee would be provided and that the Guarantors were requesting that the procurement agreement would be entered into. The provisions of the last sentence of the passage from Chitty on Contracts set out above are clearly satisfied in this case, and accordingly I find that the Guarantee is valid and effective, having been provided in writing, signed by or on behalf of each of the Defendants, and provided in exchange for consideration.

There is a further potential argument that I should deal with at this stage. Ms Zaman has correctly pointed out that, as a matter of English law, if the obligations of the principal debtor are varied, this will, as a general matter, discharge the guarantor. In this regard, it is noted, in Chitty on Contracts (33^rd ed, 2018) at [45-104] that:

“It is a well established and strictly applied principle that any variation in the terms of the agreement between the creditor and the debtor which could prejudice the surety will, unless he consents thereto, discharge him from liability, unless the contract of suretyship provides to the contrary.”

Since 23 January 2016, there have been five amendments to the Procurement Agreement which gives rise to Dardanel’s obligations. Ms Zaman pointed out that it might be said for the Defendants that these amendments have varied Dardanel’s obligations (including, by

Here, however:

The Guarantee provided that the Defendants (jointly and severally) would guarantee Dardanel’s “Obligations” under the Procurement Agreement. “Obligations” are defined in the Guarantee as follows:

“Obligations” means all present and future debts and liabilities of the Company to Purchaser (whether as principal debtor, guarantor, surety or otherwise), of any and every nature whatsoever (direct or indirect, absolute or contingent, matured or not, in principal, interest or otherwise) and howsoever incurred under, in connection with or with respect to the Procurement Agreement.”

The scheme of the contract was as follows:

Various invoices were rendered by the Plaintiffs to Dardanel between 27 September 2016 and 17 February 2017. Under the terms of the Procurement Agreement, payment of these invoices was due in accordance with the provisions of clause 1.4, as follows:

Between 23 February 2017 and 15 August 2017, Dardanel failed to make 18 payments as they fell due, totalling US$2,472,615 (“the Debt”), corresponding to a number of invoices dated between 27 September 2016 and 17 February 2017. Mr Pieri gave evidence before me, and I was shown the invoices in question. I am satisfied on the evidence that the sales covered by these invoices took place; that the invoices were rendered; that no payment (except as detailed below) has been made; and that, accordingly, the debt, as defined, was due from Dardanel to the Claimant.

A schedule of the invoices and their due dates for payment is attached to this judgment as Schedule 1.

An “Event of Default” is defined in clause 6.1 of the Procurement Agreement. Clause 6.1 of the Procurement Agreement provides as follows:

Here, as is apparent from the schedule of invoices which was annexed to the demand to which I make reference below (annexed to this judgment as Schedule 2), as at 20 October 2017, the total of $2,472,615 was outstanding, by way of principal. In addition to the Schedule to which I have made reference, a certificate was produced by the Claimants dated 6 November 2017, certifying, in accordance with Article 2.3 (the text of which I set out below) that this sum was due. That certificate was, in accordance with the terms of clause 2.3, prima facie evidence that the sum was due and owing, and I have seen no evidence to the contrary. I return to the topic of interest below.

The sum then due was therefore clearly well in excess of US$100,000, thereby triggering clause 6.1(e). In addition, as at October 2017, as is also apparent from Schedule 2, the various invoices in that schedule were more than 10 business days overdue, thus triggering clause 6.1(a).

In the light of the above, I am satisfied that:

Clauses 2.1, 2.2 and 2.3 of the Guarantee provide as follows:

By letters dated 9 November 2017, the Claimant made a formal written demand (“the Demand”)on the Defendants for payment of the Debt, pursuant to clauses 2.1 and 2.2 of the Guarantee (as well as a demand on Dardanel). Each letter of demand was accompanied by a certificate confirming the overdue sums and enclosing an “Analysis of Overdue Receivables” as at 20 October 2017. I was shown a copy of each of these letters, and I heard evidence from Mr Pieri confirming that they were sent. As I have noted above, by this time there had been Events of Default as defined in the Procurement Agreement, which meant that the Claimants were entitled to serve demands pursuant to clause 2.1 of the Guarantee.

By paragraph 13 of each Demand, the Claimant demanded payment of the Debt by no later than 21 days from receipt of the letter. The letter was received on 15 November 2017.

Each Demand called for payment of the Debt only, but formally reserved the Claimant’s rights to claim the full scope of the Obligations incurred by Dardanel, including interest at 15% per annum and legal costs. The letter however indicated that if the full amount of the Debt was paid within the 21 day period specified, the steps which the Claimant was reserving the right to take would not be needed. These included the commencement of Court proceedings and a claim for contractual interest.

The first question under this head is whether the Demand was a valid demand in relation to the sums set out within it, which comprised the principal debt.

This first question, in my view, admits of only one answer.

Here, the Demand specified the amount of the Debt; it showed how that sum had been calculated, by reference to the schedule attached; it included the necessary certificate; and it specified the bank account to which payment had to be made. All of the preconditions for the payment of the Debt were therefore satisfied and I hold that the Defendants were obliged to make payment of the debt to the nominated bank account.

To date, neither the Defendants nor Dardanel have paid the Debt in full, as has been confirmed before me by Mr Pieri. However, since the date of the Demand, Dardanel has paid US$172,445 in part payment of two of the 18 invoices. Mr Pieri understands this payment to be towards invoice numbers 10148 (in part) and 10160 (in whole). The payments were made in the sums of US$72,505 on 28 February 2018 and US$99,940 on 31 March 2018.

This has reduced the total principal outstanding in respect of the invoices to US$2,300,170.

Clause 3.1 of the Procurement Agreement provided as follows:

“3.1

Procurement Fees. Company shall pay a procurement fee… to LGT on the first Business Day of each month. The amount of the Procurement Fee payable on each Fee Payment Date shall equal 1.25% of the “Average Daily Outstanding” for the “Applicable Month”. The Applicable Month means the month most recently ended before each Fee Payment Date. The Average Daily Outstanding shall be equal to (a) the sum of (i) the price of all Goods (calculated at the price of such goods as stated in the applicable Company Purchase Order) purchased by LGT, whether paid directly to the Supplier or to Company for transfer to supplier, for which LGT has not received payment from Company at the close of business on each day in the Applicable Month, (ii) all shipping, handling, transportation, taxes, warehouse, wire transfer fees, insurance premiums and other charges and reimbursable expenses that are incurred by LGT in connection with the purchase of such Goods from an Accepted Supplier to the extent not reimbursed to LGT by Company at the close of business on each day in the Applicable Month and (iii) the amount of all fees paid, cash collateral posted, and deposits made by LGT as a condition of a bank’s opening and continuing any outstanding letter of credit issued or confirmed to pay the Accepted Supplier for the Goods purchased by LGT, divided by (b) the number of days in the Applicable Month.”

Dardanel was obliged to pay Procurement Fees to the Claimant for the duration of the term of that Agreement (which by the 5^th Amendment to the Procurement Agreement was extended to 19 January 2019). (Footnote: ²)

Dardanel has failed to pay the Procurement Fees since 1 June 2018, after the issuance of the Demand to which I have made reference and indeed after the commencement of these proceedings, which were started on 1 February 2018. The outstanding Procurement Fees, unpaid from 1 June 2018 to 2 January 2019 (inclusive), total US$ 234,841.65, as set out in Schedule 3 to this judgment.

In relation to the Procurement Fees, there are two possible arguments which I need to deal with.

The leading case on penalty clauses is the Supreme Court decision in Cavendish Square Holding BV v Makdessi [2016] AC 1162. Lord Neuberger and Lord Sumption stated:

“[13] … There is a fundamental difference between a jurisdiction to review the fairness of a contractual obligation and a jurisdiction to regulate the remedy for its breach. … the courts do not review the fairness of men’s bargains either at law or in equity. The penalty rule regulates only the remedies available for breach of a party’s primary obligations, not the primary obligations themselves. [This distinction] provided the whole basis of the classic distinction made at law between a penalty and a genuine pre-estimate of loss, the former being essentially a way of punishing the contract-breaker rather than compensating the innocent party for his breach.

...

“[32] The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contractbreaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance.”

Here, the Procurement Fee is a primary obligation owed by Dardanel in exchange for the Claimant providing the services under the Procurement Agreement. Whilst it is calculated by reference to the amount owed by Dardanel to the Claimant, the obligation to pay the fee forms part of the bargain between the parties, and its imposition does not depend on any breach of a primary obligation. It is not, therefore, a penalty, in my judgment. It is simply a separate part of the consideration in respect of the services provided by the Claimant.

As regards the fact that these charges did not form part of the demand, this argument is, in my view, far more difficult. Ms Zaman submitted that, upon service of the demand, the Guarantor was to pay the “Obligations”, as defined, and that the definition of Obligations was broad enough to cover all present and future debts and liabilities of the Company to

I am afraid that I cannot accept this argument. In my judgment, clause 2.2 indicates that the Demand must give details of the calculation of the sums which are being claimed. Here, there was such a calculation of the sums being claimed as due for non-payment of invoices. There was no such calculation – nor could there be – in relation to Procurement Fees since, as I understand the position, none were due at the time. Accordingly, the Demand did not comply in this respect with clause 2.2 and did not trigger any obligation to pay Procurement Fees. Of course, it remains open to the Claimant to make a Demand. G.Interest.

Interest is provided for by clauses 3.9 and 8.1 of the Procurement Agreement, which provide as follows:

“3.9

Late Payments. If any amount payable by Company hereunder (including any fee or any reimbursement amount), under any Company Purchase Order or any Commercial Invoice is not paid when due, such amount shall accrue interest, payable on demand, at the Default Rate, computed from the due date of such payment until such amount is paid in full….

…8.1 “Default Rate” means a rate of 15% per annum in addition to the Procurement Fees, but not in excess of the maximum rate permitted by applicable law.”

In my judgment, this makes clear that interest at the Default Rate of 15% per annum is to accrue on the Debt as set out in the 18 invoices referred to above. That amount of interest totalled [ ] as at the date of this judgment and order. A spreadsheet of interest calculations on the overdue invoices is attached to this judgment (which takes account of Dardanel’s February and March 2018 payments) as Schedule 4.

Again, there are two issues which arise in relation to this element of the claim. The first is whether the interest rate is penal. The second is whether the Demand is sufficient to cover the interest obligations. This second issue can be subdivided into the following subissues, namely:

As for whether or not the accrual of interest at the “Default Rate” constitutes a penalty, Ms

I accept this submission, particularly in the light of the evidence of Mr Pieri. It is clear that the failure to make payment when due had a significant effect on the cashflow and borrowing requirements of the Claimant.

Again, the more difficult questions are those which arise under the second head. Ms Zaman had similar submissions to those which she raised in relation to procurement expenses. In my view, the considerations are not entirely the same.

The Claimant acknowledges that the Claimant’s initial Demand of 9 November 2017 demanded only part of the Obligations, this being the principal overdue for the 18 invoices. However, it argues that the Claimant:

It is therefore submitted by the Claimant that the Claimant, having called on the Defendants by written demand of 9 November 2017, with its position reserved as to calling in the full Obligations should the Defendants fail to pay, is entitled in these proceedings to claim from the Defendants the full scope of the Obligations as at 8 February 2019, and indeed (as I understand the submission) thereafter.

I will approach this submission in a number of stages.

As to amounts by way of interest on Procurement Fees, then in my view the Claimant’s case is still weaker.

The Claimant has also incurred costs and expenses in enforcing its rights against Dardanel under the Procurement Agreement, for which Dardanel is liable under clause 9.5 (“Expenses”) and which therefore form part of the Obligations.

These total US$17,432.34 in respect of Turkish counsel and a further £16,161.85 incurred in respect of K&L Gates LLP. (Footnote: ³)I. Statutory interest.

In addition to the amounts set out above, by way of principal and contractual interest, the Claimants are, in my judgment, entitled to statutory interest from the date on which those amounts should have been paid until the date of this judgment and order. The appropriate rate for such interest, in my judgment, this being a dollar claim, is US$ LIBOR plus 1%. It is up to the Claimant to decide whether to claim this statutory interest, or to serve a new notice claiming the further contractual interest that has accrued due between the date of the last demand, referred to above, and the date of this judgment and order.

I can summarise my overall conclusion as follows:

I would be grateful if an order could be drawn up giving effect to the conclusions set out in this judgment.