UK: The Primacy Of No Set-Off Clauses In Bunker Supply Contracts

CMA-CGM Marseille v Petro Broker International (Formerly known as Petroval Bunker International) [2011] EWCA Civ 461

This case related to various claims under a bunker supply contract which contained a no set-off clause. Such clauses are common in the oil supply industry and the English courts tend to take a stringent approach to their application. Here, the arbitral tribunal dismissed an argument that it was inappropriate to carve out a single issue regarding an unpaid invoice out of a larger dispute and decide it in isolation pending a decision on the customer's counterclaim for off-spec bunkers. On the contrary, the arbitrators thought that the no set-off clause in the contract foresaw exactly such a situation. In subsequent court proceedings, the Court of Appeal took a similar view and ordered that money paid into court by the customer as security go towards satisfying the supplier's proven claims, leaving the customer to secure its pending counterclaim by other means.

The original dispute

The original disputes between the parties were dealt with in London maritime arbitration and arose out of a bunker supply contract that provided for Petroval to supply bunker fuel to CMA. The bunker supply contract expressly incorporated the General Terms and Conditions of the BIMCO Standard Bunker Contract, clause 8 of which provided for payment and stated among other things as follows:

"(b) Payment shall be made in full, without set-off, counterclaim, deduction and / or discount, free of bank charges...

(d) Any delay in payment and / or refund shall entitle either party to interest at the rate of two (2) per cent per month or any part thereof."

Petroval had various claims against CMA, including for an unpaid invoice. CMA had counterclaims against Petroval, including for losses arising out of the supply of allegedly off-specification bunkers. CMA contended that it would be inappropriate for the arbitrators to make an interim award in respect of the unpaid amounts, notwithstanding the no set-off clause in the contract, because this aspect of the dispute was just one item in a complex and interrelated series of claims and counterclaims. CMA also argued that it would be unfairly prejudiced by such a course of action, given Petroval's questionable financial status which meant that CMA might be unable to enforce any subsequent award it obtained in respect of its counterclaim against Petroval.

The tribunal's decision

The tribunal disagreed and made an interim final award in favour of Petroval for the cost of bunkers supplied. A second award was issued for the contractual interest due on the principal amount represented by the first award. The arbitrators acknowledged that CMA was clearly concerned to hold on to money otherwise due to Petroval as security for its, CMA's, counterclaim because it might otherwise be prejudiced as a result of having paid out money to Petroval which it could not recover. However, the arbitrators' view was that this was a foreseeable consequence of the terms that the parties had agreed in the supply contract. They also refused to order Petroval to provide security for CMA's counterclaim in an equivalent sum to the amount awarded to Petroval, because this would amount to using a procedural device to undermine Petroval's substantive rights, namely to be paid without set-off, counterclaim, deduction and / or discount.

Subsequent developments

CMA applied unsuccessfully to the Commercial Court to set aside the first interim award on the grounds of serious irregularity and / or error of law. In the meantime, Petroval attached bunkers belonging to CMA in the Netherlands, obtained two guarantees as security for their claims and succeeded in their application to the Rotterdam court to have the award recognised and enforced in the Netherlands. This cleared the way for the guarantees to be called.

CMA then obtained a freezing order from the English Commercial Court, prohibiting Petroval from drawing down on the guarantees. CMA alleged that it had good grounds to believe that Petroval had ceased trading, was only being kept alive for the purpose of receiving the proceeds of enforcement of the arbitration awards and that if it received those proceeds, the money would vanish and CMA would have nothing against which to enforce any award it obtained on its counterclaim. In return for being granted this order, CMA undertook to pay a significant sum into court.

Petroval was subsequently sold to a publicly listed company as a going concern and there was therefore no longer any risk of dissipation of assets and no basis to maintain the freezing order. CMA argued that it was entitled to have the monies it had paid into court returned to it, contending that Petroval could now enforce its claims against the guarantees if it wished. Petroval wished the money to remain in court so that it could enforce the awards against it. The Commercial Court judge found in favour of CMA and ordered the repayment of the money. Petroval appealed. It also applied to the court to have judgment entered in terms of the awards, so that they were now enforceable in the same manner as a judgment of the court.

The Court of Appeal decision

Mr Justice Tomlinson gave the leading judgment. He agreed with the first instance judge that the rationale for requiring the payment in to be made no longer applied, but he disagreed that this was of itself conclusive of the question whether the money should simply be returned to CMA. The appeal judge could not see why Petroval should not be allowed to take advantage of the fact that its debtor had brought the money into court. CMA had demonstrated an intention to put every possible obstacle in Petroval's way when it came to enforcing the awards and had already evinced an intention not to honour the awards.

Furthermore, even though other security might be available in the Netherlands, Lord Justice Tomlinson did not see why Petroval should be put to the trouble and expense of further proceedings in that jurisdiction when there was a fund in the English court available for immediate execution. The Court of Appeal therefore ordered that the money in court should be paid to Petroval in partial satisfaction of its judgments.

Comment

It is arguable that in choosing to exercise its discretion as it did, the Court of Appeal was influenced by the fact that there was no longer a risk that Petroval would dissipate its assets and CMA could, therefore, seek to secure its counterclaim by other means. Nonetheless, those entering into similar contracts, particularly where standard terms and conditions are being agreed, should consider carefully the consequences of incorporating a no set-off clause in their agreement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.