Condition - Breach - Effect - Defendant terminating agreement
Deiulemar Shipping SpA and another v Transfield ER Futures Ltd: Queen's Bench Division, Commercial Court (Mr C Edelman QC (Sitting as a Deputy Judge of the Commercial Court)): 18 April 2012
The parties were freight shipping companies. In July and September 2008, they entered into a number of forward freight swap agreements (FFAs). Each of the FFAs was subject to provisions that the obligation of each party to make a payment required by the FFA would be subject to the condition precedent that no event of default or potential event of default with respect to the other party had occurred and was continuing; and that there would be an event of default with respect to a party if that party or its credit support provider (CSP) became insolvent or unable to pay its debts or failed or admitted its inability generally to pay its debts as they became due.
The FFAs incorporated the provisions of the 1992 ISDA Master Agreement relating to events of default triggered by insolvency. The claimants subsequently alleged that the defendant was unable to pay its debts as they became due and/or had failed generally to pay its debts as they became due, thereby triggering an event of default. In support of that allegation, the claimants relied on what they averred was the defendant's failure to pay the sum of $8m due and payable to another freight company, P. The claimants sought to assert an event of default because otherwise the FFAs would have been terminated by the defendant pursuant to notices of early termination effective on 5 July 2010 following the claimants' respective failures to pay certain sums which became due for payment under the FFAs.
On the basis of that early termination, the defendant claimed the sum of $26,713,46.32 against the first claimant and $15,181,119.01 against the second claimant. After the claimants brought their claim, the defendant, in October 2011, applied for summary judgment dismissing the claimants’ claim and granting the defendant judgment on its counterclaims. As a result of evidence served by the defendant in support of its summary judgment application, the claimants applied to amend their particulars of claim, abandoning their earlier allegation and seeking instead to rely on the new allegation that the defendant was insolvent in a balance-sheet sense from, at the latest, 1 January 2010 on the basis that by virtue of its indebtedness to P of $8m, it had an excess of liabilities over assets at all relevant times after 17 December 2009, thereby triggering an event of default under the FFAs.
They further alleged that another company, T, which was a guarantor in respect of the FFAs and which became thereby a CPS to the defendant, was unable to pay its debts as it fell due, also triggering an event of default. The two applications were heard together on the basis that the outcome of both turned on whether the new allegations raised in the amended particulars of claim had any real prospects of success at trial. It was agreed that the defendant would be entitled to judgment on its counterclaims in the event that the claimants’ case no. had no prospect of success. The issues were whether the claimants had any real prospect of establishing that: (i) the defendant had been insolvent at any material time; and (ii) T was a CSP, whose inability to pay its debts had triggered an event of default for the purpose of the relevant FAA. Consideration was given to BNY Ltd v Eurosail plc  3 All ER 470 (Eurosail) and to section 123(2) of the Insolvency Act 1986 (the act).
The court ruled: (1) The correct test for determining the question of the defendant’s solvency in the instant case was that laid down in Eurosail. Although that case determined the meaning of insolvency ostensibly in the context of section 123(2) of the act, there was no rational basis for applying any materially different test to the question whether a party was insolvent for the purposes of triggering an event of default under the 1992 ISDA Master Agreement (see  of the judgment).
Under the Eurosail test, there was no basis for finding the defendant to be insolvent at any material time. In particular, the claimants' allegation that the defendant's liability to P had rendered the defendant balance sheet insolvent had no real prospect of success. Even applying the full $8m of the P claim, which had yet to be decided in any case, to describe the defendant as insolvent on the basis of the net asset figures at various dates had been precisely the approach that had been firmly rejected in the Eurosail case. The net asset figure for the defendant fluctuated from month to month and it was right to say that occasionally the net asset position of the defendant had been below the full value of the P claim.
However, standing back and looking at the defendant's net asset figures over the whole relevant period, the suggestion that the defendant had reached the point of no return, even if the full value of the P claim was, was utterly fanciful. Any reasonable commercial person considering the defendant's financial position would also bear in mind that there was at the very least a reasonable argument for saying that the defendant had not owed any money at all to P. Consequently, the proposed plea that the defendant had been insolvent at the material times was entirely without substance (see ,  of the judgment).
BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc  3 All ER 470 applied; European Life Assurance Society, Re (1869) LR 9 Eq 122 considered; Britannia Bulk plc (in liq) v Pioneer Navigation Ltd  2 Lloyd's Rep 84 considered; Pioneer Freight Futures Co Ltd (in liq) v TMT Asia Ltd  2 Lloyd's Rep 96 considered.
(2) The parties had had the option of making T a CSP for the purposes of the FFAs but had chosen not to do so. Therefore, to treat T as a CSP in the instant case would clearly be to make for the parties a bargain which they could sensibly have made but had not made. It was not then possible to conclude that the parties should have intended to specify T as a CSP when they had not made such a specification in their agreement (see  of the judgment).
The claimants' application to amend their particulars of claim would be refused, and the defendant's application for summary judgment on the claimants' claim would succeed, with the result that the claimants' claim fell to be dismissed, and the defendant was entitled to judgment on its counterclaim against the first claimant for $26,710,346.32 and against the second claimant for $15,181,119.01 together with interest thereon (see  of the judgment)
Mark Hapgood QC and James Willan (instructed by Berwin Leighton Paisner LLP) for the claimants; Andrew Baker QC and Siddarth Dhar (instructed by DLA Piper UK LLP) for the defendant.