AS Klaveness Chartering v Pioneer Freight Futures Co Ltd
Forward Freight Agreements (FFA) - ISDA Master Agreement - Amendment, Modification or Waiver of Terms
Timothy Hill QC and Neil Henderson acted on behalf of the Claimant Klaveness. Here they look at the implications of the case.
Background facts
The Claimant, Klaveness Chartering ("Klaveness") claimed for sums under a number of forward freight agreements ("the FFA contracts") between it and the first Defendant, Pioneer Freight Futures ("PFF"). The forward freight agreement contracts incorporated the 1992 version of the Multicurrency-Cross Border Master Agreement of the International Swap Dealers Association ("the ISDA Master Agreement"). The second Defendant Pioneer Metals ("PM") had guaranteed PFF's performance of the FFA contracts up to US$10 million ("the Guarantee"). The settlement dates under the FFA contracts were the last Baltic Exchange Index publication days of each contract month.
In the second half of 2008 the freight market slumped dramatically. The parties discussed a possible novation arrangement whereby PFF's trades with a creditworthy counterparty, which would owe PFF large sums under trades maturing from January onwards, would be novated so that Klaveness took PFF's place. The basis of the proposed deal was that the December settlement would be "washed out" in the novation agreement.
The parties were still discussing the novation on the December settlement date. PFF invoiced Klaveness for the December settlement sum. Klaveness contended that it had been agreed that the December settlement would not take place pending conclusion of the novation agreement. When the December settlement sum was not paid PFF served cure notices under the ISDA Master Agreement. The novation agreement was not agreed by the January settlement date, and was never subsequently agreed.
In February 2009, Klaveness invoiced PFF for the January settlement sum giving credit for the December sum due to PFF. PFF did not pay the January sum and Klaveness designated an early termination date and sought the early termination sum of $30 million. Klaveness also claimed against PM under the Guarantee. PFF submitted that nothing was due because Klaveness' failure to pay the December sum meant that there was an event of default in respect of Klaveness and PFF was thereafter under no obligation to make payment.
Judgment
Christopher Clarke J held that an oral agreement had been reached between Klaveness and PFF at the end of December 2008 on the basis that the settlement sums for December would not be payable by Klaveness pending conclusion of the novation agreement. There was sufficient consideration for that agreement in Klaveness' continued preparedness to negotiate the proposed novation deal and the keeping open of that deal which would be of considerable benefit for PFF. The agreement was not an "amendment, modification or waiver" of the ISDA Master Agreement, but was a collateral oral contract. It was therefore not caught by section 9(b) of the ISDA Master Agreement which required any such modification to be in writing . The judge referred to authority that a contract which is collateral to a contract which is required to be in writing does not itself have to be in writing. Angell v DukeCity of Westminster Properties v Mudd (1875) L.R. 10 QB 174; [1959] Ch 129; Record v Bell [1991] 1 WLR 853; Chitty on Contracts, (30th ed., 2008), paragraphs 12-103 and 22-036.
In the alternative, PFF was not, in equity, entitled to resile from its representation that the December payment was to be suspended and had forborne on its strict legal rights. The judge held that was not necessary that any forbearance to enforce should be in writing in order for equitable principles to apply relying upon the principle in MSAS Global Logistics v Power Packaging Inc. [2003] EWHC 1393 (Ch).
In order for the December settlement sums to become due it was necessary for PFF, either as a matter of contract or in order to terminate its forbearance, to give reasonable notice to Klaveness that payment was required . PFF never did so. PFF could not, in equity, at one and the same time represent that it would not seek payment and rely on provisions of the contracts which were only applicable upon the footing that the payment in question was due.
In any event the parties had agreed after the January settlement date that the December sums should be set off against the January sums such that there was no amount due from Klaveness which could form the basis of a cure notice leading to a notice of default . The agreement satisfied the requirements of Clause 8(b) of the FFA contracts since the relevant terms were in writing (in an e-mail of 3 February). The judge relied upon the principle that the acceptance of the offer was not required to be in writing: Zambia Steel & Buildings Supplies Ltd. v James Clark & Eaton Ltd. [1986] 2 Lloyd's Rep. 225. There it was held that a quotation incorporating an arbitration clause on its back could constitute an "agreement in writing to refer disputes to arbitration" within the meaning of the Arbitration Act 1975 even though the assent to the quotation was oral.
In the alternative, the agreement reached on 5 February could be regarded as a collateral contract and effective as such (see the authorities cited above) .
In any event the content of the conversation on 5 February 2009 together with the request by PFF for a revised invoice, coupled with the absence of any claim that Klaveness should be paying the December amounts, constituted a clear representation that PFF accepted that Klaveness had a right to set off, whatever clause 8(b) of the FFA contracts said. Klaveness relied on that representation by not paying the December amounts and by proceeding on the basis that PFF was satisfied with the setting-off arrangement. PFF was not allowed to resile from its representation in the circumstances where Klaveness was no longer able to pay the December Settlement Sum prior to 6 February .
PFF was in default in failing to pay anything in respect of January. Klaveness was entitled to serve, as it did, a cure notice, to fix an early termination date, and to recover its losses. Klaveness was entitled to judgment against PFF for the amount claimed and against PM under the Guarantee for $10 million.
Comment
The past twelve months has been a series of FFA contract-related claims following the collapse of the freight market in 2008. These have seen a number of major players in the FFA contract market becoming insolvent.
The significance of these cases goes beyond the FFA market, since the FFA contracts are based on various versions of the standard form Multicurrency-Cross Border Master Agreement of the International Swap Dealers Association. This standard form contract is used worldwide for all forms of financial derivative contracts. Until the advent of these FFA contract claims, the caselaw in relation to these very important standard form agreements was sparse.
The Klaveness case follows the recent High Court FFA/ISDA contract case of Marine Trade SA v Pioneer Freight Futures Co Ltd [2009] EWHC 2656 (Comm); [2009] All ER (D) 30 (Nov), which also involved PFF. In that case Flaux J considered the consequences of the insolvency of one of the parties to an FFA contract on the obligations of the parties to pay under the contract. In particular, it involved analysis of the operation of section 2(a)(iii) of the ISDA Master Agreement and the circumstances in which a party is no longer obliged to pay when the other party is insolvent because of there being an Event of Default or Potential Event of Default.
The Klaveness case also involves judicial analysis of section 2(a)(iii) of the ISDA Master Agreement and whether there was an Event of Default or Potential Event of Default. However, this was not in relation to insolvency but in the circumstances where the parties had agreed to alter or suspend their contractual obligations.
The significance of the Klaveness case is that it involves judicial consideration of the circumstances in which the parties are able to alter or suspend the operation of the terms of the FFA contracts without the need for this to be in writing.
Specifically, it recognises that: (i) the parties are able to suspend the operation of a Settlement sum through a collateral oral contract notwithstanding the requirement at section 9(b) of the ISDA Master Agreement that any "amendment, modification or waiver" be in writing; and (ii) that the parties are able to agree to set-off sums from different calendar months under a collateral oral contract notwithstanding the requirement of clause 8(b) of the FFA contract that the agreement to set-off must be in writing. The case is also significant in that it recognises the effect of equity, and in particular the principle of forbearance, on the parties' obligations under the FFA/ISDA contractual regime.
It is anticipated that both the Klaveness case and the Marine Trade case will provide invaluable assistance and guidance to commercial parties trading on the standard form FFA contract and ISDA Master Agreement on the meaning and effect of those terms.
Aside from its importance to ISDA-using commercial parties, the Klaveness case is of importance on a more general point of legal principle. Christopher Clarke J decided that despite section 9(b), which provided that "No amendment, modification or waiver in respect of this Agreement will be effective unless in writing", a collateral oral contract had the effect of altering the agreement between the parties. The only prior caselaw on this issue was an unreported Court of Appeal decision in relation to a summary judgment application: I-Way Ltd v World Online Telecom UK Ltd [2002] EWCA Civ 413. The Klaveness case provides clarity and guidance on this issue.