International Trade And Commodities - November 2011

INTRODUCTION By Stuart Shepherd

I am pleased to introduce the fifth issue of our International Trade and Commodities Legal Update. Once again, we have included articles on recent decisions of the English courts which cover a wide range of issues that we believe will be interesting to our readers.

The Linsen International v. Humpuss Sea Transport case is of particular interest in view of the numerous contractual defaults which have taken place in the past few years due to market conditions. It illustrates that an attempt to pierce the corporate veil under English law, in order to "follow the money" that may have passed into the hands of other companies within the same corporate group as the defaulting party, will only succeed in very limited circumstances, as will any attempt to freeze that money where it is held by any other company within the group over which the English court does not have jurisdiction. In Linsen International, Mr Justice Flaux distinguished another 2011 decision of the Commercial Court in Antonio Gramsci Shipping v. Stepanovs. In the latter case, the court's view was that there was a good arguable case that the whole purpose of the corporate structure was to perpetrate the relevant fraud and that both the chartering companies and the charterparties themselves were a sham or facade from the outset. In Linsen Transport, on the other hand, there was no evidence that the corporate structure had been abused or that the original charterparties and guarantee were anything but genuine contracts.

In R G Grain Trade v. Feed Factors, we focus on the issue of whether the fact that the goods did not meet the contractual specification entitled the buyers to reject them. The Court stated that that would depend on whether the specification was a condition of the FOB contract, a warranty or an innominate term.

In Thai Maparn Trading v. Louis Dreyfus, the Commercial Court judge dismissed the FOB sellers' appeal from two GAFTA arbitration awards. The judge rejected the sellers' argument that the contractual requirement of "minimum 7 working days written" prior notice of the nominated vessels' ETA was a condition precedent to the sellers' obligation to provide and load the cargo.

Sovarex v. Alvarez highlights the English court's power to enter an arbitration award as an English court judgment so that it can be enforced as a court judgment. This is one of three cases this year where the Commercial Court has granted such an application in circumstances where one of the parties had commenced court proceedings in another EU Member State in breach of the London arbitration provision. The advantage of turning the arbitration award into an English court judgment is that under the Brussels Regulation, that court judgment should take precedence over any conflicting judgment rendered subsequently by the court of another EU Member State.

The report on AstraZeneca v. Albemarle provides an overview of the English court's approach to the interpretation of limitation and exclusion clauses in commercial contracts.

Finally, on the trade finance side, Swotbooks.com Ltd v. Royal Bank of Scotland reinforces the importance of the doctrine of strict compliance both under the Uniform Rules for Documentary Credits ("UCP") and in relation to letters of credit generally.

Ince & Co's International Trade and Commodities Group provides a full service to clients in the global trading community. We advise clients in a range of industries, including oil and gas, biofuels, coal, sugar/molasses, grain and feed, oils and fats and metals. If you have any queries arising out of the content of this Update, or any other matters you wish to discuss with us, please feel free to contact me or the authors of specific case reports you are interested in, or your usual contact at Ince & Co.

In addition to the International Trade and Commodities Legal Update, we also send out regular client bulletins by e-mail on topical issues of interest to our clients. Recently, we have circulated bulletins on letters of indemnity, force majeure, trade sanctions and piracy from a cargo's perspective. If you do not already receive these bulletins and should like to do so in the future, please contact reema.shour@incelaw.com.

TRADING

Piercing The Corporate Veil And Chabra Injunctions - Clarification From The English High Court By Stuart Shepherd and Sacha Christopher

Linsen International v. Humpuss Sea Transport & others [2011] EWHC 2339 (Comm)

In this case, the Commercial Court (Mr Justice Flaux) has reviewed and examined the relevant English legal principles with regard to piercing the corporate veil, as well as the specific set of circumstances in which a Chabra injunction may be obtained. A Chabra injunction is, in essence, a freezing order directed to a party against whom the Claimant does not have a substantive cause of action (the "NCAD") which is made in aid of enforcement of a judgment, or anticipated judgment, against a party against whom the Claimant does have a substantive cause of action ("CAD").

The background facts

The Claimant ship-owners ("owners") were companies in a group of which Empire Chemical Holdings Inc was head ("the Empire Group"). In 2007, the Empire Group entered into negotiations with a number of shipyards for the construction of 12 chemical tankers, and also entered into an agreement where seven of those tankers would be chartered to the Defendant charterers, who were companies in the Humpuss group of companies ("the Humpuss Group"). Various time charterparties were entered into between various companies in the Empire Group and the Humpuss Group in October 2007 and again in January 2008.

By the time the vessels were delivered to the charterers under the charterparties in early 2009, the freight market had collapsed. The charterers were unable to sub-charter the vessels at rates which covered the time charter hire and so did not pay hire to the owners by the due dates. The owners commenced arbitration, obtained arbitral awards against the charterers for repudiatory breach of the charterparties and also obtained summary judgment against the guarantor of the charterers' obligations under the charterparties. They also obtained freezing orders against both the First and Second Defendants (the charterers and guarantors) in these proceedings. However, neither the arbitral awards nor the summary judgment were honoured, and the owners applied for and obtained world wide freezing orders against the Third to Thirteenth Defendants on an ex parte basis. Those defendants were principally other companies within the Humpuss Group, and the orders were granted on the basis that (i) there was a good arguable case that there had been abuse of the corporate structure of the Humpuss Group; and (ii) thus that various corporate veils could be lifted so as to render the other companies within this group liable as parties to the charterparties/guarantees on the basis that they were in fact the "true" parties to the charterparties/guarantees.

The present application before Mr Justice Flaux was for a continuation of the freezing orders against the Third to Thirteenth Defendants.

The Commercial Court decision

Piercing the corporate veil

The judge reviewed the evidence submitted by the owners to support their case that there had been an abuse by the Defendants of their corporate structure entitling the owners to pierce the corporate veil. He rejected many of the owners' allegations in respect of abuse but did accept that there was evidence that assets had been moved from the First Defendant to the Third Defendant with a view to frustrating enforcement against the First Defendant.

He then went on to review the authorities in relation to the piercing of the corporate veil to identify in what circumstances the corporate veil would be pierced so as to impose liability in contract on a party who was not, ostensibly, a party to the contract concerned. One of the cases relied upon by the owners on this issue was the recent Commercial Court decision of Mr Justice Burton in Antonio Gramsci Shipping v. Stepanovs [2011] 1 Lloyd's Rep 647, where the Court held that it was sufficiently arguable (for the purpose of founding jurisdiction) that the Claimant ship-owners could pierce the corporate veil of the chartering entities, so as to hold Mr Stepanovs liable as a party to the charterparties.

In his judgment, Mr Justice Flaux notes that there are circumstances in which a court may lift the corporate veil so as to ignore transactions which are plainly a sham. However, he said that there was no authority which supported the proposition that abuse of the corporate structure subsequent to the conclusion of contracts could be used to pierce the corporate veil in the sense of rendering third parties liable under contracts concluded prior to such abuse. The Court's decision in the Antonio Gramsci case could, he said, easily be distinguished from the present case since, in that case, the Court found that the Claimants had a good arguable case that the whole purpose of the corporate structure was to perpetrate the relevant fraud and that both the chartering companies and the charterparties themselves were effectively a sham or façade from the outset. In the present case, the Court concluded that at the time the original charterparties and guarantees were entered into in 2007, "there was no question of any abuse of the corporate structure" and that there was "no basis for impugning the genuineness of the original charterparties or guarantees or for suggesting that those contracts were shams....".

In the circumstances, he concluded that there was no basis for any of the Third to Thirteenth Defendants being held liable as parties to the charterparties and the existing freezing orders against them should not be continued.

The application for a Chabra injunction

Mr Justice Flaux then considered the application for a Chabra injunction against the Third Defendant. In doing so, he...