Mr Ian Glick QC:
Introduction
- In this action the Claimant, Contigroup Companies, Inc. ("Contichem") claims the unpaid balance of the price of a cargo of butane that it sold to the Defendant, Glencore A.G. ("Glencore") in 2002. Glencore resold the cargo to an associated company, Glencore International A.G. ("Glencore International") which in turn resold it to Petrochina Zhejiang Huadian Resource Co. Ltd. ("Petrochina"). Under the terms of the sale contract (and the sub-sale to Glencore International) the cargo should have reached Wenzhou in Eastern China by 10 June 2002; and under the sub-sale contract with Petrochina delivery was to take place by 12 June 2002. In fact the cargo reached Wenzhou and started unloading on 15 June 2002. Petrochina claimed against Glencore International in respect of the delay, and that claim was settled for US$172,899.67. The question for me is whether Glencore is entitled to a like sum in damages against Contichem, which it can set off against Contichem's claim.
- I would like to record my gratitude to the parties and their counsel and solicitors for the speed with which the hearing was conducted. The factual evidence consisted of witness statements from Mr. Michael Mayberry and Mr. Ralph Delia (put in by Contichem) and witness statements and oral evidence from Mr. James DuPay and Mr. David Schneider (called by Glencore). Contichem put in a report of, and called, Mr. Michael Hoare, and Glencore put in the report of, and called, Mr. David Chamberlin, as experts on the market for the contract goods. In addition Glencore put in an expert report on Chinese customs duties from Mr. Li Chenbiao. Mr. Hoare and Mr. Chamberlin and Mr. Hoare and Mr. Chenbiao also produced joint memoranda. The written material was most helpful, and it was clear that the witnesses who gave evidence in person were doing their very best to assist the Court. I am also grateful to counsel for their extensive pre-trial, and succinct post trial written submissions.
- It is not in dispute that Contichem was in breach of contract in making late delivery to Glencore. It is very much in dispute whether, as a result, Glencore suffered any, and if so, what recoverable loss. To resolve that dispute I must first set out my findings as to what happened. Secondly I must find whether there was an available market for bulk butane at the relevant time. Thirdly I must examine the settlement between Glencore International and Petrochina to see to what, if any, extent it reflected claims other than delay, and whether it was reasonable. Finally having made those findings I must decide what recoverable loss, if any, Glencore has suffered and in particular whether, as it claims, it is entitled to be in effect indemnified against the cost of the settlement with Petrochina.
What happened
The sale contract
- On 22 April 2002 Contichem entered into an exchange contract for the sale of liquid petroleum gas ("LPG") with Glencore. The contract ("the sale contract") is evidenced in writing by a document called a "Final Recap" sent by Contichem to Glencore on 24 April 2002.
- Under the first part of the sale contract ("part AA") Glencore agreed to sell to Contichem certain quantities of propane and butane. Under the second part ("part BB"), Contichem agreed to sell to Glencore between 43,000 and 45,000 metric tones of propane and butane in two lots.
- The relevant terms of the sale contract, as originally agreed, provided as follows.
"Contichem sell CFR to Glencore
3. Product
Fully refrigerated commercial grade propane and butane
Part cargo delivery
2 lots, each lot being minimum 21,000 mts to maximum 22,000 mts LPG. Cargo ratio to be abt 50/50 propane/butane ratio.
6. Origin
Arabian Gulf (except Iran/Iraq/Qatar) and Yanbu.
7. Delivery
CFR 1-2 safe port (s) anchorages, 1 safe berth each port, Singapore Japan (Imari/Kashima range) during June 1 15, 2002. Arrival range is basis Japan arrival. If non Japan disport is nominated, the delivery range will be amended based on the actual discharge port.
Seller to advise a 7 day delivery range 22 days prior day 1 of the 7 day range. Thereafter, seller to narrow the range to a 5 day range, 16 days prior day 1 of the 5 day range.
8. Vessel.
LGC/C Oval Nova or sub, any sub to be acceptable to buyer which shall not be unreasonably withheld.
9. Price
Saudi Aramco contract price (CP) in effect for May 2002 for fully refrigerated propane and butane per metric ton plus USD15.00 pmt CFR 1 safe port/berth Japan.
10. Payment
Both parties agree to settle the amounts under parts AA) and BB) via an offset agreement. Any settlement under the offset agreement will be made on June 20, 02. The payer will be the party which owes funds after offsetting the amounts due under part AA) against part BB). It is further agreed that under such offset arrangement if either party is due/owes interest for early or late payment, compensation will be arranged on basis of LIBOR plus 1 (one) where applicable with such interest included in the offset agreement.
21. Law
This agreement shall be governed and interpreted in accordance with the laws of England."
- Glencore duly delivered to Contichem the cargo sold under the first part of the sale contract.
- On 2 May 2002 the sale contract was varied. The second lot sold by Contichem ("Lot 2") was to be solely butane; and the delivery date range was narrowed so that arrival had to take place not later than 10 June.
- On 15 May 2002, Contichem nominated the LPG carrier, Sunway, to deliver Lot 2.
- Both Contichem and Glencore trade LPG as part of their businesses. Contichem knew that Glencore was a trader, and accepts that it knew Glencore was likely to re-sell Lot 2.
The sub-sale contract
- As already mentioned, Glencore has an associated company, Glencore International. Business with the United States is usually done through Glencore, whereas business with the Far East is generally done through Glencore International. So Lot 2, because it was due for delivery in the Far East, was sold by Glencore to Glencore International on terms back to back to those of the sale contract.
- In mid-May 2002, Mr. David Schneider and Mr. Chris Mulliken, who were LPG traders for Glencore and Glencore International, were on a business trip in China together with Mr. James DuPay. He was an LPG broker whose company, International Gas Trading and Transport ("IGTT"), acted for the Glencore companies. In the course of the trip, Mr. DuPay learnt that Petrochina was in the market for a large LPG cargo. Mr. DuPay asked Mr. Mulliken and Mr. Schneider whether Glencore had any suitable cargoes available. Mr. Schneider says he thought that Lot 2 might fit Petrochina's requirements.
- On 15 May 2002, Glencore International entered into a contract to sell a cargo of fully refrigerated LPG to Petrochina ("the sub-sale contract"). The relevant terms were as follows.
"4. Quantity.
25,000 metric tons maximum 10% less in Seller's option.
2,000-10,000 metric tons Propane (Min. 2,000 mt for propane) and 15,000 to 23,000 metric tons butane in Seller's option 10% more or less on declared quantities of each grade, not to exceed 25,000 metric tons in total.
Seller to declare the quantities of propane and butane by either close of business London on May 16, 2002 or May 22, 2002.
5. Specifications.
Complying with Saudi Aramco specifications.
6. Delivery Dates.
One cargo lot DES 1 safe port/1 safe berth Buyer's terminal, Xiaomen Island LPG Terminal, Wenzhou, China, June 7-12, 2002.
8. Price.
DES USD233.80 per metric ton for fully refrigerated LPG if the propane and butane quantities declared by May 16, 2002.
DES USDollars 233.00 per metric ton for fully refrigerated LPG if the propane and butane quantities declared by May 22, 2002.
16. Payment terms.
By irrevocable Letter of Credit opened in format acceptable to Seller, with a bank acceptable to seller. Confirmation by a bank outside of China, if required, to be arranged and paid by Seller. The Letter of Credit shall be opened not later than May 27th, 2002. The form of L/C to be as normal for a delivery to shore terminal. Wording to be agreed by Seller along with Buyers bank and branch. The L/C shall be drawn against draft upon presentation of the following documents.
(a) invoice (original)
(b) full set of 3/3 of clean onboard ocean bill of lading to the order of applicant and marked freight as agree
"
The sub-sale contract also provided for English law to be applied and for disputes to be resolved by arbitration in Hong Kong.
- The sub-sale contract was for a delivery of a single cargo made up partly of propane and partly of butane, not for a mixture of the two.
- Even though Glencore International would gain a slight price advantage by declaring early, Mr. Schneider wanted to keep his company's delivery programme flexible. So Glencore International did not declare the Sunway to Petrochina straight away. Moreover the Sunway was carrying only butane, whereas Glencore International had agreed to deliver to Petrochina a single cargo made up of both butane and propane. Though in evidence Mr. Schneider said he did not anticipate this would present a problem. If necessary, he believed, the deal could be renegotiated.
- On 22 May 2002, Contichem notified Glencore by e-mail that the Sunway's estimated time of arrival at Ras Tanura was the morning of 26 May 2002; and on the following day, Contichem further narrowed the delivery dates to 6 to 10 June 2002. If the Sunway left Ras Tanura quickly it would just be possible for it to reach Wenzhou by 10 June, the last date for delivery under the sale contract. For 26 May was the last day a ship could leave the Gulf for Eastern China to be sure of arriving by 10 June; though a ship might make it if it left very early on 27 May. Moreover on 23 May Contichem again narrowed the delivery dates, though the final date of the range remained 10 June 2002.
- On 28 May 2002, Glencore UK Limited (on behalf of Glencore International) sent the following fax to Petrochina.
"Kindly note our intention to deliver Propane and Butane on board the vessel "Sunway", eta 10th June, 2002."
As, however, those at Glencore were well aware, the Sunway was only carrying butane.
The delay
- On 29 May 2002, Glencore e-mailed Contichem saying:
"
please forward by return:
vessel's eta basis Ulsan
In view of delivery dates 6-10 June, it is imperative we receive this information by return."
- Later the same day, Contichem replied saying, amongst other things:
"Pls note the vessel is due to call Ruwais after Ras Tanura.
The vessel eta Korea is now only abt June 15th due to delays in the AG [Arabian Gulf]. We are awaiting owners updated eta's and once received will advise you."
- To this, Glencore responded:
"
as vessel "Sunway" is unable to meet nominated delivery dates at disport. Please re-nominate a vessel/cargo which will arrive within the contractual delivery period of 6-10 June 2002."
- The following day, 30 May 2002, Glencore again e-mailed Contichem, this time to say:
"Kindly note we nominate disport Wenzhou for delivery of 2nd lot during 6-10 June 2002.
Please advise vessel's eta."
- Also on 30 May 2002, Glencore e-mailed Contichem:
"
we again point out the urgency of advising us by what method you intend to make the contractual delivery for arrival 6-10 June, 2002. Clearly the vessel "Sunway" is not in a position to make this delivery."
- On the following day, 31 May 2002, Mr. Yangqing (a broker at IGTT), notified Petrochina that the cargo was going to be three days late.
- Later the same day IGTT told Glencore in an e-mail from Mr. Yangqing, forwarded by Mr. DuPay to Mr. Schneider and Mr. Mulliken, that Petrochina needed 3,000 tons of butane per day from 10 June until when the Sunway berthed. Of course 10 June was not the last date for delivery under the sub- sale contract, but it was the date Glencore International had told Petrochina to expect the Sunway.
- Glencore e-mailed Contichem as follows.
"
If the cargo is not delivered by the contractual date, our buyer will run out of product and will have to be supplied from an alternative source for the period between the end of the date range and the arrival of "Sunway". You should understand that we will hold you fully liable for all damages, costs and expenses that we incur as a result of your breach of contract.
Please advise by 4pm London time today:
(1) the earliest possible eta of "Sunway" at Wenzhou and
(2) whether you will provide us with an alternative cargo which meets your narrowed date range or 3,000m tons per day pressurised cargo delivered at Wenzhou from 10 June up to arrival of "Sunway" to prevent our receiver running out of product."
- Contichem replied:
"We have already provided you with the vessel's eta Wenzhou. The earliest is approx. June 14/pm - June 15th (we are still awaiting firm eta from owners). We cannot control this any better.
It must have been clear to you on 20/22 May that she was going to arrive after 10 June. If the situation was so serious with your buyer, why didn't you tell us then, instead of waiting until 31 May?
You have now left very little time for finding a replacement cargo
However please
2. obtain evidence in the form of your receivers inventory levels, their terminal discharge program and any other deliveries your receiver is getting showing that your buyer will run out of product after 10 June.
3. confirm that you will receive the Sunway cargo basis the above ETA in any event."
- To this, Glencore e-mailed back:
"
it is unrealistic to suggest that "we must have known on 22/23 May that the "Sunway" would be late" when you nominated a 6-10 June delivery range on the 23rd May. Were we also supposed to know this was false?
We will do everything we can to mitigate the costs involved but there is no point in asking for your assistance in this matter if you will not accept responsibility for your breach of contract and the consequential damages arising therefrom."
- On 3 June 2002, Glencore again sent an e-mail to Contichem.
"It is clear that you are not able, nor willing to perform the delivery of 21-22,000 mt of butane between 6-10 June as per the contractual obligation undertaken by yourselves.
In the circumstances you leave us no option but to start mitigating damages by purchasing product to cover our receiver during the dates that your delivery should have been made.
We shall hold you responsible for all costs/charges incurred in doing so and reserve our rights herein in full."
- Also on about 3 June 2002 Contichem delivered Lot 1 to Glencore. There is no complaint about this cargo.
- There was considerable evidence about Glencore and Glencore International's (there is no need for these purposes to distinguish the two) attempts to find substitute cargoes to deliver to Petrochina. I accept that Mr. DuPay, as he told me, made strenuous efforts from about 30 May to find a large cargo of butane (probably one already afloat) that could reach Wenzhou before 15 June 2002 that Glencore could buy outright or exchange for another cargo. These efforts took place on the telephone which is why there is no paper trail to evidence them. He failed. As he pointed out in evidence, he had a strong financial incentive to succeed, as the commission would have been substantial, and I accept that his failure was not for want of trying.
- Mr. Schneider, both directly and through brokers, attempted to find small, pressurised cargoes, as stop gaps to fill Petrochina's need for about 3,000 tonnes of butane per day. The only cargo found, however, was of an unsuitable specification: it had too high an olefin count. As appears below, although one could have been found, Petrochina did not want a cargo of propane only.
- On 4 June 2002, Glencore again sent an e-mail to Contichem.
"Please note that our receiver at Wenzhou is the terminal operator and they have advised us (via the brokerage channel) that they anticipate that their stock position will become critical on June 10, 2002. We will be unable to substantiate this issue until ullage reports from the terminal are made available to us. We have no reason to doubt their word.
(1) You are advised that we are not seeking to purchase a replacement cargo. We are however actively trying to secure small quantities of product to supply our receiver to prevent a run out of stock at the terminal between the period of June 10th to the 15th when you maintain the LPG/C Sunway will arrive. These efforts are made in an effort to mitigate any claim for damages.
(2) In light of your refusal to nominate a substitute vessel for delivery within the nominated delivery range of June 6-10, we have no alternative but to accept your nomination of the LPG/C Sunway with an ETA of June 15th for the contract quantity of minimum 21,000 mt/maximum 22,000 mt butane.
This acceptance is made without prejudice to the rights and obligations of the contract parties."
Contichem acknowledged receipt of this the same day. It is clear, however, from the above e-mail that by 4 June Mr. Schneider and Mr. DuPay had ceased looking for a substitute for the Sunway and were concentrating on trying to find small cargoes to prevent Petrochina running out of butane before the Sunway arrived.
- At about the same time, Glencore International (through IGTT) offered Petrochina 2,000 metric tons of propane to arrived between 11 and 14 June; but Petrochina declined a propane only cargo. Moreover at the end of an e-mail (of 5 June 2002) dealing with this, Mr. Yanqing reported to Mr. Schneider:
"And considering Customs Tax is 5/% for refrigerated product and 3% for mix pressurised product, [Petrochina] need Propane in Sunway, say at least 700 MT, otherwise, the 2% Customs tax would be paid by Glencore."
- This is the first reference to the fact that Petrochina believed that, with a cargo of both butane and propane, it would only have to pay Chinese import duty at the rate of 3 per cent, rather than the rate of 5 per cent for a cargo made up only of butane: see paragraphs 58 to 61 below.
Negotiating a settlement
- On 5 June 2002 Mr. DuPay drew Mr. Schneider's attention to the fact that the letter of credit issued pursuant to the sub-sale contract was not workable. Both the arrival date and the cargo were going to be non-conforming.
- This point was underscored by an e-mail from Petrochina to Mr. Yanqing (passed on by him to Mr. Schneider) of the same date. This pointed out that the sub-sale contract had not been amended, and that Glencore International was obliged to deliver the cargo, "on June 7-12, 2002". It continued:
"We also remind you of noting the formal notice dated 28 May 2002 from the seller, the contents of which is largely self-explanatory, that is, the seller has nominated the vessel and has confirmed the ETA as 10th June, 2002; according to this ETA we have arranged our discharging and our retail sales work."
- The same day, Glencore International e-mailed Petrochina direct to ask, amongst other things, for the letter of credit to be amended. In a later e-mail, also the same day, Glencore International made a proposal for compensation, namely:
"
paying
a penalty of USD0.50/pmt per day that the vessel is late (pro rata) from 24:00 hrs on the 12th June until the arrival of the Sunway."
- Also that day Petrochina learnt for the first time (from loading details sent to it) that the Sunway would be carrying only butane.
- As a result, the next day (6 June 2002) Petrochina sent the following fax to Glencore International.
"
Our loss fees are as following.
(i) We also remind you of noting the formal notice dated 28 May 2002 from the seller, the contents of which is largely self-explanatory, that is the seller has nominated the vessel and has confirmed the ETA as 10th June, 2002; according to this ETA we have arranged our discharging and our retail sales work. Hence, we can't sale cargo from 10th June to 16th June 2002.
a. 3,000 MT/day x 6 days x USD25/MT (profit) = USD450,000.00
(ii) From your E-mail dated 5th June 2002, the loading details for the butane portion, there isn't any propane on the vessel Sunway, according to the contract, you should deliver us Min. 2,000MT propane, how about do you deal with this matter?
(iii) We must depreciate to sale our cargo hastily, according to our current schedule, our terminal may be has another cargo to berth from 15th 19th June 2002.
a. 10,000MT x USD15/MT = 150,000.00
."
In short Petrochina was asking for compensation of US $600,000 for delay, and for Glencore International's proposals to deal with the absence of any propane on the Sunway.
- Glencore International replied the same day. Amongst other things it said:
"(1) We do not consider that there is any liability for Glencore International prior to the last day of the contractual arrival range i.e., the 12th of June. Further, the daily volumes you specify seem to be in excess of your average monthly imports on a historical basis.
(2) Relative to the issue of propane; we have proposed to deliver 2,000mt of propane in a pressurised vessel in the delivery range in the contract. This has been rejected by [Petrochina] although we were entitled to do so under the terms of the contract.
(3) We cannot accept that this would be included in a cancellation fee. If you have a firm cargo scheduled for June 15th, then we must assume that you do not require the contract cargo at this time
We must point out that it is essential that we come to an agreement without undue delay. In view of the current ETA of June 15th, we will need to resolve the current dispute and take the necessary steps to amend the contract and letter of credit. We must point out that we will be unable to discharge the cargo on the LPG/C Sunway without the required amendments to the current letter of credit. Without prejudice to either party we would like to make the following proposals to resolve this issue.
(a) We increase our proposal for a discount of $1.00 per metric ton for each day or pro rata part thereof the arrival of the vessel is delayed past June 12th.
(b) Alternatively, we could propose to amend the contract and to deliver a cargo of 2,000 mt propane and 22,000 mt butane in a new date range of June 20-25, 2002 at a price of $240.00/mt for propane and $230.00/mt for butane under the same terms and conditions."
- The suggestion that Glencore International was entitled to deliver propane separately from butane was not consistent with the sub-sale contract, which refers to, "One cargo lot".
- In further exchanges Glencore International threatened to divert the Sunway from Wenzhou elsewhere.
- On 8 June 2002, an e-mail from Mr. DuPay to Mr. Schneider and Mr. Mulliken recorded that Mr. Yangqing had discussed the matter with Mr. Zhang of Petrochina.
"It seems that there are a number of issues that they are looking at.
(1) Duty on pure butane will be 2% higher or $4.66/mt. While agreeing to pay for this additional cost will help, they are still concerned about not have propane. On the Basis of 21,750mt the lumpsum associated with this issue is $101,355.
(2) They do not feel that $1.00 mt is adequate compensation for the late delivery. Yangqing can not draw from them their ideas, but he feels that they will require something in excess of $100,000. How much above this level is hard to define and he is not receiving any guidance from Zhang.
(4) The lawyer has told [Petrochina] that if Glencore does not deliver the cargo, he feels that he can get a judgment against Glencore for damages larger than the $600,000 and can get it enforced in China against any other business Glencore has."
- Thus Petrochina was claiming that a butane only cargo would cost it US $101,355 in additional duty.
- Petrochina sent a further fax to Glencore International, dated 10 June 2002. (Despite a fax marking of 11 June, the parties seem to accept the earlier date is correct and in view of the correspondence that follows it seems to me that they must be right.)
"
Our loss fees are as following,
(i) According to the contract, you should deliver cargo to our terminal during 7-12 June 2002 but we received your vessel's ETA 0800/15/2002 LT, therefore, we can't sale cargo from 12th June to 16th June 2002.
a. 3,000 MT/day x 4 days x USD25/MT (profit) = USD300,000.00
(ii) Refer to our phone conversation, we consider our longstanding friendly cooperation, we give you discount 6.133% (i.e. USD300,000 x 6.133% = USD184,000.00
(iii) USD184,000.00 χ 23,000MT = USD8/MT."
In fact the discount was not 6.133 per cent. The discounted figure of US$184,000 is 61.33 per cent of US$300,000.
- The same day Mr. Yangqing e-mailed Mr. Schneider and Mr. Mulliken and, after indicating that Petrochina was prepared to make certain amendments to the letter of credit, continued:
"As for "compensation fee", [Petrochina] consider long term relation with Glencore, now offer its "compensation fee" is US dollar 8.00 per ton with quantity based on 23,000MT and ETA on June 15. And the fee include all [Petrochina] lose, for example, no Propane, delivery timing delay, increasing Customs Tax."
- This was followed by a fax from Glencore International to Petrochina, again dated 10 June 2002.
"
Glencore International A.G. now confirms its final proposals as follows:-
1. Glencore to agree a compensation fee of $8 per metric ton in respect of all buyers' claims whatsoever under contract
dated May 15 2002, including delivery date, no propane, and Customs tax differential.
2. Buyer to agree amended delivery range June 10-16 and not later than 9 a.m. London time 11 June to make [certain amendments to the letter of credit]"
- Petrochina replied the same day thanking Glencore International for its fax and indicating it would make the required amendments to the letter of credit.
- Glencore International faxed to Petrochina confirming that it had accepted the proposed amendments to the letter of credit, adding:
"We will require a statement from the Customs Clearance Office confirming that Petrochina
have been assessed and have paid the higher Customs duty due to delivery of butane only."
- In recording this settlement I have put the correspondence in an order different from that contained in the trial bundle. The matter is made difficult by the fact that documents emanate from different time zones. In my judgment, however, the documents passed in the order I have set out; but even if that is wrong, there can be no doubt that Glencore International's fax quoted in paragraph 47 above recorded the settlement of Petrochina's claims for compensation for breach of the sub-sale contract.
Delivery and payment
- On 14 June 2002 Mr. Yanqing e-mailed Glencore International as follows:
"[Petrochina] say in L/C amendment
in June 11, Description of goods and/or services: Fully refrigerated LPG.
However in Cargo manifest in attached image file the Description of goods: Butane.
[Petrochina] require Vessel master amend the Cargo manifest, and quickly fax to [Petrochina] for Customs clearance. The vessel will schedule to berth Xiaomen island tomorrow (Saturday)."
- In its turn Glencore e-mailed Contichem:
"Please note cargo receivers in Wenzou require Master of "Sunway" to urgently amend the cargo description on the ship's manifest to read: "Fully refrigerated LPG" instead of Butane. This is required for Customs clearance."
- A copy of the cargo manifest faxed by Contichem to Glencore on 17 June 2002 shows that this change was made.
- In the event, the Sunway arrived at Wenzhou on 15 June 2002, in time for Lot 2 to be discharged on 15 and 16 June.
- The abatement in price of US $8 per metric ton agreed in the settlement meant that Glencore International received US$172,899.67 less than the price provided for in the sub-sale contract: US $4,862,903.73 instead of US $5,035,703.40.
- As between Glencore and Contichem the price payable for Lot 2 on the Sunway was US$4,891,221.90.
- When, however, the offset arrangement in the sale contract came to be operated, Glencore, which turned out to be the party owing funds, withheld US$173,815.52 claiming to be entitled to set off that sum as loss and damage it had suffered by reason of Contichem's late delivery. This was (or was supposed to be) the cost of Glencore International's settlement with Petrochina which had been passed on by Glencore International to Glencore. Though, as Glencore accepted just before the hearing, that figure was the product of a miscalculation; and the correct figure (reflecting the amount of butane landed) was US$172,899.67.
Customs duty
- It is not in dispute that Glencore International breached the sub-sale contract not only by delay, but also by failing to deliver propane on the Sunway. The only loss, however, which Petrochina ever asserted might flow from this failure was having to pay additional customs duty. As to this in my judgment the evidence establishes the following.
- In June 2002 duty on pure butane entering China was 5 per cent, as was the duty on pure propane. The duty on segregated parcels of propane and butane on board the same vessel should also have been, for each parcel, 5 per cent. There was, however, a 3 per cent rate of duty for, "Other liquified petroleum gas and hydrocarbon gas."
- In 2002 there was some uncertainty as to whether a cargo of mixed propane and butane would attract the lower rate. Moreover, it is clear that Petrochina intended to try to have the lower rate applied to the cargo it was expecting on the Sunway, apparently on the basis that it was mixed, even though, had it been in accordance with the sub-sale contract, it would have consisted of segregated parcels of butane and propane. This is why Petrochina claimed that they would have to pay extra duty because the Sunway in fact only carried butane.
- I accept Mr. Hoare's view that the cargo manifest was changed to help Petrochina to obtain the lower rate. The replacement description, "Fully refrigerated LPG," was true, but was far less informative than, "Butane", which was what the manifest originally said. It seems clear that Petrochina was successful in only paying the lower rate. It never confirmed it had paid the higher rate (see paragraph 49 above) and, indeed, in a letter to Mr. Schneider sent in June 2004 Petrochina made it clear it had not paid it.
Available market
- Could Glencore have gone into the market and acquired a substitute for Lot 2 on 10 June 2002, the date of breach, or, indeed, at any time between learning on 29 May that the Sunway would be late and 10 June? For if it could, it would be difficult to argue that Glencore's loss could have been any more than the additional cost (if any) of obtaining that substitute.
- Glencore was entitled to receive a cargo of between 21,000 and 22,000 metric tonnes of butane at Wenzhou not later than 10 June 2002. It knew by 29 May that the Sunway could not arrive by that date. Moreover, despite requests by Glencore, Contichem never showed any sign of itself finding a substitute cargo to enable the sale contract to be performed on time.
- I have already indicated that I accept that between 29 May and 4 June Glencore and Glencore International made strenuous efforts through Mr. DuPay to find a single substitute cargo on a vessel able to reach Wenzhou, by 10 June, or at least earlier than the Sunway. They also, mostly through Mr. Schneider, tried to find smaller cargoes to keep Petrochina supplied. The former efforts failed altogether. The latter only produced one, unsuitable, cargo.
- Moreover, the expert evidence called by Contichem entirely failed to establish that at the end of May or in early June 2002 there were cargoes of butane, whether in port or afloat, that were available for purchase or exchange, and that could have been re-directed to Wenzhou to arrive there earlier than the Sunway. Mr. Hoare listed eight vessels (excluding the Yusho referred to below) carrying large cargoes of butane, or butane and propane, that could have arrived at Wenzhou between 6 and 12 June 2002. That is, they were so positioned that, had they been ordered so to do, they could have reached Wenzhou at some time within that period. These include apparently, a vessel Mr. Delia suggests might have been diverted to Wenzhou. Mr. Hoare accepted that none of these cargoes was for sale and that all were committed to other parties. Possibly, he said, they could have been exchanged for other cargoes. He was not, however, saying there was such a cargo available for purchase or exchange. He was saying it is possible that there was such a cargo available.
- It is, of course, to be observed that if such a cargo did exist, then between 29 May and 4 June, Mr. DuPay, who had every incentive to find it, did not do so. Indeed, it was not even possible to find much smaller cargoes of suitable butane. Moreover, the closer in time to 10 June, the less chance there was that any cargo fund would have been able to reach Wenzhou by then. Nor was it suggested that there was any sufficient butane already at Wenzhou available to be acquired.
- In my judgment, on the evidence considered as a whole, it is fanciful to suppose that Glencore, or Petrochina for that matter, could have gone out into the market and acquired substitute butane for delivery at Wenzhou before the Sunway arrived, whether at the date of breach (10 or 12 June) or between learning the Sunway would be late and that date. It is in my judgment plain that there was no relevant available market for butane.
The settlement
- Glencore claims to be able to pass on to Contichem the cost of the settlement made between Glencore International and Petrochina. Before considering that claim there are two factual issues that need to be determined. First, when Glencore International agreed to abate the price under the sub-sale contract to settle Petrochina's claims, how far was that reduction referable to Petrochina's claim for delay? Contichem says it was substantially referable to other claims. Secondly, however it was made up, was it a reasonable settlement? This does not mean, did Glencore International act reasonably in making it? Clearly, given the commercial situation, it did. It means rather was the settlement reasonable by reference to what would probably have happened had the parties to it fought out their dispute? See Biggins & Co. Ld. v. Permanite Ld. [1951] 2 KB 314, per Somervell LJ at 321 and Singleton LJ at 325.
Make up
- Glencore International was in breach of the sub-sale contract in two respects. First the cargo was late. Secondly the cargo consisted solely of butane. In its fax of 6 June 2002 Petrochina sought US $450,000 for lost profits on retail sales, and US $150,000 for having to sell off the butane cheaply to clear the tanks to allow another cargo to berth; and asked for Glencore International's proposals for the failure to deliver propane. Glencore International's response pointed out that it had offered propane separately and rejected any claim based on clearing the tanks.
- The conversation between Mr. Zhang and Mr. Yangqing referred to on 8 June 2002 suggests that Petrochina feared that it would lose about US $101,000 as a result of receiving butane alone, and, in consequence, paying a higher rate of duty.
- Petrochina's initial fax of 10 June 2002, however, which sought an abatement of US $8 per metric ton and which formed the basis of the actual settlement agreed later that day, refers only to lost profit. Glencore International's fax in reply makes clear that, "no propane, and Customs tax differential," are to be covered by the settlement, but no additional abatement, or other payment, was proposed, or ever sought or agreed, in respect of these items. The most likely explanation for this is that Petrochina anticipated (as it turned out correctly) that it would be able to import the cargo on the Sunway at the lower rate of duty even without there being any propane on board.
- For these reasons I find that, although the settlement covered any claim Petrochina might have arising from the failure to deliver propane, including any claim relating to customs duty, the amount abated from the price of the cargo was calculated by reference to, and was solely referable to, Petrochina's claim for lost profit arising from the delay.
- I should add that I accept, as Mr. Schneider told me, that Glencore International orally rejected the duty claim, and that he did not consider that anything had been paid in respect of it. But that has played no part in coming to my conclusion.
Reasonableness
- The evidence before me indicates that Petrochina had storage capacity at Wenzhou of about 40,000 metric tonnes. It is also clear that about 21,000 metric tons of butane were delivered to Petrochina at Wenzhou on the Yusho which discharged on 6 and 7 June 2002. There was, however, no evidence to show how much butane Petrochina already had in storage at that time; though Mr. Hoare doubted if Petrochina's tanks would have been completely empty prior to the vessel's arrival. Mr. Hoare believed Petrochina took delivery of about 90,000 metric ton per month which is consistent with an average daily requirement of about 3,000 metric tons. Mr. DuPay doubted whether Petrochina would have run out of butane to sell by 10 June; though he thought it might have done so by 12 or 13 June.
- If, when the Yusho discharged its cargo, Petrochina's tanks were empty or nearly so, it follows that at that rate it would have run out of butane around 12 or 13 June. There are, however, no ullage reports to demonstrate the actual position, though I accept that Glencore (through Mr. Yangqing) sought them.
- What is, however, also striking is the rate at which Petrochina was importing butane. It took 21,000 metric tons on 6 and 7 June, it had contracted for a further 15,000-23,000 metric tons to be delivered by 12 June, and it was apparently expecting a further delivery between 15 and 19 June. This suggests that Petrochina was selling butane to its customers as fast as it could import it.
- Again looking at the evidence as a whole, it seems to me probable that the late arrival of the Sunway did significantly dislocate Petrochina's ability to supply its own customers and that, as a result, three or four days' sales that would otherwise have been made were lost.
- Petrochina said its loss amounted to US $300,000: 3,000 metric tons per day for 4 days at US $25 per ton (i.e. about 11 per cent) profit. This, it can be inferred, is what Petrochina would have claimed in an arbitration.
- Whether it would have recovered the full amount of its claim may be uncertain but it is probable that, had an arbitration taken place, Petrochina would have been able to establish a claim for at least the sum for which it settled. In my judgment, therefore, the settlement was a reasonable one.
Recoverable damages
- It was urged upon me that the proper measure of damages in the absence of an available market is the difference between the value of the cargo at the time when it should have been delivered and its value at the time of actual delivery. In my judgment to try to calculate damages on that basis would be entirely artificial. The loss suffered by Petrochina and passed back ultimately to Glencore did not result from any change in the value of butane. It resulted from Petrochina being short of butane and as a result losing profits. The question is whether Glencore can recover damages for having compensated Petrochina for this loss.
- The position is in my judgment is as follows:
(a) Contichem knew that Glencore was a trader and that it would probably resell Lot 2. Such a resale might be to another trader, to a retailer, or indeed to an end user.
(b) Glencore did resell Lot 2, to Glencore International which in turn sold it to Petrochina, a retailer.
(c) On the facts of this case, the interposition of Glencore International is of no consequence. The sale to it was on terms back to back to the sale contract, and any claim for a breach of contract against Glencore International caused by a breach of contract by Contichem would inevitably be passed back to Glencore. The position is the same as if Glencore had resold direct to Petrochina.
(d) Given that Glencore was likely to resell Lot 2, the parties must have contemplated that if Contichem delivered late, that was likely to put Glencore in breach on any sub-sale (for which purpose, for the reasons given, I include the sub-sale to Petrochina).
(e) There was no available market on which Glencore could acquire a substitute cargo. If it is necessary to do so, I find that it must have been within the contemplation of the parties to the sale contract that, if the nominated vessel was late, Glencore would be unable to acquire substitute goods. The parties certainly must have realised when they made the sale contract that, if Glencore found itself looking for 21,000 metric tons of butane at the port of discharge because the nominated vessel had failed to arrive in time it would have precious little chance of finding them. But even on the basis that Glencore would be given, as it was, 12 or 13 days' warning of the breach, the parties must have appreciated Glencore would probably be unable to find substitute butane. Indeed, it is noticeable that Contichem does not seem to have made any attempt itself to find a substitute cargo to enable it to comply with the sale contract. Doubtless it knew then, and earlier at the time of the sale contract, that such an attempt would be fruitless.
(f) It follows that it must also have been in the contemplation of the parties that, if delivery was delayed, Glencore would have to compensate a sub-buyer for any loss (including of course loss of profit) it suffered as a result of that delay.
(g) Glencore (albeit through Glencore International) did have to compensate such a sub-buyer.
(h) The compensation in question was that provided for in the settlement. That compensation was wholly referable to the delay, and the settlement itself was reasonable.
- Accordingly, Glencore is in my judgment entitled to damages in the sum of US $172,899.67 and to set off those damages against Contichem's claim for the balance of the purchase price of Lot 2.
